real exchange rate volatility and economic openness theory and evidence this paper relates the volatility of the trade weighted effective real exchange rate to the degree of trade openness of an economy the theoretical part presents an intertemporal monetary model of a small open economy with nominal rigidities both monetary and aggregate supply shocks are shown to produce ceteris paribus smaller real exchange rate movements if the country is more open to foreign trade empirical evidence on a cross section of forty eight countries confirms this relationship differences in trade openness explain a large part of the cross country variation in the volatility of the effective real exchange rate

accuracy of response in labor market surveys evidence and implications this paper examines the extent of response errors in labor market survey data and explores the implications of such errors for economic analysis explicitly examined are responses to questions on industry occupation union status hours worked and wages analyses are based on two sources 1 a special supplement to the january 1977 current population survey that obtained data from workers and their employers and 2 an exact match of workers and their employers interviewed in the employment opportunity pilot project survey the dual nature of these surveys provides a basis for analyzing the effect of response error on a variety of economic analyses including the trade off between wages and risk the wage impact of unionism and the sensitivity of wage determination models to alternative responses to earnings questions

public services increasing returns and equilibrium dynamics abstract this paper is concerned with casting off the standard assumption the production function displays socially constant returns to scale in a simple growth model with public inputs in the model public services work as a source of utility and as an input to production making use of the global bifurcation technique we show that the model can generate a whole spectrum of interesting dynamics which do not arise with constant returns specifically when increasing returns are not exceedingly strong not only does an indeterminate steady state take place but also there exist divergent perfect foresight paths in expanding oscillations and economic cycles the role of history and expectations in shaping equilibrium is also considered

sectoral composition of government spending and macroeconomic in stability this article examines the quantitative interrelations between sectoral composition of public spending and equilibrium in determinacy in a two sector real business cycle model with positive productive externalities in investment when government purchases of consumption and investment goods are set as constant fractions of their respective sectoral output we show that the public consumption share plays no role in the model s local dynamics and that a sufficiently high public investment share can stabilize the economy against endogenous belief driven cyclical fluctuations when each type of government spending is postulated as a constant proportion of the economy s total output we find that there exists a trade off between public consumption versus investment expenditures to yield saddle path stability and equilibrium uniqueness 2014 western economic association international

estimation of an occupational choice model when occupations are misclassified this paper examines occupational choices using a discrete choice model that accounts for the fact that self reported occupation data is measured with error despite evidence from validation studies which suggests that there is a substantial amount of measurement error in self reported occupations existing research has not corrected for classi cation error when estimating models of occupational choice this paper develops a panel data model of occupational choices that corrects for misclassi cation in occupational choices and measurement error in occupation speci c work experience variables the model is used to estimate the extent of measurement error in self reported occupation data and quantify the bias that results from ignoring measurement error in occupation codes when

indeterminacy and stabilization policy abstract it has been shown that a one sector real business cycle model with sufficient increasing returns in production may possess an indeterminate steady state that can be exploited to generate business cycles driven by animal spirits of agents this paper shows how an income tax schedule that exhibits a progressivity feature can ensure saddle path stability in such a framework and thereby stabilize the economy against sunspot fluctuations conversely an economy with a flat or regressive tax schedule is more susceptible to indeterminacy journal of economic literature classification numbers e32 e62

taxation human capital and growth abstract this paper builds an overlapping generations model of endogenous growth by introducing human capital accumulation into the blanchard overlapping generations model in this model the growth rate of consumption is increasing both in the after tax interest rate and in the share of human wealth in total wealth a higher rate of taxation reduces the after tax interest rate but at the same time it raises the share of human wealth in total wealth if the horizon is short and the elasticity of factor substitution is high the latter effect dominates the former and a higher rate of taxation increases long run growth

industry specific capital and the wage profile evidence from the national longitudinal survey of youth and the panel study of income dynamics using data from the national longitudinal survey of youth 1979 96 and the panel study of income dynamics 1981 91 i seek to determine whether there is any net positive return to tenure with the current employer once we control for industry specific capital including total experience in the industry as an additional explanatory variable i show that the return to seniority is markedly reduced using gls while it virtually disappears using iv gls at both the one digit and three digit levels therefore it seems that what matters most for the wage profile in terms of human capital is industry specificity not firm specificity

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

competitive depreciation and the role of distorting taxes in an interdependent economy abstract this paper investigates the manners in which international cooperation in monetary policies affects the rate of inflation in a two country sticky price model within reasonable parameter values international monetary coordination increases the steady state inflation for given tax policies when the tax regime is endogenously chosen however self oriented monetary policies can engage in competitive depreciation and induce a higher average inflation than the first best inflation rate

unemployment benefits and labor market transitions a multinomial logit model with errors in classification this paper utilizes validation data on survey response error in the current population survey to generalize the standard multinomial logit model to allow for spurious events that result from classification error the authors basic approach could be used with other stochastic models of discrete events as well they illustrate their algorithm by studying the effect of unemployment insurance on transitions from unemployment to employment and on labor force withdrawal their results confirm earlier work suggesting that unemployment insurance lengthens unemployment spells and show that correcting for classification error strengthens the apparent effect of unemployment insurance on spell durations copyright 1995 by mit press

the new open economy macroeconomics of government debt in this paper we introduce an overlapping generations structure of the blanchard type in a new open economy macroeconomics model this allows us to study a wider range ofscal shocks compared to the traditional mundell fleming and to the baseline redux models one important policy implication of our model is that the tax cut imple mented in the us in 2001 might have contributed to the appreciation of the dollar vis a vis the euro in contrast the imposition ofscal constraint such as the golden rule proposed by the uk government can have opposite exchange rate e ects

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

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

useful government spending direct crowding out and fiscal policy interdependence this paper introduces perfect substitutability between private and public consumption in a dynamic open economy with imperfect competition and nominal rigidities this implies a direct crowding out effect that generalising to the two country case some well known properties of a closed economy tends to reduce consumption following both domestic and foreign expansions a less expected result is that sub stitutability has a positive effect on the short run output spillover we also show that if we modify the model to allow for home bias in government spending temporary fiscal expansions display a quasi neutrality property

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

long run growth and welfare effects of public policies with distortionary taxation abstract in a one sector growth model with infrastructure investment we study the impact of fiscal policies on growth the government collects taxes on labor income and profits the government uses these revenues to purchase infrastructure investment provide utility enhancing government services and to provide transfer payments to the households we show that the balanced growth rate is an increasing function of the percent of government revenues that goes to infrastructure we find that the growth maximizing mix of taxes depends on the elasticity of substitution between inputs in particular with distortionary taxes the growth maximizing tax rate on capital is higher the lower the elasticity of substitution between private physical capital and public capital in addition the growth maximizing size of the government is higher when the elasticity of substitution between public and private inputs is low we also investigate welfare effects of other public expenditures as well depending on the elasticity of substitution in production the welfare implications of different public policies can be substantial

language fluency and earnings estimation with misclassified language indicators we use panel data to analyze the determinants of speaking fluency and wages of immigrants our model takes account of two problems that may bias ols estimates of the impact of speaking fluency on earnings first subjective variables on an ordinal discrete scale such as self reported language ability can suffer from misclassification errors the model decomposes misclassification errors into a time persistent and a time varying component second the model accounts for correlated unobserved heterogeneity in language and earnings equation the main finding is that these two generalizations of the standard model both lead to substantial changes in the estimated effect of speaking fluency on earnings

the macroeconomic effects of monetary and fiscal policy in a small open economy does the exchange rate regime matter abstract this paper develops a small open economy model in the spirit of obstfeld and rogoff 1995 the introduction of endogenous traded sector output unlocks current account and real exchange rate effects within this framework where specific consideration is given to the case with fixed but adjustable parities exchange rate devaluation generates similar qualitative effects as a money supply expansion under floating rates output and external effects of government spending shocks are broadly consistent with the adjusted basic non micro founded mundell and fleming mf framework but differ in significant ways from the baseline mf model contrary to the textbook mf model a government expenditure shock depreciates the nominal exchange rate and generates real effects under the fixed rate system

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

on indeterminacy and growth under progressive taxation and productive government spending we examine the theoretical interrelations between equilibrium in determinacy and economic growth in a one sector representative agent model of endogenous growth with progressive taxation of income and productive flow of public spending we analytically show that if the demand side effect of government purchases is weaker the economy exhibits an indeterminate balanced growth equilibrium and belief driven growth fluctuations when the tax schedule is sufficiently progressive or regressive if the supply side effect of public expenditures is weaker indeterminacy and sunspots arise under progressive income taxation in sharp contrast to traditional keynesian type stabilization policies our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents self fulfilling expectations sur l indetermination et la croissance quand la fiscalite est progressive et les depenses gouvernementales productives on examine les interrelations theoriques entre l in determination de l equilibre et la croissance economique dans un modele de croissance endogene un secteur agent representatif quand la fiscalite sur le revenu est progressive et le flux de depenses publiques productif on montre analytiquement que si l effet du cote de la demande des achats gouvernementaux est relativement plus faible cela se traduit par un equilibre de croissance balancee indeterminee et des fluctuations de la croissance alimentees par les croyances quand la cedule de taxation est suffisamment progressive ou regressive si l effet du cote de l offre des depenses publiques est relativement plus faible l indetermination et les fluctuations emergent quand la fiscalite sur le revenu est progressive contrairement aux analyses traditionnelles de type keynesien des politiques de stabilisation ces analyses montrent qu augmenter la progresssivite de la fiscalite peut destabiliser une economie avec croissance endogene quand les fluctuations sont alimentees par les anticipations auto realisees des agents canadian economics association

fiscal consolidation under fixed exchange rates abstract we present the fixed exchange rate version of the obstfeld and rogoff model and analyze the international transmission of fiscal policy shocks the welfare effects of an unanticipated contraction in government expenditure in the home country are shown to depend crucially on the way in which world money stock is set if home authorities alone are responsible for pegging the exchange rate a fiscal adjustment leads to a decrease in the real interest rate stimulates private consumption and limits the contraction in world output compared with a situation in which a cooperative scheme is implemented the model is then used to propose a new interpretation of recent events in the eu countries that have enacted restrictive fiscal policies while pegging their currencies to the dm

tax structure and growth in a model with human capital abstract the effect of the tax structure on the long run growth rate of income and consumption is analyzed where tax structure refers to the mix of taxes on physical and human capital which satisfy an exogenously given government budget constraint the factor used intensively in the consumption good sector relative to the capital goods sector as a whole is taxed more highly in a growth maximizing tax structure an endogenous labor supply the tax treatment of depreciation and the effect of replacing the income tax with a consumption tax are all considered

a switching frontier model for imperfect sample separation information with an application to constrained labor supply this paper combines frontier functions and switching regressions this allows economic agents to operate under different efficiency regimes thus relaxing the assumption that all observations are drawn from the same distribution of inefficiency the switch is based on sample separation information that is treated first as perfect then as imperfect or noisy available sample separation information suggests an observation s regime however the information may not be accurate by comparing results across alternative specifications of sample separation information as perfect and noisy this approach provides evidence on the quality of the sample separation information the technique s usefulness is demonstrated via an application to constrained labor supply copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the importance of composition of fiscal policy evidence from different exchange rate regimes abstract we study the macroeconomic effects of fiscal policies in an open economy we emphasize two transmission mechanisms the cost channel by which wage government spending and labor taxes raise the real wage firms must pay and the exchange rate channel by which the nominal exchange rate shifts induced by fiscal policy have real effects if some prices and wages are sticky the latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates in a 1964 93 panel of oecd countries we find significant evidence for both channels moreover we find that the real product wage and profitability are more responsive than quantities employment and output to fiscal policy innovations

public spending endogenous growth and endogenous fluctuations abstract this article studies indeterminacy and endogenous growth in a simple one sector model of capital accumulation endowed with inelastic labor supply in which the presence of public goods creates positive externalities both in the production and the consumption sectors because of increasing returns in the utility function the economy exhibits not only perpetual growth but also indeterminacy and therefore endogenous stochastic growth fluctuations the possibility of sunspot equilibrium growth paths is shown to be consistent with plausible parameter values journal of economic literatureclassification numbers e32 o41 h40

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

self selection and the distribution of hourly wages this article formulates and estimates alternative equilibrium models of industrial wage determination and self selection in explaining industrial wage differentials we find that it is important to account for heterogeneous sector specific skills and self selection decisions by agents concerning their sector of employment the classical roy model is rejected so is an efficiency units model of the labor market a revised roy model that accounts for comparative advantage in the choice of industrial sectors and choice between market and nonmarket work is much more successful in explaining cross section wage distributions and their evolution over time

classification error in dynamic discrete choice models implications for female labor supply behavior two key issues in the literature on female labor supply are i whether persistence in employment status is due to unobserved heterogeneity or state dependence and ii whether fertility is exogenous to labor supply until recently the consensus was that unobserved heterogeneity is very important and fertility is endogenous hyslop 1999 challenged this using a dynamic panel probit model of female labor supply including heterogeneity and state dependence he found that adding autoregressive errors led to a substantial diminution in the importance of heterogeneity this in turn meant he could not reject that fertility is exogenous here we extend hyslop 1999 to allow classification error in employment status using an estimation procedure developed by keane and wolpin 2001 and keane and sauer 2005 we find that a fairly small amount of classification error is enough to overturn hyslop s conclusions leading to overwhelming rejection of the hypothesis of exogenous fertility

occupational specificity of human capital we find that returns to occupational tenure are substantial everything else being constant 5 years of occupational tenure are associated with an increase in wages of 12 20 moreover when occupational experience is taken into account tenure with an industry or employer has relatively little importance in accounting for the wage one receives this finding is consistent with human capital being occupation specific

real exchange rates and macroeconomics evidence and theory since the early 1980s a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates the authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment many studies have established the pertinence of long run purchasing power parity ppp and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations a reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates which emphasizes short run price stickiness but long run ppp but a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the law of one price an example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations

staggered wages and output dynamics under disinflation we study the output costs of a reduction in monetary growth in a dynamic general equilibrium model with staggered wages the money wage is fixed for two periods and is chosen according to intertemporal optimisation agents have labour market monopoly power we show that the introduction of microfoundations helps to resolve the puzzle raised by directly postulated models namely that disinflation in staggered pricing models causes a boom in our model disinflation whether unanticipated or anticipated unambiguously causes a slump

inflation in open economies abstract this paper relates the time consistent inflation rate to the degree of trade openness of an economy the mechanism linking the welfare effects of monetary surprises and hence the incentives to inflate to openness does not rely on a large country terms of trade effect but rather is due to imperfect competition and nominal price rigidity in the non traded sector the empirical evidence supports the main predictions of the model 1997 elsevier science b v

progressive taxation and long run growth since the emergence of early endogenous growth models larry e jones and rodolfo e manuelli 1990 sergio rebelo 1991 a large body of work has studied the growth effects of tax reform while virtually all of this literature has confined itself to the analysis of flat rate taxes tax codes are generally progressive this paper therefore explores the effects of progressive taxes in conventional growth models with heterogenous households in such frameworks the tax code helps to determine simultaneously the pre tax income distribution and the rate of technical progress we present three main findings first we show that when variations in tax codes stem from differences in progressivity shares of tax revenue in gdp or income may constitute poor proxies for average marginal tax rates in particular we find that the decrease in progressivity associated with the tax reform act of 1986 tra 86 lowered the u s average marginal tax rate by 0 06 to 0 37 percentage points depending on the model used at the same time however the endogenous adjustment in the distribution of income produced by this progressivity change contributed to raising the tax share of income by approximately 0 8 percentage points because marginal tax rates are not easily observable empirical work often has to make use of tax shares in income as an alternative to the degree that lower marginal rates entail less tax distortion our study suggests that relying on tax shares may cause less progressive tax codes to be incorrectly perceived as more distortional second we find that the progressivity decrease implied by tra 86 helped raise u s per capita gdp growth by 0 12 to 0 34 percentage points given the prominence of tra 86 compared with other u s tax reforms over the past four decades these growth effects while not negligible as in robert e lucas 1990 shed doubt on the potential for tax policy to alter significantly prospects for u s long run growth finally consistent with previous work our analysis suggests that the progressivity change associated with tra 86 had a significant effect on income inequality resulting in a 20to 24percent increase in the gini coefficient of income we carry out our analysis using two prototypical endogenous growth models augmented to include a nondegenerate distribution of income these models one first formulated by robert j barro 1990 and the other by rebelo 1991 account for two polar extremes regarding the use of tax proceeds on the one hand in rebelo s two sector framework tax revenue is spent in a way that affects neither the marginal utility of private consumption nor the production possibilities of the private sector on the other hand in the environment envisioned by barro 1990 all tax revenue serves to finance public services that enhance private production interestingly the results we have just described emerge irrespective of the framework under consideration

dynamic analysis of an endogenous growth model with public capital this paper develops an endogenous growth model with productive public capital along with private capital in a spirit similar to that of r j barro 1990 since the authors model includes two stock variables it has transitional dynamics unlike most of the previous studies on endogenous growth including barro s where concerns are restricted to the steady state analysis first they show that the transitional path is unique and stable second the character of the transitional path is explored third the authors show that the optimal tax rate is smaller than the rate that maximizes the national growth rate with a log linear utility function copyright 1993 by the editors of the scandinavian journal of economics