international coordination of trade and domestic policies the past half century has seen a dramatic multilateral reduction in tariff barriers under general agreement on tariffs and trade gatt negotiations however as tariff barriers have fallen attention has shifted to the use of domestic policies as secondary trade barriers a primary concern is that as countries sign trade agreements that constrain their ability to pursue trade goals through trade policy there will be unilateral incentives for governments to distort their domestic policies as a secondary means of protection 1 increasingly international trade disputes revolve around a country s use of internal regulations as a means of restricting trade the united states has successfully challenged the system of liquor taxes in both japan and korea as discriminating against imported liquor while venezuela and brazil have challenged american standards for reformulated and conventional gasoline as trade protection masquerading as environmentalism gatt contains several articles concerning the international regulation of domestic policies but the question of how to fully incorporate domestic policies within gatt negotiations and other international trade agreements remains contentious indeed at both the ministerial meeting in 1994 at the close of the uruguay round and the recent unsuccessful ministerial conference in seattle many gatt delegates renewed demands for the relationship between trade and various domestic policies e g environmental policy labor standards or competition policy to be examined despite the importance that has recently been placed on international cooperation over domestic policies no theoretical basis exists for considering how to cooperate over both trade and domestic policies within an international agreement previous papers on negotiation over two instruments of protection e g copeland 1989 1990 thomas l hungerford 1991 have assumed asymmetric limitations on cooperation i e they assume that one of the two instruments is either nonobservable or nonnegotiable this paper extends such work by investigating cooperation over two negotiable instruments of protection under symmetric limitations on cooperation and provides insight into the design of international trade agreements that incorporate cooperation over domestic policies i adopt the view that enforcement issues are central to the understanding of international cooperation one of the challenges of international cooperation is the absence of a central authority to enforce the terms of an agreement without access to an external enforcement mechanism international agreements are viable only as long as member countries view continued cooperation to be in their own self interest i e the benefits from cooperating outweigh the potential gains from cheating 2 while the gatt department of economics university of miami p o box 248126 coral gables fl 33124 e mail ederington miami edu i would like to thank bob staiger bob baldwin wolfgang keller phillip mccalman jenny minier seminar participants at the nber conference on trade the environment and natural resources and two anonymous referees for comments on earlier versions of this paper any remaining errors are of course my own for example brian r copeland 1990 examined negotiation over one trade barrier leaving a secondary trade barrier e g nontariff barriers domestic legislation etc to be set noncooperatively he shows that trade liberalization will induce substitution toward the less efficient nonnegotiable instrument of protection due to the unilateral incentives to maintain trade protection facing countries thus within a cooperative framework the two types of barriers serve as imperfect substitutes for each other 2 as stated by kenneth w dam in his review of the gatt institution the best guarantee that a commitment of any kind will be kept particularly in an international setting where courts are of limited importance and even more important marshals and jails are nonexistent is that the parties continue to view adherence to their agreement in their mutual interest thus the gatt system unlike most legal systems is not designed to exclude self help in the form of retaliation rather retaliation subjected to established procedures and kept within prescribed bounds is made the heart of the gatt system dam 1970 pp 80 81

on the relationship between growth and volatility abstract we study the relationship between output growth and output variability in a simple stochastic monetary growth model with nominal rigidities and learning by doing we show that this relationship may be positive or negative depending on the impulse source of fluctuations

equilibrium dynamics in an endogenous growth model of money and banking we construct an analytically tractable endogenous growth model of money and banking where money provides liquidity services to facilitate transactions and banks convert non reserve deposits into productive capital we examine both the long and short run effects of changes in the money growth rate or the reserve requirement ratio in response to a change in the required reserve ratio the inflation rate and the growth rates of capital real balances and consumption need not adjust monotonically along the transition path while the balanced growth equilibrium may be either a saddle or a source locally the global dynamical system exhibits flip bifurcation

the role of multilateral institutions in international trade cooperation the world trade organization wfo lacks the power to directly enforce agreements it is therefore important to understand what role the wto can play to facilitate international cooperation and whether a multilateral institution can offer distinct advantages over a web of bilateral agreements this paper examines two potential benefits of a multilateral trade institution first verifying violations of the agreements and informing third parties thus facilitating multilateral reputation mechanisms second promoting multilateral trade negotiations rather than a web of bilateral negotiations the model suggests that a multilateral approach is particularly important when there are strong imbalances in bilateral trading relationships

inflation uncertainty and growth in a cash in advance economy abstract this paper analyzes the effects of inflation variability on economic growth in a model where money is introduced via a cash in advance constraint in this setting we find that inflation adversely affects long run growth even when the cash in advance constraint applies only to consumption at the same time we find that inflation and growth are positively related in the short run furthermore variability increases average growth through a precautionary savings motive since inflation and inflation variability tend to be highly correlated the presence of uncertainty attenuates the negative long run relationship between inflation and real growth it also provides a partial rationale for the apparent lack of robustness in cross country regressions of growth and inflation

do big countries win tariff wars yes it is widely believed that tariffs invite retaliation and that the postretaliation equilibrium l eaves all countries worse off than they would be at free trade the a uthors present a simple pure exchange model with two countries and t wo goods and show which endowment patterns are consistent with this belief they find that if one country is substantially bigger than th e other it can expect to gain from a tariff war despite retaliation the model can be extended to show that the advantage obtained by bei ng part of a large trading unit can help explain the formation of cus toms unions copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

policy variability and economic growth this paper explores the effect of policy variability or frequency of regime switching on economic growth and welfare we study a one sector growth model where investment can be subsidized at either a positive rate or not subsidized at all we find that the lack of persistence in policies per se need not be welfare reducing and that it is likely to decrease growth higher variability implies more frequent changes in consumption and investment but by creating a stronger intertemporal link across regimes variability reduces the fluctuation in investment rates thus decreasing the magnitude of changes in consumption and increasing welfare

inflation output growth and nominal and real uncertainty empirical evidence for the g7 abstract we use univariate garch models of inflation and output growth and monthly data for the g7 covering the 1957 2000 period to test for the causal effect of real and nominal macroeconomic uncertainty on inflation and output growth and the effect of inflation on inflation uncertainty our evidence supports a number of important conclusions first inflation is a positive determinant of uncertainty about inflation second output growth uncertainty is a positive determinant of the output growth rate third there is mixed evidence regarding the effect of inflation uncertainty on inflation and output growth hence uncertainty about the inflation rate is not necessarily detrimental to economic growth finally there is not much evidence supporting the hypothesis that output uncertainty raises inflation

anticipated policy and endogenous growth in a small open monetary economy abstract this paper analyzes the effects of a preannounced change in the growth rate of credit in a small open economy the model based on an endogenous growth model introduces the adjustment costs for investment and the role of money in the production function and highlights the dynamic behavior of an open economy we show that an increase in the rate of anticipated credit growth lowers the steady growth rate of capital real money balances and real output we also find that the rate of depreciation of the domestic currency will rise steadily toward its stationary level the anticipated domestic credit growth hence exhibits monetary nonsuperneutrality in both the rate and the level of output in the intermediate and the long run

endogenous growth monetary shocks and nominal rigidities we introduce endogenous growth in a standard nk model with staggered prices and wages we find that the source of nominal rigidities the shock persistence and the type of taylor rule affect the relationship between monetary volatility and growth

linking risk aversion time preference and fertilizer use in burkina faso this paper investigates whether burkinabe maize farmers fertilizer use decisionsare correlated with their risk and time preferences we conducted a survey and a se ries of hypothetical experiments on a sample of 1 500 farmers we find that morepatient farmers do use more fertilizer but it is only because they plant more maize afertilizer intensive crop rather than because they use more fertilizer per hectare ofmaize planted conversely we find no statistically significant link between risk aver sion and fertilizer use we use a simple two period model which suggests that riskaversion may indeed have an ambiguous effect on fertilizer use

a revised tobin effect from inflation relative input price and capital ratio realignments usa and uk 1959 1999 the paper studies the realignments induced by inflation within an endogenous growth monetary economy accelerating inflation raises the ratio of the real wage to the real interest rate and so raises the use of physical capital relative to human capital across all sectors we find cointegration evidence for the us and uk economies consistent with a general equilibrium tobin type effect of inflation on input prices and capital intensity even while the growth rate of output is reduced by inflation

understanding the process of agricultural technology adoption mineral fertilizer in eastern dr congo summary we analyze the adoption of mineral fertilizer in south kivu we model technology adoption as a three step process including awareness tryout and adoption and empirically analyze these steps using cross sectional farm household data and bivariate and heckman selection probit models we find that awareness about fertilizer is high 57 and mainly determined by education and social capital tryout is low 13 of aware farmers but positively influenced by extension interventions continued adoption is high 70 of tryout farmers but capital constraints are important and not all extension interventions are effective for continued adoption our results entail implications for extension policies in poor areas

risk preferences and pesticide use by cotton farmers in china abstract despite that insect resistant bt cotton has been lauded for its ability to reduce the use of pesticides studies have shown that chinese bt cotton farmers continue to use excessive amounts of pesticides using results from a survey and an artefactual field experiment we find that farmers who are more risk averse use greater quantities of pesticides we also find that farmers who are more loss averse use lesser quantities of pesticides this result is consistent with our conceptual framework and suggestive evidence where farmers behave in a loss averse manner in the health domain and place more weight on the importance of health over money in the loss domain

the value of trade agreements in the presence of political pressures an argument often heard in favor of trade agreements is that by committing to free trade a government can credibly distance itself from domestic lobbies but several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process we develop a small country model in which factors are sector specific in the short run but mobile in the long run we show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade and hence it may value a trade agreement

simultaneous estimation of risk and time preferences among small scale cattle farmers in west africa this article reports results from economic field experiments with cattle dependent small scale farmers in west africa we simultaneously estimate both risk and time preferences and examine how demographic and socio economic characteristics are correlated with each preference the empirical basis for our analysis is a panel data survey of 211 households conducted in mali and burkina faso in 2007 and 2011 and economic experiments conducted with the heads of these households in 2011 the theoretical basis for our analysis is a discounted utility model we apply prospect theory and quasi hyperbolic discounting to estimate the present values of future utility streams we apply a maximum likelihood approach to jointly estimate risk and time preferences and to investigate the correlations among the preference parameters and observable characteristics we find that on average the west african cattle farmer is generally more risk averse and more patient than similarly situated respondents from asia additionally risk and time preferences are correlated with wealth education and religion we find that constraints in wealth and education are associated with greater risk aversion and impatience furthermore time spent in a koranic school is positively related to the overweighting of small probabilities greater risk taking behavior and patience

what have we learned about policy and growth from cross country regressions economists have been seeking to comprehend why some countries are rich and others poor for well over 200 years a better understanding of the national policies associated with long run growth would both contribute to our ability to explain cross country differences in per capita incomes and provide a basis for making policy recommendations that could lead to improvements in human welfare recently economists have used cross country regressions to search for empirical linkages between longrun growth and indicators of national policies e g roger kormendi and philip meguire 1985 robert j barro 1991 the large cross country growth literature has identified various fiscal monetary trade exchange rate and financial policy indicators that are significantly correlated with longrun growth yet levine and david renelt 1992 show that many of these findings are fragile to small alterations in the conditioning information set that is small changes in the right hand side variables produce different conclusions regarding the relationship between individual policies and growth in this paper we take stock of what the profession has learned from cross country regression studies of policy and long run growth i limitations

policy variability productive spending and growth in this paper i present two models with policy variability arising from randomness in the provision of productive public spending in the first model public spending enters as an input in output production in this case i find that the relationship between policy variability and growth depends critically on the technological parameters of the production function in the second model public spending enters as an input in the education sector of the economy in this case i find that policy variability retards growth as individuals respond to increased uncertainty by actually reducing rather than increasing their investment in human capital

is the wto passe the wto has delivered policy outcomes that are very different from those likely to emerge out of the recent wave of preferential trade agreements ptas should economists see this as an efficient institutional hand off where the wto has carried trade liberalization as far as it can manage and is now passing the baton to ptas to finish the job this paper surveys a growing economics literature on international trade agreements and argues on this basis that the wto is not passe rather and subject to some caveats this survey of research to date suggests that the wto warrants strong support while a more cautious view of ptas seems appropriate

taylor rules long run growth and real uncertainty we study the eects of real uncertainty on long run growth under dierent taylor type rules we nd a non negligible relationship between real uncertainty and growth which depends on the source of real uncertainty as well as the type of the taylor rule considered importantly when uncertainty is due to investment speci c shocks it is highly detrimental for growth unless the central bank follows a strong in ation targeting rule furthermore we nd that in the presence of real uncertainty there is a positive correlation between average growth and average in

friedman rule in a model with endogenous growth and cash in advance constraint this paper introduces money into an overlapping generations model with endogenous growth the model due to docquier et al 2007 exhibits a positive intergenerational externality which precludes its laissez fair equilibrium to be optimal even if the government can control the level of physical capital and set it to satisfy the modified golden rule the main message of the paper is that as long as the modified golden rule is attained friedman rule is optimal the result holds regardless of the ability of the government to internalize the externality and control the level of human capital other results include i violation of friedman rule for a different second best environment wherein human capital accumulation is controlled but not physical capital accumulation ii existence of a negative relationship between money growth rate and the economy s endogenous growth rate and iii non uniqueness of friedman rule

money and growth an alternative approach this paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments in addition to the conventional effects of sustained inflation on growth are examined while the effects of inflation on growth are small the effects of growth on the monetary system are substantial the results are consistent with ideas about money and growth contained in work that predates that of james tobin and miguel sidrauski as well as with evidence that money and asset demands vary systematically within economies as they develop copyright 1994 by american economic association

risk aversion and credit constraints in farmers decision making a reinterpretation in 1976 the agricultural development council sponsored a conference on risk uncertainty and agricultural development which has been summarised in a volume edited by james roumasset jean marc boussard and inderjit singh 1979 the volume provides an excellent review of the state of the art at that time however as discussed in the summary chapters of that volume there were few theoretical empirical or policy issues on which clear conclusions could be reached on the basis of knowledge then available in the intervening years progress has been made on a number of issues as a result of both empirical investigations and theoretical advances this paper concentrates on advances which have relevance to the controversy about the relative roles of risk aversion and credit constraints in limiting farmers investment levels especially for purchased inputs such as seeds or fertilizers in particular we review recent experimental studies on the extent of risk aversion among farmer populations in developing

adoption of agricultural innovations in developing countries a survey this paper reviews various studies which have provided a description and possible explanation to patterns of innovation adoption in the agricultural sector the survey points out that the tendency of many studies to consider innovation adoption in dichotomous terms adoption nonadoption may not be appropriate in many cases where the actual decisions are defined over a more continuous range more attention needs to be given to the socio cultural and institutional environment in area studies so that their interrelation with economic factors affecting adoption can be inferred the presence of several interrelated innovations is another aspect that needs to be considered more carefully in future research since a number of simultaneous decisions may be involved furthermore the possibility of regular sequential patterns in adopting components of a new technological package should be specifically addressed in future studies finally the impact of differential adoption rates on land holding distribution merits attention in future research

trade policy cross border externalities and lobbies do linked agreements enforce more cooperative outcomes abstract we analyze whether linking international cooperation in trade policy to environmental policy or other issues with nonpecuniary externalities promotes more cooperation in both policies or whether cooperation in one is strengthened at the expense of the other in the context of self enforcing agreements we show that if the policies are independent in the government s objective function then linkage promotes cooperation in one policy at the expense of the policy that is easier to enforce under no linkage however if the linked policies are not independent and if these policies are strategic complements then linkage can sustain more cooperation in both issues than no linkage the policies are strategic complements only if i the production externality has cross border effects ii the weight on the externality cost is high iii import competing lobbies are not powerful

inflation volatile public spending and endogenously sustained growth i construct a model of an economy whose government finances volatile public spending via money creation the model jointly accounts for the emergence of some well known empirical observations specifically it predicts a negative correlation between output growth and policy volatility furthermore given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending the model provides a novel theoretical justification for the simultaneous negative correlation of long run growth with both average inflation and inflation variability the model also supports the view that policy volatility reduces social welfare

from riches to rags and back institutional change financial development and economic growth in argentina since 1890 abstractargentina is the only country in the world that in 1900 was developed and in 2000 was developing although economic historians have identified and explored various possible explanations chiefly institutions political instability financial development inflation trade openness and international financial integration no study so far has attempted a comprehensive quantitative assessment of their relative importance this article tries to fill this gap using the power arch framework and annual data since 1896 to study the effects of these factors in terms of both growth and growth volatility the results highlight two main factors to understand the remarkable growth trajectory of argentina over the very long run financial development and institutions formal and informal political instability and stress the importance of differences in their short vis a vis long run behaviour

another perspective on the effects of inflation uncertainty this paper examines the effects of inflation uncertainty on real economic activity by utilizing a flexible dynamic multivariate framework that accommodates possible interaction between the conditional means and variances the empirical model is based on a familiar identified vector autoregressive framework modified to accommodate multivariate generalized autoregressive conditional heteroskedasticity our empirical model is preferred to the baseline var by likelihood based information criteria and it retains the important dynamics of the underlying var we find that an average shock to inflation uncertainty has tended to reduce output growth over three months by about 22 basis points

homeownership informality and the transmission of monetary policy cross country aggregate data exhibits a strong positive relationship between the size of the informal employment and aggregate homeownership rates we investigate this empirical observation using a cash in advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates specifically we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short term cash usage and avoid periodic rental payments when i informality is associated with constrained business investment finance and ii inflation expectations are high our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets

macroeconomic uncertainty and performance in the european union abstract we use a very general bivariate garch m model and monthly data on eu countries covering the 1962 2003 period to test for the impact of real output growth and nominal inflation macroeconomic uncertainty on inflation and output growth our evidence supports a number of important conclusions first in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in several countries is negative second in half of the cases there is no significant relationship between inflation uncertainty and output growth performance third inflation and output uncertainty have a mixed effect on inflation nevertheless considerable evidence for the cukierman meltzer hypothesis is obtained our conclusions are based on adopting both a structural and a reduced form bivariate garch model finally we also find statistically significant evidence of regime switching for both inflation and output growth volatility throughout the sample

gradualism in free trade agreements a theoretical justification a notable feature of many recent trade agreements is the gradual rather than immediate reduction of trade barriers in this paper we model trade liberalization as a cooperative relationship that evolves gradually in a non cooperative environment we show that specialization capacity irreversibility and the development of trade partner specific capital increase the benefit of continuing the liberalizing relationship and decrease over time the lowest obtainable self enforcing tariff by increasing the penalty of future defection sunk costs ensure that the self enforcing trading relationship starts slowly but once in progress the level of cooperation continues to improve

learning by doing and learning from others human capital and technical change in agriculture household level panel data from a nationally representative sample of rural indian households describing the adoption and profitability of high yielding seed varieties hyvs associated with the green revolution are used to test the implications of a model incorporating learning by doing and learning spillovers the estimates indicate that i imperfect knowledge about the management of the new seeds was a significant barrier to adoption ii this barrier diminished as farmer experience with the new technologies increased iii own experience and neighbors experience with hyvs significantly increased hyv profitability and iv farmers do not fully incorporate the village returns to learning in making adoption decisions

the optimal inflation rate under schumpeterian growth abstract to analyze the relationship between inflation and economic growth we construct an endogenous growth model with creative destruction incorporating sticky prices due to menu costs price changes reduce the reward for innovation and thus lower the frequency of creative destruction central banks can maximize the growth rate by setting their inflation target at the negative of a fundamental growth rate while the optimal inflation rate may be greater than the growth maximizing inflation rate our calibrated model shows that the optimal inflation rate is close to the growth maximizing inflation rate and that a deviation from the optimal level has sizable impacts

the economic effects of production taxes in a stochastic growth model this paper analyzes the effects of stochastic taxes on production in simple stochastic growth model in so doing the paper explicitly examines the importance of uncertainty on the decisions of individual agents this importance is emphasized by comparing economic outcome to various realizations of tax rates under uncertainty and perfect foresight copyright 1990 by american economic association

domestic policies in self enforcing trade agreements abstract if all cross country externalities travel through the terms of trade efficient trade agreements may simply target the terms of trade and ignore domestic policies this argument has been advanced by several prominent studies simply put it reads terms of trade agreements are efficient i show that this result breaks down if the following two standard conditions are met first a self enforcement requirement constrains the agreement and second production possibilities are intertemporally linked these conditions imply that a country s current policy mix affects future production possibilities and thus impacts payoffs under potential defection since a terms of trade agreement does not specify a country s policy mix it effectively invites countries to manipulate their own defection temptation to be self enforcing terms of trade agreement must ensure that no country while optimizing its policies on the iso terms of trade schedule will abandon its zone of voluntary cooperation this requirement implies that terms of trade agreements are inefficient and can be improved upon by agreements that target policies directly

on the optimality of interest rate smoothing abstract this paper studies some continuous time cash in advance models in which interest rate smoothing is optimal we consider both deterministic and stochastic models in the stochastic case we obtain two results of independent interest i we study what is to our knowledge the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time and ii we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem we also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium focusing on the particular example of an economy with externalities

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

trade policy home market effect versus terms of trade externality we study trade policy in a two sector krugman 1980 trade model allowing for wage import and export subsidies taxes we study non cooperative trade policies first for each individual instrument and then for the situation where all instruments can be set simultaneously and contrast those with the efficient allocation we show that in this general context there are four motives for non cooperative trade policies the correction of monopolistic distortions the terms of trade manipulation the delocation motive for protection home market effect the fiscal burden shifting motive the nash equilibrium when all instruments are available is characterized by first best level wage subsidies and inefficient import subsidies and export taxes which aim at relocating firms to the other economy and improving terms of trade thus the dominating incentives for non cooperative trade policies are the fiscal burden shifting motives and terms of trade effects

soil quality and fertilizer use rates among smallholder farmers in western kenya studies of fertilizer use in sub saharan africa have been dominated by analyses of economic and market factors having to do with infrastructure institutions and incentives that prevent or foster increased fertilizer demand largely ignoring how soil fertility status conditions farmer demand for fertilizer we apply a switching regression model to data from 260 farm households in western kenya in order to allow for the possibility of discontinuities in fertilizer demand based on a soil carbon content scc threshold we find that the usual factors reflecting liquidity and quasi fixed inputs are important on high scc plots but not on those with poorer soils external inputs become less effective on soils with low scc hence the discernible shift in behaviors across soil quality regimes for many farmers improved fertilizer market conditions alone may be insufficient to stimulate increased fertilizer use without complementary improvements in the biophysical conditions that affect conditional factor demand

optimal international agreement and restriction on domestic efficiency the wto s strict treatment of domestic subsidies has not been well received in the existing literature an essential reason is that the consequent restriction on domestic efficiency is hardly compatible with the existing theory of government intervention under which the primary objective of using domestic subsidies domestic efficiency is not sacrificed for another objective we develop a trade agreement model in which the magnitude of a legitimate domestic subsidy with which to address a production externality is private information we find that an optimal agreement substantially restricts domestic efficiency for the international objective of expanding market access

economic growth under money illusion abstract empirical and experimental evidence documents that money illusion is persistent and widespread this paper incorporates money illusion into a stochastic continuous time monetary model of endogenous growth we model an agent s money illusion behavior by assuming that he maximizes nonstandard utility derived from both nominal and real quantities money illusion affects an agent s perception of the growth and riskiness of real wealth and distorts his consumption savings decisions it influences long run growth via this channel we show that the welfare cost of money illusion is negligible whereas its impact on long run growth is noticeable even if the degree of money illusion is low

money and asset prices in a cash in advance economy an asset pricing model with money introduced via a cash in advance constraint is presented the monetary velocity is variable hence money demand does not obey the trivial quantity equation the effects of disturbances in output and money growth on real balances the price level and interest rates are examined monetary policy has effects on real asset prices the fisher relation and the premium on nominal bonds are discussed the precise role of the timing of information and transactions for properties of price levels and interest rates are clarified

inflation and real stock returns revisited i introduction this article empirically reinvestigates the relationship between real stock returns and inflation according to fisher 1930 1 in an efficient market real stock returns should reflect expectations only about real factors such as growth in output and time preference of savers such that real stock returns and inflation should vary independently in other words on average investors are fully compensated for erosions in purchasing power over time however this so called generalized fisher hypothesis has received little empirical support while kaul 1990 boudoukh and richardson 1993 solnik and solnik 1997 madsen 2005 and ryan 2006 find positive or weakly positive correlation between stock returns and inflation most empirical studies including nelson 1976 fama 1981 1983 geske and roll 1983 gultekin 1983 kaul 1987 and solnik 1983 uncover a negative effect of inflation anticipated and or unanticipated on real or nominal stock returns these apparent inconsistencies between the data and the predictions of economic theory have been termed as the stock return inflation puzzle and cited as evidence of monetary nonsuperneutrality or irrationality and market inefficiency 2 to reconcile the seemingly conflicting contributions danthine and donaldson 1986 provide a rational expectations equilibrium model in which a negative relation between stock returns and inflation arises from non monetary sources e g a real output shock and a positive relation is driven by purely monetary sources stulz 1986 marshall 1992 and bakshi and chen 1996 also assert that stock returns may be negatively correlated with inflation especially when the source of inflation is related to nonmonetary factors evidently hess and lee 1999 khil and lee 2000 and lee 2003 find that while monetary shocks drive a positive correlation real fiscal or real output shocks result in a negative correlation between stock returns and inflation from a different perspective kaul 1987 1990 argues that the relation between these two variables depends on both the money demand and the money supply specifically while the combination of money demand effects with a countercyclical monetary response accentuates a negative correlation money demand shocks along with a procyclical monetary response lead to a neutral or positive correlation between real stock returns and inflation similar arguments can be found in day 1984 kaul and seyhun 1990 boudoukh richardson and whitelaw 1994 and gallagher and taylor 2002 and are supported by compelling empirical evidence see e g kim 2003 lee 1992 as an alternative this article models the real stock return inflation relationship as intrinsically dynamic explicitly distinguishing between the short run and the long run such a distinction is crucial because imperfect information rigidity and or contractual obligations are more prevalent in the short run than in the long run in that sense the response of real stock returns to inflation could differ in the short run versus long run moreover we assess the long and short run impacts of inflation uncertainty on real stock returns as argued the real costs of inflation are associated with its uncertainty greater inflation uncertainty resulting from higher inflation may lead to economic inefficiency lower real investment and unemployment thereby reducing economic growth thus it is interesting to see if there are independent effects of inflation uncertainty on real stock returns both in the short run and in the long run in so doing this article uses an innovative econometric technique to explore the long and short run relationships between real stock returns and inflation both anticipated and unanticipated and the relationships with inflation uncertainty it departs from earlier work and complements recent evidence in at least three aspects

fiscal policy inflation and the accumulation of risky capital the effect of government policies on the level of investment and inflation has become a major concern of policy makers in a number of industrial countries proposals to raise the level of business investment have included overall tax cuts tax incentives to spur investment and a reduction in the level of government spending this paper presents a theoretical apparatus to explore the relationships between fiscal policy government debt inflation and capital accumulation it develops a one sector growth model embodying a stochastic production function and government fiscal policy atomistic agents in the economy choose consumption levels and allocate their wealth between risky capital and risky government debt to maximize expected discounted utility over an infinite horizon fiscal policy by affecting asset yields affects the composition of portfolios the price of government bonds and the accumulation of capital the model is used to answer three general questions 1 does the level of government expenditure affect the rate of capital accumulation and inflation in steady state 2 does the mode of government finance when the choice is between an income tax and deficit finance affect these magnitudes 3 what is the effect of uncertainty in the productivity of capital on growth the analysis relates to several areas of literature 1 the analysis of the relationship between capital accumulation and debt 2 the theory of the demand for government debt 3 considerations of the effect of income taxation on risk bearing and 4 the analysis of capital accumulation under uncertainty 1 the effects on output and the capital stock of the government s expenditure decision and its decision to finance its expenditure by taxation or debt issue are explored in two major bodies of economic theory the literature on the burden of the debt as developed by modigliani 1961 diamond 1965 and phelps and shell 1969 for example implies that policies which increase the value of outstanding government debt will tend to lower the level of the capital stock by displacing capital with public debt in private wealth the theory of money and growth as represented by tobin 1965 and sidrauski 1967b also implies that government debt displaces capital but specifically recognizes the role of capital gains on government debt

trade agreements and the nature of price determination the terms of trade theory of trade agreements holds that governments are attracted to trade agreements as a means of escape from a terms of trade driven prisoner s dilemma see bagwell and staiger 1999 one of the termsof trade theory s most striking predictions is about the treatment of behind the border policy measures in trade agreements according to this prediction in the noncooperative nash equilibrium from which countries would begin in the absence of a trade agreement tariffs are set inefficiently high but behind the border policies are set at efficient levels hence even in the context of a complex policy environment there is no need for member governments of a trade agreement to negotiate directly over the levels of their behind the border policies rather according to the terms of trade theory the fundamental problem for a trade agreement to solve is to prevent terms of trade manipulation and to thereby reduce tariffs and raise trade volumes without introducing distortions into the unilateral choices of domestic tax subsidy and regulatory policies as a result of the negotiated constraints on tariffs see bagwell and staiger 2001 importantly this result holds for a wide variety of government preferences and has also been shown to hold in imperfectly competitive environments the terms of trade theory of trade agreements therefore provides strong support for shallow integration as the most direct means to solve the policy inefficiencies that would arise absent a trade agreement simply put according to the terms of trade theory negotiations over tariffs alone coupled with an effective market access preservation rule that prevents governments

domestic policies national sovereignty and international economic institutions to what extent must nations cede control over their economic and social policies if global efe ciency is to be achieved in an interdependent world this question is at the center of the debate over the future role of the wto formerly gatt in the realm of labor and environmental standards in this paper we establish that the market access focus of current wto rules is well equipped to handle the problems associated with choices over labor and environmental standards in principle with relatively modest changes that grant governments more sovereignty not less these rules can deliver globally efe cient outcomes i introduction to what extent must nations cede control over their economic and social policies if global efe ciency is to be achieved in an interdependent world at a broad level this question probes the limits of any international economic institution whether geared toward real or e nancial concerns that is designed to promote global efe ciency while respecting national sovereignty naturally the answer depends upon the particular problem that the institution is meant to solve in other words the answer depends upon the inefe ciency that would arise under unilateral policy choices at a more specie c level this question is at the center of the debate concerning the appropriate scope of the world trade organization wto formerly gatt recently member countries have considered ways to broaden the wto s orientation beyond conventional trade policy measures to include labor and environmental standards there are now initiatives to introduce the issue of labor standards directly onto the negotiating agenda of the wto with the purpose of creating a wto social clause the social clause would specify a set of minimum international labor standards and then permit restrictions to be placed against imports from countries not complying with these minimum standards with regard to environmental policies a wto committee on trade and environment has been established to identify the relationships between trade and environmental measures and to

international trade agreements between countries of asymmetric size abstract this paper analyzes how changes in the structure and environment of trade agreements between a small and a large country affect the efficient frontier of those self enforcing agreements and hence negotiation outcomes using the autarky punishment instead of the interior nash punishment may provide the small country with greater bargaining power negotiating direct transfers under free trade instead of reciprocal tariff reductions improves the worst possible negotiation outcome for the small country the existence of irreversible investment may strengthen weaken the small country s bargaining power under the interior nash autarky punishment scheme

behavioral foundations of microcredit experimental and survey evidence from rural india microcredit is an innovative financial tool designed to reduce poverty and fix credit market imperfections we use experimental measures of time discounting and risk aversion for villagers in south india to highlight behavioral features of microcredit conditional on borrowing from any source women with present biased preferences are more likely than others to borrow through microcredit institutions microcredit contracts require loan repayments in regular fixed installments and they harness peer pressure to encourage discipline these innovations mirror mechanisms highlighted in behavioral approaches to saving suggesting that microcredit s popularity stems partly from modes of encouragement and self discipline absent in typical lending mechanisms

inflation and innovation with a cash in advance constraint on human capital accumulation abstract this note explores a novel channel a cash in advance cia constraint on endogenous human capital investment through which monetary policy impacts growth and welfare in a scale invariant schumpeterian growth model we find the following an increase in the nominal interest rate leads to a decrease in human capital investment which in turn reduces long run growth and welfare calibration shows that long run growth increases 0 61 by reducing the nominal interest rate from 9 9 the sample mean of the u s to 0 the corresponding welfare gain is equivalent to a permanent increase in consumption of 15 98 the growth and welfare effects depend on the strength of the cia constraint on human capital investment our study has strong policy implications for developing countries where out of pocket money may be important for schooling

inflation variability and the evolution of human capital in a model with transactions costs abstract in a monetary growth model i show that average inflation inhibits growth while inflation volatility enhances it the effect of nominal volatility on human capital accumulation depends on the response of money demand and the corresponding extent of transactions costs rather than from a direct precautionary motive

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

contrasting models of the effect of inflation on growth the paper formulates a nesting model for studying the theoretical literature on inflation and endogenous growth it analyses different classes of endogenous growth models with different usage of physical and human capital with different exchange technologies first the paper shows that a broad array of models can all generate significant negative effects of inflation on growth second it shows that these models can be differentiated primarily by the fact whether there is a tobin type effect of inflation and also whether the inflation growth effect becomes weaker as the inflation rate rises a non linearity or stays essentially constant over the range of inflation rates the paper compares these features of the models to empirical evidence as a way to summarize the efficacy of the models

how high are rates of return to fertilizer evidence from field experiments in kenya the idea that peasant farmers are rational profit maximizers has been a staple of development economics since theodore schultz 1964 it has also been influential in shaping policy for example agricultural experts have stressed the importance of fertilizer use in raising agricultural yields pointing to impressive results on experimental farms and to huge differences in agricultural productivity across countries with different levels of fertilizer use robert evenson and douglas gollin 2003 historically many countries subsidized fertilizer in response but economists have been skeptical of claims that farmers are leaving money on the table noting that fertilizer may not have the same returns on real world farms as on experimental farms that returns to fertilizer may be low for many farmers even if they are high on average tavneet suri 2007 that fertilizer may require complementary inputs or may be risky many countries have withdrawn or scaled back fertilizer psychology and development theory and experimental evidence

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

nudging farmers to use fertilizer theory and experimental evidence from kenya we model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias such farmers may procrastinate post poning fertilizer purchases until later periods when they may be too impatient to purchase fertilizer consistent with the model many farmers in western kenya fail to take advantage of apparently profit able fertilizer investments but they do invest in response to small time limited discounts on the cost of acquiring fertilizer free deliv ery just after harvest calibration suggests that this policy can yield higher welfare than either laissez faire policies or heavy subsidies

will international rules on subsidies disrupt the world trading system international disputes over subsidies have become a prominent feature of the world trading system the creation of the world trade organization wto as a successor to the general agreement on tariffs and trade gatt was nearly prevented by disputes in the uruguay round of gatt negotiations over the issue of negotiating disciplines on agricultural subsidies an issue which continues to plague the ongoing doha round of wto negotiations and ongoing disputes over subsidies that violate existing wto rules have led to the largest amount of authorized retaliation in gatt wto history yet despite their evident importance the international rules that govern subsidies have received little formal attention

real effects of money growth and optimal rate of inflation in a cash in advance economy with labor market frictions this paper studies the consequences of labor market frictions for the real effects of steady inflation when cash is required for households consumption purchases and firms wage payments money growth may generate a positive real effect by encouraging vacancy creation and raising job matches this may result in a positive optimal rate of inflation particularly in an economy with moderate money injections to firms and with nonnegligible labor market frictions in which wage bargains are not efficient this main finding holds for a wide range of money injection schemes with alternative cash constraints and in a second best world with pre existing distortionary taxes

time to change what to sow risk preferences and technology adoption decisions of cotton farmers in china this paper examines the role of individual risk attitudes in the decision to adopt a new form of agricultural biotechnology in china i conducted a survey and a field experiment to elicit the risk preferences of chinese farmers who faced the decision of whether to adopt genetically modified bt cotton a decade ago in my analysis i expand the measurement of risk preferences beyond expected utility theory to incorporate prospect theory i find that farmers who are more risk averse or more loss averse adopt bt cotton later farmers who overweight small probabilities adopt bt cotton earlier

money and growth revisited abstract conventional wisdom is that if public policy can affect the growth rate of the economy the welfare implications of alternative policies will be large in this paper a stochastic dynamic general equilibrium model with endogenous growth and money is examined in this setting inflation lowers growth through its effect on the return to work however the welfare costs of higher inflation are modest the endogenous labor supply is important in producing this result

choice under uncertainty evidence from ethiopia india and uganda we review experimental evidence collected from risky choice experiments using poor subjects in ethiopia india and uganda using these data we estimate that just over 50 of our sample behaves in accordance with expected utility theory and that the rest subjectively weight probability according to prospect theory our results show that inferences about risk aversion are robust to whichever model we adopt when we estimate each model separately however when we allow both models to explain portions of the data simultaneously we infer risk aversion for subjects behaving according to expected utility theory and risk seeking behaviour for subjects behaving according to prospect theory

decreasing impatience a criterion for non stationary time preference and hyperbolic discounting despite recent interest in hyperbolic discounting there has been little discussion of exactly what property of time preferences is instantiated by hyperbolic or quasi hyperbolic functional forms the paper revives an earlier proposal in prelec 1989 that the key property is prattarrow convexity of the log of the discount function which corresponds to decreasing impatience di at the level of preferences di provides a natural criterion for assessing the severity of departure from stationarity in that greater di is equivalent to more choices of dominated options in two stage decision problems as well as greater convexity of the log of the discount function inefficient choices may arise as intentional precommitments or as unintended reversals of preference by naive agents

the role of education in facilitating risk taking and innovation in agriculture the impact of education on farmers attitudes toward endogenous risk measured using an attitude survey instrument is estimated with household data from rural ethiopia education of the household head is found to decrease risk aversion next the effects of education and risk attitudes on technology adoption are estimated schooling encourages farmers to adopt innovations whereas risk aversion reduces the probability of adoption thus we find that schooling encourages innovation a potentially risky undertaking not only directly but also indirectly through its effect upon attitudes toward risk to the extent that educated farmers are early innovators and are copied by those with less schooling as other research on the same data has shown the reduction of riskaversion not only has private benefits for those with education but also may have externality benefits

inflation and balanced path growth with alternative payment mechanisms the paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience a negative inflation growth relation is explained including a striking nonlinearity found re peatedly in empirical studies a set of tobin 1965 effects are also explained and further linked in magnitude to the growth effects through the interest elasticity of money demand undis closed previously this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism

consumption risk technology adoption and poverty traps evidence from ethiopia much has been written on the determinants of input and technology adoption in agriculture with issues such as input availability knowledge and education risk preferences profitability and credit constraints receiving much attention this paper focuses on a factor that has been less well documented the differential ability of households to take on risky production technologies for fear of the welfare consequences if shocks result in poor harvests building on an explicit model this is explored in panel data for ethiopia historical rainfall distributions are used to identify the counterfactual consumption risk controlling for unobserved household and time varying village characteristics it emerges that not just ex ante credit constraints but also the possibly low consumption outcomes when harvests fail discourage the application of fertilizer the lack of insurance causes inefficiency in production choices

estimating individual discount rates in denmark a field experiment we estimate individual discount rates with respect to time streams of money using controlled laboratory experiments these discount rates are elicited by means of field experiments involving real monetary rewards the experiments were carried out across denmark using a representative sample of 268 people between 19 and 75 years of age individual discount rates are estimated for various households differentiated by socio demographic characteristics such as income and age our conclusions are that discount rates are constant over the 12 month to 3 year horizons used in these experiments and that discount rates vary substantially with respect to several socio demographic variables hence we conclude that it would be reasonable to assume constant discount rates for specific household types but not the same rates across all households

estimating time preferences from convex budgets experimentally elicited discount rates are frequently higher than what seems reasonable for economic decision making such high rates are often attributed to present biased discounting a well known bias of standard measurements is the assumption of linear consumption utility attempting to correct this bias using measures of risk aversion to identify concavity researchers find reasonable discounting but at the cost of exceptionally high utility function curvature we present a new methodology for identifying time preferences both discounting and curvature from simple allocation decisions we find reasonable levels of both discounting and curvature and surprisingly dynamically consistent time preferences jel c91 d12 d81 understanding and estimating time preferences is obviously of great importance to economists marketers and policy makers consumers decide how much to invest in savings education real estate and life insurance how much to diet exercise and smoke whether to marry when to have children and what to leave in their wills while there has been substantial research estimating time preferences using aggregate consumption data 1 the bulk of the effort has occurred in laboratory environments 2 among the many laboratory techniques employed recent studies have favored multiple price lists mpl with monetary payments 3 with mpls individuals are asked multiple times to choose between smaller payment amounts closer to the present and larger amounts further into the future the interest rate increases monotonically in a price list such that the point where an individual switches from preferring sooner payments to later payments carries interval

agricultural decisions after relaxing credit and risk constraints the investment decisions of small scale farmers in developing countries are conditioned by their financial environment binding credit market constraints and incomplete insurance can limit investment in activities with high expected profits we conducted several experiments in northern ghana in which farmers were randomly assigned to receive cash grants grants of or opportunities to purchase rainfall index insurance or a combination of the two demand for index insurance is strong and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture the binding constraint to farmer investment is uninsured risk when provided with insurance against the primary catastrophic risk they face farmers are able to find resources to increase expenditure on their farms demand for insurance in subsequent years is strongly increasing with the farmer s own receipt of insurance payouts with the receipt of payouts by others in the farmer s social network and with recent poor rain in the village both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance imperfect trust that promised

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

on the real effects of inflation and inflation uncertainty in mexico we estimate an augmented multivariate garch m model of inflation and output growth for mexico at business cycle frequencies the main findings are 1 inflation uncertainty has a negative and significant effect on growth 2 once the effect of inflation uncertainty is accounted for lagged inflation does not have a direct negative effect on output growth 3 however as predicted by friedman and ball higher average inflation raises inflation uncertainty and the overall net effect of average inflation on output growth in mexico is negative that is average inflation is harmful to mexican growth due to its impact on inflation uncertainty 4 the mexican presidential election cycle significantly raises inflation uncertainty both during the year of the election and the year following the election which has correspondingly negative effects on output growth

gradualism in trade agreements with asymmetric countries this paper uses recursive methods to characterize the payoff frontier of self enforcing trade agreements between countries of asymmetric size we show that at points on the frontier where only one country s incentive constraint binds the efficient agreement will be a non stationary one that starts with a positive trade distortion but eventually reaches free trade our analysis illustrates how i relative country size ii consumption smoothing incentives and iii sunk investments affect the form of efficient trade agreements in contrast to previous work on gradualism our results are obtained from a model in which the economic environment is stationary