individual risk in an investment based social security system this paper examines the risk aspects of an investment based defined contribution social security plan we focus on the risk after the plan is fully phased in individuals deposit a fraction of wages to a personal retirement account pra invest these funds in a 60 40 equity debt mix and in a similarly invested annuity at age 67 the value of the assets follows a random walk with mean and variance of a 60 40 equity debt portfolio over the period 1946 95 a mean log return of 5 5 percent net of administrative costs of 0 4 percent and a standard deviation of 12 5 percent we study he stochastic distributions of this process by doing 10 000 simulations of the 80 year experience of the cohort that reached age 21 in 1998 the resulting annuities are compared to the future defined benefits specified in current law the benchmark benefits with no uncertainty a 5 5 percent log return would permit the benchmark benefits to be purchased with pra deposits of 3 1 percent of payroll only one sixth of the pay as you go tax needed for the benchmark benefits saving a higher share of wages provides a cushion that protects the individual from the risk of an unacceptably low level of benefits for example pra deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0 17 and the probability that they are less than 61 percent of the benchmark to 0 05 pra deposits of 9 percent of wages half of the tax rate required in a pay as you go system would substantially reduce these risks this pure investment based plan is an extreme case the investment risk can be reduced further by using a mixed system that combines pay as you go and investment based components or that makes intergenerational transfers conditional on the performance of stock and bond prices this abstract was borrowed from another version of this item

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

credibility of policies versus credibility of policymakers standard models of policy credibility defined as the expectation that an announced policy will be carried out emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility whether a policy is carried out however will also reflect the state of the economy we present a model in which a policymaker maintains a fixed parity in good times but devalues if the unemployment rate gets too high our main conclusion is that if there is persistence in unemployment observing a tough policy in a given period may lower rather than raise the credibility of a no devaluation pledge in subsequent periods we test this implication on ems interest rates and find support for our hypothesis

bargaining in legislatures bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided legislative outcomes depend on those rules and on the structure of the legislature although the social choice literature provides theories about voting equilibria it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures in our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting the model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard institution free model of social choice theory yields no equilibrium

sample autocorrelation learning in a capital market model adaptive agent models are supposed to result in the same limit behavior as models with perfectly rational agents in this article we show that this claim cannot by accepted in general even in a simple capital market model where the agents apply sample autocorrelation learning to perform their forecasts by applying this learning algorithm the agents use sample means the sample autocorrelation coefficient and the sample variances of prices to predict the future prices and to determine the demand for the risky asset therefore even if the agents are not perfectly rational we require that the agents forecasts are consistent with the underlying information in this article a sufficient condition for convergence is derived analytically and checked by means of simulations the price sequence as well as the sequence of parameters estimated by means of sample autocorrelation learning converge if the initial value of the price sequence is sufficiently close to the steady state equilibrium and a random variable derived from the dividend process is not too volatile to skip the price trajectory out of the attracting region therefore the market price can even diverge and the region of convergence could become very small depending on the underlying parameters thus divergence of the price sequences is not a pathological example since it possibly occurs over a wide range of parameters therefore the often claimed coincidence of adaptive agents models and ration agent models cannot be observed even in a simple capital market model author s abstract

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

choosing and reneging on exchange rate regimes we use data on announced and actual exchange rate arrangements to ask which countries follow de facto regimes different from their de iure ones that is do not do what they say our results suggest that countries with poor institutional quality have difficulty in maintaining pegging and abandon it often in contrast many countries with relatively good institutions display fear of floating that is they manage more than announced perhaps to signal their differences from those countries incapable of maintaining promises of monetary stability jel f3 o1

classifying exchange rate regimes deeds vs words abstract most of the empirical literature on exchange rate regimes uses the imf de jure classification based on the regime announced by the governments despite the recognized inconsistencies between reported and actual policies in many cases to address this problem we construct a de facto classification based on data on exchange rates and international reserves from all imf reporting countries over the period 1974 2000 which we believe provides a meaningful alternative for future empirical work on the topic the classification sheds new light on several stylized facts previously reported in the literature in particular we find that the de facto pegs have remained stable throughout the last decade although an increasing number of them shy away from an explicit commitment to a fixed regime hidden pegs we confirm the hollowing out hypothesis but show that it does not apply to countries with limited access to capital markets we also find that pure floats are associated with only relatively minor nominal exchange rate volatility and that the recent increase in the number of de jure floats goes hand in hand with an increase in the number of de facto dirty floats fear of floating

corporate dollar debt and depreciations much ado about nothing abstract emerging markets firms often carry foreign currency debt on their balance sheets following a depreciation the expanding peso value of dollar liabilities could via a net worth effect offset the expansionary competitiveness effect to assess which effect dominates we use accounting data including the currency composition of liabilities for 450 nonfinancial firms in five latin american countries in the 1990s we find that firms holding more dollar debt do not invest less than their peso indebted counterparts following a depreciation we also show that these firms match the currency denomination of their liabilities with the exchange rate sensitivity of their profits

exploring different views of exchange rate regime choice the empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions which factors may induce a de facto peg why do countries enforce a peg but do not announce it why do countries break their promises we show that a stable socio political environment and an efficient political decision making process are a necessary prerequisite for choosing a peg and sticking to it challenging the view that sees the exchange rate as a commitment device policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio political fundamentals

constitutional rules and fiscal policy outcomes we investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies we rely on different estimation methods to address prospective problems of statistical inference due to non random selection of these constitutional rules the findings are consistent with our theoretical priors presidential regimes induce smaller governments than parliamentary democracies while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections

democratic institutions and exchange rate commitments since the collapse of the bretton woods system countries have been able to choose from a variety of exchange rate arrangements we argue that politicians incentives condition the choice of an exchange rate arrangement these incentives reflect the configuration of domestic political institutions particularly electoral and legislative institutions in systems where the cost of electoral defeat is high and electoral timing is exogenous politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate in systems where the costs of electoral defeat are low and electoral timing is endogenous politicians are more likely to adopt a fixed exchange rate regime consequently differences in domestic political systems can help account for variations in the choice of exchange rate arrangements we test this argument using constrained multinomial logit and binomial logit on a sample of twenty democracies over the period 1974 95 domestic political institutions have a significant effect on exchange rate regime choice even after controlling for systemic macroeconomic and other political variables

can agents learn their way out of chaos abstract in an olg model with adaptive learning forecast errors of the agents are analyzed in regions where the resulting dynamical system behaves chaoticly agents think they are living in stochastic world it is shown that they cannot reject the hypothesis that mean and autocorrelation coefficients of their forecast errors are 0 thus they have no incentive to switch to another learning rule predictions cannot be unmasked as being wrong because of the limited statistical tools the agents possess bounded rationality these phenomena occur in the olg model even with a cobb douglas utility function

social status and economic performance a survey abstract this survey combines ideas and results from sociology and economics recognizing that economic decisions are often shaped by social concerns and influences based on the sociological literature we define social status and describe its measurement we then describe the role of social status in economic analysis of saving and consumption wages and economic growth we review recent work on status determination in equilibrium including evolutionary models we conclude with some remarks on the need for further interaction between sociology and economics

risk preferences in multi period consumption models the equity premium puzzle and habit formation utility abstract the relationship between the relative risk aversion measure for the utility function for consumption and that for the value function for wealth is a derived relationship whose properties depend on how consumption and wealth are defined and measured this fact together with information concerning estimates for these two relative risk aversion measures is used to give another perspective on the equity premium puzzle and to explain why it is that the habit formation utility function is effective in eliminating that puzzle a time separable utility function that can serve as an alternative to the assumption of habit formation is also presented

designing social security a portfolio choice approach public social security systems may provide diversification of risks to individuals life time income capturing that a pay as you go program paygo may be considered as a quasiasset we study the optimal size of the social security program as well as the optimal split between a funded part and a paygo part by means of a theoretical portfolio choice approach a low yielding paygo system can benefit individuals if it contributes to hedge other risks to their lifetime resources moreover a funded part of the social security system can be justified by potential imperfections to the individuals free access to the stock market numerical calculations for sweden norway the us and the uk demonstrate that the optimal size of paygo part of the pension program varies considerably in response to differences in projected growth rates and the correlation between stock returns and growth our calculations suggest that a paygo program has an important role in the three former countries but not in the u k

capital account liberalization what do cross country studies tell us capital account liberalization it is fair to say remains one of the most controversial and least understood policies of our day one reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows another is that empirical analysis has failed to yield conclusive results the answer another influential strand of thought contends is that this efficient markets paradigm is fundamentally misleading when applied to capital flows limits on capital movements are a distortion it is an implication of the theory of the second best that removing one distortion need not be welfare enhancing when other distortions are present

consistent expectations equilibria and learning in a stock market abstract in this article we investigate the question whether the highly demanding informative requirements of rational expectations models are necessary to derive equilibria within capital market models in this analysis agents are only provided with publicly available information such as prices and dividends nevertheless we require that agents should behave like econometricians additionally we skip the assumption of rational expectations models that agents know the implied actual law of motion of the system by these assumptions the stock market can be considered as a hommes sorger consistent expectations model we show the existence of consistent expectations equilibria with myopic agents and independent identically distributed dividends the only cee is the rational expectations equilibrium in the simulation part we demonstrate how the steady state cee can be derived by means of sample autocorrelation learning thus we are able to derive a stock market equilibrium with less demanding requirements where this equilibrium is equal to the rational expectations equilibrium

learning and inflation convergence in the erm this paper develops a model where agents learn about the probability of devaluations in a fixed exchange rate regim e the true probability of devaluation is assumed to be low or zero b ut agents are initially unsure about the government s intentions and st art with a high prior belief bayesian updating dictates that private sector expectations are revised down during periods when no devaluat ion occurs but are sharply increased when a devaluation does occur thi s model of learning is embedded in a model of overlapping contracts to study the process of inflation convergence after erm entry the main results are that agents over estimate the authorities desired realignment rate so inflation will be high in anticipation but as the authorities do not actually devalue there is a terms of trade loss leading to recession before long run equilibrium in which agents correctly estimate realignment rates can be attained competitivenes s losses actually have to be regained by a sustained deflation copyright 1993 by royal economic society

fiscal policy when monetary policy is tied to the mast the paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy the equilibrium under discretion is characterised by inflation and a deficit comm

labor markets and adjustment in open asian economies the republic of korea and malaysia this article deals with the adjustment following external shocks in two open asian economies the republic of korea and malaysia there were important differences in the economic structure of the two countries as well as significant differences in the way external events produced crises that interrupted their dynamic economic growth detailed analyses of economic cycles in the two decades preceding 1987 88 show that the behavior of factor markets particularly the markets for labor and foreign exchange helped korea to adjust quickly to the shocks but in malaysia actually caused the crisis to deepen for economies heavily dependent on exports the unit cost of labor in dollars is of central importance as an index of the competitiveness of exports and hence of their ability to mount a sustained recovery after a difficult period accordingly the heart of the analysis is the determination of the unit cost of labor and the factors affecting its change throughout the cycles concentration on this critical variable helps to spotlight the crucial differences in the factor markets of the two economies

euroization what factors drive its persistence household data evidence for croatia slovenia and slovakia the question asked in this article is why people continue to use foreign currencies even after their economies have stabilized survey data for croatia slovenia and slovakia are employed to provide an answer the results confirm the role of network effects and of remittances furthermore the extent of currency substitution is found to be positively associated with the level of income and education an important aspect of euroization seems to be age older people are more likely to hold foreign currencies in contrast neither expectations about inflation rates nor about exchange rates do seem to affect the degree of euroization in a systematic and predictable way trust in the banking system is found to affect the choice between foreign currency cash and foreign currency deposits overall the results support the view that the persistence in the use of foreign currencies is driven to a large extent by factors that are related to the past

prospects for social security reform preface part i what is the social security problem 1 an overview of the issues 2 measuring solvency in the social security system 3 criteria for evaluating social security reform 4 new opportunities for the social security system part ii assessing the economic impact of social security 5 social security money s worth 6 simulating benefit levels under alternative social security reforms 7 stochastic simulation of economic growth effects 8 thinking about social security s trust fund 9 government guarantees for old age income 10 means testing social security 11 social security and employer induced retirement part iii political and practical considerations regarding social security reform 12 compliance in social security systems around the world 13 employer responses to social security reform 14 an actuarial perspective on how social security reform could influence employer sponsored pensions 15 an organized labor perspective on social security reform 16 women as widows under a reformed social security system 17 investment and administrative constraints on individual social security accounts 18 americans views of social security and social security reforms contributors index

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

an empirical inquiry into the role of sectoral diversification in exchange rate regime choice abstract whether sectoral diversification affects the exchange rate regime choice and the mechanisms through which this effect might work are largely unknown this study identifies two mechanisms through which sectoral diversification and exchange rate regime choice may be related namely the external shock absorption and rent seeking mechanisms a direct effect of diversification on regime choice is also hypothesized using a panel dataset covering 91 countries over the period 1985 2006 the paper runs a horse race among these potential channels the results show that diversification is associated with flexible regimes in countries experiencing greater external shocks additionally countries characterized by higher levels of corruption and lower levels of diversification opt for fixed regimes suggesting that a fixed regime may shield the powerful elites from international competition there is also weak evidence of the direct effect of diversification in adopting flexible regimes

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

the optimal mix between funded and unfunded pension systems when people care about relative consumption the paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption in pay as you go systems with fixed contribution rates pensions are tied to wages this lowers the uncertainty of individuals future relative position thereby increasing the attractiveness of unfunded systems the paper shows analytically that the optimal share of funding decreases with the importance of relative standing a calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding for reasonable assumptions it is typically around 20

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

the economic determinants of the choice of an exchange rate regime a probit analysis abstract probit models were used to analyze the choice of exchange rate regimes by developing countries in the period 1977 1995 the results show the preeminence of criteria postulated in the theory of optimum currency areas i e individual structural characteristics

national culture and the choice of exchange rate regime abstract based on the social analysis framework of williamson we argue that national culture especially the individualism collectivism dimension located in the social embeddedness level can guide behaviors and decisions in a country including the choice of exchange rate regime we argue that individualistic societies are more likely to choose floating regimes because their economic agents are independent overconfident and have higher levels of risk tolerance individualistic societies are also associated with better financial development fewer capital controls and more democratic institutions which are all tied to a higher probability of choosing a floating exchange rate regime we use data on 78 countries over the 1976 2014 period and we control for common determinants of exchange rate regimes we find that individualistic countries have a significantly higher probability of implementing a floating regime than a fixed regime our evidence is robust to using an instrumental variables approach an alternative estimation technique an alternative regime classification alternative proxies for culture a subsample analysis and additional controls we also find that other cultural dimensions uncertainty avoidance power distance and masculinity can influence the choice of exchange rate regime but their effect is weaker than that of individualism

does government ideology matter in monetary policy a panel data analysis for oecd countries this paper examines whether government ideology has influenced monetary policy in oecd countries we use quarterly data in the 1980 1 2005 4 period and exclude emu countries our taylor rule specification focuses on the interactions of a new time variant index of central bank independence with government ideology the results show that leftist governments have somewhat lower short term nominal interest rates than rightwing governments when central bank independence is low in contrast short term nominal interest rates are higher under leftist governments when central bank independence is high the effect is more pronounced when exchange rates are flexible our findings are compatible with the view that leftist governments in an attempt to deflect blame of their traditional constituencies have pushed market oriented policies by delegating monetary policy to conservative central bankers

capital controls and foreign exchange market intervention abstract high level of capital controls and volatile exchange rates in developing countries are considered suboptimal in classical trilemma frameworks the paper presents a new keynesian small open economy model that assesses middle ground policies such as partial capital controls and managed exchange regimes the paper introduces a policy endogenous risk premium which creates financial frictions breaking exchange rate peg exposes foreign investors to exchange rate risk and even signals the country s economic instability and financial sector responds by raising the country s exchange rate risk premium contrary to the classical theory the results suggest that implementing both capital controls and managed exchange regimes can be optimal while maintaining domestic monetary policy sovereignty

the gains from pension reform we classify social security pension systems in three dimensions actuarial versus non actuarial funded versus unfunded and defined benefit versus defined contribution systems recent pension reforms are discussed in terms of these dimensions shifting to a more actuarial system reduces labor market distortions although limiting the scope for redistribution shifting to a funded system may increase saving redistribute income to future generations and distort contermporary labor supply a partial shift to a funded system helps individuals diversify their pension assets a shift from a defined benefit to a defined contribution system means that income risk will be shifted from workers to pensioners

chaotic learning equilibria chaotic temporary equilibrium trajectories under least squares learning are shown to exist in a standard version of the overlapping generations model theses trajectories show forecast errors that never vanish thus we do not find convergence to an equilibrium in which agents have perfect foresight complex trajectories can even be found in the case of savings functions which are monotonically decreasing in the expected gross rate of inflation in this case no cyclical or chaotic trajectories with perfect foresight exist thus learning alone is a source of chaotic dynamic journal of economic literature classification numbers d83 d84

a portfolio approach to the optimal funding of pensions abstract fully funded pension systems are advocated for their higher rate of return but this return is typically risky using a simple mean variance model we find that mixed funded unfunded systems are desirable in this setting because they enable risk diversification

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

capital account liberalization as a signal the authors present a model in which a government s current capital control policy signals future policies controls on capital outflows evolve in response to news on technology conditional on government attitudes toward taxation of capital when there is uncertainty over governmental types a policy of liberal capital outflows sends a favorable signal that may trigger a capital inflow this prediction is consistent with the experience of several countries that have liberalized their capital accounts copyright 1997 by american economic association

the effect of government ideology on an exchange rate regime some international evidence this paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974 2009 our results clearly indicate that a left wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes nevertheless evidence is weaker when using the de jure imf course classification which is set up by ilzetzki et al 2008 in a deeper investigation we find that left wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of oecd non oecd and non eurozone countries as the impacts from government ideology on the determinant of the choice of exchange rate regime in eurozone countries disappear more importantly we present many explanations for exchange rate regime choices when macroeconomic conditions political constraints and institutions impact the choice of exchange rate regime