calculating and using second order accurate solutions of discrete time dynamic equilibrium models we describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectations models the paper also explains methods for using such an approximate solution to generate forecasts simulated time paths for the model and evaluations of expected welfare differences across different versions of a model the paper gives conditions for local validity of the approximation that allow for disturbance distributions with unbounded support and allow for non stationarity of the solution process

spatial competition and vertical integration cement and concrete revisited reply in this review 1983 mark mcbride reconsiders the federal trade commission s ftc enforcement policy toward vertical mergers between cement and ready mix concrete firms in response to a significant increase in acquisitions of ready mix concrete firms by cement manufacturers during the 1960 s the ftc undertook a series of legal actions to block or dissolve the mergers the actions of the ftc constituted one of the most intensive efforts undertaken to date to challenge vertical mergers in a single industry mcbride p 1012 notes that the actions of the ftc provoked considerable debate concerning the motivation for the mergers both in the industry and in academe a significant number of articles were published advancing various reasons for the mergers in addition to the ftc s main contention that the mergers were motivated by a desire for captive markets it has been suggested that there were economies of integration or that the mergers were the outcome of an erroneous view of the potential benefits to foreclosure held by executives in the beleaguered cement industry 2 mcbride s 1983 paper offers another explanation for the mergers his argument is that vertical integration was undertaken to avoid rigid oligopolistic pricing in the cement industry 3 the empirical results presented by mcbride suggest that vertical integration was a significant factor in the decline of cement prices in the 1960 s the purpose of this comment is to point out some of the problems with mcbride s analysis in particular we show that the experimental design of his testing equation is faulty and does not offer a test of his hypothesis as a result mcbride s analysis does not provide convincing evidence on whether cement firms vertically integrated to avoid rigid oligopolistic pricing or if cement firms were merely reacting to prices that had already begun to decline our intent however is not to challenge mcbride s contention that vertical integration can provide lower prices to consumers rather we would argue that the evidence presented at the ftc hearings involving cement and ready mix concrete firms as well as mcbride s and others analyses illustrate the problems in discerning the motives for mergers 4

second order approximation of dynamic models with time varying risk abstract this paper provides first and second order approximation methods for the solution of non linear dynamic stochastic models in which the exogenous state variables follow conditionally linear stochastic processes displaying time varying risk the first order approximation is consistent with a conditionally linear model in which risk is still time varying but has no distinct role separated from the primitive stochastic disturbances in influencing the endogenous variables the second order approximation of the solution instead is sufficient to get this role moreover risk premia evaluated using only a first order approximation of the solution will be also time varying

monetary shocks and sticky wages in the u s great contraction a multi sector approach abstract we quantify the role of contractionary monetary shocks and nominal wage rigidities in the u s great contraction in contrast to conventional wisdom we find little increase in the economy wide real wage over 1929 33 although real wages rose significantly in some industries in the context of a two sector model with intermediates and nominal wage rigidities in one sector contractionary monetary shocks account for only a third of the fall in gdp intermediate linkages play an important role as the output decline without intermediates is almost a third larger at the trough the role of nominal wage rigidities beyond their interaction with monetary shocks is limited

forward integration by a monopolist some extensions vertical integration by imperfectly competitive firms poses both positive and normative economic questions the positive questions concern the incentives of such firms to engage in forward or backward integration on the other hand the normative questions concern the impact of integration by such firms on social welfare if the incentives of imperfectly competitive firms lead to a welfare gain then there is no need for public intercession in the process say by antitrust authorities however if private incentives are at odds with social welfare then public policy attention may be needed these matters are considered in an extensive theoretical and empirical literature on vertical integration a review of the central issues in this literature is provided by machlup and taber 5 and warren boulton 12 here i shall focus on the recent work by schmalensee 8 and warren boulton 11 on forward integration by a monopolist the basic insight of their models is as follows suppose a monopolist is producing a product used as an input by a competitive downstream industry in variable proportions with another input monopoly pricing of the first input induces inefficient input utilization by the downstream industry in the production of the final good the monopoly input price exceeds its marginal costs of production the resulting efficiency loss represents an incentive for the monopolist to integrate forward by producing the final product in an integrated firm the monopolist transfer prices the otherwise monopolized input at marginal costs and thereby converts the efficiency loss into profit this point was originally made by burstein 3 but the recent work appears to have been motivated by the graphical formulation of vernon and graham 10 after developing the case of a fixed proportions technology we present the vernon and graham illustration

spurious welfare reversals in international business cycle models several papers have documented spurious welfare reversals incompletemarkets economy produces a higher level of welfare than the completemarkets economy this paper first demonstrates how conventional linearization can generate approximation errors that can result in welfare reversals using a two country production economy we argue that spurious welfare reversals are not only possible but also plausible under reasonable values for model parameters this paper then proposes an approximation method that modifies the conventional linearization by a bias correction this method can be easily implemented and approximates welfare as accurately as a second order perturbation method

the uncertainty multiplier and business cycles abstract i study a business cycle model where agents learn about the fundamentals by accumulating capital during recessions agents invest less and this generates noisier estimates of macroeconomic conditions and an increase in uncertainty the endogenous increase in aggregate uncertainty further reduces economic activity and thus gives rise to a multiplier effect that amplifies aggregate fluctuations to discipline learning dynamics i parametrize the model so that it matches not only standard business cycle moments but also survey data on macroeconomic forecasts i find that the uncertainty multiplier amplifies output standard deviation by 16

environmental policy and macroeconomic dynamics in a new keynesian model this paper studies the dynamic behavior of an economy under different environmental policy regimes in a new keynesian model with nominal and real uncertainty we find the following results i an emissions cap policy is likely to dampen macroeconomic fluctuations ii staggered price adjustment alters significantly the performance of the environmental policy regime put in place iii the optimal environmental policy response to shocks is strongly influenced by the degree to which prices adjust and by the monetary policy reaction

labor market dynamics when un employment is a social norm this paper proposes a new keynesian model with search and matching frictions in the labor market that can account for the cyclicality and persistence of vacancies unemployment job creation inflation and the real wage after a monetary shock motivated by evidence from psychology unemployment is modeled as a social norm the norm is defined here as the belief that individuals in society prioritize or should prioritize the search for gainful employment whereas those who do not are perceived as outside the norm and consequently stigmatized households pressure the unemployed to find jobs the fewer unemployed workers there are the more supporters the norm has and therefore the greater the pressure and psychological cost experienced by each jobseeker as this psychological cost is procyclical it hinders the wage from absorbing most of the effect of the shock thus the model is able to capture the high volatility of vacancies and unemployment observed in the data accounting for the shimer puzzle the paper also departs from the literature by introducing price rigidity in the labor market inducing additional inertia and persistence in inflation and the real wage after a monetary shock the model s responses after a monetary shock are in line with the responses obtained from a var on us data

the paradox of vertical integration antitrust policy and commentary include a persistent suspicion that vertical integration may increase market power in the integrated industries the facet of this suspicion that economists have analyzed most is conveyed as follows suppose that a pure monopoly sells an intermediate good to the firms in a final product industry and that the monopolist acquires all of those firms since the firms in the final product industry have been combined vertical integration has extended monopoly to a second industry the integration does not improve production technologies or product traits in either industry nor reduce transaction costs thus abstracting from any economies of integration this paper concerns the paradox that economic models usually show vertical integration increasing economic welfare in spite of the extension of monopoly and even in the absence of any economies since economies would also enhance welfare these models contradict the suspicion that vertical integration is harmful in a recent survey of these models blair and kaserman have commented that o n the basis of these results the economics profession generally argued that the appropriate antitrust policy regarding vertical integration was conciliation at best or neutrality at worst 2 2 the only contrary result is in models where inputs are substitutable in final production sometimes vertical integration reduces welfare however in order to focus sharply on the paradoxical welfare result this paper assumes fixed input proportions and ignores any economies of integration section i has a summary model that sets the stage for the succeeding analysis the principal discovery of this paper is that the paradox is not in general valid even for a simplified model this discovery appears when the assumption of pure input monopoly which is universal in the existing literature is relaxed in section ii the new model includes situations in which integration reduces welfare contrary to the usual result these contradictory situations have strong implications for antitrust policy because the analysis also shows that they ate the only kinds of situations that antitrust enforcers are likely to confront

political competition within and between parties an application to environmental policy this paper presents a political economy model that explains the low rate of emission taxes in the u s as well as the fact that neither democrats nor republicans propose to increase them the voters differ according to their wage and capital incomes which are assumed to have a bivariate lognormal distribution they vote over the emission tax rate and a budgetary rule that specifies how to redistribute the tax proceeds the political competition is modeled a la roemer 2001 where the two parties care for the policies they propose as well as the probability of winning the equilibrium solution concept is the party unanimity nash equilibrium pune we calibrate the model using u s data and compute the punes numerically two main results emerge all viable punes entail subsidies on emissions as opposed to taxes this indicates the importance of distributional concerns in garnering political support for environmental policies second parties always propose an interior value for the budgetary rule even though all citizens prefer extreme values this illustrates the emergence of political compromise to attract voters

euro area inflation persistence in an estimated nonlinear dsge model abstract we estimate the approximate non linear solution of a small dsge model on euro area data using the conditional particle filter to compute the model likelihood our results are consistent with previous findings based on simulated data suggesting that this approach delivers sharper inference compared to the estimation of the linearised model we also show that the non linear model can account for richer economic dynamics the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample

inflation stabilization and welfare the case of a distorted steady state this paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price setting rotemberg and woodford 1997 and woodford 2002 have shown that under certain conditions a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function in which each period s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values zero however those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolistically competitive price setters so that the steady state under a zero inflation policy involves an efficient level of output here we show how to dispense with this unappealing assumption so that a valid linear quadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary extent allowing for tax distortions as well as market power and when as a consequence it is necessary to take account of the effects of stabilization policy on the average level of output we again obtain a welfare theoretic loss function that involves both inflation and an appropriately defined output gap though the degree of distortion of the steady state affects both the weights on the two stabilization objectives and the definition of the welfare relevant output gap in the light of these results we reconsider the conditions under which complete price stability is optimal and find that they are more restrictive in the case of a distorted steady state we also consider the conditions under which pure randomization of monetary policy can be welfare improving and find that this is possible in the case of a sufficiently distorted steady state though the parameter values required are probably not empirically realistic

wage or price based inflation alternative targets in optimal monetary policy rules abstract in this paper the optimality of a specific variant of monetary policy rules a la taylor is tested within a general equilibrium monetary model with both nominal and real rigidities the traditional taylor rule is amended by the inclusion of the growth rate of nominal wage or wage inflation nominal rigidities are inserted via quadratic adjustment costs for both prices and wages a la rotemberg 1982 sticky prices in the united states journal of political economy 90 1187 1211 and kim 2000 constructing and estimating a realistic optimizing model of monetary policy journal of monetary economics 45 329 359 cost of capital adjustment together with a positive steady state inflation rate allow the model to match the main empirical facts about us economy the model is solved by using a second order approximation around the non stochastic steady state as in kim et al 2008 calculating and using second order accurate solutions of discrete time dynamic equilibrium models journal of economic dynamics and control 32 11 3397 3414 the welfare metric is offered by the second order expansion of the utility function conditional to the non stochastic steady state the results show that wage inflation targeting is welfare improving when coupled with inflation targeting moreover optimal monetary rules include also a positive coefficient for output targeting as the need to smooth out quantity adjustments induced by real and nominal rigidities similar results occurs when both targets are in expected value one period ahead the model shows good in sample and out of sample properties

when is discretion superior to timeless perspective policymaking the monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective woodford 1999a however by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely using standard new keynesian dsge models discretion is found to dominate timeless perspective policymaking when the price wage phillips curves are relatively flat due perhaps to firm specific capital or labor and or kimball 1995 aggregation in combination with nominal rigidities these results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion paying careful attention to how policy performance is evaluated

computing second order accurate solutions for rational expectation models using linear solution methods this paper shows how to compute a second order accurate solution of a non linear rational expectation model using algorithms developed for the solution of linear rational expectation models the result is a state space representation for the realized values of the variables of the model this statespace representation can easily be used to compute impulse responses as well as conditional and unconditional forecasts

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

the yield curve and macroeconomic dynamics we show that microfounded dsge models with nominal rigidities can be successful in replicating features of bond yield data including sizeable term premia and volatile long term yields which have previously been considered puzzling in general equilibrium frameworks at the same time sample moments of consumption growth and inflation can be fit relatively well the improved model performance does not arise directly from the presence of nominal rigidities however this feature introduces short run monetary non neutrality so that monetary policy affects consumption dynamics and bond prices a high degree of interest rate smoothing in the policy rule is essential for our results at the core of dynamic macroeconomic models we find equilibrium relationships which describe the allocation of quantities e g consumption and investment and when imperfect competition prevails the setting of prices these equations are typically valid across time and across states of nature and financial assets form the tool that is supposed to ensure their validity financial assets are therefore an integral part of macroeconomic models any well specified model should be able to match financial data as well as macro data it is therefore problematic that microfounded models have had a hard time explaining key features of asset prices the most famous example of this difficulty is the equity premium puzzle but various features of bond yield data have also been char acterised as puzzling in the literature a number of papers including backus et al 1989 donaldson et al 1990 den haan 1995 and chapman 1997 have con cluded that general equilibrium models cannot generate term premia of a magnitude comparable to what we observe in actual data and may not even be capable of producing positive term premia for equity one could argue that fundamentals the expected future profitability of individual firms are unobservable and difficult to evaluate equity prices may therefore be thought to be subject to fluctuations disconnected from the real economy information acquisition fads etc and one could hope that the inability of macroeconomic models to match equity prices does not represent a signal of misspecification this argument is more difficult to construct for bonds bond yields should ultimately reflect expectations of future monetary policy decisions which at least in recent years are arguably more predictable than equity fundamentals thus the ability of macroeconomic models to explain bond prices represents an important test of their empirical performance in this article we revisit the relationship between bond prices and macroeconomic fundamentals contrary to the papers cited above that rely on flexible price models we

yield curve in an estimated nonlinear macro model this paper estimates a sticky price macro model with us macro and term structure data using bayesian methods the model is solved by a nonlinear method the posterior distribution of the parameters in the model is found to be bi modal the degree of nominal rigidity is high at one mode sticky price mode but is low at the other mode flexible price mode i find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve when prices are more flexible a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long run inflation expectations in contrast when prices are more sticky a highly persistent markup shock is the main driver the posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode although to a lesser degree than using survey data information

when to exit a product evidence from the u s motion picture exhibition market when is it optimal for a multi product firm to exit a product we analyze strategic product exit using data on motion pictures exhibition choices in a major metropolitan first run market to estimate the survivor function for films at a given theatre this analysis indicates that a film s survival at a particular theatre is affected by intra firm relative performance and interfirm competitive pressures we find that theatres within chains avoid business stealing preliminary analysis further suggests that theatres compete for market share with neighboring theatres by increasing the time to exit when the competing theatre is owned by a different chain this abstract was borrowed from another version of this item

the changing transmission of uncertainty shocks in the u s this article investigates if the impact of uncertainty shocks on the u s economy has changed over time to this end we develop an extended factor augmented vector autoregression var model that simultaneously allows the estimation of a measure of uncertainty and its time varying impact on a range of variables we find that the impact of uncertainty shocks on real activity and financial variables has declined systematically over time in contrast the response of inflation and the short term interest rate to this shock has remained fairly stable simulations from a nonlinear dynamic stochastic general equilibrium dsge model suggest that these empirical results are consistent with an increase in the monetary authorities antiinflation stance and a flattening of the phillips curve supplementary materials for this article are available online

fifth order perturbation solution to dsge models abstract this paper derives a fifth order perturbation solution to dsge models the paper develops a new notation that reduces the notational complexity of high order solutions and yields a faster code the new notation consists of new matrix forms of high order multivariate chain rules and a new representation of the model as a function of one vector variable the algorithm that implements the new notation is between 3 and 55 times faster than dynare depending on model size and solution order

environmental taxes with heterogeneous consumers an application to energy consumption in france abstract this paper constructs a model with four groups of households who have preferences over labor supply consumption of polluting energy related and non polluting non energy goods and emissions it quantifies the model for the french economy and computes its optimal tax equilibria under nine second best tax regimes we find that the redistributive role of environmental taxes requires the polluting goods to be taxed at a rate much below their marginal social damage these goods may even require an outright subsidy if the society values equality a lot secondly if environmental taxes that have an exclusively externality correcting role they benefit all types although the gains are rather modest the gains and losses become more substantial when environmental taxes have a redistributive role as well third setting the environmental tax at its pigouvian level rather than its optimal externality correcting cum redistributive level benefits the high income group at the expense of the low income groups fourth nonlinear taxation of polluting goods and nonlinear commodity taxation in general is a powerful redistributive mechanism fifth introducing environmental taxes in the current french tax system with its suboptimal income taxes results in substantial welfare gains for the highest income group and a sizable loss for the least well off persons

patience persistence and welfare costs of incomplete markets in open economies abstract we investigate the welfare implications of alternative financial market structures in a two country endowment economy model we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset and we compare this welfare level with that obtained under complete asset markets the welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent for realistic cases in which agents are very patient and shocks are highly persistent the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

the un importance of unemployment fluctuations for the welfare cost of business cycles abstract this paper studies the cost of business cycles within a real business cycle model with search and matching frictions in the labor market we endogenously link both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk the key result of the paper is that business cycles are costly fluctuations over the cycle induce a higher average unemployment rate since employment is nonlinear in the job finding rate and the past unemployment rate we show this analytically for a special case of the model we then calibrate the model to u s data for the calibrated model too business cycles cause higher average unemployment the welfare cost of business cycles can easily be an order of magnitude larger than lucas s 1987 estimate the cost of business cycles is the higher the lower the value of nonemployment is or equivalently the lower is the disutility of work the ensuing cost of business cycles rises further when workers skills depreciate during unemployment

causes of nonlinearities in low order models of the real exchange rate abstract this paper investigates the extent to which modern dsge models which feature local currency pricing home bias nontraded goods and incomplete markets can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current floating period our key findings are as follows first if the true model can be appropriately characterized as a set of linear equations then linearity tests that utilize univariate autoregressions of the real exchange rate suffer from an omitted variables problem which leads them to overestimate the true incidence of nonlinearity consequently studies that fail to control for this problem may spuriously find evidence of nonlinearities in the data despite the fact that the data generating process may be linear second we propose a strategy that can largely eliminate this distortion finally we find that dsge models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

on the marginal cost of public funds and the optimal provision of public goods abstract this paper argues that in models with heterogeneous agents the concept of the marginal cost of public funds mcpf will only be useful if it is compared with an analogous concept for the benefit side the mcpf does not assume a unique value and is not particularly illuminating in and out of itself also gone is the benchmark status of mcpf 1 turning to the provision of public goods using a mechanism design approach the paper constructs a two stage proof for kaplow s kaplow l 1996 the optimal supply of public goods and the distortionary cost of taxation national tax journal 49 513 533 proposition concerning the irrelevance of labor supply and distributional concerns in public good provision this highlights the two fundamental ingredients for his result first the provision of public goods per se when it satisfies the samuelson s rule is only potentially pareto improving second the actual pareto improvement will materialize when or if one reforms the income tax structure if the reform is not forthcoming the decision on public goods provision must rely on redistributional concerns finally the paper generalizes broadway and keen s boadway r keen m 1993 public goods self selection and optimal income taxation international economic review 34 463 478 result to a model with many types of agents many private goods and without making any assumptions regarding which self selection constraints are or are not binding

environmental tax design with endogenous earning abilities with applications to france abstract this paper studies environmental taxation in a mirrlees setting with two novel features first energy a polluting good is used both as a factor of production and a final consumption good second the wage is determined endogenously while labor of different individual types remain homogeneous the model is calibrated for the french economy we show that i the optimal tax is less than the marginal social damage of emissions and turns into an outright subsidy when the inequality aversion index is high ii the optimal tax on energy as an input is always equal to its marginal social damage iii the social welfare gain due to lowering the current energy taxes to their optimal levels with the general income tax being set optimally in both cases is between 17 and 32 euro per household this hurts the rich and benefits the poor

vertical integration and collusive incentives an experimental analysis abstract we consider vertically related industries with multiple downstream markets firms make simultaneous output choices in a repeated game upstream duopolists merge with producers in one of the downstream markets that also is a duopoly experimental duopoly markets are constructed to assess the effects of vertical integration upon outputs and profits we find that integration raises outputs in both downstream and upstream markets although only the upstream effect is statistically significant integrated profits are lower and consumer welfare is higher the integrated markets tend to equilibrate more quickly

solving endogenous regime switching models abstract this paper solves rational expectations models in which structural parameters switch across multiple regimes according to state dependent endogenous transition probabilities assuming small shocks and smooth transition probabilities we apply a perturbation approach we first provide for conditions under which a unique bounded equilibrium exists we then compute first and second order approximations in a new keynesian model with monetary policy switching we document new effects of monetary policy switching when transition probabilities depend on inflation

factor substitutability monopoly and vertical integration a heuristic analysis a monopolist of an intermediate good can extract profit from final consumers only indirectly since it only sells to other firms which in turn produce final products if those final producers substitute other inputs for the one the monopolist sells they would not see that their substitution cuts into the monopolist s profit because of this vertical externality 10 179 the monopolist would earn less than the maximum monopoly rent although the final producers would minimize their nominal costs their input combination would be suboptimal vernon and graham 11 showed that the monopolist would increase both its profit and economic welfare by vertically integrating to reverse such input substitution for a given final output schmalensee 9 then investigated what portion of a perfectly competitive final product industry the input monopolist would acquire while he found that complete integration would maximize profits schmalensee also discovered that the integration would affect final output and its price but that the effect was ambiguous obviously the welfare gain from lower real costs would be offset partially or entirely if integration also reduced output this ambiguity differed from analyses that had assumed a fixed input proportion in final production with fixed proportions integration never would reduce output and always would increase welfare the many refinements of schmalensee s analysis have shown that whether integration by the monopolist would increase or decrease final production depends on the elasticities of final demand and input substitution 3 6 7 12 13 the ambiguous effect on output that occurs when inputs are substitutable has become part of the lore about vertical integration and has been an element in the debates about antitrust policy toward vertical integration 2 168 this literature is very technical and does not have any single clear result comparable to that in the fixed proportions case for that reason it is difficult to convey intuitively this paper takes a heuristic approach that adds to this literature in several ways first the two components in the anatomy of integration are derived explicitly for the first time the first is a change in input proportions so as to reduce real costs the second is a broadening of monopoly 8 27 each of these components can affect final output revealing the anatomy shows that the component due to the change in the input proportions in final production not only reduces real cost it always con

fiscal federalism and monetary unions a quantitative assessment abstract in this paper i provide a quantitative analysis of three different forms of fiscal federalism in monetary unions fully decentralized regional fiscal authorities as the benchmark fiscal equalization with nominal tax revenue sharing and a common central fiscal authority i assess the capability of the different arrangements to stabilize regional consumption output and employment over the business cycle i also study the implications for interregional income consumption risk sharing and welfare from this analysis the following results emerge first a central fiscal authority stabilizes consumption fluctuations and increases the scope of interregional income and consumption risk sharing second fiscal equalization destabilizes consumption fluctuations and also reduces the scope of interregional income and consumption risk smoothing third a central fiscal authority leads to welfare gains whereas fiscal equalization leads to welfare losses