the inflation targeting regime in the united kingdom a view from threadneedle street the recent financial crisis and subsequent deterioration in macroeconomic outcomes have raised question marks over the framework for monetary policy in the united kingdom this paper examines the performance of the uk s monetary policy framework in the light of these questions far from concluding that inflation targeting needs to be replaced we argue in the paper that the regime has provided a clear policy compass that facilitated strong and decisive monetary policy decisions during the financial crisis we argue that it should remain the mainstay of the uk macroeconomic policy framework even so lessons need to be learnt to prevent financial market excesses from destabilizing the economy in future the single most important being the need to expand the range of instruments available to policy makers copyright 2010 oxford university press

remaking macroeconomic policy after the global financial crisis a balance sheet approach this paper describes the origins of the global financial crisis and how the prevailing new keynesian macroeconomic orthodoxy failed to anticipate its severity this failure we argue stemmed from an incomplete understanding of the pivotal role of financial institutions in the amplification of the crisis and its transmission to the wider economy low global interest rates and a consequent search for yield in the pre crisis period encouraged financial institutions to build highly leveraged balance sheets which in turn generated extremely large asset price movements when a small event the downturn in the us sub prime mortgage market triggered the crisis the paper then briefly describes the element of the broadly successful and coordinated macroeconomic policy response to the crisis before turning to the medium term challenges facing policymakers in sustaining global recovery at the national level we focus on the resolution of fiscal imbalances which contributed in part to the crisis and which then worsened because of the policy actions which have been taken to deal with it at the international level we emphasise the need to rectifying the imbalances between savings and investment in many significant countries this will require greater coordination of macroeconomic policy across the world s major economies it will also involve strengthening the role and the governance of the international monetary fund

tariff evasion and rules of origin violations under the canada u s free trade agreement using product level data on trade between canada and the u s this paper presents evidence of tariff evasion and violation of the rules of origin occurring under the canada u s free trade agreement cusfta it shows that more imports go unreported at the destination country when tariffs are higher consistent with the tariff evasion hypothesis this result implies that the trade creation effect of a free trade agreement may in fact be due to less underreporting further this paper shows that the larger canadian tariff preference margin for the u s is associated with more goods originating in third countries being transshipped through the u s territory for re export the preference margin is also positively correlated with the value of excess imports from the u s which qualify for preferential treatment both results suggest the presence of persistent violations of cusfta s rules of origin a l aide de donnees au niveau des produits sur les flux de commerce entre le canada et les etats unis on montre qu il y a evitement de tarif et violation des regles d origine dans les operations de l accord de libre echange canada etats unis on montre que davantage d importations ne sont pas declarees au point de destination quand les tarifs sont eleves dans l esprit meme de l hypothese d evitement de tarif ce resultat implique que l effet de creation de commerce d un accord de libre echange peut en fait etre attribuable a moins de sous declaration de plus le texte montre que les plus grandes marges preferentielles des tarifs avec les etats unis sont associees a davantage de biens en provenance de tiers pays et convoyes a travers le territoire americain pour re exportation la marge preferentielle est aussi positivement co reliee avec la valeur des importations excedentaires en provenance des etats unis qui se qualifient pour un traitement preferentiel ces deux ensembles de resultats suggerent la presence persistante de violations des regles d origine de l accord de libre echange canada etats unis

quota hopping in bond diversion we show that the u s in bond system of imports may be used by firms to illegally avoid trade barriers a practice known as in bond diversion the illicit scheme involves declaring chinese exports bound for mexico but diverting them to the u s market while in transit thus creating a gap between chinese and mexican reports using the phaseout and removal of u s quotas at the end of the multifiber agreement as a policy experiment as well as variation in quota bindingness across products we show that quota bound products were associated with larger trade gaps which shrunk following the quota removals jel f13 o17 o19

entrepot trade and smuggling in west africa benin togo and nigeria official trade statistics indicate very little intra african trade but this is often because of the prevalence of unrecorded trade particularly smuggling this paper explores smuggling from benin and togo into nigeria nigeria has very high import tariffs and bans on certain products togo and benin have deliberately maintained low import barriers to facilitate an entrepot role vis a vis nigeria and land locked sahelian countries togo competes at a geographic disadvantage relative to benin for access to the nigerian market and compensates with lower transit taxes the volume and composition of cross border trade is analysed using data obtained from benin and togo customs authorities as well as interviews with traders and customs officials in both countries benin and to a lesser extent togo are the origin of a very large volume of transshipment of precisely those products which are heavily protected in nigeria such as used cars cloth and rice it is common knowledge in benin and togo that these imports although declared for domestic consumption or transit to other countries are in fact overwhelmingly intended for nigeria smuggling is a major source of income and employment in benin and togo but provides a fragile and unreliable foundation for economic development

labour supply and saving under uncertainty this article examines how variations in labour supply can be used to self insure against wage uncertainty and the impact of such self insurance on precautionary saving the analytical framework is a two period model with saving and labour supply decisions where preferences are consistent with balanced growth the main findings are that i labour supply flexibility raises precautionary saving when future wages are uncertain and ii uncertainty about future wages raises current labour supply and reduces future labour supply

testing the theory of trade policy evidence from the abrupt end of the multifiber arrangement abstract quota restrictions on united states imports of apparel and textiles under the multifiber arrangement mfa ended abruptly in january 2005 this change in policy was large predetermined and fully anticipated making it an ideal natural experiment for testing the theory of trade policy prices of quota constrained categories from china fell by 38 in 2005 with smaller declines from other exporters prices in unconstrained categories from all countries changed little we also find substantial quality downgrading in imports from china in previously constrained categories the annual cost of the mfato u s consumers was 63 per household

does public insurance crowd out private insurance the cost of expanding public sector health programs depends critically on the extent to which public eligibility will cover just the uninsured or will crowd out existing private insurance coverage we estimate the extent of crowd out arising from the expansions of medicaid to pregnant women and children over the 1987 1992 period we estimate that approximately 50 percent of the increase in medicaid coverage was associated with a reduction in private insurance coverage this occurred largely because employees took up employer based insurance less frequently there is also some evidence that employers contributed less for insurance and that workers dropped coverage of dependents

taxation insurance and precautionary labor we examine optimal taxation and social insurance with adverse selection in competitive insurance markets in a previous literature it has been shown that with perfect insurance markets social insurance improves welfare since it is able to redistribute without creating distortions this result has been taken as robust to the introduction of adverse selection as this would only provide additional justifications for social insurance we show however that adverse selection can weaken the case for social insurance compared to a situation with perfect markets whenever social insurance mitigates private underinsurance it also causes welfare reducing effects by decreasing precautionary labor supply and hence tax revenue in addition adverse selection may reduce the redistributive potential of social insurance we illustrate our general results using different equilibrium concepts for the insurance market notably we derive conditions under which a complete renunciation of social insurance is optimal and the government only relies on income taxation to achieve its redistributive objectives

labor supply under wage uncertainty abstract we consider an agent in an atemporal setting facing an increase in the uncertainty of her uncertain wage more labor is supplied given small initial wage uncertainty by a person with a ces utility function with an elasticity greater than unity we relate this result to an extended measure of decreasing relative risk aversion a cobb douglas person makes no change in her labor supply in response to increased wage uncertainty

the efficiency of competitive equilibria in insurance markets with asymmetric information abstract this paper addresses the relationship between competitive equilibria and efficient allocations in an insurance market with asymmetric information using the definition of second best efficiency proposed by harris and townsend 1981 for environments characterized by informational assmmetry the efficiency properties of several proposed market equilibria are examined we find an analogue to the first optimality theorem a miyazaki wilson equilibrium always results in a second best allocation

transfers in cash and in kind theory meets the data we review theoretical explanations for in kind transfers in light of the limited empirical evidence after reviewing the traditional paternalistic arguments we consider explanations based on imperfect information and self targeting we then discuss the large literature on in kind programs as a way of improving the efficiency of the tax system and a range of other possible explanations including the samaritan s dilemma pecuniary effects credit constraints asymmetric information amongst agents and political economy considerations our reading of the evidence suggests that paternalism and interdependent preferences are leading overall explanations for the existence of in kind transfer programs but that some of the other arguments may apply to specific cases political economy considerations must also be part of the story

social insurance and redistribution with moral hazard and adverse selection rochet 1991 showed that with distortionary income taxes social insurance is a desirable redistributive device when risk and ability are negatively correlated this finding is re examined when ex post moral hazard and adverse selection are included and under different informational assumptions individuals can take actions influencing the size of the loss in the event of accident or ill health social insurance can be supplemented by private insurance but private insurance markets are affected by both adverse selection and moral hazard we study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced the case for social insurance is strongest when the government is well informed about household productivity

tariffs enforcement and customs evasion evidence from india we examine the effect of tariff policies on evasion of customs duties in the context of the trade reform in india of the 1990s by exploiting the variation in tariff rates across time and products we identify a robust positive elasticity of evasion with respect to tariffs a second contribution of the paper is to provide some evidence on the impact of enforcement while we cannot identify the direct impact of enforcement on evasion we can establish the extent to which enforcement related factors such as product characteristics that determine the ease of detection of evasion affect the evasion elasticity the results render support to the hypothesis that improvements in enforcement can reduce the responsiveness of evasion to tariffs

in search of a smoking gun macroeconomic policies and the crisis this paper looks at macroeconomic factors behind the current crisis the first part looks at how global macroeconomic trends including sustained strong growth low real interest rates and high saving rates provided an environment conducive to increased financial risk taking the second part examines macroeconomic policies and the international monetary system assessing whether too easy monetary policy contributed to asset price bubbles whether excessive reserve accumulation contributed to a glut of global savings whether the us dollar s reserve currency status aggravated financial excesses and whether policies in capital importing countries were sufficiently countercyclical we do not find a single factor that can explain the crisis and account for differences in countries experiences leading up to it instead the contribution of macroeconomic policy choices seems complex and ambiguous however there are still important policy lessons for in particular rebalancing economies away from export dominated growth and having monetary policy place greater weight on macrofinancial stability copyright 2009 oxford university press

the limits to discretionary fiscal stabilization policy the use of discretionary fiscal policy as a counter cyclical tool has declined in popularity over the last 30 years this paper examines the extent to which this decline is justified in terms of developments in macroeconomic theory over this period both a small calibrated model and a larger econometric model suggest that the intertemporal consumer will smooth away most of the impact of temporary tax changes even when additional discounting and credit constraints are allowed for however this analysis suggests a more powerful role for other forms of fiscal policy such as government objections to the use of discretionary fiscal stabilization policy and makes a tentative suggestion as to how these might be overcome copyright 2000 by oxford university press

differentiated products and evasion of import tariffs emerging literature has demonstrated some unique characteristics of trade in differentiated products this paper contributes to the literature by postulating that differentiated products may be subject to greater tariff evasion due to the difficulties associated with assessing their quality and price using product level data on trade between germany and 10 eastern european countries during 1992 2003 the authors find empirical support for this hypothesis they show that the trade gap defined as the discrepancy between the value of exports reported by germany and the value of imports from germany reported by the importing country is positively related to the level of tariff in 8 out of 10 countries further the authors show that the responsiveness of the trade gap to the tariff level is greater for differentiated products than for homogeneous goods a one percentage point increase in the tariff rate is associated with a 0 6 percent increase in the trade gap in the case of homogeneous products and a 2 1 percent increase in the case of differentiated products finally the data indicate that greater tariff evasion observed for differentiated products tends to take place through misrepresentation of the import prices

the substantial bias from ignoring general equilibrium effects in estimating excess burden and a practical solution we show that under typical conditions the simple excess burden triangle formula substantially underestimates the excess burden of commodity taxes in some cases by a factor of 10 or more this formula performs poorly because it ignores general equilibrium interactions most important interactions between the taxed commodity and the labor market many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias we derive an implementable alternative to the simple formula this alternative formula captures interactions that the simple formula omits as a result it is both unbiased and usually more accurate

optimal annuitization with stochastic mortality and correlated medical costs the conventional wisdom since yaari 1965 is that households without a bequest motive should fully annuitize their investments numerous frictions do not break this sharp result we modify the yaari framework by allowing a household s mortality risk itself to be stochastic due to health shocks a lifetime annuity still helps to hedge longevity risk but the annuity s remaining present value is correlated with medical costs such as those for nursing home care thereby reducing annuity demand even without ad hoc liquidity constraints we find that most households should not hold a positive level of annuities and many should hold negative amounts jel d14 d82 g23 i12 j14 j26

tax rates and tax evasion evidence from missing imports in china tax evasion by its very nature is difficult to observe we quantify the effects of tax rates on tax evasion by examining the relationship in china between the tariff schedule and the evasion gap which we define as the difference between hong kong s reported exports to china at the product level and china s reported imports from hong kong our results imply that a one percentage point increase in the tax rate is associated with a 3 percent increase in evasion furthermore the evasion gap is negatively correlated with tax rates on closely related products suggesting that evasion takes place partly through misclassification of imports from higher taxed categories to lower taxed ones in addition to underreporting the value of imports

monetary and fiscal policy switching a growing body of evidence finds that policy reaction functions vary substantially over different periods in the united states this paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a markov process can change the impacts of policy shocks in one regime monetary policy follows the taylor principle and taxes rise strongly with debt in another regime the taylor principle fails to hold and taxes are exogenous an example shows that a unique bounded non ricardian equilibrium exists in this environment a computational model illustrates that because agents decision rules embed the probability that policies will change in the future monetary and tax shocks always produce wealth effects when it is possible that fiscal policy will be unresponsive to debt at times active monetary policy like a taylor rule in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks the paper also considers the implications of policy switching for two empirical issues

should central banks target consumer prices or the exchange rate in this article we consider two arguments suggesting that monetary authorities in an open economy should target output price inflation and not consumer price inflation the first suggests that output price inflation corresponds to the distortions caused by price rigidity the second shows how policy rules involving consumer price inflation can induce instability because of the feedback from interest rates to consumer price inflation via the exchange rate we examine both arguments in the context of an open economy which is subject to a range of shocks we show that both arguments remain robust but that there is a case for including a terms of trade or real exchange rate gap term in the authorities welfare function alongside the output gap and output price inflation

uncertain lifetimes and the welfare enhancing properties of annuity markets and social security this paper explores the implications of social security programs and annuity markets through which agents who are characterized by different distributions of length of lifetime share deathrelated risks when annuity markets operate a non discriminatory social security program affects only the intragenerational allocation of resources in the absence of private information regarding individual survival probabilities such a program will lead to a non optimal intragenerational allocation of resources however the presence of adverse selection considerations gives rise to a pareto improving role for a mandatory non discriminatory social security program

macroeconomic policy in light of the credit crunch the return of counter cyclical fiscal policy this paper begins by arguing that the 2007 8 credit crunch does not require a fundamental reevaluation of monetary policy the crunch occurred because regulation was too lax and we need to develop new and more effective tools of regulatory control to focus on current account imbalances or mistakes in setting interest rates as a prime cause of the credit crunch is unconvincing and has the danger of diverting attention away from the need to increase financial regulation the current recession does require a re evaluation of the role fiscal policy can play when interest rates hit a zero bound an expansionary fiscal policy is required because monetary policy makers are reluctant to promise higher future inflation and the impact of quantitative easing is likely to be small although rising debt may place a limit on how much conventional fiscal policy can do not all expansionary fiscal measures require additional borrowing there are two important lessons for the future first although monetary policy should remain the primary tool to stabilize the business cycle the combination of fiscal implementation lags and uncertainty means that some precautionary fiscal action may be appropriate during the early phase of some economic downturns second to play this backstop stabilization role effectively a policy that results in the government debt to gdp ratio declining albeit gradually and erratically in normal times seems appropriate

macroprudential policy what can it achieve this paper examines both the objectives and the available instruments for new macroprudential policy making bodies it argues that the objective financial stability is best understood as avoiding widespread disruption of financial flows achieving this objective requires that policy makers carry out two different but related tasks first they must ensure the resilience of the financial system to external shocks second they must respond in a timely fashion to future unsustainable expansions of credit and growth of asset prices these are old policy challenges what has changed is the emergence of new vulnerabilities in our innovative and relatively lightly controlled financial system exposed by the recent global financial crisis macroprudential policy can be effective in addressing these vulnerabilities but will not remove the major political and institutional obstacles to the effective control of unsustainable credit expansions 136 words

is it legitimate to encourage work sharing a generalization of mirrlees income taxation model is formulated in which qualifications of workers are both endogenous and observable by the government individuals differ by their unobservable abilities which simultaneously affect their disutility of labor and their cost of training in general the optimal tax schedule depends not only on income but also on its components i e wage rate or qualification and labor supply we find conditions under which it is optimal to subsidize lower qualifications or to encourage work sharing

premium subsidies and social health insurance substitutes or complements premium subsidies have been advocated as an alternative to social health insurance these subsidies are paid if expenditure on health insurance exceeds a given share of income in this paper we examine whether this approach is superior to social health insurance from a welfare perspective we show that the results crucially depend on the correlation of health and productivity for a positive correlation we find that combining premium subsidies with social health insurance is the optimal policy

the limits to fiscal stimulus the paper considers the case for an internationally coordinated further fiscal stimulus during the second half of 2009 although this makes some of the analysis period specific most of the issues and principles considered are timeless for a fiscal stimulus to be both effective there must be idle resources due to a failure of effective demand for it to be desirable there must be no alternative policy instruments including monetary policy for boosting demand there must be no complete financial crowding out and no complete direct crowding out through ricardian equivalence debt neutrality through minsky equivalence or through a high degree of substitutability between private and public exhaustive expenditure in private preferences or production possibilities finally for international coordination to be desirable there must be cross border externalities from national fiscal stimuli the paper considers each of these conditions in turn

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

monetary and fiscal policy interaction the current consensus assignment in the light of recent developments in the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents this article examines whether this analysis provides support for the consensus assignment where monetary policy controls demand and inflation and fiscal policy controls government debt we argue that the basic structure of new keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation no similar dominance appears to operate for fiscal policy and debt if debt has to return to its initial level after shocks

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

competitive insurance markets with two unobservables i study a screening game in a competitive insurance market in which insurance customers differ with respect to both accident probability and degree of risk aversion it is shown that indifference curves of customers may cross twice thus the single crossing property does not hold when differences in risk aversion are sufficiently large firms cannot use policy deductibles to screen high risk customers types may be pooled in equilibrium or are separated by raising premiums above actuarially fair levels this leads to excessive entry of firms in equilibrium