capital taxation and government debt policy with public discounting abstract this paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty the government has access to linear taxes on capital and labor and to non state contingent bonds government impatience generates positive and empirically realistic long run levels of both capital taxes and public debt prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries alongside other statistics the paper then presents econometric evidence that countries with higher political instability used as an approximation of unobservable public discount rates have both higher capital taxes and debt

competition between telecommunications operators abstract many observers of the telecommunications industry predict that regulation will soon give way to competition policy the paper analyzes unregulated network competition both in the mature and the transition phase of the industry it considers competition in linear or nonlinear prices for customers and also considers both nondiscriminatory pricing and termination based discriminatory pricing the paper investigates whether freely negotiated access charges are compatible with effective competition in the mature phase of the industry and do not erect barriers to entry in the transition towards competition last it analyzes the meaning and impact of the efficient component pricing rule in the context of network competition

armington models and terms of trade effects some econometric evidence for north america elasticities of substitution among u s imports from mexico canada the rest of the world and competing domestic production are estimated for twenty two mining and manufacturing sectors based on quarterly data for 1980 88 these elasticities will provide a benchmark for computable general equilibrium models of north american trade liberalization the authors also find that estimated armington elasticities are low and therefore researchers may want to reconsider the device of using high values of armington elasticities in multicountry computable general equilibrium models to avoid large terms of trade losses associated with preferential trade liberalization

intergovernmental transfers and fiscal behavior insurance versus aggregate discipline abstract this paper evaluates the trade off between the advantages of risk sharing and the perils of common pool problems in federal fiscal arrangements under the assumption of asymmetric information we evaluate two alternative regimes of intergovernmental transfers in one regime the central government pre commits to a certain level of transfers that compensate vertical fiscal imbalances and provide some limited ex ante insurance in the other regime it accommodates ex post the fiscal needs of the different provinces in this second case full insurance results but the economy is subject to a tragedy of the fiscal commons with excessive subnational spending insufficient local taxation and reduced production of federal public goods we find the range of parameters for which one or the other institutional regime will be preferable the result is a fiscal federalism version of the usual trade off between rules and discretion

regional debt in monetary unions is it inflationary this paper studies the inflationary implications of interest bearing regional debt in a monetary union is this debt simply backed by future taxation with non inflationary consequences or will the circulation of region debt induce monetization by a central bank we argue here that both outcomes can arise in equilibrium in the model economy there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met in one equilibrium termed ricardian the future obligations are met with taxation by a regional government while in the other termed monetization the central bank is induced to print money to finance the region s obligations the multiplicity of equilibria reflects a commitment problem of the central bank a key indicator of the selected equilibrium is the distribution of the holdings of the regional debt we show that regional governments anticipating central bank financing of their debt obligations have an incentive to create excessively large deficits we use the model to assess the impact of policy measures within a monetary union

aggregate fluctuations with national and international returns to scale cyclical movements in aggregate output factor inputs and productivity are all positively correlated across countries this article proposes a model in which positive cross country correlations of these variables result from increasing returns to the world wide variety of intermediate goods even if technology shocks are purely country specific the model also accounts for the observed positive relationship between bilateral trade volume and international comovements positive comovements can also arise with constant returns to variety but only if technology shocks are themselves strongly correlated the combination of constant returns and common shocks however tends to generate procyclical fluctuations of the trade balance

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

the tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

optimal inflation under dollarization abstract this paper analyzes the effects of dollarization where a country c uses money produced by another country m we derive a general formula to determine the optimal rate of inflation which maximizes m s welfare but does not take into account any loss to c we show how this inflation varies with relative income size and output growth estimates of the optimal inflation rate are made for some countries we also analyze a contract under which m shares a fraction of total potential seigniorage with c to induce m to inflate at a rate which leads to no seigniorage accruing to m from c finally we provide estimates of the present discounted value of the seigniorage accruing from m to c despite this loss we estimate the net welfare gain to c s household when dollarization results in a lower rate of inflation

trade finance specialization and synchronization i investigate the determinants of business cycle synchronization across regions the linkages between trade in goods financial openness specialization and business cycle synchronization are evaluated in the context of a system of simultaneous equations the main results are as follows i specialization patterns have a sizable effect on business cycles most of this effect is independent of trade or financial policy but directly reflects differences in gdp per capita ii a variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized even though they also tend to be more specialized iii the estimated role of trade is closer to that implied by existing models once intra industry trade is held constant the results obtain in a variety of data sets measurement strategies and specifications they relate to a recent strand of international business cycle models with incomplete markets and transport costs and on the empir

network competition and interconnection with heterogeneous subscribers abstract this paper analyses two way access pricing in a telecommunications market where consumers are heterogeneous in their demand for calls and firms are allowed to use non linear tariffs we first investigate how the presence of access charges affects the tariffs offered by firms in symmetric equilibrium next we show that under certain conditions each firm s profit is independent of the level of reciprocal access charge and therefore collusion using access charges is not sustainable this result suggests that efficient call allocations can be achieved under a minimal regulatory intervention i e recommending firms set access charges equal to call termination cost

the welfare effects of different pricing schemes for electricity distribution in finland the main components of electricity prices can be divided into the wholesale price the price of network operations and taxes even if the wholesale price is determined efficiently total welfare can be significantly disturbed if network operations are priced inefficiently in this study we calculate network prices based on four alternative methods these are marginal cost pricing ramsey pricing fdc pricing and optimal two part tariffs the welfare effects on the prevailing pricing system are compared we show that potentially significant improvements in welfare can be achieved by using marginal cost prices or optimal two part tariffs also ramsey pricing indicates that prevailing prices are inefficient

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

the allocation of seigniorage in a common currency area this paper considers the allocation of seigniorage in a common currency area with an independent central bank it is shown that if the central bank retains autonomy in the allocation of seigniorage inflation will be suboptimally high and taxes and government spending will be suboptimally low constitutionally mandating the rate of money growth will result in optimal inflation but taxes and government spending will be too low as long as consumers do not put too much weight on public good consumption relative to private it is better to constitutionally mandate seigniorage allocation shares than the level of money growth

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

optimal access pricing for natural monopoly networks when costs are sunk and revenues are uncertain this paper studies optimal access pricing for natural monopoly networks with large sunk costs and uncertain revenues using techniques from the option pricing literature we show that the optimal access price corresponds to a risk free form of the efficiency component pricing rule ecpr that is where the opportunity cost is based on the risk free rate of return we also show that at levels of revenue above the optimal level that triggers entry the entrant should pay a premium above risk free ecpr that rewards the incumbent for relinquishing his rights to the risky cash flows at the higher revenue level

international trade and business cycles is vertical specialization the missing link within academic and policy circles it is a given that international trade is important in transmitting business cycles from one country to another most analyses of the effects of the 1997 1998 asia currency crisis on the world economy focused on the trade linkages between the asian crisis countries and the rest of the world with mounting evidence of a slowdown in u s growth questions have already been raised about the effect of a reduction in u s imports on emerging economies indeed the metaphor when the u s sneezes europe catches a cold is often invoked to highlight the importance of these linkages recent empirical research has reaffirmed the above wisdom by finding that pairs of countries with stronger international trade linkages tend to have more highly correlated business cycles the goal of this paper is to examine whether these findings can be explained by standard international business cycle models we focus on the model by david backus et al 1994 which is the workhorse two good internationalbusiness cycle model in the backus et al 1994 model trade is induced by an armington aggregator which combines domestic and foreign intermediate goods to produce the final good while the aggregator has the drawback of forcing the specialization pattern to be determined in advance flying in the face of trade theory it has been very useful in quantitative and empirical applications we add transportation costs to the model in order to be consistent with the empirical research frankel and rose 1998 clark and van wincoop 2001 which deals with the endogeneity of trade by employing instrumental variables such as distance and adjacency we simulate the model and compute the effect of different transportation costs different trade intensities on the correlation of business cycles our main result is that the standard international business cycle model cannot deliver results that are quantitatively consistent with the recent empirical work in a world of fully integrated asset markets the model delivers a qualitatively counterfactual result as high trade intensity is associated with lower businesscycle correlations under portfolio autarky the model delivers increased correlations as trade intensity increases but the increased correlation is only a fraction of what it is in the data we then introduce the idea that an increasing amount of trade is vertical or fragmented countries increasingly specialize in particular stages of a good s production sequence as opposed to producing the entire good allowing for more of this back and forth trade might lead to greater business cycle correlation responsiveness to stronger trade ties however we find that adding the simplest form of vertical specialization to the model also falls short

price regulation of access to telecommunications networks abstract without access of networks to each other competition in the telecommunications sector would hardly have spread so quickly such mutual access is necessary for carriers to provide ubiquitous service and enable endusers to call and be called by anybody without subscribing to a system wide monopolist one way access concerns bottleneck inputs provided by an incumbent network to entrants while two way access concerns the interconnection between networks whereas one way access regulation is exclusively driven by containment of market power two way access is additionally affected by collusion possibilities among the numerous pricing rules discussed none clearly dominates this article provides a roadmap vis a vis the competing policy objectives for access price regulation

overturning mundell fiscal policy in a monetary union central to ongoing debates over the desirability of monetary unions is a supposed trade off outlined by mundell 1961 a monetary union reduces transactions costs but renders stabilization policy less effective if shocks across countries are sufficiently correlated then according to this argument delegating monetary policy to a single central bank is not very costly and a monetary union is desirable this paper explores this argument in a setting with both monetary and fiscal policies in an economy with monetary policy alone we confirm the presence of the trade off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low however fiscal interventions by national governments combined with a central bank that has the ability to commit to monetary policy overturn these results in equilibrium such a monetary union will be welfare improving for any correlation of shocks

oil prices and the terms of trade abstract the combination of substantial terms of trade variability and unstable correlation patterns of trade prices with output and trade volumes has led some to suggest a break in the link between trade volumes and prices we find that oil accounts for much of the variation in the terms of trade over the last twenty five years and its quantitative role varies significantly over time and since our dynamic general equilibrium model predicts that the economy responds differently to oil supply shocks than to other shocks changes in their relative importance helps to account for the unstable correlations in the data

trade production sharing and the international transmission of business cycles countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations we use data on trade flows between us multinationals and their affiliates as well as trade between the united states and mexican maquiladoras to measure production sharing trade and its link with the business cycle we then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production sharing trade and internationally synchronized business cycles a key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good

access pricing and exclusionary behavior abstract when a regulated upstream monopolist vertically integrates downstream a price squeeze or non price discrimination becomes a concern the access pricing rule that protects against this type of exclusionary behavior is unique and is a form of the efficient component pricing rule

externalities incentives and failure to achieve national objectives in decentralized economies abstract this paper studies why decentralized economies often fail to achieve national objectives we assume that the central government allocates its tax revenues among a large number of decision makers provincial authorities or ministers decision makers are facing a soft budget constraint because of limited monitoring by the central authorities spending in excess to allocations fuels inflation cooperation to limit aggregate spending occurs when no decision maker can benefit by opportunistic behavior adverse macroeconomic shocks are shown to reduce the likelihood that decentralized decision makers will cooperate in order to achieve national objectives debt relief can induce higher investment because it can promote a shift from opportunistic behavior to cooperation

international business cycles financial markets and household production abstract this paper investigates the properties of an international real business cycle model with household production we show that a model with disturbances to both market and household technologies reproduces the main regularities of the data and improves existing models in matching international consumption investment and output correlations without irrealistic assumptions on the structure of international financial markets sensitivity analysis shows the robustness of the results to alternative specifications of the stochastic processes for the disturbances and to variations of unmeasured parameters within a reasonable range

market entry and international propagation of business cycles abstract in this paper pro cyclical market entry acts as an international transmission mechanism for business cycle shocks in an imperfectly competitive dynamic equilibrium model an expansion in one open economy leads to additional business formation in a parallel large open economy through demand spillovers business formation causes a decline in markups leading to an expansion in employment production and investment in both economies the modeling of the entry decision is critical only when the entry game is modelled as sequential with incumbents enjoying a first mover advantage are markups sufficiently elastic to cause international comovement

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

access pricing and competition abstract in many industries electricity telecommunications railways the network can be described as a natural monopoly a central issue is how to combine the necessary regulation of the network with the organization of competition in activities which use the network as an input and are potentially competitive generation of electricity value added services road transportation in this paper we derive access pricing formulas in the framework of an optimal regulation under incomplete information first we study how access pricing formulas take into account the fixed costs of the network and the incentive constraints of the natural monopoly over the network second we examine the difficulties coming from the accounting impossibility to disentangle costs of the network and costs of the monopoly s competitive goods third the analysis is extended to the cases where governmental transfers are prohibited where the competitors have market power and where competitors are not regulated fourth the possibility some consumers bypass the network is taken into account finally the role of access pricing for inducing the best market structure is assessed the conclusion summarizes our results and suggests avenues of further research

international business cycles what are the facts abstract modern business cycle theory involves developing models that explain stylized facts for this strategy to be successful these facts should be well established in this paper we focus on the stylized facts of international business cycles we use the generalized method of moments and quarterly data from twenty industrialized countries to estimate and test hypotheses concerning pairwise cross country correlations of macroeconomic aggregates a remarkable common feature emerges these correlations are mostly positive not very high and of a similar order of magnitude the most important discrepancy with the theory is the low cross country correlation of consumption

international currency substitution and seigniorage in a simple model of money i introduction currency substitution describes the change in the holdings of domestic and foreign real balances in response to fluctuations in the relative prices of these currencies so far the empirical evidence on the strength of currency substitution has been mixed miles 1978 finds evidence in favor of strong currency substitution between the canadian dollar and the u s dollar bordo and choudhri 1982 criticize miles on the ground that miles has a misspecified model and their estimates of a canadian money demand function indicate little currency substitution in a recent paper rogers 1992 finds that dollarization in a high inflation economy such as mexico s is quite strong and statistically significant imrohoroglu 1994 on the other hand estimates the extent of currency substitution between the canadian dollar and the u s dollar using a gmm approach and finds that the elasticity of currency substitution in canada is quite low between 0 29 and 0 43 depending on the instruments used furthermore the estimate of the share of u s dollar denominated deposits in producing canadian liquidity services is on the order of 1 percent to 3 percent the policy implications of currency substitution have been extensively analyzed most of these studies concentrate on the impact of currency substitution on the volatility of exchange rates and the autonomy of domestic monetary policy under a flexible exchange rate regime 1 recently researchers have started to explore whether currency substitution alters the results in the optimal inflation tax literature for example vegh 1989 shows that it may be optimal to resort to the inflation tax under currency substitution since it reduces the distortion introduced by an exogenously given positive foreign interest rate in his model a positive foreign interest rate creates a distortion because it acts as an indirect consumption tax kimbrough 1991 analyzes a small open economy under currency substitution where domestic agents are required to use domestic real balances to purchase the domestic nontraded good foreign real balances to purchase the imported good and either domestic or foreign real balances to purchase the exportable good he finds that it is optimal to follow the friedman rule of a zero nominal interest rate in this setup since money serves as an intermediate good guidotti and vegh 1993 however argue that kimbrough s 1991 result only applies under very restrictive assumptions on the transactions technology and that in general the optimal inflation rate is positive under currency substitution aizenman 1992 considers a multi country money in the utility function model in a common currency area where there are collection costs associated with income taxation he shows that in the absence of a cartel agreement on how to share the seigniorage revenue the optimal inflation rate for individual countries will exceed the optimal inflation rate under a cooperative solution canzoneri and diba 1992 study the role of currency substitution in a two country money in the utility function model under a flexible exchange rate regime where there are collection costs of lump sum taxes they show that the outcome of a noncooperative seigniorage maximization or welfare maximization game is characterized by the friedman rule the cooperative outcome on the other hand includes the inflation tax as part of an optimal tax package since lump sum taxes are costly to collect the theoretical literature summarized above suggests that currency substitution may have important economic implications most of the attention has been on the role of the elasticity of currency substitution the share of foreign real balances in the residents domestic portfolio has largely been ignored laney radcliffe and willett 1984 and joines 1985 emphasize the distinction between the elasticity of substitution and the cross elasticity of money demand and argue that a high cross elasticity is necessary for currency substitution to have a major destabilizing impact on domestic money demand

can the standard international business cycle model explain the relation between trade and comovement abstract recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles we assess whether the standard international business cycle framework can replicate this intuitive result we employ a three country model with transportation costs we simulate the effects of increased goods market integration under two asset market structures complete markets and international financial autarky our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more but the increased correlation falls far short of the empirical findings even when we control for the fact that most country pairs are small with respect to the rest of the world the model continues to fall short we also conduct additional simulations that allow for increased trade with the third country or increased tfp shock comovement to affect the country pair s business cycle comovement these simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

an econometric analysis of telecom competition privatization and regulation in africa and latin america this paper explores the effects of privatization competition and regulation on telecommunications performance in 30 african and latin american countries from 1984 through 1997 fixed effects regressions reveal that competition measured by mobile operators not owned by the incumbent is correlated with increases in the per capita number of mainlines payphones and connection capacity and with decreases in the price of local calls privatization combined with an independent regulator is positively correlated with telecom performance measures privatization alone however is associated with few benefits and is negatively correlated with connection capacity

investment composition and international business cycles abstract this paper studies a two country model with traded and nontraded sectors in which sector specific capital goods as in practice are produced by combining inputs from all sectors the model also includes nontraded distribution services employed in retailing traded goods to consumers the results show that the model with capital goods comprising multisectoral inputs outperforms the standard model in which sectoral output also serves as its capital in particular it substantially improves a the movements of trade balance and relative prices b within country comovements of sectoral and aggregate quantities c cross country comovements of output vis a vis consumption the results change only marginally when distribution services are removed from the model

access to bottleneck inputs under oligopoly a prisoners dilemma we analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream market first two vertically integrated incumbents make access price offers to an entrant that chooses which one to accept if any second firms compete on salop s circle the firms may be asymmetrically located on the circle to reflect differences in consumer shares for some levels of asymmetry the incumbents face a prisoners dilemma with respect to conceding access to their bottleneck inputs entry by a downstream firm may lead to lower retail prices however entry may also lead to higher retail prices for the access provider and for the entrant we also consider the cases where there are several incumbents and where the entrant makes the access price offers

positive and normative theories of public debt and inflation in historical perspective the study of public finance has progressed along two avenues the first dates to the work of anglo saxon economists at the turn of the century they focused on the normative question of which policy should be chosen by a hypothetical benevolent dictator the second approach originated at about the same time in the work of italian and swedish economists they asked the positive question of how governments choose policies the normative prescriptions of this second approach concern the procedures for reaching public policy decisions rather than the policy decision itself the first approach which focused on the theory of optimal taxation naturally fits in the development of neoclassical economics in this century the second approach was somewhat neglected until buchanan tullock and their associates developed it in the public choice school today these two different traditions are reflected in two active areas of research in macroeconomics the first is the literature on dynamic optimal taxation the second is a political economy literature studying the effects of political incentives and constraints on policy formation these two research programs have more in common than their predecessors the both have a strong empirical motivation and share an emphasis on individual rationality

finance and international business cycles abstract business cycles are more correlated among countries that have similar financial structures we first document this empirical regularity using oecd data and then build a two country dsge model with financial frictions that replicates it alternative monetary policy regimes and parameter values are explored output co movements increase when the countries involved are linked by a credible exchange rate peg and when they open up to trade they decrease when their financial openness increases the model also accounts for a number of stylized facts of international business cycles such as the positive international correlation of output investment and employment

optimal bypass and cream skimming this paper develops a normative model of regulatory policy toward bypass and cream skimming it analyzes the effects of bypass on second degree price discrimination on the rent of the regulated firm and on the welfare of low demand customers it shows that pricing under marginal cost may be optimal for the regulated firm excessive cream skimming occurs if access to the bypass technology is not regulated and the prohibition of bypass may increase or decrease the regulated firm s rent jel 026 613 the regulation of natural monopolies is often associated with policies toward competition including restrictions on entry this paper is concerned with a common form of competition which threatens the regulated firm on its most lucrative markets examples abound in the telecommunications industry the development of microwave radio and communication satellites in the 1960 s introduced the possibility that big telecommunication customers might bypass the major common carrier att and the 1978 natural gas policy act in the united states has created the possibility for industrial plants to bypass the local distribution utilities by building direct connections to the pipelines gas producers or intermediaries

government finance in a common currency area abstract european integration in 1992 may require greater exchange rate coordination thatn currently exists the delors report goes as far as to recommend the eventual adoption of a single currency however the formation of a common currency area raises fears that independent fiscal policies may produce inferior outcomes this paper shows that lack of cooperation in fiscal policy leads to too little inflation too high taxes and too much government spending jel f33

seigniorage delegation and common currency why monetary unions may fail we provide a parable that can explain why monetary unions havehistorically been dissolved following political separation using a simple model of government finance in a commoncurrency area it is shown that delegation to an inflationary central banker is an optimal policy whencountries struggle for seigniorage revenues whether delegatescoordinate monetary policy or not furthermore a commoncentral bank in which representatives coordinate monetarypolicy will reach an outcome that is pareto inferior to thatproduced by a non cooperative seigniorage war accordingly without political dialogue regarding the designation of therepresentatives a monetary union can fail

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

consumption real exchange rates and the structure of international asset markets abstract international real business cycle irbc models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series empirical tests with data for the us japan france uk italy canada and sweden suggest that neither the trend behavior nor high frequency movements of consumption and real exchange rates are well explained by irbc models with complete markets it appears however that high frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk free bonds

pricing access forward looking versus backward looking cost rules abstract regulators across many different jurisdictions and industries have recently adopted the practice of setting access prices based on the current costs of providing the relevant facilities though widely regarded as being efficient the efficiency implications of using current costs instead of historical costs have not been formally analyzed our analysis shows that given stochastic costs forward looking access prices retard investment and are generally dominated by access prices determined by historical cost whenever investment is desired

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

international transmission of the business cycle in a multi sector model abstract standard multi country models do not replicate important features of the international transmission of business cycles predicting cross country correlations of output and consumption which are respectively too low and too high in this paper we modify the supply side of a two country model by adding multiple sectors and trade in intermediate goods the model generates a higher cross country correlation of output than standard one sector models it also predicts cross country correlations of employment and investment that are closer to the data we analyze the relative impact of multiple sectors trade in intermediate goods imperfect substitution between domestic and foreign goods home preference capital adjustment costs and capital depreciation in order to pinpoint the features which move the model s predictions closer to the data

on the need for fiscal constraints in a monetary union the desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to following its policies if it can commit then debt constraints can only impose costs if it cannot commit then fiscal policy has a free rider problem and debt constraints may be desirable this type of free rider problem is new and arises only because of a time inconsistency problem

central bank independence and monetary control ing from details these conclusions imply that inflation is lower the higher is cbi and that given independence countries that pre announce monetary policy have even lower rates of inflation furthermore there is no evidence that cbi retards growth or investment as a matter of fact for ldcs the evidence points in the opposite direction low independence is associated with lower growth and investment some economists feel that excessive independence may interfere with the potential stabilisatory function of monetary policy since fluctuations in the growth rate of the economy are found to be unrelated to cbi this does not appear to be the case iii commitment via central bank independence and

the competitive externalities and the optimal seignorage this study analyzes the inflation tax in an economy with several competing decisionmakers who can effectively print more money via the central bank the author derives the sequential rational expectation equilibrium and shows that the presence of competing decisionmakers increases the inflation rate and may put the economy on the wrong side of the inflation tax laffer curve the analysis is interpreted for a country consisting of several states or provinces where the centralized government system is weak similar results apply to the case of competing ministers in an economy where the central bank is weak copyright 1992 by ohio state university press

strategic investment timing under asymmetric access charge regulation in telecommunications in a liberalized telecommunications market an incumbent has several advantages over any entrant an asymmetric access charge regulation for two such asymmetric firms stimulates competitive investment we show that an entrant with a cost disadvantage has an incentive to invest as a leader under an asymmetric access charge regulation these results fit well with the findings of previous empirical work moreover we also investigate the effects of an asymmetric access charge regulation on competitive investment strategies

monetary union without fiscal coordination may discipline policymakers abstract with benevolent policymakers and fiscal leadership monetary unification reduces inflation taxes and public spending these disciplining effects of a monetary union which become stronger if the number of participants in the union increases are likely to raise welfare two types of arrangements are considered for the union s common central bank ccb making the ccb more conservative and imposing an inflation target on the ccb in contrast to the results of svensson 1997 svensson l e o 1997 optimal inflation targets conservative central banks and linear inflation contracts american economic review 87 98 114 an optimally designed conservative ccb may outperform inflation targeting finally we find that fiscal coordination offsets the disciplining effects of monetary unification hence subsidiarity in fiscal policymaking may enhance welfare

network competition i overview and nondiscriminatory pricing we develop a model of unregulated competition between interconnected networks and analyze the mature and transition phases of the industry in this deregulated environ ment networks pay negotiated or regulated access charges to each other and com pete in prices for customers we show that a competitive equilibrium may fail to exist for large access charges or for large network substitutability and that freely negotiated access charges may prevent effective competition in the mature phase of the industry and erect barriers to entry in the transition toward competition last we examine the meaning and impact of policies such as the efficient component pricing rule

competition and regulation in vertically related markets in an industry where naturally monopolistic and competitive activities are vertically related should the natural monopolist be allowed also to operate in the deregulated competitive sector unlike much of the literature on vertical integration this paper assumes that monopoly pricing behaviour is regulated and therefore the effect of vertical integration on the task of regulation is central to the analysis in the model there is both imperfect information and imperfect competition when vertical integration by the monopolist is allowed the regulator s task is made harder insofar as the monopolist has anticompetitive incentives to raise rivals costs on the other hand integration may lead to there being fewer firms in the deregulated sector and hence less duplication of fixed costs the overall welfare comparison between separation and integration is ambiguous as two simple examples illustrate various extensions to the analysis are also considered one of the central questions in debates on regulatory reform is how to organize industries that contain both naturally monopolistic and potentially competitive activities electricity transmission and distribution are characterized by natural monopoly cost conditions but electricity generation is not in the gas industry pipeline services may be naturally monopolistic but supply to larger customers is not in telecommunications natural monopoly is more a feature of local network operations than of long distance operations and is not present in apparatus manufacture and supply or in the provision of value added services in railways while the infrastructure of track and stations is naturally monopolistic the supply of train services might not be policy developments notably those associated with privatization in britain and deregulation in the united states have sometimes led to radical structural reform in these industries at t for decades a vertically integrated monopolist was required under the 1982 settlement of its long running antitrust case against the u s government to divest itself of its local network operations the central electricity generating board cegb in england and wales was restructured both vertically transmission grid activities were separated from generation and horizontally before privatization in 1990 1991 by contrast british telecom was privatized as a vertically integrated dominant firm bt now faces competition from mercury and others especially in the long distance market but its dominance of local network operations might affect competition there and in other areas such as apparatus supply the local network monopoly would of course have to be regulated in any event but its link via ownership to vertically related and potentially competitive activities poses additional regulatory questions many of the efforts of the regulatory body oftel notably in relation to interconnection between bt s and rivals 1 for a general account of the theory and british experience of regulatory reform in the utility industries

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41

majoritarian management of the commons yong j yoon this article analyzes usage of a common property resource the commons under collectivization as compared with more familiar privatization institutional arrangements particular emphasis is on majority decision rules when separate majority coalitions may authorize simultaneous usage of a common resource total value is dissipated but the interdependencies introduced by possible membership in differing coalitions to an extent reduce the incentives for exploitation the formal analysis is analogous to that familiar in cournot nash duopoly oligopoly models but with differing efficiency implications the argument has relevance for differential benefit public spending from general tax sources as well as other applications jel d7 h00 02 i introduction the operation and management of common property resources the commons have been exhaustively examined in economics and political science both in formal analyses and in practical application 1 however the full range of institutional alternatives has not been covered even at a level of stylized interaction models our purpose in this article is to fill in at least some of the gaps here and specifically to examine the predicted results that emerge when usage decisions are collectivized under majoritarian voting rules to our knowledge this analysis has not been undertaken we shall in section ii first summarize the classic analysis along with the familiar institutional reform suggested as a solution to the tragedy this solution privatization is analyzed under several institutional variants in section iii we then shift attention in section iv to arrangements under which usage of the commonly shared resource or facility is chosen by some predesignated collective decision rule specifically we concentrate analysis on the predicted results in several majority rule environments we analyze thoroughly the case in which different majority coalitions make usage decisions separately and simultaneously the analysis incorporates recognition on the part of any member of a specific majority of the prospect for membership in alternative majority coalitions we demonstrate that instead of full dissipation the level of usage that emerges in the limit is structurally analogous to the outcome in the cournot nash duopoly model even if the efficiency implications differ in the two settings ii the classic model summarized the familiar tragedy of the commons lends itself to stylized illustration an immobile but renewable resource exists a common pasture aquifer fishing ground and has economic value if used effectively through the application of units of complementary mobile resources that are themselves valued in their alternative market opportunities there are no assigned ownership rights to the immobile resource or facility free and open access may dissipate most or even all of the potential value consider figure 1 the productivity of mobile complementary resource units as applied elsewhere in the economy e g steers grazed on the open range beyond the commons is set at w a value assumed constant the quantity of such inputs applied on the commonly used facility is measured along the abscissa in figure 1 the marginal and average productivity curves for the units of applied complementary resource are shown as mp and ap total value is maximized when q sub m units are applied at which point marginal product values are equalized as between this usage and other opportunities the maximal value of the commonly used resource is the area under the mp curve above w if entry to usage is open and if the institutional structure is such as to allow for decentralized decisions on the part of many potential users rational choices made separately will generate a full behavioral equilibrium at q sup where average product per unit of the complementary resource is equalized as between the commons and other uses

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

understanding the cross country effects of u s technology shocks abstract business cycles are substantially correlated across countries yet most existing models are not able to generate substantial transmission through international trade we show that the nature of such transmission depends fundamentally on the features determining the responsiveness of labor supply and labor demand to international relative prices we augment a standard international macroeconomic model to incorporate three key features a weak short run wealth effect on labor supply variable capital utilization and imported intermediate inputs for production this model can generate large and significant endogenous transmission of technology shocks through international trade we demonstrate this by estimating the model using data for canada and the united states with limited information bayesian methods we find that this model can account for the substantial transmission of permanent u s technology shocks to canadian aggregate variables such as output and hours documented in a structural vector autoregression transmission through international trade is found to explain the majority of the business cycle comovement between the united states and canada

commitment and the adoption of a common currency in contrast to mundell s inquiry on the optimality of currency areas this article aims to understand under what circumstances a pareto dominant monetary union will be established using a multicountry overlapping generations model we highlight gains from monetary union arising from reduced transactions costs and lower inflation despite these gains countries acting independently will impose barriers to exchange through local currency restrictions thereby creating transactions costs and providing an incentive for inflation therefore the gains from monetary union are most likely to be lost without collective effort