macroeconomics of stagflation under flexible exchange rates the concerns of macroeconomic policy in the industrial countries in recent years have shifted the focus of open economy ncroeconomics to new and interesting problems although no synthesis or a fully coherent theory of policy has yet emerged from this research the results have already led to major revisions in views about the nature of the problems that policy has to deal with this paper provides a selective survey and discussion of son of the results of recent research with errhasis on their inplications for policy pentti j k kouri department of economics 269 mercer street second floor new york university new york n y 10003 macroeconomics of stagflation under flexible exchange rates

government spending effects in low income countries abstract despite the voluminous literature on fiscal policy very few papers focus on low income countries lics this paper develops a new keynesian small open economy model to show analytically and numerically that several prevalent features of lics dependence on external financing public investment inefficiency and a low degree of home bias in public investment play important roles in government spending effects external financing increases the resource envelope mitigating the crowding out effects but it tends to appreciate the real exchange rate lowering traded output although capital scarcity in lics implies high returns to public capital low marginal investment efficiency can substantially dampen the output multiplier also public investment may not be effective in stimulating output in the short run as lics often rely on imports to a large extent to carry out public investment projects weakening its role as a short run demand stimulus

habits costly investment and current account dynamics abstract we analyze the current account dynamics for a small country model with habit forming consumers and costly investment the model has several empirical and policy implications i it is consistent with stylized facts regarding the effects of productivity shocks and increases in fiscal spending and regarding the savings investment co movement ii the long run effect of a temporary shock on net foreign assets is often opposite to that of a permanent shock iii under strong habit persistence the welfare dynamics are sluggish so that a beneficial tax financed fiscal policy may have a harmful hangover effect on welfare

structural factors in the economic reforms of china eastern europe and the former soviet union reform in china and russia jeffrey sachs and wing thye woo china s experience does not show that gradual reform is superior to the shock therapy undertaken in eastern europe and the former soviet union eefsu differing performance primarily reflects different economic structures prior to reform china was a peasant agricultural society eefsu was urban and overindustrialized in both jobs in state enterprises were so heavily subsidized that workers refused to move to new industries elsewhere even when productivity in the latter was much higher in eefsu the large state sector impeded structural adjustment curtailing subsidies would have produced many losers who used their power to resist this outcome failure to curtail subsidies then cut off the potential supply of labour and other factors to new emerging firms china s state enterprises have not performed as well as the rest of the chinese economy and do not explain its success rapid growth was possible because the large agricultural sector contained vast surplus labour and did not enjoy subsidies and soft budget constraints once constraints on migration across regions and jobs were removed this labour was available to fuel expansion in new industries unlike the distributional conflict in eefsu in china reallocation of labour allowed all groups to gain in both partial liberalization also unleashed macroeconomic pressures manageable in china because of rapid growth and adequate monetary policy but explosive in much of eefsu because of deeper structural problems and gross monetary mismanagement

the one child policy a macroeconomic analysis abstract this paper studies the effects of china s one child policy using a calibrated general equilibrium model a benchmark with a fertility constraint in place is compared to a counterfactual experiment without the fertility constraint the results indicate that the implementation of the one child policy promotes the accumulation of human capital and increases per capita output in addition the policy leads to different welfare effects across generations and skill groups the initial generation would benefit from relaxing the one child policy but the following generations would be hurt a redistribution effect between skilled and unskilled workers is also observed these findings demonstrate that focusing solely on gdp per capita as a measure of economic well being paints an incomplete picture of the welfare consequences of population policies

credit rationing in an open economy this paper claims that credit market imperfections matter significantly to open economies and can alter basic macroeconomic results this is demonstrated in the paper by use of an open economy model with individual credit rationing due to asymmetric information and moral hazard the paper concentrates on the effect of fiscal policy and shows that when credit is rationed the standard result does not hold and a fiscal expansion may create a surplus instead of a deficit in the current account furthermore the paper shows that whether credit is rationed or not depends on the tax burden copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

wage and price control policies in transition economies abstract this paper studies the structural impact of wage and price control policies in transition economies using a two sector three factor small open economy model it illustrates the results quantitatively via simulation exercises at the earlier stage of the transition when labor is immobile a strict control on the price of the nontradables and the wage rate minimizes the fall in employment and output also a more severe control on the price of the nontradables than on the wage rate alleviates the fall in the real wage at negligible costs in lost employment and output at the later stage of the transition when labor becomes mobile the liberalization of the price of the nontradables can proceed faster than that of the wage rate this policy combination increases employment and output and reduces the shortage for the nontradables but lowers the real wage

law enforcement and transition abstract we present a simple model to analyze law enforcement problems in transition economies law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality we analyze two institutional mechanisms for solving the coordination problem a first mechanism which we call dualism follows the scenario of chinese transition where the government keeps direct control over economic resources and where a liberalized non state sector follows market rules the second mechanism we put forward is accession to the european union we show that accession to the european union even without external borrowing provides a mechanism to eliminate the bad equilibrium provided the accessing country is small enough relative to the european union interestingly we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

output inflation and stabilization in a small open economy evidence from mexico abstract we study the sources of fluctuation in output and inflation for mexico considering fiscal real money growth exchange rate and asset market disturbances which are identified using an estimable equilibrium model incorporating important features of high inflation economies changes in inflation are influenced by all shocks while output growth is explained by real fiscal and asset shocks the results lend strong support to the fiscal view of inflation and to a lesser degree support the balance of payments view we also find that higher inflation and higher budget deficits cause each other to spiral upward

fiscal policy and the real exchange rate under risk abstract this paper examines the effect of fiscal expansions on the real exchange rate in a small open economy where home and foreign assets are imperfect substitutes there is an hypothesis raised by sachs and wyplosz 1984 dornbusch and fischer 1986 and others that risk and imperfect substitutability of assets can explain why fiscal expansions sometimes create real depreciations unlike the standard mundell fleming result this paper examines the issue within an optimizing framework where risk and imperfect capital mobility are explicitly modeled the paper comes up with the conclusion that even when assets are imperfect substitutes and a fiscal expansion crowds out investment and consumption this crowding out is not full and the real exchange rate always appreciates

diagnostics before prescription few branches of economics have wielded as much infl uence on the world ew branches of economics have wielded as much infl uence on the world of policy as development economics virtually every major development of policy as development economics virtually every major development strategy of the last 50 years is associated with some pioneering research that strategy of the last 50 years is associated with some pioneering research that provided its intellectual underpinnings consider some of the key milestones the provided its intellectual underpinnings consider some of the key milestones the dominant import substitution policies of the 1950s and 1960s were the practical dominant import substitution policies of the 1950s and 1960s were the practical realization of the ideas of prebisch 1959 and singer 1964 and were based on the realization of the ideas of prebisch 1959 and singer 1964 and were based on the famous prebisch singer thesis on the declining terms of trade for primary products famous prebisch singer thesis on the declining terms of trade for primary products and the dynamic benefi ts of manufacturing the emphasis on development planand the dynamic benefi ts of manufacturing the emphasis on development planning in those same decades was greatly infl uenced by rosenstein rodan s 1943 ning in those same decades was greatly infl uenced by rosenstein rodan s 1943 big push framework with its stress on increasing returns to scale and the need big push framework with its stress on increasing returns to scale and the need to kick start growth through large scale investments and the planning model of to kick start growth through large scale investments and the planning model of mahalanobis 1955 which argued that economic development could be accelermahalanobis 1955 which argued that economic development could be accelerated by government encouragement of heavy industry ated by government encouragement of heavy industry when such models were discarded in the 1980s in favor of more outwardwhen such models were discarded in the 1980s in favor of more outwardand market oriented strategies it was in no small measure because of the research and market oriented strategies it was in no small measure because of the research published during the 1970s by balassa 1971 bhagwati 1978 krueger 1978 published during the 1970s by balassa 1971 bhagwati 1978 krueger 1978 and little scitovsky and scott 1970 the washington consensus of the 1990s and little scitovsky and scott 1970 the washington consensus of the 1990s despite its appellation represented the common views of a group of despite its appellation represented the common views of a group of latin american technocrats and policymakers many of whom had trained at top economics departtechnocrats and policymakers many of whom had trained at top economics departments in the united states the infl uential human development reports of the

on exchange rate stabilization abstract this paper extends calvo s 1986 and obstfeld s 1985 analyses of stabilization policies through predetermined exchange rates in a few directions the graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good or under time nonseparable preferences it also shows that the dynamic process of exchange rate stabilization exhibits hysteresis effects that is the steady state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy

the chinese box the opaque economic borders of the chinese state although the state in china is no longer all encompassing as it had been during the pre 1979 centrally planned period it still reaches into numerous areas of the economy notably through its continuing ownership of state owned enterprises as a result china poses a paradox in that it has incomplete property rights and rule of law which are thought to be essential for growth there are though numerous inefficiencies associated with such a gradual transition which may have maintained a stable growth rate in the past but could hamper future economic development as a key example state owned firms continue to benefit from financial repression in which they received preferable allocations of credit thus china s high savings rate fuels investment which has driven growth but is increasingly inefficient as credit is funnelled to the less productive soes this inefficiency points to the need for legal and institutional reforms which may conflict with the still broad but opaque borders of the chinese state copyright 2011 oxford university press

domestic and foreign disturbances in an optimizing model of exchange rate determination abstract this paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are divided from optimization by the private sector in this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy in response to a disturbance in either the foreign interest rate or inflation rate the economy undergoes an initial partial jump towards its new equilibrium which it thereafter approaches gradually the implications of these results for exchange rate adjustments and the insulation properties of flexible exchange rates are discussed

fertility and savings contractions in china long run global implications following three decades of rapid but unbalanced economic growth china s reform agendas are set to rebalance the economy towards consumption while maintaining strong gdp growth headwinds include a demographic contraction that will bring negative labour force growth and rapid ageing rising aged dependency combined with lower saving rates will rebalance the economy but they will reduce both gdp growth and real per capita income while an effective two child policy could sustain growth and eventually mitigate the aged dependency problem it would set real per capita income on a still lower path these conundrums are examined using a global economic and demographic model which shows how the continuing demographic and saving contractions in china would alter the trajectories of both the chinese and global economies

wage flexibility in the chinese labour market 1989 2009 abstractwage flexibility in the chinese labour market 1989 2009 regional studies china s bureaucratic wage determination system is gradually being replaced by a market based system leading to a novel version of a dual labour market this paper studies wage flexibility in this dual market its principal findings are as follows wages in both sectors have become less responsive to changes in official registered unemployment with an alternative market based measure of unemployment becoming more relevant there is evidence of convergence of flexibility between the two sectors the wages of women exhibit greater flexibility than those of men and there is evidence of differences in wage flexibility between workers who have urban residential rights and rural migrants

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

too many mothers in law abstract developing countries with low tax capacity may rely on predation to finance government functions government predation in turn is often accused of imposing a choking effect on state owned enterprises soes contributing to the latter s poor performance we formalize this choking effect as a problem of inefficient predation that arises from time inconsistency and show that having multiple government bodies supervising the same soe may mitigate this problem our theory provides an efficiency rationale for the chinese style of decentralization before 1978 and challenges the wisdom of china s recent enterprise reform that attempted to consolidate supervisory power

after state socialism the political origins of transitional recessions transitions from state socialism created a startling range of initial economic outcomes from renewed growth to deep economic crises debates about the causes have largely ignored the political dis

reforming fisheries lessons from a self selected cooperative we analyze a policy experiment in an alaskan commercial fishery that assigned a portion of an overall catch quota to a voluntary co op with the remainder exploited competitively by those choosing to fish independently unlike the individual quota system advocated by many economists the policy encouraged coordinated fishing and did not require a detailed assignment of rights we model the decision to join and behavior under cooperative and independent fishing the data confirm our key predictions the co op attracted the least skilled fishermen consolidated and coordinated effort among its most efficient members and provided shared infrastructure we estimate that resulting gains in rent were at least 33 percent some independents were disadvantaged by the co op s formation however which prompted them to oppose it in court we analyze the source of their disadvantage and provide guidance for designing fishery reform that leads to pareto improvements enabling reform without losers

sectorial wages and the real exchange rate abstract this paper considers a multi sector economy subject to exogenous demand shocks that alter the equilibrium structure of relative prices and relative wages contracts set nominal wages in advance of the realization of stochastic shocks formulae for optimal sectorial wages indexation rules are provided these optimal rules alter the absolute and the relative structure of sectorial nominal wages the rules depend on the heterogeneity of the skill distribution the effects of shocks on the real exchange rate and on real wages are determined and the limited role of second best nominal exchange rate policy is analyzed

a tale of two reforms i identify the absence of well functioning product markets in transition economies as a sufficient condition under which big bang reduces output initially while a chinese style reform increases output big bang dismantles central planning or centralized organization of production permitting monopolistic and vertically interdependent enterprises to pursue their own monopoly profits by restricting output and inter firm trade to the detriment of the economy as a whole the chinese reform by maintaining central planning but allowing enterprises to produce for the emerging product markets after they have fulfilled their output quotas under planning gives enterprises incentives to expand output beyond planned targets

the transition to a market economy pitfalls of partial reform we present a theory of a partial economic reform of a planned economy similar to the one that took place in russia since 1988 and in china earlier in such a reform some markets are liberalized in the sense that producers can sell output to whomever they want including private firms at free prices but at the same time must sell to state firms at state prices we show that such a reform can result in a substantial diversion of subsidized inputs away from state firms and toward private firms even when state firms value these inputs more the result may be a reduction of total output the simple analysis sheds light on many consequences of the soviet reform such as breakdown of coordination of production increased state policing of delivery quotas prohibitions of trading cooperatives and opposition to privatization the model also explains why partial reform failed in russia but worked in china

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

reform without losers an interpretation of china s dual track approach to transition this paper develops a simple model to analyze the dual track approach to market liberalization as a mechanism for implementing efficient pareto improving economic reform that is reform achieving efficiency without creating losers the approach based on the continued enforcement of the existing plan while simultaneously liberalizing the market can be understood as a method for making implicit lump sum transfers to compensate potential losers of the reform the model highlights the critical roles of enforcement of the plan for achieving pareto improvement and full liberalization of the market track for achieving efficiency we examine how the dual track approach has worked in product and labor market liberalization in china

chicago harvard and the doctrinal foundations of monetary economics the relationship between milton friedman s monetary economics and the views espoused by chicago and non chicago quantity theorists during the years 1930 36 is examined contrary to recent interpretations chicago economists advanced the efficacy of monetary policy as the means of escaping from the great depression provided that such a policy was implemented by the use of budget deficits to generate monetary expansion the use of the quantity theory of money to provide a theoretical rationale for budget deficits distinguished the chicago economists from other quantity theorists and left them less susceptible to the keynesian revolution the claim that harvard was an important center for monetary research in the early 1930s is refuted

the integration of major fuel source markets in china evidence from panel cointegration tests abstract the paper tests for energy price co movement in china over the new regime as part of a strategy to test for the existence of a national energy market panel cointegration test statistics suggest that not all energy commodities are spatially homogenous in prices and the processes of energy price cointegration are different over time and over groups of fuels the statistics demonstrate china s gradual spatially partial and idiosyncratic energy reform process coal and electricity price series have co moved since 2003 while the national panel cointegration test statistics suggest that gasoline and diesel price series have co moved since 1997 regional panel tests also show that there are apparently differences in the emergence of energy price co movement this suggests that regional energy markets have emerged in china one of the important lessons of the research is that an energy market has to some extent already emerged in china and as a consequence energy prices are much less distorted than previously if correct this fact is of major global significance both in terms of future environmental effects and future trade and investment negotiations as china is seen internationally as a market driven economy

an imbalanced development of coal and electricity industries in china china s coal and electricity industries have a strong reliance on each other however because of excessive invasion of government it is difficult for these two industries to form a stable reasonable and transaction cost saving relationships but long run disputes and quarrels this paper discusses the pricing policies and transaction relationship between these two industries from the historical perspective it begins with the discussion of coal coal market has become competitive since 1980 due to the system of dual track approach but coal sold to electricity was still tightly controlled by government guided pricing then the paper examines electricity investment and tariff reform unlike coal entry to electricity generation sector was gradually relaxed but generation and retailing tariffs are still strictly regulated as energy demand and prices soared after 2002 coal and electricity enterprises are all unsatisfied with the rule of price setting of coal sold to electricity industry this paper concludes that the deliberate low coal price policy does protect electricity industry from fuel cost fluctuation but harm coal industry allocative and productive efficiency are difficult to achieve in the long run

policy reform and growth in post soviet russia in pursuit of its transition from a command to a market economy russia has witnessed enormous regional differences in economic growth rates moreover the implementation of economic reforms has also differed markedly across regions we analyze whether regional differences in reform policies can account for regional differences in growth rates and conclude that to a considerable degree they can most notably we find that regional differences in price liberalization policies exhibit a positive direct correspondence with growth we also find that regional differences in large scale privatization exhibit a positive correspondence with the regional formation of new legal enterprises which in turn exhibits a strong positive correspondence with growth

output inflation and stabilization a counterfactual analysis abstract we estimate a small open economy macro model in which movements in inflation and output are driven by fiscal real monetary exchange rate and asset disturbances we use 1980 s data from bolivia and brazil each of which undertook stabilization programs though only bolivia s succeeded an important part of our analysis is counterfactual where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated for bolivia there is clear evidence that deficits affect inflation largely through their effects on money growth and do not have much influence on output external shocks are important for brazilian inflation

plan and market in china s agricultural commerce this article examines interactions between markets and state commercial planning in the context of china s agricultural sector it begins with a discussion of recent trends in agricultural planning and commerce in china and then presents a theoretical model that analyzes the way that a mixed commercial system of the sort observed in china functions the theoretical analysis suggests that a mixed system is sustainable and can have desirable efficiency and distributional effects markets however limit the range of sustainable plans and in the presence of markets state planning may no longer directly influence production and consumption behavior

government spending and the real exchange rate i study the effect of government spending on the real exchange rate in an open economy version of the sidrauski model with a time varying rate of time preference that introduces complementarity between consumption at different points in time i show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods if the increase falls instead on nontraded goods both the stylized results of a real appreciation and a current account deficit and the perverse result of an appreciation and a surplus can occur

a transitional institution for the emerging land market in urban china chinese economic reforms since 1978 have been a continuous process of fundamental institutional change the new institution of ambiguous property rights over state owned urban land evolves from the

incremental reform and distortions in china s product and factor markets the purpose of economic reform is to reduce distortions and enhance efficiency however when reforms are partial and incremental individuals and local governments are often able to capture the rent inherent in the gradual transition process young 2000 warned that such rent seeking behavior might lead to increasing market fragmentation empirical studies have shown the opposite in the product market this article argues that as the rent from china s product market has been squeezed out due to deepening reforms rent seeking behavior may have shifted to the capital market further reforms are needed in the capital market to squeeze out these rent seeking opportunities just as those from the product and labor markets were squeezed out earlier

the rate of time preference and dynamic economic analysis strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation in fact most of the modern literature concerned with capital theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference this specification is attractive because it is analytically tractable in dynamic models and it clearly delineates how tastes and opportunities interact to determine an economy s household s paths of consumption and capital formation however its rigid structure constancy of time preference severely limits the conclusions and explanatory power of the corresponding models this paper considers a class of utility functionals in continuous time which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption the more flexible structure embodied in these functionals leads to important generalizations and

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

weakly nonseparable preferences and distortionary taxes in a small open economy this paper examines the dynamic effects of distortionary taxes in a small open economy the employed utility function implies both endogenous rates of time preference and a tractable form of weak nonseparability between consumption and leisure weak nonseparability induces novel long run welfare and wealth effects of taxes and generates very different current account movements endogenous rates of time preference facilitate the examination of a tax on international borrowing and lending copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

gradual reforms and the emergence of energy market in china evidence from tests for convergence of energy prices this study investigates the emergence of energy markets by testing for convergence of energy prices with a new dataset on energy spot prices in 35 major cities in china both descriptive statistics and unit root are employed to test the convergence of energy prices for each of four fuel price series the whole study period is divided into two sub periods in order to reconcile the gradual energy reforms the results show the steady improvement in energy market performance in china especially during the second sub period which suggests that the market appears to be playing an increasing role in determining energy prices while panel unit root tests show energy markets are integrated in china as a whole city by city univariate unit root tests suggest that there are still many regional energy markets probably because energy reserves especially coal vary widely across regions since china s energy economy is gradually moving towards market oriented mechanisms the existing literature may become obsolete soon

the domestic demand compensated effects of changes in the exchange rate foreign prices tariffs and foreign demand macroeconomic models for open economies are often quite similar in terms of the supply side of the economy but specification of the demand side varies substantially in this paper aggregate domestic demand is assumed to be exogenous the choice of how to specify what determines aggregate domestic demand is thus avoided the simple treatment of the demand side of the economy makes it possible to render other parts of the model more general than usual in particular our model has several goods which may be divided into tradeables with exogenous prices tradeables with endogenous prices and nontradeables with endogenous prices intermediate inputs of imported and domestically produced goods are allowed for changes in exogenous variables such as the exchange rate tariff rates foreign prices government consumption and foreign demand are analyzed

the political economy of transition the overriding importance of political constraints in the transition process has led to developments of the theory of the political economy of reform what are the main insights from that theory how does it reflect the transition reality what have we learned and what do we still need to learn the present article will attempt to answer those questions

when ideas trump interests preferences world views and policy innovations the contemporary approach to political economy is built around vested interests elites lobbies and rent seeking groups which get their way at the expense of the general public the role of ideas in shaping those interests is typically ignored or downplayed yet each of the three components of the standard optimization problem in political economy preferences constraints and choice variables rely on an implicit set of ideas once the manner in which ideas enter these frameworks is made explicit a much richer and more convincing set of results can be obtained in particular new ideas about policy or policy entrepreneurship can exert an independent effect on equilibrium outcomes even in the absence of changes in the configuration of political power

how did china take off economic growth to take off the fi rst view gives the pride of place to globalization according to this view chinese growth started when deng globalization according to this view chinese growth started when deng xiaoping liberalized trade and foreign investments by setting up special economic xiaoping liberalized trade and foreign investments by setting up special economic zones in the coastal provinces in this view china s export oriented manufacturing zones in the coastal provinces in this view china s export oriented manufacturing largely foreign funded employed millions of rural migrants boosted their income largely foreign funded employed millions of rural migrants boosted their income and reduced poverty far and wide the second perspective emphasizes the imporand reduced poverty far and wide the second perspective emphasizes the importance of internal reforms especially in rural interior regions of the agricultural tance of internal reforms especially in rural interior regions of the agricultural pricing system land contracting and the entry of rural businesses known as townpricing system land contracting and the entry of rural businesses known as township and village enterprises ship and village enterprises china s early external reforms are politically important special economic china s early external reforms are politically important special economic zones were ideologically controversial at the time they were introduced and their zones were ideologically controversial at the time they were introduced and their establishment signaled a triumph of the reformist leaders over conservatives also establishment signaled a triumph of the reformist leaders over conservatives also the infl ows of foreign investments were not spontaneous they required an explicit the infl ows of foreign investments were not spontaneous they required an explicit shift in policies and legal practices politically the 1979 passage of the law on shift in policies and legal practices politically the 1979 passage of the law on chinese foreign equity joint ventures only three years after the cultural revoluchinese foreign equity joint ventures only three years after the cultural revolution and committing the chinese government to the protection of foreign property tion and committing the chinese government to the protection of foreign property rights was pathbreaking rights was pathbreaking

capital accumulation and the current account in a two country model abstract this paper examines the joint determination of international debt and capital accumulation in a two country model national rates of time preference are endogenous adjusting along an optimal path to come into equality with one another in the steady state the characteristics of short run current account dynamics are crucially linked to world capital accumulation and to a country s long run net external asset position steady state creditor countries tend to have current account surpluses during episodes of world output growth and vice versa for debtor countries this gives rise to possible non monotonic adjustment in the current account and consumption

rural reforms and agricultural growth in china this paper employs province level panel data to assess the contributions of decollectivization price adjustments and other reforms to china s agricultural growth in the reform period decollectivization is found to improve total factor productivity and to account for about half of the output growth during 1978 84 the adjustment in state procurement prices also contributed positively to output growth its impact came mainly from the responses in input use the effect of other market related reforms on productivity and output growth was very small reasons for slowdown in agricultural growth after 1984 are also analyzed copyright 1992 by american economic association

exchange rates and fiscal policy in a popular model of international trade this paper develops a reinterpretation of the devaluation analysis in a popular model of international trade developed by charles bickerdike joan robinson and lloyd metzler it has come to be known as the elasticity approach 1 that model developed in terms of independent markets for imports and exports has been criticized for its apparent lack of general equilibrium properties the assumptions underlying the model have remained by and large implicit and vary across users and the integration of this analysis with the absorption approach and macroeconomics has never been demonstrated all this is very much recognized and indeed application of the model is consistently accompanied by appropriate partial equilibrium impact effect or upper bound caveats these shortcomings notwithstanding the model continues to enjoy substantial popularity in policy discussions and interpretations of current events in empirical work and in recent textbooks in the field of international economics the brm model is likely to remain the preferred tool in the analysis of trade balance issues along with the foreign trade multiplier model it is therefore interesting and useful to enquire into its formal general equilibrium implications this paper is concerned with one such interpretation involving a nontraded goods sector and a well defined government policy that makes the analysis consistent with the absorption approach while it may well be possible to generate alternative interpretations the present analysis would seem to have the advantage of simplicity while at the same time pointing out the essential properties that would have to be satisfied by alternative treatments in section i a brief review of the brm approach is offered in section ii that approach is interpreted in terms of a simple model with nontraded goods and constant terms of trade the implicit assumptions of the brm model are brought to the f oreground by an explicit consideration of the market for home goods the equilibrium conditions and the role of the relative price of nontraded goods 3 following that analysis section iii considers the subsidiary issues that are raised by variable terms of trade the notion of total elasticities is given an interpretation in section iv where we return to the composite traded good model to explore alternative assumptions about absorption policies

china and india in the age of globalization sectoral variation in postliberalization reregulation in recent years china and india have extensively liberalized their economies they have departed from the east asian developmental states which have restricted foreign direct investment fdi to protect domestic industry and the liberal fdi strategy of latin america during a similar stage of development as they have eschewed dependent development instead they have taken a liberalization two step which follows liberalization with reregulation that varies across industrial sectors country and sectoral case studies demonstrate the perceived strategic value of a sector sectoral characteristics and the organization of state institutions shape the ways in which reregulation varies insulated from political pressures the chinese state shifts from universal controls on the aggregate level to selective controls at the sectoral level and adopts a bifurcated strategy in its reregulation in india the government liberalizes fdi according to state goals but reregulates as a function of sectoral interests

are new tigers supplanting old mammoths in china s banking system evidence from a sample of city commercial banks abstract new tigers including city commercial banks outperform state owned commercial banks burdened with non performing loans from unprofitable state owned enterprises we study whether this is solely due to superior corporate governance multiple shareholders versus total government ownership or also to the favorable environment the new tigers target affluent china while state owned commercial banks operate nationwide using a field survey on 20 city commercial banks from three provinces at different levels of economic development we find better performance at those in the east and worse performance at those controlled by state owned enterprises geography and policy do matter and reform of state owned commercial banks is necessary to bring better banking to china

monetary and fiscal policy under deep habits allowing habits to be formed at the level of individual goods deep habits can radically alter the fiscal policy transmission mechanism as the counter cyclicality of mark ups this implies can result in government spending crowding in rather than crowding out private consumption in the short run we explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors we then describe optimal monetary and fiscal policy in our new keynesian economy subject to the additional externality of deep habits and explore the ability of simple policy rules to mimic fully optimal policy we find that the presence of deep habits at empirically estimated levels can imply large externalities that significantly affect the conduct of monetary and tax policy however despite the rise in government spending multipliers implied by deep habits government spending is barely used as a stabilisation tool under the optimal policy

government expenditure and equilibrium real exchange rates abstract government expenditures financed by lump sum taxes influence real exchange rates potentially via a resource withdrawal channel and a consumption tilting channel recent theoretical and empirical studies have considered only the effects of government spending through the resource withdrawal channel we solve for the theoretical relationships among the real exchange rate relative private consumption relative government consumption and tradables and nontradables production in a two country general equilibrium model and then estimate the model s structural equations the results suggest that government expenditures influence real exchange rates approximately equally via the resource withdrawal and consumption tilting channels and that government and private consumption are complements in utility

monetary expansion and real exchange rate dynamics this paper examines the effect of a change in the rate of monetary expansion on the dynamics of the real exchange rate under fully flexible domestic prices and a floating exchange rate the model is similar in structure to an ealier paper by calvo and rodriguez the main difference being that in our model consumers have an infinite planning horizon and long run perfect foresight one of the main findings is that an increase in the rate of monetary expansion has the impact effect of creating a real appreciation of the exchange rate and a deterioration of the balance of payments contrary to the results of calvo and rodriguez

far from the tree do private entrepreneurs agglomerate around public sector incumbents during economic transition while it is well known that state enterprises in transition economies were displaced by private enterprises at a macro level little is known about whether private entrepreneurs emerged in a way that helped preserve or shift preexisting agglomerations of industrial activity at a microgeographic level to address this question we integrate competing perspectives on the role of large bureaucratic incumbents in spawning entrepreneurs we conceptualize a trade off between two countervailing effects of large incumbents on potential entrepreneurs bureaucratic socialization and exposure to capabilities this yields novel predictions about how different kinds of startups agglomerate around different kinds of incumbents we test these predictions using fine grained geographic data on founding rates by private entrepreneurs in china s bicycle manufacturing industry consistent with our theorized trade off we find evidence of a nonmonotonic effect of incumbent size on local founding rates by private entrepreneurs additional moderating effects are consistent with boundary conditions on the hypothesized mechanisms our results provide the first empirical investigation of the extent to which entrepreneurial activity agglomerated around public sector incumbents during economic transition we discuss how these insights add to the understanding of economic transition as well as how the context of economic transition adds to the understanding of entrepreneurial spawning

wage flexibility and openness this paper analyzes the degree of short run real wage flexibility in a two sector economy under floating rates this is done by deriving optimal wage indexation in a contracting framework we find that the more closed the economy the lower the degree of wage indexation as a result output will fluctuate less around its desired level in a more closed economy these findings further imply that a given unexpected monetary shock will cause as maller output shock in a more open economy whereas a given real shock will induce a smaller output shock in a more closed economy this abstract was borrowed from another version of this item

the importance of composition of fiscal policy evidence from different exchange rate regimes abstract we study the macroeconomic effects of fiscal policies in an open economy we emphasize two transmission mechanisms the cost channel by which wage government spending and labor taxes raise the real wage firms must pay and the exchange rate channel by which the nominal exchange rate shifts induced by fiscal policy have real effects if some prices and wages are sticky the latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates in a 1964 93 panel of oecd countries we find significant evidence for both channels moreover we find that the real product wage and profitability are more responsive than quantities employment and output to fiscal policy innovations

the determination of the real exchange rate the productivity approach abstract this paper explains deviations of exchange rates from purchasing power parity with the differences between countries of the relative growth rates of labor productivity between traded and nontraded sectors two cases are considered germany and japan versus their respective major trading partners the results show that the time series methodology yields a more favorable confirmation of the productivity differential model than the cross section regressions in the literature

pareto improving economic reforms through dual track liberalization abstract pareto improving economic reforms that also simultaneously achieve efficiency can be implemented through a strategy of dual track liberalization its success requires the feasibility of the original plan and its continued enforcement by the state the chinese experience demonstrates that such a strategy works

adjustment costs in investment time preferences and the current account abstract this paper studies the effects of supply and demand shocks on the optimal investment and savings decisions of economic agents in a small open economy the two building blocks of the setup are adjustment costs in investment and a recursive time preference structure it is shown that the model can mimic certain stylized facts

dual track reforms with and without losers the dual track approach to market liberalization has been widely recognized as the key to the success of the chinese economic reform in this paper we study the effectiveness of this strategy in economic environments where the status quo government control is incomplete we show that in a dynamic context contractual arbitrage will emerge potentially resulting in efficiency losses and or adverse distributional effects by establishing a necessary and sufficient condition for the dual track approach to retain its appeal in a dynamic context our analysis provides a clear guideline to the broader applicability of this reform mechanism

growth in transition what we know what we don t and what we should abstract this essay surveys macroeconomic issues that marked the transition from planned to market economy in central and eastern european and former soviet union countries we first establish stylized facts of the transition so far we then critically survey the theoretical literature on transition discussing explanations for the initial output fall and mediumterm issues such as optimal speed of transition disorganization institutions and sectoral reallocation as source of output dynamics we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts we conclude with suggestions for future research

greasing the wheels of bank lending evidence from private firms in china abstract bribery rather than firm performance largely determines the extent to which private firms access bank credit in china bribery enables an economic outcome whereby firms with better economic performance are awarded larger loans these firms also pay more in terms of bribes although satisfactory firm performance does determine whether firms can access loans it does so only for loans originated by the big four banks for loans originated by smaller banks performance is not essential for firms to secure loan access our evidence sheds light on the surprising finding of earlier studies that chinese banks use commercial logic in their lending practices despite being endowed with a weak institutional framework

government expenditure real exchange rate and the decline of the manufacturing sector some empirical evidence abstract i show that the increase in government expenditure in european countries during the 1970s raise the relative price of non traded goods this relative price movement may explain why the share of manufacturing in private sector value added declined in those countries

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

hawtrey harvard and the origins of the chicago tradition milton friedman has claimed that his monetary economics derives from a chicago tradition that in the 1930s offered a monetary explanation of cyclical fluctuations in general and the great depression in particular an optimistic view of the power of monetary policy and a case for governing it by rules rather than discretion it is argued that all the elements of this tradition except the last are to be found in earlier writings of ralph hawtrey allyn young and lauchlin currie and that there is much evidence to point to a direct influence running from hawtrey through harvard to chicago

capital controls policy an intertemporal perspective abstract this paper studies capital controls policy from an intertemporal perspective using a small open economy model with optimizing agents it derives a policy rule which conforms real world stylized facts and is sustainable in the long run in particular it explicitly models the constraints on the policy rule implied by the dynamics of the economy studying several prevalent policy experiments it is demonstrated that significant real effects are generated by the interaction between controls policy and traditional policy tools this happens as controls affect agents intratemporal asset allocation and intertemporal consumption patterns the use of controls enlarges the set of possible outcomes generating some non traditional results the analysis points to new tradeoffs and hence new dilemmas faced by a government that uses controls

does the razor s edge exist new evidence of the law of one price in china 1997 2012 this paper revisits the market integration in china under the gradual economic reform using a novel data set of monthly prices for 267 goods across 173 cities from 1997 to 2012 with price regulations dramatically removed we provide new evidence to show that the law of one price lop holds in the context of china which is experiencing substantial trade liberalisation first by accounting for heterogeneity and cross sectional dependence our results show that prices converge to the lop for most goods and industrial materials converge faster than non perishable goods second in comparison with the earlier analysis with static evidence our results with the moving window show that convergence is escalating third we find that the price dispersion across products at the city level is increasing with distance but it is decreasing with openness and economic development our findings show china s market integration is going well under its ongoing market oriented reforms and cast doubt on the proposition that incremental reform in china has led to the fragmentation of the domestic market

selection staging and sequencing in the recent chinese privatization selection in privatization is a decision making process of choosing state owned enterprises soes prioritizing and sequencing privatizing events and determining the extent of private ownership in partial privatization we investigate this process in an important but rarely studied case of china based on the soe population over 1998 2008 we track 49 456 wholly soes and identify 9 359 privatization cases over time our econometric analysis concludes i the privatization selection is a complex decision making process in which local governments balance between various economic financial and political objectives ii in the recent chinese privatization firm performance relates to the selection staging and sequencing in privatization in an inverted u fashion the worse and the best performing soes are more likely to remain state owned maintain higher state holding when privatized and are less likely to be privatized later in time these patterns suggest the privatization reform slowdown and the underlying changes in the privatization policy

reform and openness why china s economic reforms have delayed democracy most theories that seek to explain democratization look to changes in the economy as the precursor to significant political liberalization locating the main causal factor in either severe economic crisis or rapid economic growth in the chinese context by contrast the communist party has extricated itself from the socialist social contract with the urban working class without losing its grip on political power moreover china has maintained a rapid pace of economic growth for over twenty five years without significant political liberalization comparative analysis of china s post 1978 reform policies yields insights both across types of socialist transition comparing china with eastern europe and russia and across time comparing china with other high growth east asian economies a key factor in china s ability to reform the economy without sacrificing political control is the timing and sequencing of its foreign direct investment fdi liberalization there are two key variables that are important to this comparative analysis china s pattern of ownership diversification and china s mode of integration into the global economy the article relates these two variables to the success of economic change without political liberalization in particular how fdi liberalization has affected relations between workers and the ruling communist party reform and openness in this context resulted in a strengthened chinese state a weakened civil society especially labor and a delay in political liberalization

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

how to reform a planned economy lessons from china the countries of eastern europe and the former soviet union have been flooded with advice from the west on how to liberalize their planned econo mies this advice is unfortunately offered in an empirical vacuum no one knows how these econo mies will react to the proposed liberalization meas ures there exists however a neglected source of information china offers a long time series of data over a decade s worth on the effects of reforms on a planned economy china s reforms were gradual but their cumulative effect has been large and they have been remarkably successful china s experiments provide some practical les sons on what kinds of reforms can work elsewhere the dominant school of thought among economists favours the big bang policy of reforming quickly and according to a comprehensive plan partial reforms in this view are useless they will be negated by the remnants of the planning system the proponents of big bang reform have been influential with poland czechoslovakia and rus sia announcing plans for a rapid transition to capi talism

the law of one price evidence from the transitional economy of china abstract this paper applies the recently developed econometric methods of panel unit root tests and nonlinear mean reversion to investigate price convergence in china the largest transitional economy in the world we find that prices did converge to the law of one price in china for an overwhelming majority of goods and services based on a large panel data set the finding sheds light on the extent of the market economy in china and casts doubt on young s proposition that the economic reform has led to the fragmentation of chinese domestic markets