can fat tail create the momentum and reversal we suggest that fat tail variations can cause both short term momentum and long term reversal simultaneously in both the time series and cross sectional returns of securities the fat tail of the

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

estimating value at risk of crude oil price and its spillover effect using the ged garch approach estimation has been carried out using garch type models based on the generalized error distribution ged for both the extreme downside and upside value at risks var of returns in the wti and brent crude oil spot markets furthermore according to a new concept of granger causality in risk a kernel based test is proposed to detect extreme risk spillover effect between the two oil markets results of an empirical study indicate that the ged garch based var approach appears more effective than the well recognized hsaf i e historical simulation with arma forecasts moreover this approach is also more realistic and comprehensive than the standard normal distribution based var model that is commonly used results reveal that there is significant two way risk spillover effect between wti and brent markets supplementary study indicates that at the 99 confidence level when negative market news arises that brings about a slump in oil price return historical information on risk in the wti market helps to forecast the brent market conversely it is not the case when positive news occurs and returns rise historical information on risk in the two markets can facilitate forecasts of future extreme market risks for each other these results are valuable for anyone who needs evaluation and forecasts of the risk situation in international crude oil markets

roughing it up including jump components in the measurement modeling and forecasting of return volatility a rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from high frequency returns coupled with simple modeling procedures building on recent theoretical results in barndorff nielsen and shephard 2004a 2005 for related bi power variation measures the present paper provides a practical and robust framework for non parametrically measuring the jump component in asset return volatility in an application to the dm exchange rate the s p500 market index and the 30 year u s treasury bond yield we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process moreover many jumps appear directly associated with specific macroeconomic news announcements separating jump from non jump movements in a simple but sophisticated volatility forecasting model we find that almost all of the predictability in daily weekly and monthly return volatilities comes from the non jump component our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling forecasting and pricing the continuous and jump components of the total return variation process

unemployment and income distribution time series evidence from sweden for a long time swedish politicians have been devoted to keeping unemployment at low levels the main reason for this devotion is probably the belief that higher unemployment increases inequality of income and welfare this is a reasonable belief since unemployment risks are highest among people with low earnings capacity even when they have a job by means of micro data it is easy to verify a marked low income profile of unemployment further the swedish unemployment insurance system replaces only about 70 per cent of foregone income and quite many unemployed do not qualify for any benefits see bjorklund and holmlund 1991 increases in unemployment however are associated with many changes in the economy with complex consequences for the personal distribution of income in addition to the income losses suffered by those who become unemployed higher unemployment also affects the factor shares of income the profit share typically declines during recessions and because upper income groups receive a relatively high proportion of their income from capital income a countervailing mechanism is involved changes in unemployment also affect inflation which in turn might influence the personal distribution of income the distributional effects of inflation are an open question this note makes an investigation into the relationship between unemployment and the personal distribution of income using swedish time series data the method was first used on u s data by blinder and

on the faustian dynamics of policy and political power this paper examines the faustian dynamics of policy and power we posit a general class of dy namic games in which current policies affect the future distribution of political power resulting in the following faustian trade off if the current ruler chooses his preferred policy he then sacrifices future political power yet if he wants to preserve his future power he must sacrifice his present policy objec tives the trade off comes from the fact that the current political ruler pivotal voter cannot uncouple the direct effect of his policy from its indirect effect on future power a policy endogenous pe equilibrium describes this endogenous transfer of power and the resulting evolution of policy and political power over time we show that the faustian trade off in a pe equilibrium is decomposed into two basic rationales the political preservation effect induces more tempered policy choices than if one s policy choice did not affect one s political fortunes however the reformation effect induces more aggressive policies in order to exploit the productivity gains from policies chosen by even more aggressive successors we distinguish between political systems that give rise to monotone faustian dynamics political power that progressively evolves towards more fiscally liberal types of leaders and cyclical faustian dynamics political power that oscillates between liberal and conservative types of leaders in each case we show that the faustian trade off moderates the choices of each type of leader

regional labor markets and the determinants of wage inequality from 1972 to 1990 the united states experienced the largest increase in wage inequality of any developed country the spread in log wages between the 90th and 10th percentiles of the male wage distribution increased by about 60 points and inequality increased within virtually every demographic or skill category of the labor force see chinhui juhn et al 1993 various explanations have been offered including changes in the relative demand for skill intensive goods international trade immigration of less skilled workers and increased labor force participation of women yet attempts to quantify the relative importance of these factors have not met with much success this leaves skill biased technical change as the residual claimant that rationalizes the data this paper uses regional differences in the evolution of wage inequality to provide new evidence on the determinants of relative wages using a model of factor demand in geographic markets i isolate contributions of i changing skill ratios in the labor force ii increased participation of women iii technical change and iv changes in the industrial composition of labor demand the data indicate that changing skill ratios and women s labor supply have affected the wages of low skilled men in the west the data indicate that increased immigration of less skilled hispanic and asian workers has adversely affected the wages of natives causing a greater increase in inequality there than in any other region of the country i modeling wage inequality in regional markets

intergenerational mobility and the political economy of immigration abstract flows of us immigrants are concentrated at the extremes of the skill distribution we develop a dynamic political economy model consistent with this observation individuals care about wages and the welfare of their children skill types are complementary in production voter support for immigration requires that the children of median voter natives and of immigrants have sufficiently dissimilar skills we estimate intergenerational transition matrices for skills as measured by education and find support for immigration at high and low skills but not in the middle in a version with guest worker programs voters prefer high skilled immigrants but low skilled guest workers

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

the political economy of naturalization this paper presents a political economy model in which self interested natives decide when citizenship and or voting rights should be granted to foreign born workers native voters know that immigrants hold different political preferences and would thus tend to postpone their enfranchisement as much as possible they also consider however that a more restrictive naturalization policy may reduce the gains from immigration we find that the optimal timing of naturalization depends on the quantity quality productivity and preferences of potential immigrants the political composition and the age structure of the native population as well as the sensitivity of migration choices to the citizenship issue

business cycles in switzerland a comparative study abstract the goal of this paper is to provide an empirical description of business cycles in switzerland and a comparison with business cycles in other countries we adopt a view of business cycles as a set of regularities in the movements and the co movements of economic aggregates common to all decentralized economies lucas 1977 and test whether switzerland conforms to this view in order to identify the appropriate cyclical series we follow a procedure proposed by hodrick and prescott 1980 we then compute correlations of various types we test their stability through time and compare with corresponding estimates for the u s france germany and the u k

immigration conflict and redistribution we study how the possibility of a conflict between natives and immigrants shapes income redistribution in democracies conflict erupts when immigrants are given less than what they could obtain by resorting to confrontation that in turn can make natives vote for lower tax rates and lower public spending we show that income redistribution both vertical from the rich to the poor and horizontal from natives to migrants decreases with the level of immigration this is because the threat of conflict intensifies as the migrant population becomes bigger inequality softens the effect of immigration on tax rates but reduces horizontal redistribution despite the threat of conflict the welfare of the native population unambiguously increases with the stock of migrants

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

human capital and the reduction of inequalities an intra national analysis in italy human capital is a fundamental economic resource in the knowledge economy era and improvements in education are usually associated with both economic development and the reduction of inequality i

pricing discretely monitored asian options under levy processes we present methodologies to price discretely monitored asian options when the underlying evolves according to a generic levy process for geometric asian options we provide closed form solutions in terms of the fourier transform and we study in particular these formulas in the levy stable case for arithmetic asian options we solve the valuation problem by recursive integration and derive a recursive theoretical formula for the moments to check the accuracy of the results we compare the implementation of our method to monte carlo simulation implemented with control variates and using different parametric levy processes we also discuss model risk issues

business cycles in the united kingdom facts and fictions this paper documents the statistical properties of contemporary business fluctuations in the united kingdom we study the period 1956 90 using quarterly detrended data on key aggregate variables we compute selected moments of the data compare our results with those for the united states and rigorously test for dynamic instabilities our findings confirm the existence of substantive cyclical regularities both across countries and across time some notable cross country differences are also identified conclusions about stability are shown to be potentially sensitive to the method of testing in general cross correlations are appreciably more stable than standard deviations

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

decentralized income redistribution and immigration abstract we analyze the welfare and other effects of immigration on a system of jurisdictions with a common labor market mobile capital and redistributive tax transfer policies comparative statics analysis of a model of nash non cooperative equilibria in tax transfer policies shows that the welfare effect of immigration depends on whether immigrants are net fiscal contributors or burdens any one jurisdiction s redistribution and immigration policies generate fiscal externalities for others in the system which a central government can internalize by appropriate taxes and subsidies

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

bridging the gap between the distribution of realized ecu volatility and arch modelling of the euro the garch nig model summary this paper bridges the gap between traditional arch modelling and recent advances on realized volatilities based on a ten year sample of five minute returns for the ecu basket currencies versus the us dollar we find that the realized volatilities constructed from the summation of the high frequency intraday squared returns conditional on the lagged squared daily returns are approximately inverse gaussian ig distributed while the distribution of the daily returns standardized by their realized volatilities is approximately normal moreover the implied daily garch model with normal inverse gaussian nig errors estimated for the ecu returns results in very accurate out of sample predictions for the three years of actual daily euro us dollar exchange rates copyright 2002 john wiley sons ltd

trends and cycles in macroeconomic time series two structural time series models for annual observations are constructed in terms of trend cycle and irregular components the models are then estimated via the kalman filter using data on five u s macroeconomic time series the results provide some interesting insights into the dynamic structure of the series particularly with respect to cyclical behavior at the same time they illustrate the development of a model selection strategy for structural time series models

on the positive correlation between income inequality and unemployment abstract two papers published in this journal jantti 1994 and mocan 1999 among others find empirical evidence that increases in structural unemployment have a substantial aggravating impact on income inequality the main point of this work is to show that standard job search models can help us understand this empirical regularity as a byproduct of the analysis the paper also provides a closed form general expression that enables direct calculation of the gini coefficient of wage income inequality as a function of any arbitrary initial distribution of wage offers three numerical examples illustrate the results

time series analysis for financial market meltdowns abstract there appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling more specifically it is alleged that current risk models have failed to properly assess the risks associated with large adverse stock price behavior in this paper we first discuss the limitations of classical time series models for forecasting financial market meltdowns then we set forth a framework capable of forecasting both extreme events and highly volatile markets based on the empirical evidence presented in this paper our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods

continuous time models realized volatilities and testable distributional implications for daily stock returns we provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous time jump diffusion models traditionally used in asset pricing finance our approach builds directly on recently developed realized variation measures and non parametric jump detection statistics constructed from high frequency intra day data a sequence of simple to implement moment based tests involving various transformations of the daily returns speak directly to the importance of different distributional features and may serve as useful diagnostic tools in the specification of empirically more realistic continuous time asset pricing models on applying the tests to the 30 individual stocks in the dow jones industrial average index we find that it is important to allow for both time varying diffusive volatility jumps and leverage effects to satisfactorily describe the daily stock price dynamics copyright 2009 john wiley sons ltd

sustaining fiscal policy through immigration this paper explores the fiscal implications of immigration to the us and argues that immigration policy should be viewed as a vital part of fiscal policy in particular a case is made that skill

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 fine structure of asset returns an empirical investigation we investigate the importance of diffusion and jumps in a new model for asset returns in contrast to standard models we allow for jump components displaying finite or infinite activity and variation empirical investigations of time series indicate that index dynamics are devoid of a diffusion component which may be present in the dynamics of individual stocks this leads to the conjecture confirmed on options data that the risk neutral process should be free of a diffusion component we conclude that the statistical and risk neutral processes for equity prices are pure jump processes of infinite activity and finite variation

the impact of macroeconomic policies on income distribution an empirical study of the philippines there has been a growing awareness of the income distribution dimension of macroeconomic policies this paper studies this issue empirically considering the case of the philippines and using data available from integrated surveys of households after estimating a reduced form equation it was found that underemployment inflation and government spending worsen income distribution while productivity gains the real interest rate and the real exchange rate were found to improve distribution a similar pattern emerges when the effects of these variables on the absolute incidence of poverty are estimated excerpt

fiscal increasing returns hysteresis real wages and unemployment european unemployment is widely regarded as a problem of excessive real wages this view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed the first part of this paper shows that increases in employment in europe are likely to be associated with rising real take home pay for workers because of fiscal increasing returns increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor the second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies it concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

structural unemployment cyclical unemployment and income inequality this is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution controlling for the influence of inflation increases in structural unemployment have a substantial aggravating impact on income inequality inflation has a progressive impact which is due to the unexpected component the study demonstrates that previous work failed to take into account the stochastic trend behavior of the variables consequently specifications used by previous research cannot predict the behavior of income shares after 1983 whereas the specification used by this paper generates accurate forecasts the results also indicate that a sustained gnp growth is not necessarily associated with an improvement in income inequality because sustained gnp growth can coexist with increased structural unemployment

is the nairu more useful in forecasting inflation than the natural rate of unemployment recent studies have indicated that the terms nairu non accelerating inflation rate of unemployment and natural rate of unemployment are not interchangeable while nairu is an empirical macroeconomic relationship estimated via a phillips curve the natural rate is an equilibrium condition in the labour market reflecting the market s microeconomic features this study evaluates comparatively the inflation forecasting power of alternative time varying estimates of the natural rate of unemployment relative to the nairu the natural rate of unemployment in the usa since the second world war is estimated three alternative methods are utilized the kalman filter a structural determinants approach and the hodrick prescott filter the section that follows assesses how each estimator of the natural rate compares with the others as well as with the nairu derived from a phillips curve in forecasting inflationary changes in the usa in the second half of the twentieth century the analysis reveals that th

the trend behavior of alternative income inequality measures in the united states from 1947 1990 and the structural break this article tests the hypothesis that the time series process of income inequality has experienced a structural break the timing of the structural break is treated as an unknown parameter to be estimated from the data because it is not possible to associate a single episodic policy event with the break year and to avoid bias in favor of a unit root hypothesis if the break was near the selected year for several measures of income inequality a segmented trend model is more appropriate to account for the fundamentals affecting the behavior of income inequality as opposed to a stochastic trend model

searching for the effect of immigration on the labor market we compare two approaches to analyzing the effects of immigration on the labor market and find that the estimated effect of immigration on u s native labor outcomes depends critically on the empirical experiment used area analyses contrast the level or change in immigration by area with the level or change in the outcomes of non immigrant workers factor proportions analyses treat immigrants as a source of increased national supply of workers of the relevant skill the different effects of immigration on native outcomes in the area and factor proportions methodologies appear to result from the diluting effect of native migration flows across regions and failure to take adequate account of other regional labor market conditions in area comparisons excerpt

on the political economy of immigration the authors study how immigration policies that impose capital and skill requirements would be determined under majority voting when native agents differ in their wealth holdings and vote to maximize their income the results of the model calculations indicate that the native population will be polarized between those who would like an immigration policy to maximize the domestic capital labor ratio and those who would like an immigration policy that would minimize it

tax burden and migration a political economy theory and evidence abstract the extent of taxation and redistribution policy is generally determined as a political economy equilibrium by a balance between those who gain from higher taxes transfers and those who lose the standard theory of the size of government in a representative democracy links the tax burden to measures of the pre tax income inequality we develop in this paper a theory which encompasses the existing literature and provides a complementary channel linking the tax burden in the presence of migration to the fiscal leakage from native born to the migrants in a stylized model of migration and human capital formation we show somewhat against the conventional wisdom that low skill immigration can lead to a lower tax burden and less redistribution than would be the case with no immigration even though migrants naturally join the pro tax transfer coalition data on 11 european countries over the period 1974 1992 are consistent with the implications of the theory a higher share of low education immigrants in the population leads to a lower tax rate on labor income and less generous social transfers

early warning signals using avars of infinitely divisible garch models evidence from stock index markets classical time series models have failed to properly assess the risks that are associated with large adverse stock price behaviour this article contributes to autoregressive moving average model garch arma garch models with standard infinitely divisible innovations and assesses the performance of these models by comparing them with other time series models that have normal innovation we discuss the limitations of value at risk var and aim to develop early warning signal models using average value at risk avars based on the arma garch model with standard infinitely divisible innovations empirical results for the daily dow jones industrial average index the england financial times stock exchange 100 index and the japan nikkei 225 index reveal that estimating avars for the arma garch model with standard infinitely divisible innovations offers an improvement over prevailing models for evaluating stock market risk exposure during periods of distress in financial markets and provides a suitable early

the economics of immigration this literature review concerns the impact of immigration on the economy of the host country focusing on the experience of the united states the emphasis is on the period from the 1970s to the 1990s the author shows that research earlier in this period generally concluded that the economic effects of immigration were positive but that more recent research on later migrations have generally concluded that immigration may be having an adverse effect on the earnings of native unskilled workers and be placing an increased burden on welfare programs the importance of such economic analysis for the formulation of appropriate migration policies is stressed

immigration and income redistribution a political economy analysis this paper examines the effect of immigration on the extent of income redistribution via majority voting on the income tax the tax outcome depends on the size of the native majority and the initial amount of redistribution in the economy which in turn determines the skill composition of immigrants as a main result we derive conditions for multiple tax equilibria if the native majority of either skilled or unskilled is not too strong and immigrants are allowed to vote both a high tax and a low tax outcome is possible in a referendum natives will then vote against immigrant voting at best natives are indifferent towards immigrant voting

beyond sharpe ratio optimal asset allocation using different performance ratios abstract as the assumption of normality in return distributions is relaxed classic sharpe ratio and its descendants become questionable tools for constructing optimal portfolios in order to overcome the problem asymmetrical parameter dependent performance ratios have been recently proposed in the literature the aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios a multi period portfolio optimization up covering a fixed horizon is set up at first bootstrapping of asset return distributions is assessed to recover all ratios calculations at second optimal rebalanced weights are achieved at third optimal final wealth is simulated for each ratios eventually we make a robustness test on the best performance ratios empirical simulations confirm the weakness in forecasting of sharpe ratio whereas asymmetrical parameter dependent ratios such as the generalized rachev sortino satchell and farinelli tibiletti ratios show satisfactorily robustness

carrots sticks and broken windows abstract this paper investigates the effect of economic conditions carrots and sanctions sticks on murder assault robbery burglary motor vehicle theft grand larceny and rape in new york city using monthly time series data spanning 1974 99 carrots are measured by the unemployment rate and the real minimum wage sticks are measured by the number of felony arrests size of the police force and number of new york city residents in prison in addition the paper tests the validity of the broken windows hypothesis consistent with its implementation by the new york police department we use misdemeanor arrests as a measure of broken windows policing the broken windows hypothesis has validity in the case of robbery motor vehicle theft and grand larceny while both economic and deterrence variables are important in explaining the decline in crime the contribution of deterrence measures is larger than those of economic variables

contracts and money why are contracts not fully indexed in a setting in which fully indexed contracts are feasible we find that when price level data are gathered with delay these contracts are not renegotiation proof the contracts that replace them entail a lower level of welfare for the parties to that contract they also imply that real variables respond to nominal shocks

the effect of immigration on public finances the impact of immigration on the public finances is an important influence on public opinion this study aims to provide a thorough conceptual survey pointing out the complexities of a full understanding and the relevance of indirect effects and covering both static perspectives and longer run dynamic issues it considers simple accounting approaches which are relatively neglectful of behavioural responses but also tries to bring out the complexities in the nature of the relationship between immigration and the public exchequer that come with more sophisticated modelling of its economic effects

unemployment and infant health times series evidence from the state of tennessee this is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution controlling for the influence of inflation increases in structural unemployment have a substantial

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

a more efficient estimate of the effects of macroeconomic activity on the distribution of income the effects of unemployment and inflation on quintile shares of family income in the united states are estimated by means of generalized least squares inflation is found to have a significant progressive impact on the distribution of income the results also lend support to earlier findings regarding the regressive effects of unemployment copyright 1994 by mit press

forecasting economic time series with structural and box jenkins models a case study the basic structural model is a univariate time series model consisting of a slowly changing trend component a slowly changing seasonal component and a random irregular component it is part of a class of models that have a number of advantages over the seasonal arima models adopted by box and jenkins 1976 this article reports the results of an exercise in which the basic structural model was estimated for six u k macroeconomic time series and the forecasting performance compared with that of arima models previously fitted by prothero and wallis 1976

on the political economy of immigration and income redistribution in this article we analyze an economy in which agents vote over immigration policy and redistributive tax policy we show that natives preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy we also show that changes in the degree of international capital mobility the distribution of initial capital among natives the wealth or poverty of the immigrant pool and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies finally we provide some empirical support for the model s predictions

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association