the strategy proof provision of public goods under congestion and crowding preferences we examine the strategy proof provision of excludable public goods when agents care not only about the level of provision of a public good but also the number of consumers we show that on such domains strategy proof and efficient social choice functions satisfying an outsider independence condition must be rigid in that they must always assign a fixed number of consumers regardless of individual desires to participate the fixed number depends on the attitudes of agents regarding group size being small when congestion effects dominate individuals prefer to have fewer other consumers and large when cost sharing effects dominate agents prefer to have more consumers a hierarchical rule selects which consumers participate and a variation of a generalized median rule to selects the level of the public good under heterogeneity in agents views on the optimal number of consumers strategy proof efficient and outsider independent social choice functions are much more limited and in an important case must be dictatorial

the choice of an optimum currency peg for a small open country abstract this paper explores the choice of an optimal exchange rate system in a monetary context with rational expectations it is related to the problem of the choice of an exchange rate regime heller 1978 and some trade oriented solutions black 1976 branson and katseli papaefstratiou 1978 lipschitz 1979 lipschitz and sundararajan 1980 but differs from these in that broad monetary considerations are stressed it assumes that a country must choose to peg to one of two major currencies or to a basket of the two but cannot float independently for optimum currency reasons mundell 1961 mckinnon 1963 in particular the approach puts the accent on the notion of international competition between national monies tullock 1973 klein 1975 in a rational expectations framework with national money demands and supplies causing changes in relative prices connolly and taylor 1979 dornbusch 1978 the specific question asked is to which if any of two reserve currencies say the us dollar and the pound sterling should a small open country peg in order to best insure domestic monetary stability e g stable home prices or in general is a basket peg composed of the two currencies preferable to a single currency peg

interest rate arbitrage in currency baskets forecasting weights and measuring risk we use a time series modeling approach to address two related questions of interest to foreign exchange market participants and policy makers dealing with basket currencies first how are unknown weights appropriately extracted from basket currencies second how does one correctly account for the risk in terms of conditional variance of expected profits that time varying weights add to the standard basket hedge position we suggest a methodology that can provide answers to these questions and apply it to the heavily traded thai baht currency basket

rethinking the brain drain abstract when productivity is fostered by both the individual s human capital and by the average level of human capital in the economy individuals underinvest in human capital a strictly positive probability of migration to a richer country by raising both the level of human capital formed by optimizing individuals in the home country and the average level of human capital of nonmigrants in the country can enhance welfare and nudge the economy toward the social optimum under a well controlled restrictive migration policy the welfare of all workers is higher than in the absence of this policy

global feminization through flexible labor abstract the emphasis on structural adjustment and labor flexibility in both developing and industrialized economies is rapidly altering the nature of employment women are being substituted for men and many forms of work are being converted into the kinds of jobs traditionally geared to women international data on recent trends in female economic activity reveal that new types of labor data are needed to highlight the mechanisms of control over workers and the actual economic forms of vulnerability to which women are exposed the paper concludes by posing questions that challenge the traditional concerns of donors and policy makers in many developing countries

negative international transmission of economic expansion abstract this paper uses a conventional two sector real trade model and demonstrates how within that framework the relative price effect resulting from a demand expansion in one country may quite plausibly generate negative effects in overall activity abroad it is shown how under the chosen assumptions of wage rigidities the transmission of an expansion which occurs through the relative price effect may be decomposed into a an employment effect and b a terms of trade effect either of which may be positive or negative expansions resulting from i an increase in the money supply and ii increases in government expenditure on the importable and exportable commodity are discussed

exchange rate overshooting the trade balance and rational expectations abstract this paper presents a model of exchange rate determination characterized by imperfect asset substitutability between domestic and foreign bonds sticky goods market prices and rational expectations the model is used to analyze the response of the exchange rate to a step change in relative money supplies the assumption of imperfect asset substitutability permits introduction into the analysis of trade flows which respond to relative price changes these flows create non monotonic exchange rate adjustments to long run equilibrium these non monotonic adjustments are consistent with rationality and may lead to short run undershooting or overshooting

workers response to job loss female and male industrial workers in brazil abstract it is often assumed that when formal sector workers in the third world lose their jobs during a recession they move into the informal sector lack of state support rules out long periods of unemployment above all for breadwinners a survey of industrial workers in brazil shows that following job loss in the early 1980s resorting to the informal sector was more common for women than men and less likely for the skilled than the unskilled unemployment and a return to industrial employment were most common experiences for male breadwinners workers preferences and the structure of labor market opportunities explain much of this behavior

a brain gain with a brain drain abstract we study human capital depletion and formation in an economy open to out migration as opposed to an economy which is closed under the assumption of asymmetric information the enlarged opportunities and the associated different structure of incentives can give rise to a brain gain in conjunction with a brain drain migration by high skill members of its workforce notwithstanding the home country can end up with a higher average level of human capital per worker

income taxation and international mobility today millions of people work in countries where they are not citizens income taxation and international mobility addresses the novel theoretical and practical problems that this growing phenomenon of international personal mobility creates for the design of a country s tax system and takes up questions that have grown largely out of the extensive debate over jagdish bhagwati s proposal in the early 1970s to tax the brain drain the contributors who include many of the leading theorists of international economics and public finance look at how the difficult question of how horizontal equity is to be defined between nationals at home and abroad or between nationals abroad and foreign citizens abroad and tackle such questions as should a country exercise income tax jurisdiction over its citizens abroad if so in what way is it practical to do so the issues that these questions raise are complex lying on the interface of politics sociology and economics income taxation and international mobility breaks significant new ground by analyzing these questions and building on the modern theory of optimal income taxation to examine the consequences of the possibility of outmigration on the appropriate exercise and design of income tax jurisdiction on those who live outside their native country theoretical analyses are presented in six chapters by the editors and by james mirrlees william baumol and koichi hamada the well known tax law expert richard pomp examines the philippines experience in taxing citizens abroad the editors provide a substantial introduction that synthesizes the book s major analytical approaches and conclusions and richard musgrave provides an insightful view of the issues in his foreword

wages relative prices and the choice between fixed and flexible exchange rates this paper reexamines the choice between fixed and flexible exchange rates to take into account wage indexation and flexible prices the difference in output variation in the two exchange rate regimes is shown to be dependent on wage behaviour in the domestic economy being proportional to one minus the degree of wage indexation foreign wage behaviour is also shown to be of key importance since high wage indexation abroad can insulate the domestic country from some foreign disturbances regardless of domestic behaviour while for other economic disturbances it is the relative degree of wage indexation which determines the desirability of flexible rates niveaux de salaires prix relatifs et le choix entre les regimes de taux de change fixes ouflucttuants ce memoire reouvre le dossier du choix entre regime de taux de change fixes et regime de taux de change fluctuants quand on tient compte de l indexation des salaires et de la flexibilite des prix il appert que l ecart entre les variations du niveau de production domestique entre les deux regimes depend du comportement des salaires dans l economie domestique il est proportionnel a 1 le degre d indexation des salaires le comportement des salaires dans le reste du monde est aussi important puisque un haut degre d indexation des salaires dans le reste du monde peut proteger l economie domestique de certaines perturbations economiques h l etranger quel que soit le comportement des salaires domestiques dans le cas d autres perturbations economiques c est le degre relatif d indexation des salaires h l interieur et h l exterieur qui devient le facteur determinant dans le choix d un regime de taux de change how much difference a flexible exchange rate makes to the economic performance of a country depends significantly on wage behaviour if wages are sufficiently sensitive to exchange rates output will exhibit much the same variability under flexible exchange rates as under fixed rates foreign wage behaviour is also of key importance since high wage flexibility abroad can insulate the domestic country from some foreign disturbances regardless of domestic wage behaviour while for other economic disturbances it is the relative degree of wage flexibility which determines the desirability of flexible rates this paper re examines the choice between fixed and flexible rates taking into account both domestic and foreign wage

the degree of capital mobility and the stability of an open economy under rational expectations recent stochastic models of the open economy have tended to downplay the role of the trade account in short run exchange rate demination focusing instead on the stock equilibrating function of exchange rates and interest rates l the reason for this is that such models are specified in terms of discrete time and virtually all assume i perfect capital mobility in the sense that domestic and foreign assets are perfect substitutes on an uncovered basis ii no wealth effects in the relevant demand functions under these assumptions the exchange rate is essentially determined within the money market however as soon as either assumption is dropped the current account balance together with the appropriate asset market s assumes an important role in determining the exchange rate and domestic interest rate along with the accumulation of foreign securities by the domestic economy during the period 2

measuring investment in education historic debates about the measurement of capital are even more complicated in the case of education and human capital as extensive research demonstrates education resources are not consistently related to student performance in existing elementary and secondary schools this inefficiency in public schools implies that spending and resource measures do not accurately capture variations in school quality this finding then has clear implications for both education policy and economic research because school inputs are poor policy instruments an alternative policy focus that appears much more productive is performance incentives related to student achievement

human capital depletion human capital formation and migration a blessing or a curse abstract we specify conditions under which a strictly positive probability of employment in a foreign country raises the level of human capital formed by optimizing workers in the home country while some workers migrate taking along more human capital than if they had migrated without factoring in the possibility of migration a form of brain drain other workers stay at home with more human capital than they would have formed in the absence of the possibility of migration a form of brain gain

quality trade and growth abstract this paper analyzes the roles of product quality and increasing returns in international division of labor and economic development because the qualities of different intermediate goods are highly complementary in producing the quality of the final good a poor economy will choose to be in autarky if its average level of human capital is sufficiently low thus the heterogeneity of human capital may hamper the division of labor further by linking quality trade and growth this model simultaneously explains the east asian miracle and the empirical finding of conditional convergence

effects of monetary disturbances on exchange rates with risk averse speculation abstract this paper develops a macroeconomic model in which domestic and foreign bonds are perfect substitutes on a covered basis but in which speculators are assumed to be risk averse we analyze the effects of various transitory and permanent disturbances on the economy and show how the existence of the risk premium known to exist under such conditions has important implications for macroeconomic behavior most of our attention is devoted to how the economy responds to temporary and permanent changes in the money and bond supplies and in the central bank s forward market position the effects of disturbances in the foreign price level and interest rate are also briefly discussed

an examination of the effects of government purchases in an open economy this paper examines the effects of permanent and transitory changes in government purchases in the context of a model of a small open economy that produces and consumes both traded and nontraded goods the model incorporates an equilibrium interpretation of the business cycle that emphasizes the responsiveness of agents to intertemporal relative price changes it is demonstrated that transitory increases in government purchases lead to an appreciation of the real exchange rate and an ambiguous change although a likely worsening in the current account while permanent increases have an ambiguous impact on the real exchange rate and no effect on the current account when agents do not know whether a given increase in government purchases is permanent or transitory the effect is a weighted average of these separate effects the weights depend on the relative variances of the transitory and permanent components of government purchases in the past few years a considerable amount of effort has been devoted to examining the effects of macroeconomic policy in an open economy such issues as exchange rate overshooting deviations from purchasing power parity sterilization and monetary control the effectiveness of monetary policy and the choice between alternative exchange rate regimes have been at center stage the models that have been employed to study these issues have run the spectrum from variants of the mundell fleming model such as dornbusch 1976 turnovsky 1981 and kimbrough 1983a to wage contracting and indexing models like bhandari 1982b and flood and marion 1982 to equilibrium models of the business cycle along the lines of bhandari 1982a saidi 1982 and kimbrough 1983b to the closely related intertemporal utility maximization models with money of helpman 1981 and stockman 1980 1983 one common thread that in a sense unifies all of these and other recent contributions is that they are concerned primarily with the effects of alternative monetary and exchange rate policies that the central bank might enact in light of the development and refinement during this period of the monetary approach to the balance of payments and the exchange rate it is not surprising i would like to thank phil brock jeremy greenwood gary zarkin and two anonymous

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

on the performance of nominal income targeting as a strategy for monetary policy in a small open economy abstract there is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework is nominal income targeting equally attractive in a small open economy this paper compares nominal income targeting to alternative monetary policy rules in a stochastic macro model for a small open economy we find that both the weighting in the overall price level of the exchange rate and foreign prices and the elasticity of output supplied with respect to the real exchange rate are important factors in assessing the attractiveness of nominal income targeting in a small open economy where the size of both parameters is not negligible a rule targeting the overall price level may actually be preferred to nominal income targeting

the macroeconomics of populism in latin america by populism this paper refers to an economic approach that emphasizes growth and income redistribution and deemphasizes the risks of inflation and deficit finance external constraints and the reaction of economic agents to aggressive nonmarket policies it analyzes two instances of populism chile under allende and peru under garcia these experiences are described in detail not as a righteous assertion of conservative economics but as a warning that populist policies ultimately fail and always at a frightening cost to the groups they were supposed to benefit this paper explores the question of whether some variant of populist policies could succeed it suggests that populist policies could succeed if they stayed clear of foreign exchange constraints emphasized reactivation for a brief initial period and then shifted to growth policies most important expansionary policies must reflect awareness of capacity constraints and must rely for financing on an extremely orthodox fiscal policy and rigorous tax adminsitration the paper concludes by warning that imf style policies unconcerned with growth of social progress may establish financial stability in the short run but inevitably open the door to yet another round of destructive reaction in the form of populist policies

the transmission of foreign disturbances under different exchange rate regimes abstract this paper is divided into two parts in the first part section 2 we present a model of a smaller economy which we use to evaluate in a simple comparative static framework the roles of exchange rate flexibility capital mobility and indexation in the transmission of foreign impulses from abroad in the second part section 3 we examine in some detail how expectations about foreign disturbances affect the way in which policies abroad are transmitted to the home economy we analyse three distinct cases the case of a fully anticipated permanent monetary and fiscal expansion abroad the case of an anticipated permanent change in policy abroad which is not realised and the case of an unanticipated policy change abroad

exchange risk political risk and macroeconomic equilibrium with the advent of increased exchange rate flexibility the role of policy and the transmission of economic disturbances under flexible rates have become topics of considerable interest j marcus fleming 1962 and robert mundell 1963 in their early analysis of the theory of policy in open economies emphasized the importance of the degree of capital mobility subsequently a number of authors have analyzed the implication of the degree of capital mobility for exchange rate and income determination in open economies see for example pentti kouri and michael porter 1974 william branson 1975 1979 lance girton and dale henderson 1976 and turnovsky 1976 the polar case of perfect capital mobility has received most attention capital is perfectly mobile when investors consider domestic bonds denominated in domestic currency and foreign bonds denominated in foreign currency to be perfect substitutes two factors may cause perfect substitutability to break down one is exchange risk the values of the two bonds are defined in terms of different currencies and the exchange rate at the date of maturation is uncertain the second is default risk investors may perceive that foreign bonds are more subject to the risk of default than are domestic bonds for one thing in the event of default the investor must pursue his claim through a foreign legal system which is likely to be costly robert aliber 1973 terms differences in default risk arising from the foreignness of assets as political risk where domestic and foreign securities are assumed to be only imperfect substitutes it is important to distinguish the degree of imperfection due to each of these sources of risk while this distinction has been noted in optimal portfolio models developed by authors such as kouri 1976 and michael alder and bernard dumas 1977 it has not been brought out in the current macro literature the objective of the present paper is to investigate the macroeconomic consequences of this distinction and to show how it may be crucial in assessing the effects of various macroeconomic disturbances under varying degrees of capital mobility we find that well known results about the effects of increased capital mobility on the efficacy of monetary policy are correct when the increased mobility is due to a reduction in exchange risk but not necessarily so when it is due to a reduction in default risk section i formulates a general equilibrium macroeconomic model which embodies the distinction between these two sources of risk we assume that the economy is small so that it treats certain characteristics of the foreign economy as parametric section ii carries out certain comparative static exercises with this model specifically it considers some important relationships between the available policy instruments and endogenous variables and shows how these are affected by the degree of capital mobility in the two senses in which this term is defined in particular we show that as long as there is a possibility of default there exists an independent role for forward market intervention in the limiting case of no default risk yale university and university of illinois respectively see peter kenen 1965 for an early analysis of the forward market incorporating potential default political risk may derive from the threat of exchange controls as well as from the threat of outright debt repudiation in either case the risk may not be the loss of the total net worth of the investment when the threat derives from exchange controls the expected value of net worth may even be preserved but if payment is delayed forward cover obtained for the investment will no longer be appropriate for our purposes it is the risk that repayment not occur on the date for which the forward cover is arranged thereby exposing the investor to exchange risk that is relevant our analysis could easily be modified to incorporate a preservation of some or all net worth in the event of default see eaton and mark gersovitz 1981 for a model in which the probability of default is endogenous

losses and gains to developing countries from the migration of educated workers this paper synthesizes and extends recent research on the new economics of the brain drain in a unified framework the paper shows that while recently identified adverse repercussions of the brain drain exacerbate the long recognized negative impact of the brain drain longer term consequences turn the brain drain into the harbinger of powerful gains these gains have been studied already in recent research or merit attention in future research

openness and the effects of monetary policy abstract economic theory suggests that an economy s openness reduces the ability of monetary policy to affect output while increasing its effects on inflation using annual data from the 1953 1990 period for a panel of 38 countries the paper s empirical results support the theoretical predictions the more open the economy the smaller larger the output inflation effects of a given change in the money supply this finding is robust across all the different specifications and estimation methods examined

policies for a heterogeneous informal sector in latin america abstract the concept of the informal sector has gained increasing acceptance in latin america some 30 million persons now work outside the modern economy in low productivity jobs with marginal incomes many of them are living in poverty international and national policy makers have become aware of the political and economic consequences of this phenomenon and are seeking ways to improve returns and incomes the sector however is composed of different kinds of activities each with its own problems which need to be addressed in different ways policy planners should bear this in mind as they seek solutions the paper recommends three types of measures providing productive assistance to informal enterprises supporting informal sector workers and revising regulations that govern informal sector activities

does globalisation discipline monetary policymakers abstract this paper analyses globalisation using a small general equilibrium model it concludes that whether increased openness a reduction in the costs of international trade helps to discipline monetary policy in large open economies depends on the type of trade costs moreover to the extent that globalisation induces stronger competition in the goods market this may also have an adverse effect on monetary policy discipline the latter is due to international expenditure switching which becomes a more forceful channel as competition intensifies thus the answer to the question in the title is not necessarily affirmative

a determination of the optimal currency basket a macroeconomic analysis abstract this paper analyzes the choice of the optimal currency basket using a general equilibrium macro model of a small open economy with perfect capital mobility the optimal weights are derived to minimize the variance of domestic output the general properties of the optimal basket so obtained are identified and a number of special cases are analyzed in detail the weights are also compared with those found in the existing literature which differs from the approach here in its more partial equilibrium nature its neglect of capital flows and its focus on the stabilization of more proximate policy objectives

materials price increases and aggregate adjustment in an open economy a stochastic approach abstract this paper develops a stochastic macroequilibrium frameworks to analyze the differing implications of alternative types of input price disturbances the distinctions between expected and unexpected permanent and transitory nominal and real disturbances are considered the introduction of input disturbances involves a more elaborate modelling of the supply side of the economy both constant returns to scale and decreasing returns to scale technologies are considered the analysis highlights the sensitivity of the macroeconomic impacts of input price shocks to their specific type the analytical results obtained are not unambiguous and are supplemented with numerical simulations

employment and poverty during economic restructuring the case of bogota colombia bogota is seemingly a positive example of what restructuring and sensible macroeconomic policy can bring to latin america despite liberalisation and a vast increase in the number of people seeking work unemployment rates have fallen large numbers of new jobs have been created principally in the informal sector there seems little real doubt that since 1970 poverty in bogota has become both less common and less serious however if there is less poverty it is principally because of demographic change adults form a larger proportion of the labour force and more of those adults are working poverty has been cut by the huge rise in labour participation fewer people are hungry but people are also a great deal busier nor has the degree of income inequality been reduced

monetary accommodation of supply shocks under rational expectations in dealing with the expectationists arguments i will divide them somewhat artificially into two groups arguments in the first group which i call present disaster arguments allege that econometric models err by understating the reaction of inflationary expectations for example it is claimed that a policy of monetary accommodation would increase inflationary expectations shift the short run phillips curve upward and defeat the purpose of the expansionary policy arguments in the second group which i call future disaster arguments are more subtle but also more elusive the idea is that by informing private agents that it will accommodate supply shocks in the future the monetary authority would exacerbate the downward rigidity of wages and prices thus making it more difficult to deal with future supply shocks such arguments are cases of the lucas 12 econometric policy critique since they suggest that policy changes will cause parameter shifts neither of these arguments is implausible on its face the problem is that it is hard to know how to evaluate them until they are formalized in theoretical models and then tested empirically this paper takes one small step in that direction by augmenting two popular macro models with rational expectations so that they are capable of dealing with supply shocks and then examining both the present and future disaster arguments in the context of each this abstract was borrowed from another version of this item

informational efficiency and the open economy a troublesome feature of existing stochastic macroequilibrium models of the open economy is the nature of the informational assumptions usually made most of these models assume that full contemporaneous information on all relevant macrovariables is freely available to economic agents this is the assumption made for example in cox 7 driskill and mccafferty 10 driskill 8 and turnovsky 17 18 among others further when information gaps are introduced the lack of full current information refers to the inability of domestic agents to correctly identify permanent versus transitory components of movements in either the currently observed domestic money supply as in ueda 20 or the observable foreign price level 2 16 5 yet prevailing economic reality is characterized by the availability of differentiated current information to economic agents information or data on variables relevant to auction markets such as asset markets is far more easily and frequently available than information that relates to markets that are contractual in nature such as commodity markets a financial newspaper such as the wall street journal for example provides daily information on half a dozen foreign prime interest rates a multitude of u s

macroeconomic effects of budget deficits further international evidence abstract this paper investigates the effects of budget deficits on money growth inflation investment and real output growth using annual data from a sample of 32 countries the findings can be summarized as follows i deficits are generally not monetized and therefore they do not produce inflation via monetary expansions ii deficits are not inflationary even through their alleged aggregate demand effects iii deficits are negatively correlated with the rate of growth of real output but this may just reflect their countercyclical nature and iv increased deficits do appear to retard investment usually after one or two years jel e63 h62

can a brain drain be good for growth in the source economy this paper analyzes the interaction between income distribution human capital accumulation and migration it shows that when migration is not a certainty a brain drain may increase average productivity and equality in the source economy even though average productivity is a positive function of past average levels of human capital in an economy it is also shown how the temporary possibility of emigration may permanently increase the average level of productivity of an economy

the simple macroeconomics of an oil dependent economy abstract this paper constructs and analyzes a simple macrodynamic model of a small economy that is completely dependent upon opec for oil imports the impact and dynamic behavior of wages prices output and exchange rates is analyzed under several alternative scenarios initially it is assumed that oil is denominated in dollars and the consequences of an increase in oil prices are investigated under a system of free floating in later sections the effects of this disturbance are re examined under various kinds of managed float systems

world trade patterns economic disturbances and exchange rate management abstract this paper construct and analyzes a three country stochastic model of world trade the objectives of this paper are to investigate the propagation of economic disturbances worldwide and to analyze the nature of optimal exchange rate management on the part of a single country faced with monetary and real disturbances accurring in all its trade patterns the paper analyzes the roles of bilateral trade patterns the type of underlying stochastic disturbances i e monetary vs real and transsitory vs permanent and of the optimality criterion in determining the optimal exchange rate regime

wage relationship informal sector and employment policy in south america in advanced capitalist countries the shaping of a relatively homogeneous wage earning class was a slow process that lasted at least three generations this gradual transition to a wage earning economy does not seem to have taken place in developing countries where the existence of a wide informal sector encompasses a series of consecutive phases in advanced capitalist countries in a complex way more than a form of transition the informal sector appears as a particular type of economic organisation this sector internally and when joined with the formal economy develops a special rationality that cannot be explained by interpretations underlying the policies directed towards this sector such a rationality suggests a new type of policy that of taking the sector s pecularities into account and goes beyond the plain assistence treatment and simplifying attempts of formalising the informal

the forward exchange market speculation and exchange market intervention this paper examines two issues the first is the role of speculation in stabilizing the economy against stochastic disturbances increased speculation i stabilizes domestic income against disturbances in the domestic bond market and forward exchange market ii exacerbates the effect of foreign disturbances and iii may dampen or augment the effect of money market and output supply disturbances the second issue is the role of the forward market in stabilization policy forward market intervention does not provide monetary authorities additional leverage in stabilizing income beyond unsterilized spot market intervention intervention rules based on reactions to both the forward and the spot exchange rates however can outperform intervention policies responding to the spot rate alone regardless of the market in which intervention occurs

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

inflation targeting and output inflation tradeoffs abstract this article assesses whether the adoption of inflation targeting it helps reduce the output inflation tradeoff we address the self selection problem of it policy adoption by the endogenous switching regressions and show that the output inflation tradeoffs are significantly lower in it countries not only over the whole sample but also across the developed and developing country subsamples in addition we also find strong evidence supporting the positive selection hypothesis i e countries have higher probability of adopting it are exactly those who benefit more larger reduction of output inflation tradeoff from the implementation of it additional results reveal that economies with higher trade openness lower financial openness and less flexible exchange rate regime are associated with larger tradeoff between output and inflation but the effects are only statistically significant in the it regime

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

the optimal currency basket under vertical trade abstract this paper explores the theory of optimal currency basket in a small open economy general equilibrium model with sticky prices in contrast to existing literature we focus on an economy with vertical trade where the currencies in the basket may play different roles in invoicing trade flow in a simple two currency basket one currency is used to invoice imported intermediate goods and is called import currency while the other currency is used to invoice exported finished goods and is called export currency we find that the optimal weights of the import currency and the export currency depends critically on the structure of vertical trade moreover if a country decides to choose a single currency peg the choice of pegging currency also depends on how other competing economies respond to external exchange rate fluctuations

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

the flexible exchange basket a macroeconomic analysis abstract this paper constructs and analyzes a multi country stochastic equilibrium framework suitable for analyzing the behavior of an economy which pursues a flexible exchange basket policy the framework is general enough to accommodate the special cases of a multilateral floating exchange rates and b rigid basket regimes an important issue that is addressed in the present framework involves the composition of the optimal flexible basket versus that of the corresponding rigid basket such an investigation is carried out for various patterns of multilateral trade for various types of structural disturbances and for alternative optimality criteria

exchange rate indicators and optimal currency baskets a macroeconomic analysis with application to developing countries this paper presents a framework for deriving and estimating an optimally weighted exchange rate index within a general equilibrium model the main contribution is a dual one at a theoretical level the paper yields the unambiguous result that the kalman filter technique and turnovsky optimization control technique for deriving optimal weights are equivalent at an empirical level the paper illustrates how the theoretical optimal weights can be translated into empirical weights and estimated within a simple general equilibrium model optimally weighted exchange rate indices are constructed for a group of asian developing countries using a vector autoregressiori model in which the weights are designed to minimize the forecast variance of a target variable real output the properties of the weighted indices are examined and their potential usefulness for exchange rate policy both as economic indicators and as currency baskets is discussed

monetary policy exchange rate dynamics and the labour market the large fluctuations of exchange rates since the 1970 s have stimulated theories of exchange rate dynamics two broad classes of models can be distinguished sticky price models e g bilson 1979 dornbusch 1976 gray and turnovsky 1979 mathieson 1977 and witte 1979 with monotonic exchange rate dynamic adjustment and the possibility of overshooting exchange rate dynamics are the result of slowly adjusting prices the other class is flexible price models e g branson 1976 calvo and rodriguez 1977 dornbusch and fischer 1980 driskill 1980 kouri 1976 and niehans 1977 with a richer variety of dynamic paths and almost invariably no overshooting exchange rate dynamics are the result of wealth accumulation through current account imbalances within the class of sticky price models perhaps the most prominent is dornbusch 1976 this model emphasizes the differential speed of adjustment between goods and assets markets as the cause of short run exchange rate overshooting following a monetary expansion using this framework frenkel and rodriguez 1982 show that it is the assumption of perfect capital mobility or perfect asset substitutability which results in overshooting with a low degree of asset substitutability the exchange rate is likely to undershoot its equilibrium value as they stress the speed of adjustment in commodity markets does not seem to be a fundamental factor frenkel and rodriguez op cit p 3 bhandari driskill and frenkel 1984 confirm this result using a stock rather than a flow formulation of the capital account their analysis emphasizes the relationship between the degree of asset substitutability the responsiveness of the trade balance to relative prices and the interest rate semi elasticity of the money demand as the condition for over shooting bhandari 1981 made an early attempt to provide a model in which the role of the degree of asset substitutability and the speed of adjustment of the goods market can be investigated however his analysis suffers from major weaknesses in model specification see gazioglou 1984 the present paper analyses exchange rate dynamics in a model that integrates slowly adjusting prices with wealth accumulation dynamics the aim is to examine the overshooting hypothesis and the nature of the dynamic path that is whether it is monotonic or cyclical following a change in monetary policy henderson 1980 and kawai 1985 have attempted a similar synthesis under perfect asset substitutability and by restricting the choice of assets to domestic and foreign currencies henderson and

optimal currency baskets for small developed economies optimal weights for a currency basket are derived under the assumption that the objective of the policymaker is to minimize fluctuation in the production of traded goods using the formulas derived in the analysis various optimal basket calculations are carried out for finland norway and sweden for all these countries the optimal basket weights for germany and united kingdom are found to be less than the trade share weights the opposite is true for united states moreover the actual weights in the basket of sweden are almost identical to those we have computed as optimal

monetary policy and foreign price disturbances under flexible exchange rates a stochastic approach the analysis of monetary policy under flexible exchange rates has received extensive treatment during recent years particular attention has been devoted to the role of exchange rate expectations with a general conclusion being that many of the propositions of the traditional static flemingmundell model see fleming 8 and mundell 19 require substantial modification once such expectations are taken into account see 5 21 24 with few exceptions the analysis has been carried out in a deterministic framework the usual assumption made is that any monetary expansion that is introduced is initially ex ante unanticipated but having taken place it is then ex post expected to be permanent this assumption underlies for example the recent contribution by dornbusch 5 and much of the subsequent work that stems from it l this assumption while very natural is also a polar one in practice agents in the economy may attempt to anticipate monetary policy and the policies themselves

overeducation in the labor market this article examines the reasons for the observed discrepancy between workers actual and required levels of schooling and the resulting differences in returns to schooling overeducated workers are found to be younger and to have lower amounts of on the job training than workers with the required level of schooling they also have higher rates of firm and occupational mobility characterized by movement of higher level occupations the findings suggest that overeducation can be explained by the trade off between schooling and other components of human capital and by the mobility patterns of overeducated workers

does anticipated monetary policy matter an econometric investigation a heated debate has arisen over the policy ineffectiveness proposition associate with the work of lucas sargent and wallace it postulates that anticipated aggregate demand policy will have no effect on business cycle fluctuations so that one deterministic feedback policy rule is as good as any other from the point of view of stabilizing the economy this paper develops a methodology for empirically analyzing rational expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle

monetary policies in interdependent economies an open economy explanation for base drift and price level non trend stationarities abstract most nations have experienced base drift of their money stocks and associated price level non trend stationarities recent explanations for this fact have emphasized tensions among various possible objectives of central banks in closed economy or small open economy frameworks in contrast this paper explores structural and policy interdependence among economies as an explanation for price level non trend stationarities it demonstrates that such interdependence can induce central banks to follow non trend stationary policies even if they desire only to smooth prices in their home economies

oil prices and exchange rates the quotations show a sharply divergent pattern in the response of the foreign exchange market to announcements of oil price increases during the first oil shock news about oil price rises led to a strengthening of the dollar whereas during the i979 surge of oil prices the reverse was generally true when the news was not so bad as feared the dollar fell back in i974 but rose in i979 in 1980 the pattern shifted once again back to dollar appreciation is there a rational fundamental explanation for the behaviour of the foreign exchange market or is it a matter of traders responding to what other traders arbitrarily think it is difficult to resolve this question but some insight can be provided through an analytical examination of the relationship between oil price increases and exchange rates the paper begins with a theoretical framework for analysing the relation between oil prices and exchange rates and then uses the theory to explain the behaviour of the foreign exchange market

the effects of foreign disturbances under flexible exchange rates abstract foreign fiscal expansion has a contractionary and monetary expansion an expansionary effect on the small economy in the real wage model the reverse conclusions hold in the money wage model only if the income elasticity of the demand for money is one or greater the same results hold also for the stationay state effects this theory provides an explanation in the policy mix of the united states for the recent lacklustre performance of europe under rational expectations foreign monetary expansion leads to an overshooting appreciation fiscal expansion leading to several possible exchange rate responses the new results are produced by consistently specified money demand and import functions the supply side and the wealth effect

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

on the european monetary system the spillover effects of german shocks and disinflation we analyse the disinflationary experience between 1979 93 for two traditionally inflationary countries of the european monetary system france and italy for each country a vector autoregressive model is estimated shocks in the model combine domestic and foreign sources the latter capture the world oil price shocks as well as nominal and real shocks originating in germany under investigation is the hypothesis that shocks originating in germany have a spillover disinflationary effect in france and italy the empirical evidence provides support to the validity of this hypothesis furthermore german shocks account for an important share of the total price variance in france and italy these results indicate that the interaction between countries of the european monetary system has contributed to the success of the disinflationary experiences of the 1980s the evidence sheds therefore some light on potential benefits that may be further realized as countries of the european monetary system move towards

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

experiments with the optimal currency composite this paper addresses the issue of the determination of an optimal currency composite in the context of a world characterized by generalized exchange rate flexibility the approach adopted here is macroeconomic in nature and stresses general equilibrium considerations the emphasis upon both monetary and real considerations capital mobility and rational expectations in the context of a multi country framework is what sets this paper apart from previous attempts to address this issue empirically the problem of choosing an optimal currency composite has if anything gained importance according to the annual report on exchange arrangements issued by the international monetary fund as many as 37 countries were reported to be practicing currency basket arrangements during 1980 81 while a year later i e 1981 82 the number of such countries had increased to 53 see annual report june 3 1983 as indicated in the annual report this increase can be attributed to the movement away from single currency dollar pegs in favor of increased use of currency composites including the sdr pg 9 the advantage of a composite peg over a single currency peg is clear a composite peg embodies automatic and systematic adjustment of bilateral exchange rates whenever necessary which may be preferable to an absolute peg against all currencies or to joint floating as implied by a single currency peg the latter arrangement may subject the economy in question to an undesirable degree of exchange rate volatility while the former carries with it heavy intervention costs thus the composite currency peg has proved to be an acceptable middle ground for economies as different as sweden and india in practice the shares assigned to various currencies comprising the basket where such arrangements have been maintained have usually been determined on the basis of the currency composition of the economy s international trade the appendix provides some institutional details regarding the weighting practices of the 53 currency composite countries over the period 1981 82 as indicated here 32 countries peg their currencies to a basket whose currency shares are determined in accordance with bilateral trade patterns of the economy in question an additional 21 countries peg their currencies to the sdr which is itself a 5 currency basket with the weights being set by the imf by reference to the currency denomination of world trade theoretical analysis of the composition of the optimal basket owes much to flanders and helpman 8 9 whose work is extended by

efficient and stable collective choices under gregarious preferences we consider collective choice problems where a set of agents have to choose an alternative from a finite set and agents may or may not become users of the chosen alternative an allocation is a pair given by the chosen alternative and the set of its users agents have gregarious preferences over allocations given an allocation they prefer that the set of users becomes larger we require that the final allocation be efficient and stable no agent can be forced to be a user and no agent who wants to be a user can be excluded we propose a two stage sequential mechanism whose unique subgame perfect equilibrium outcome is an efficient and stable allocation which also satisfies a maximal participation property

the international transmission of economic shocks in a three country world under mixed exchange rates the international transmission of economic disturbances is analysed in a three country world where two countries have no macroeconomic impact on a third country but are large enough to influence each other under a system of mixed exchange rates a system that combines the fixed exchange rates fers among two ec member countries germany and france and the flexible exchange rates flers towards a third country the rest of the world usa we find that a positive output demand shock originating in germany or france has a positive effect on domestic output but due to a special third country effect is likely to produce a contractionary impact on foreign output negative transmission while the total effect on the world economy is expansionary money supply shocks in either germany or france have identical effects on the output of the two countries the fler component of the mer regime serves as an important tool for dampening the impact of us shocks on the output of the ec

wage indexation and exchange market intervention in a small open economy the analysis of this paper stresses the interdependence between wage indexation on the one hand and exchange market intervention on the other as tools of macroeconomic stabilization policy in a small open economy subject to stochastic disturbances it is shown how the choice of eitherpolicy instrument impinges on the effectiveness of the other in particular if the domestic money wage is fully indexed to some weighted average of the domestic and foreign price levels then irrespective of what that chosen weight may be exchange market intervention is rendered totally ineffective insofar as the stabilization of the real part of the domestic economy is concerned likewise if the monetary authority intervenes in the exchange market so as to exactly accommodate for nominal movements in the demand for money thereby rendering the excess demand for money dependent only upon real variables then any form of wage indexation is totally ineffective for the stabilization of the real part of the system in either polar case the respective instrument can stabilize the domestic price level alternative combinations of policy for the stabilization for domestic and foreign disturbances are considered this abstract was borrowed from another version of this item

staggered wage setting and exchange rate policy in an economy with capital assets abstract this paper investigates the effects of exchange market intervention on price output stability tradeoffs in the context of a moderately sized open economy in this model which incorporates interest bearing capital assets monetary accommodation is the mechanism whereby exchange rate indexation is achieved it is seen that increased exchange market intervention reduces output variability but only at the expense of enhanced price and nominal exchange rate variability this is true of stochastic disturbances on the supply side for disturbances originating in the money market increased intervention unambiguously reduces both price and output variability

dynamic strategic monetary policies and coordination in interdependent economies this paper develops strategic monetary policies using a standard two country macro model under flexible exchange rates the equilibria considered include feedback nash and feedback stackelberg both of which are compared to the pareto optimal cooperative equilibrium the optimal policies are obtained as feedback rules in which real money supplies are adjusted to movements in the real exchange rate the properties of these policies and their welfare implications are analyzed using numerical simulations the contrast in the present results with those obtained previously for a short run horizon suggest the importance of both intertemporal and intratemporal tradeoffs in the d etermination of optimal strategic policies copyright 1988 by american economic association

trade openness and inflation episodes in the oecd boschen and weise journal of money credit and banking 2003 model the probability of a large upturn in inflation in the oecd an inflation start we extend their work to consider the impact of trade openness on the probability of such an event the main finding is that increased openness reduces the probability of an inflation start both directly and indirectly through restricting the role of general elections in triggering inflation starts

inducing human capital formation migration as a substitute for subsidies abstract when productivity is fostered by an individual s own human capital as well as by the economy wide average level of human capital individuals under invest in human capital the provision of subsidies for the formation of human capital conditional on the subsidy being self financed by tax revenues can bring the economy to its socially optimal level of human capital yet a strictly positive probability of migration to a richer country by raising both the level of human capital formed by optimizing individuals in the home country and the average level of human capital of non migrants in the country can enhance welfare and nudge the economy toward the social optimum indeed under a well controlled restrictive migration policy the welfare of all workers is higher than in the absence of this policy

asymmetric effects of positive and negative money supply shocks this paper examines whether positive and negative money supply shocks have symmetric effects on output the results are consistent with the hypothesis that positive money supply shocks do not have an effect on output while negative money supply shocks do have an effect on output this finding is independent of whether or not expected money is assumed to affect output the results reported in this paper imply that the fed could increase the growth rate of real output by reducing the standard deviation of unexpected changes in the money supply