the impact of foreign capital inflows on domestic savings reexamined the case of argentina abstract since the beginning of the 1970 s several economists have argued that there is a negative relationship between foreign capital inflows f and domestic savings s this paper attempts to demonstrate that the framework used by these authors is not appropriate to analyze the impact of f on s the early empirical results may actually be a consequence of exogenous factors such as monetary and fiscal policies

temporary import and export quotas and the current account abstract this paper provides a comprehensive analysis of temporary import and export quotas in a two period optimization model imposing much weaker restrictions on preferences and production technologies than in the existing literature we demonstrate that under net substitutability the imposition of a temporary quota which reduces imports by a small amount improves the current account and causes an appreciation of the real exchange rate if the initial equilibrium is quota restricted the effects of tightening the quota are ambiguous by contrast under substitutability a tightening of export quotas necessarily leads to a current account deficit regardless of the nature of the initial equilibrium

foreign borrowing and macroeconomic adjustment to external shocks abstract this paper analyzes the impact of anticipated and unanticipated external shocks on the evolution of macroeconomic variables particularly foreign borrowing and on steady state stocks of capital and debt we find that the desired mode of adjustment to a shock is highly sensitive to its nature intertemporal substitution effects often dominate the pure wealth loss effect external disturbances will typically be intertemporally correlated in the real world the paper analyses the resulting implications for the dynamic smoothing of adjustment

effects of budgetary policies in open economies the role of intertemporal consumption substitution an economy s optimal response to temporary and anticipated future changes in government spending is examined in the context of a two country model which highlights the role of the elasticity of int

exchange rate policies and endogenous time preference a dynamic analysis of a small open economy abstract the effects of exchange rate policies are examined for a small open economy with endogenous rate of time preference using optimizing framework and introducing money into the utility function it is shown that a depreciation of the domestic currency generates a surplus in the current account it also leads to an increase in consumption and a decrease in the holdings of real balances in the long run

optimal labour contracts when workers have a variety of privately observed reservation wages if a firm does not know the individual ex post outside opportunities of its contracted workforce then it can use hours wages and redundancy payments to screen them will a second best contract have underemployment inefficiency or overemployment and with a stochastic contract are those workers randomly selected for layoff worse off than their retained colleagues involuntary layoff or vice versa involuntary retention the answers depend on the nature of the workers preferences two polar cases are looked at corresponding to permanent and temporary layoff the former is characterized by overemployment and involuntary retention the latter by underemployment and involuntary layoff also examined are simple contracts where all retained workers are paid a common wage and all laid off workers receive a common redundancy payment handling asymmetric information in stochastic contracts has led to two technical innovations first a number of results are proved even though all the truth telling constraints are explicitly included second a new regularity condition is found under which the local constraints are sufficient to ensure global incentive compatibility at an optimum

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

econometric analysis of cps type unemployment data analysts studying the unemployment experiences of population members often have access to data collected from a sample of individuals at a point in time which contain the length of the ongoing spell of unemployment for sample members currently unemployed no information regarding the lengths of ongoing employment spells is collected this paper considers how such information may be utilized in the estimation of parameters of alternating renewal process models of labor market attachment in the presence of both observed and unobserved population heterogeneity a number of models are presented and estimation is carried out using a cps type data set from italy

tariffs capital controls and equilibrium real exchange rates a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyse how the equilibrium real exchange rate rer reacts to changes in the degree of restrictions to intra and intertemporal trade in particular the effects of changes in the level of import tariffs and of changes in taxes on foreign borrowing on the path of equilibrium rers are investigated in the case of import tariffs both temporary and anticipated changes are considered it is shown that in this intertemporal framework equilibrium real exchange rates can exhibit interesting and convoluted behaviour in particular results that contradict the traditional wisdom can be obtained a number of extensions are also discussed tarifs douaniers controles sur les flux de capitaux et taux de change reels d equilibre l auteur developpe un moddle d equilibre general inter temporel dans lequel consom mateurs et producteurs optimisent pour analyser les reactions du taux de change reel d equilibre aux changements dans le degre de restriction du commerce intra et inter temporel en particulier l auteur analyse les effets de changements dans le niveau des tarifs douaniers sur les importations et des taxes sur les emprunts a l etranger sur le sentier d equilibre du taux de change reel dans le cas des tarifs a l importation l auteur examine a la fois les changements temporaires et anticipes on montre que dans ce cadre intertemporel le comportement des taux de change reels d equilibre est interessant et contournm les resultats obtenus contredisent ceux suggeres par la sagesse conventionnelle l auteur discute aussi un certain nombre d extensions de ces resultats

tariffs real exchange rates and the trade balance in a two country world abstract an intertemporal model of a two country world in which optimizing agents consume three goods importables exportables and nontradables is developed to investigate a tariffs effects on real interest rates real exchange rates and the trade balance real interest rates and real exchange rates are shown to move asymmetrically across countries in response to a temporary tariff we also show that in contrast to the findings of two tradable good models a temporary tariff may actually worsen the trade balance of both deficit and surplus countries even when there are no cross country differences in tastes

temporary trade taxes welfare and the current account abstract the welfare and trade balance effects of temporary import tariffs and export subsidies are compared ruling out complementarities a reduction in tariffs improves welfare while increasing export subsidies may not in general tariffs or export subsidies have an ambiguous effects on trade balance

deviations from purchasing power parity and capital flows abstract this article examines the implications of deviations from purchasing power parity ppp for an investor s portfolio decision and the consequent capital flows in a two country intertemporal model with complete financial markets in the presence of deviations form ppp investors from different nations hold disparate portfolios and the equilibrium that results is not a pooling one we solve eplicitly for asset demands and derive the relationship between the direction of capital flows and deviations from ppp in contrast to the small country assumption in the existing literature the world interest rate in this model is determined endogenously

inflationary finance in an open economy abstract models of inflationary finance that consider trade and capital flows generally conclude that openness curtails the ability of governments to impose the inflation tax due to currency substitution this paper models two channels that allow central banks to increase inflation tax revenue by opening the economy first central banks can open the capital account subject to a reserve requirement on capital inflows revenue maximization produces a smaller reserve requirement on foreign capital inflows that on domestic deposits second central banks can impose prior import deposits to broaden the monetary base in order to use the inflation tax on imports as an alternative to tariff revenue

anticipated protectionist policies real exchange rates and the current account the case of rigid wages abstract in this paper we develop a general equilibrium model of an economy with short run unemployment to analyze how anticipated protectionist policies affect real exchange rates the current account and aggregate employment we find that a key transmission channel is the change in current employment induced by future changes in tariffs we show that the direction and magnitude of this effect will depend on relative factor intensities and on real exchange rate behavior if a future tariff generated a current real exchange rate appreciation and if nontradables are labor intensive the anticipation of protectionist policies will generate an increase in current employment

the determinants of private saving in india abstract this paper examines the determinants of private saving in the process of economic development in the light of the indian experience it is found that the saving rate rises with both the level and the rate of growth of disposable income the real interest rate on bank deposits has a significant positive impact but the magnitude of the impact is modest public saving seems to crowd out private saving but less than proportionately furthermore the spread of banking facilities in the economy and the inflation rate have a positive impact and changes in the external terms of trade a negative impact on private saving

capital mobility and the current account abstract this paper analyzes the effect of unanticipated changes in the terms of trade on consumption expenditures and the current account in a small open economy simple formulas are obtained for the covariances of changes in consumption expenditures the current account and the expected current account with changes in the terms of trade it is shown that if investment is uncorrelated with the terms of trade a necessary condition for unanticipated changes in the terms of trade to be correlated with changes in consumption expenditures and the expected current account is that the real expected return on foreign bonds differs from the real expected return on domestic bonds

intertemporal price speculation and the optimal current account deficit abstract the paper studies the effects of terms of trade fluctuations in an infinite horizon optimizing model of a small open economy while the current account response to a transitory terms of trade shock is in part explicable by intertemporal smoothing an important additional factor is the effect of anticipated future terms of trade shifts on the ral value of the external debt in terms of the home consumption basket when foreign borrowing is indexed to the import good a temporary worsening of the terms of trade creates the expectation of a decline in the real value of external debt this fall in the relevant real interest rate leads households to increase consumption while export prices are low and to decrease consumption sharply once the terms of trade recover if an adverse price shock is of sufficiently brief duration instantaneous utility will rise initially

the welfare effects of trade and capital market liberalization treatise on the welfare effects of trade and capital market liberalization consquenses of the capital account liberalization in the presence of trade restrictions specifies on the liberalization of trade in the presence of foreign borrowing constraints proves superiority of gradual liberalization of trade to an abrupt liberalization

layoffs with payoffs a bargaining model of union wage and severance pay determination popular characterizations of union preferences assume that the income of laid off union members is exogenous there is evidence however of intra union distribution schemes such as severance payments unemployment insurance retraining arrangements and early retirement schemes this paper develops a model of wage and severance pay determination by a trade union and a firm bargaining in a right to manage framework the important point differentiating the model in this paper from the orthodox union model is that it is efficiency improving in the sense that it makes full insurance possible and marginal productivity is equal to the opportunity cost of labour moreover with redundancy pay on the bargaining agenda both the right to manage and the efficient bargaining union models are characterized by the same efficiency conditions this has implications for empirical research which attempts to distinguish between these two models since the outcome of both models is the same finally the union firm bargaining model can also be compared with the outcome of the implicit contract model with redundancy pay there is an important difference between the two approaches however while the result in this paper derives from an imperfectly competitive labour market where unions and firms bargain over wages and redundancy pay the implicit contract result derives from a perfectly competitive labour market in which competitive forces lead to an efficient outcome

trade taxes and the current account abstract we show that under some conditions a temporary import tariff improves the current account whereas a temporary export tax deteriorates it permanent import tariffs and export taxes have an identical although ambiguous effect on the current account

terms of trade shock and the current account in a monetary economy over the period 1973 81 the terms of trade of non oil developing countries deteriorated at about 2 per cent per annum this was accompanied by an increase in current account deficits in excess of 3 per cent above what they had been in the previous decade see khan and knight 1983 for a discussion these authors find the terms of trade shocks the major cause of the deficits this has led to a renewal of interest in the effects of changes in terms of trade for a small open economy the conventional wisdom first put forward by laursen and metzler 1950 and harberger 1950 emphasized the fact that a terms of trade worsening lowered real income which in turn lowered savings and worsened the current account the laursen metzler effect the recent reappraisal was initiated by obstfeld 1982 he showed in an infinite horizon optimizing framework with perfect capital mobilizing that if the discount rate was a function of the level of utility surpluses and not deficits accompany an unanticipated and permanent terms of trade worsening the long run level of the discount rate is tied down by the given world rate of interest this in turn fixes the long run level of utility the terms of trade shock tends to lower the level of utility and agents save to offset this across steady states there is only a substitution effect on the other hand if the discount rate is fixed and equal to the world interest rate then the economy adjusts to the terms of trade shock by immediately lowering real expenditure by the same amount as the decline in real income so that the current account is always balanced svensson and razin 1983 showed that in a two period framework this does not necessarily happen for the infinite horizon case they showed that if preferences were separable over time and the discount rate was increasing in instantaneous utility then obstfeld s results were indeed obtained in a two period overlapping generations model the results could be modified owing to the fact that human wealth and non human wealth are not perfect substitutes and a terms of trade shock affects these differently see matsuyama 1988 for a discussion but it is still true that an unanticipated permanent terms of trade shock has a one shot effect on the current account unless some ad hoc costs of adjustment are introduced see e g persson and svensson 1985 and matsuyama 1988 the uncertain lifetime model see e g frenkel and razin 1988 and matsuyama 1987 generates non trivial

the effect of government spending on the current account output and expenditures evidence from latin america abstract this paper examines the linkages between government expenditures and current account balances in several latin american economies over the period 1974 1984 in theory these linkages critically depend on private sector responses to changes in government expenditures on both the demand and supply sides the analysis provides evidence that the negative current account government expenditure linkage is much stronger in the event of a temporary shock to government expenditures than in the event of a permanent shock the source of this differential response appears to be primarily on the expenditure side suggesting that private sectors in latin america incorporate the present discounted value rather than simply the current value of government expenditures into their expenditure decisions

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

the elasticity of derived net supply and a generalized le chatelier principle the marshall 1920 hicks 1963 rules for the elasticity of derived demand for an input which demonstrate how the price elasticity of demand for the input changes as the price elasticity of demand for the product the price elasticity of supply of a competing factor the first factor s cost share and the elasticity of substitution between the two factors change have been generalized to the case where there are n inputs and one output by sato and koizumi 1970 1973 andrieu 1974 and razin 1974 have also generalized the marshall hicks rules to the case where there is one output and three inputs but one of the inputs is fixed however since most real life firms or industries produce a wide variety of products it would appear to be useful to obtain rules for the price elasticity of derived supply for an output where other output and input markets are allowed to adjust to the change in the price of the first output the recent increases in energy prices have perhaps provided a reason for renewed interest in the microeconomic determinants of industry supply in section 5 below we derive analogues to the marshall hicks sato koizumi rules in a multiple output framework in section 2 we list our assumptions on the technology and note some preliminary results from duality theory in section 3 we define the elasticity of derived net supply and we show that it will always be nonnegative in our model we also compare the elasticity of derived supply which takes into account adjustments induced by an increase in the price of the output in other input and output markets with an ordinary price elasticity of supply which holds the prices of the other inputs and outputs fixed we also compare the above two elasticities with intermediate elasticities of derived supply that are obtained by assuming that some input and output prices are fixed but others are not we find that the more markets that adjust to the price increase in the first market the smaller the elasticity of derived supply becomes in the first market we could term this an inverse le chatelier principle since it acts in a manner which is seemingly opposite to the usual le chatelier principle cf samuelson 1947 pp 36 39 which says that the more markets that we allow to adjust to the effects of a price increase in the first market the larger is the elasticity of supply in the first market however the two le chatelier principles are not really opposed as we shall see later our inverse le chatelier principle formally contains samuelson s le chatelier principle as a special case in section 4 we consider the comparative statics effects of an exogenous increase in the price of the first good on a weighted average of other prices as well as on a weighted average of changes in the industry supply of other outputs and changes in the industry demand for other inputs taking into account the general equilibrium repercussions on other markets of the increase in the price of the first good

fixed price controls and ad valorem distortions in an open economy abstract this paper compares the welfare effects of ad valorem and fixed price distortions for an open economy in the case of export protection domestic factor growth is much more likely to be immiserizing when fixed price distortions are used in contrast fixed price protection to an import substitute is less likely to induce immiserization via factor growth than ad valorem protection

critical debt and debt dynamics we study the debt dynamics and sustainable debt for an open economy which borrows from abroad in order to nance consumption to service the debt the country may exploit a renewable resource we show that there is for every resource stock r a critical level bh r of debt above which debt tends to in nity but below which it may be steered to zero we demonstrate how to compute bh r using an ode of steepest descent if the economy maximizes a discounted integral of utility depending on consumption and the resource stock the critical debt bh r may be reached in nite time in such a situation slight perturbations of the optimal consumption lead to insolvency the maximum principle ceases to be valid in this case 2000 elsevier science b v all rights reserved jel classixcation c61 f32 f34 o16

tariffs employment and the current account real wage resistance and the macroeconomics of protectionism using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework and with contract based wage rigidity we show that permanent tariffs lead to a current account deterioration and a fall in employment contradicting most of the literature on macroeconomic effects of import tariffs the crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation temporary tariffs will have less of a negative impact on the ca or potentially even a positive impact because they increase the consumption rate of interest the terms at which future consumption can be traded for current consumption and so increase private savings extensions towards incorporating a more general production structure investment and the use of tariff revenues to provide wage subsidies are presented this abstract was borrowed from another version of this item

optimal second best tariffs on an intermediate input with particular reference to pakistan abstract this is a theoretical and empirical study of trade policy in a small open economy with intermediate inputs the first part develops a theoretical model and obtains expressions for optimal second best tariffs on an intermediate input when tax revenue is used to provide a public good and all other taxes are unalterable in the second part we estimate for pakistan the optimal tariff on sheet steel using the formula developed in the theoretical part we find that the current level of tariff is considerably higher than the optimal one even after making generous allowances for government s revenue constraint

monetary and commercial policy in a two country flexible exchange rate model with perfect capital mobility abstract a two country portfolio balance model is developed in this paper in order to analyse the international transmission of monetary and commercial policy disturbances under a flexible exchange rate regime particular emphasis is placed on the role of capital mobility differences in the asset demand functions across countries and national net asset positions in determining the effects of these policies on the macroeconomic variables of the two countries both the short and the long run effects are considered with expectations assumed to be formed rationally

youth unemployment duration from the italian labour force survey accuracy issues and modelling attempts youth unemployment in the european economic community remains remarkably high and very unevenly distributed across countries in the eec area 16 7 of the labour force aged 14 29 were unemployed in 1986 among the five major member countries the youth unemployment rate varied markedly from 7 9 in federal republic of germany to 25 6 in italy and 38 4 in spain the level and variation in youth unemployment rates are of course related to the overall employment and unemployment situation however there is also clear evidence that in the various countries the burden of unemployment is shared very unequally among different age groups the ratio of youth to adult unemployment rates is 1 3 for germany but raises to 3 2 for spain and dramatically to 6 3 for italy from a slightly different perspective the uneven distribution of the risks of unemployment for young people across countries is documented by the share of long term unemployed defined as those continuously out of work for a year or more in 1986 the fraction of longterm unemployed in youth unemployment was below 40 in germany united kingdom and france but reached 59 7 in spain and up to 67 7 in italy the purpose of this paper is to investigate opportunities and problems in using microdata from the quarterly italian labour force survey in a

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

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

transitory and permanent disturbances and the current account an empirical analysis in the intertemporal framework the intertemporal models of current account determination demonstrate that in the analysis of the current account balance of a country it is important to distinguish between transitory and permanent disturbances in income and relative prices this paper attempts to decompose the observed data on income and real exchange rate into transitory and permanent components and then uses the decomposed series to test the empirical validity of the predictions of the intertemporal models evidence from the united states and japan provide very limited support for the intertemporal models in terms of the effects of transitory and permanent changes in income on current account balance for both us and japan the study finds that permanent changes in real exchange rate have significant effects on the current account balance statistical tests find no evidence of hysteresis in the trading relations of the two countries

the dutch disease a disease after all many third world oil producers are encountering serious problems in building up a diversified export base while west european oil and gas producers netherlands united kingdom are suffering a decline in their traded goods manufacturing sector induced by real wage pressures it is becoming increasingly clear that high but temporary oil revenues may be somewhat ora mixed blessing the quip of the economist notwithstanding the mechanism behind this unbalance is clear enough part of the oil revenues is spent on non traded goods which leads to a real appreciation i e a rise in the relative price of non traded goods in terms of traded goods this in turn draws resources out of the non oil traded sector into the non traded goods producing sector corden and neary 1982 van wijnbergen 1980 one may say that this is an efficient response to the increase in income from oil production the united kingdom mexico egypt simply should move into oil derived industries and non traded goods and forget about their manufacturing sector until oil reserves are exhausted however many developing countries are hesitant to take this advice after all the post world war ii success stories in economic development involve without exception countries that promoted their traded goods sector aggressively moreover it is a well established stylised fact that technological progress is faster in the traded non sheltered sectors of an economy than in the non traded sector balassa 1964 is an early reference considering the hypothesis that technological progress rather than taking place exogenously with the passage of time is a function of accumulated experience the concern of countries like egypt mexico or indonesia is much easier to understand since solow 1957 and denison 1962 it is known that capital accumulation explain only a small part of economic growth if most of economic growth is caused by learning by doing induced technologica

real disturbances the current account and the exchange rate the case of a tariff abstract this paper examines the effects of an unanticipated tariff on the current account and the exchange rate it is demonstrated that if nontraded goods and importables are substitutes complements in excess demand the imposition of a tariff will may lead to a current account surplus deficit and an appreciation depreciation of the domestic currency the model can be extended to analyze the effects of other real disturbances on the current account and the exchange rate

life cycles oil cycles or financial reforms the growth in private savings rates in indonesia what goes steady with private savings this paper investigates reasons for the sustained growth in private savings in indonesia since 1970 in a period characterized by economic growth demographic

on the theory of piecemeal tariff reform the case of pure imported intermediate inputs what is the effect of a tariff reduction that applies only to a subset of commodities subject to tariffs this important question was addressed systematically for the first time by james meade 1955 ch 13 in his classic work trade and welfare after a careful analysis meade concluded t here is more likely to be a gain in economic welfare if the rate of duty is high on the primary imports which will come in in increased volume and is low on the secondary imports which will come in in reduced volume p 208 this result was proved formally by trent j bertrand and jaroslav vanek 1971 who demonstrated that in a small open economy if the highest tariff rate is reduced to the next highest one welfare will rise provided the import demand for the good with the highest tariff exhibits gross substitutability with respect to all other goods 2 subsequently following a different strand of the literature as exemplified in john green 1961 tatsuo hatta 1973 1977 and peter lloyd 1974 independently proved similar results in terms of hicksian substitutability 3 in deriving their results bertrand and vanek allowed for the use of final goods as intermediate inputs i e interindustry flows 4 however neither they nor the subsequent writers including hatta and lloyd allowed for the existence of pure imported intermediate inputs that are not produced domestically therefore a natural question is whether the piecemeal policy prescription derived by them remains valid in the presence of pure imported intermediates this question is particularly important for developing countries for two reasons first by far the bulk of the imports of developing countries are intermediate and capital goods according to the world bank during the period 1975 1985 50 percent of developing countries imports were accounted for by intermediate inputs and an additional 30 percent were capital goods a sizable proportion of both capital and intermediate goods are neither produced nor directly consumed in these countries second the meade bertrand vanekhatta lloyd result has been the cornerstone of trade policy reform in many developing countries especially during the last decade in most countries trade reform has been based on the so called concertina approach under which the highest tariffs are reduced to the next highest ones and then to the next highest ones and so on thus lopez professor department of agricultural and resource economics university of maryland college park md 20742 and consultant trade policy division world bank 1818 h street n w washington dc 20433 panagariya senior economist trade policy division world bank 1818 h street n w washington dc 20433 and professor department of economics university of maryland college park md 20742 the findings interpretations and conclusions in this paper are entirely those of the authors they do not necessarily represent the views of the world bank its executive directors or the countries they represent the authors are indebted to two referees and tatsuo hatta for valuable comments on an earlier draft iin this quotation primary imports refers to the goods on which tariffs are reduced while secondary imports refers to other importables subject to tariffs 2robert lipsey and kelvin lancaster 1956 had proved the basic result of bertrand and vanek in a one factor three good model with a cobb douglas utility function 3more recently takashi fukushima 1979 has proved the validity of the hatta lloyd result when the highest tariff is shared by several commodities while rodney falvey 1988 has done the same in the presence of quantitative restrictions on imports 4although hatta 1973 1977 did not allow explicitly for interindustry flows his results can also be shown to be valid in the presence of such flows

tariffs and the current account the role of initial distortions from an initial position of laissez faire temporary tariffs have been shown to improve the current account however if tariffs are initially positive as in many actual economies temporary tariffs will magnify an existing distortion and therefore lower real income during protectionist periods optimizing agents may wish to smooth the path of consumption relative to income by foreign borrowing if the intertemporal elasticity of substitution is sufficiently low temporary tariffs may actually worsen the current account

trade in nominal assets and net international capital flows abstract nominal assets play a major role in international financial markets while trade in indexed bonds is limited as a result agents are exposed to both price and exchange rate uncertainty nonetheless previous research on net capital flows has assumed the presence of a risk free vehicle to intertemporal asset trade in this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity we find that exposure to nominal risk dampens net capital flows thus making economies effectively more closed

deterioration of the terms of trade and capital accumulation a reexamination of the laursen metzler effect abstract this paper analyzes the effect of both a permanent and a temporary deterioration in the terms of trade on a small open economy the model based on intertemporal optimization emphasizes the labor leisure choice and the role of capital accumulation the transitional dynamics is shown to depend upon the long run response of the capital stock to the terms of trade shock this consists of a negative substitution effect together with a positive income effect whether or not the laursen metzler effect holds depends upon whether the income effect dominates the substitution effect

foreign exchange rationing and employment in industrializing countries abstract this paper analyzes the interaction of two constraints foreign currency controls and a minimum wage on the behavior of a small industrializing country the latter is characterized by the large proportion of intermediate inputs in total imports the main results are the following 1 the two distortions magnify the adverse effects on employment of a minimum wage 2 the rationing policy is self defeating on its own terms 3 devaluation is almost inevitable despite the political considerations that make it so difficult and 4 black markets may be tolerated so openly because they help undo some of the harmful effects noted above

devaluation levels versus rates abstract in a context of infinitely lived families a la sidrauski where consumers are lump sum compensated for the inflation tax and there is no capital mobility it is shown that a devaluation improves while an increase in the rate of devaluation deteriorates the balance of payments

trade restrictions with imported intermediate inputs when does the trade balance improve the author s model demonstrates that when imports are predominantly intermediate inputs as they are in most developing countries import restrictions can not always be relied upon to improve the trade balance such restrictions act as a supply shock to the economy unless nontraded goods are intensive users of imported intermediaries the general equilibrium consequence of import restrictions is a large enough reduction in export supplies to swamp the direct effect of the restrictions the result is a deterioration of the trade balance

marshallian recursive preferences and growth abstract although alfred marshall adhered to the classical doctrine of impatience he thought that the act of saving might itself confer utility we model this by making the discount factor a function of savings in addition to providing an intuitive rationale for increasing marginal impatience marshallian time preference has interesting implications for macroeconomics marshallian preferences lower interest rates by stimulating savings paradoxically it is possible for a tax cut to lower interest rates in a marshallian economy in a growth model with marshallian consumers a permanent increase in government expenditures causes super crowding out of consumption and reduces the steady state capital stock

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

foreign exchange controls in a black market economy abstract an investigation of the impact of foreign exchange controls in a black market economy is undertaken within the context of a choice theoretic cash in advance general equilibrium model while such controls may improve a distortion free economy s trade balance and balance of payments they are found to increase the domestic price of imports and lower the country s welfare the ramifications of black market for economic welfare turn out to be ambiguous depending crucially on the government s reaction to the leakage of foreign exchange into the economy via illegal activity

export share requirements trade balances and welfare a two period analysis abstract this paper provides a two period three sector general equilibrium model for examining the effects of a temporary increase in export share requirements to foreign owned firms on the trade balance and national welfare the analysis suggests that the policy of a temporary rise in export requirements results in increases in the non tradable prices for both periods as well as intertemporal welfare the policy also leads to an improvement in the first period trade balance

can exchange rate variations or trade policy alter the equilibrium current account abstract paul krugman has pointed out that much work needs to be done before the intertemporal open economy model can replace the open economy is lm model as a guide to policy making the objective here is to take a step in this direction by examining if an exogenous increase in world demand for home goods as via trade policy can improve the equilibrium current account within an open economy intertemporal model in the process the paper explores the theoretical issue as to whether a variation in the real exchange rate can alter the difference between saving and investment the key idea is that uncovered interest parity plus some degree of mean reversion in the real exchange rate imply that a modern version of the laursen metzler harberger effect is operative the result is that a policy induced increase in the trade balance will alter the real exchange rate which in turn increases the difference between home saving and investment and thereby improves the equilibrium current account

on the dynamic non equivalence of tariffs and quotas in the monetary model of the balance of payments abstract this is a reply to a comment by daniel fried and tower 1984 regarding the observation in blejer and hillman 1982 that the adjustment mechanism of the monetary model of the balance of payments provides another instance of tariff quota asymmetry

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

demand changes and real exchange rate dynamics in a finite horizon model with sectoral adjustment costs author affiliation hung ju chen department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail hjc ntu edu tw corresponding author chen min hsu department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail chenmin ntu edu tw acknowledgment we would like to acknowledge the financial support provided by the program for globalization studies at the institute for advanced studies in humanities national taiwan university grant 95r0064 ah03 03 we wish to express our sincere appreciation for helpful comments and suggestions provided by two anonymous referees the editor of the journal joshua aizenman been lon chen ming chia li tsunao okumura and elias sanidas as well as participants at the 2007 annual conference of the asia pacific economic association and the 2007 conference of korea and the world economy we also thank ke shaw lian for his assistance any errors within the work are our responsibility 1 introductionalthough the traditional macroeconomic models tend to explain economic fluctuations by focusing solely on supply shocks given that equilibrium is determined by both demand and supply it would seem obvious that changes in demand may also have important effects in terms of their contribution to economic oscillations changes in demand can easily occur particularly for those small open economies for example small open economies can be easily disturbed by external shocks such as terms of trade shocks through international trade 1 another example is the reduction in the mortality rate as a result of higher health investment both public and private and better healthcare during the economic development 2 for export orientated growth economies in particular such as those of hong kong and taiwan changes in either the terms of trade or the mortality rate can significantly influence economic performance impacting the real exchange rate investment output savings and the current account the phenomenon that life expectancy is steadily lengthening for most developing countries has led to the emergence of a growing number of studies on the impact of population aging 3 since an increase in life expectancy will change the expectation of lifetime utility it will directly affect households inter temporal decisions with regard to consumption and savings however previous studies tend to analyze the impact of mortality decline in a closed economy or in a small open economy with exogenous and constant factor prices 4in order to study the impact of mortality rate changes on the economic performance in an open economy we use the overlapping generations model with uncertain lifetime developed by yaari 1965 and blanchard 1985 to examine household savings behavior within this model agents live with a finite lifetime such that different types of agents simultaneously live in the economy 5 furthermore we extend the blanchard type model to a three good open economy composed of exportable importable and non traded goods to allow us to consider the dynamics of the real exchange rate when demand changes capital production and accumulation are also incorporated into the framework to facilitate an examination of the investment behavior of firms we assume that the economy uses both capital and labor to produce exportable goods and non traded goods while importable goods are imported from abroad capital is produced by the non traded sector and installation costs are incurred when capital is transported to the exportable sector 6 as indicated by morshed and turnovsky 2004 the inclusion of the sectoral adjustment costs of capital can generate persistent deviations from the long run equilibrium by the real exchange rate in response to demand changes 7 because the real exchange rate is playing a dual role of a non traded goods price and a capital price we are able to study the impact of population aging and terms of trade shocks on international capital flows in a small open economy with endogenous factor prices

trade policy adjustment in ldcs a short run view the article deals with the role of tariff protection and exchange rate policies in ldcs after a terms of trade shock has occurred and a new equilibrium is to be attained constraints concerning the domestic foreign and public sectors are specified it is shown that the optimal response to the shock depends on the domestic features of the economy as well as on its trade openness in particular protectionist attitudes may well be justified and anti trade policies may be helpful to ease adjustment

bargaining and wage resistance in an open macroeconomic model this paper develops a model of an open economy in which wages and employment are determined by bargaining between firms and unions it can be regarded as an extension of an earlier paper ellis and fender 1985 to an open economy this allows us to investigate a number of contemporary issues in particular we shall explore some aspects of wage resistance the tendency for nominal wages to rise so as to offset either partially or totally any rise in the aggregate price level empirical evidence on wage resistance has been produced by sachs i980 who also shows that the assumption of real as opposed to nominal wage rigidity reverses the conclusions about the relative efficacy of monetary and fiscal policy in the fleming mundell model a number of other papers have incorporated wage resistance sometimes due to wage indexation see for example gray 1976 for analysis in a closed economy context and marston i982 modigliani and padoa schioppa 1978 and eichengreen i983 for open economy models in all these papers however wage resistance is assumed rather than derived from more basic assumptions about agents behaviour however some work has appeared recently which attempts to endogenise wage resistance in a closed economy by modelling union employer bargaining see for example mcdonald and solow i98i and ellis and fender i985

exchange rate based disinflation wage rigidity and capital inflows real exchange rate appreciation usually accompanies stabilization programs based on the exchange rate one thing that causes the real exchange rate to appreciate is the capital inflows that follow liberalization of the capital account and the financial market capital inflows cause the exchange rate to appreciate in part because of the resulting increase in expenditures this appreciation is exacerbated if there is some price rigidity and if control of the money supply is only partial all these conditions existed during chile s experiment with exchange rate based disinflation between 1978 and 1981 simulating what might have been the authors study how exchange rate based disinflation affects expenditures switching and reduction when wages are partially indexed in some segments of the labor market the paper also shows the extent to which a more flexible rule on wage indexing would have offset the adverse impact of lower capital flows on protected sector employment

keeping time an analysis of errors in the measurement of unemployment duration this study uses longitudinal microdata from the current population survey to examine the consistency with which unemployment duration is reported an estimate of measurement error is proposed and analyzed a significant negative relationship is found between the initial month s unemployment duration and the reported change between surveys on average persons who begin spells of unemployment in the second month report durations greater than the actual time elapsed overall the average duration of unemployment in this sample may be overstated by at least two weeks a brief discussion of some implications for empirical labor market research concludes the article

measuring the effects of dollar appreciation on asia a favar approach abstract exchange rate shocks have mixed effects on economic activity in both theory and empirical var models in this paper we extend the empirical literature by considering the implications of a positive shock to the u s dollar in a factor augmented vector autoregression favar model for the u s and three large asian economies korea japan and china the favar framework allows us to represent a country s aggregate economic activity by a latent factor generated from a broad set of underlying observable economic indicators to control for global conditions we also include in the favar a global conditions index which is another latent factor generated from the economic indicators of major trading partners we find that a dollar appreciation shock reduces economic activity and inflation not only for the u s economy but also for all three asian economies this result which is robust to a number of alternative specifications suggests that in spite of their disparate economic structures and policy regimes the dollar appreciation shock affects the asian economies primarily through its impact on u s aggregate demand and this demand channel dominates the expenditure switching channel that affects a country s export competitiveness

terms of trade and current account dynamics a methodological critique this paper suggests that the recent intertemporal studies concerning the implications of terms of trade deterioration on the current account of a small open economy may suffer from significant methodological deficiencies the study demonstrates that while the assumption of a small open economy represents a legitimate modeling simplification the analysis of the impact of perturbation of the terms of trade on the current account of this small open economy is methodologically erroneous in particular the paper demonstrates that a given pattern of terms of trade deterioration may be associated with opposing evolutionary patterns of the current account of this small economy this paper argues that the methodology employed by several influential intertemporal studies concerning the relationship between the terms of trade and the current account of a small economy suffers from critical deficiencies it demonstrates that while the assumption of a small open economy confronting exogenously determined terms of trade represents a legitimate modeling simplification the analysis of the impact of perturbations of this terms of trade on the small open economy and on its current account is methodologically erroneous in particular the paper demonstrates that a small economy may experience diametrically opposing evolutionary patterns of the current account in association with a given pattern of terms of trade deterioration the paper suggests therefore that predictions based on this literature are in need of reassessment these intertemporal studies of the relationship between the terms of trade and the current account of a small economy have been conducted under the simplifying assumption that perturbations in the terms of trade are exogenous and do not affect the world interest rate 2 this approach may reflect a valid simplification as long as the study is concerned with exportable goods whose prices are insignificant in the determination of the general price level in the world economy however if the focus of the analysis is a small country that exports a group of commodities such as agricultural goods or industrial goods a change in the terms of trade for the small economy may reflect fundamental changes in the world relative prices that are

vertical product differentiation and the import demand function theory and evidence in this paper we use a model of vertical product differentiation to cast doubt on the general validity of the import demand function as specified in macroeconomic models the empirical importance of our theoretical concerns is then established according to our first hypothesis the share of a good s imports in total imports is non increasing in domestic wages if the country has comparative advantage in high quality varieties of this good the second hypothesis states that the share of a good s imports is increasing in non wage domes tic income if the country has comparative advantage in high quality varieties of this good

capital movements intersectoral resource shifts and the trade balance abstract in this paper i consider the interactions between the internal structure of the economy and its external balance in an intertemporal set up with perfect foresight a simple pattern emerges current account deficits are associated with depreciating real exchange rates the incorporation of real investments and government spendings change this pattern in a systematic way depending on factor intensities the composition of government spending and its timing

capital controls and fiscal policy in the world economy an intertemporal utility maximization framework is employed to model a world economy with capital controls the effects of fiscal policy in such an environment are examined several results emerge concerning the international transmission of fiscal policy under capital controls and the nature of comovements in macro economic aggregates such as output employment consumption and investment some of the paper s other results concern the implications of capital controls for ricardian equivalence the role of financing decisions in the international transmission process under capital controls and the effect of capital controls on the magnitude of fiscal induced fluctuations throughout the world economy contr6les des mouvements de capitaux et politique fiscale dans l conomie mondiale les auteurs utilisent une approche par la maximisation intertemporelle de l utilite pour modeliser une economie mondiale dans laquelle des controles sur les mouvements de capitaux existent ils examinent les effets de la politique fiscale dans un tel contexte on tire de ces analyses plusieurs resultats quant i la transmission internationale des effets de la politique fiscale et quant aux mouvements lies de certains agregats economiques comme les niveaux de production d emploi de consommation et d investissement certains autres resultats de cette analyse ont trait aux implications des controles des mouvements de capitaux sur l1 quivalence ricardienne au role des decisions de financement dans le processus international de transmission quand il y a controle des mouvements de capitaux et aux effets des controles sur les mouvements de capitaux sur la magnitude des fluctuations induites a travers l economie mondiale par la politique fiscale helpful comments from two anonymous referees are gratefully acknowledged discussion in workshops held at ucla duke university iowa state university queen s university vanderbilt university vpi and the university of western ontario has also been useful canadian journal of economics revue canadienine d economique xviii no 4 november novembre 1985 printed in canada imprime au canada 0008 4085 85 743 65 1 50 canadian economics association this content downloaded from 207 46 13 129 on mon 27 jun 2016 05 25 03 utc all use subject to http about jstor org terms 744 jeremy greenwood and kent p kimbrough

insider bargaining power starting wages and involuntary unemployment recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders yet one typically assumes that insiders and recently hired outsiders are paid the same wage we con

terms of trade and national saving rates in asia abstract in recent theoretical work obstfeld and svensson and razin re examine the harberger laursen metzler effect of terms of trade changes on the balance of payments current account their models of intertemporal utility maximization indicate that individuals saving responses to a change in the terms of trade are ambiguous in theory from this they infer that the corresponding movements in the current account are also ambiguous however they ignore the positive rate of growth effect incorporated in the life cycle theory on the aggregate saving rate this paper presents an empirical analysis of the terms of trade effect on aggregate national saving rates in 14 asian developing countries over the period 1961 1981 it turns out to be significantly positive as the life cycle model predicts

will trade sanctions reduce child labour the role of credit markets abstract we examine the interaction between credit markets trade sanctions and the incidence of child labour in a two good two period model with unequally wealthy households both poverty and poor education quality inter alia are important determinants of child labour the incidence of child labour decreases as we move from the case of borrowing constraints to the case in which poor households can borrow freely from rich ones and then to the case of perfect international credit markets trade sanctions can increase child labour especially among poor households a possibility that decreases as their access to credit improves

temporary import quota and the current account this paper studies the effects of a temporary import quota on the real exchange rate and the current account response is determined by the interaction between two opposing forces the intertemporal relative price effect tends to improve the current account while the wealth the intertemporal relative price effect tends to improve the current account while the wealth effect contributes to a deterioration for a sufficiently low degree of intertemporal consumption substitution the wealth effect is shown to dominate in this event the current account deteriorates in response to a temporary quota and improves only after the quota is lifted

current accounts in debtor and creditor countries the authors reexamine a classic question in international economics what is the current account response to a transitory income shock such as a temporary improvement in the terms of trade a transfer from abroad or unusually high production to answer this question they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities despite its conventional ingredients the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries evidence from thirteen oecd countries broadly supports this theoretical prediction

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

terms of trade shocks and the current account in small island developing states abstract the paper investigates the dynamic relationship between external and internal shocks and the current account in selected small islands developing states external shocks defined as terms of trade fluctuations explain a significant proportion of the variation in the current account balances the external shocks have a temporary negative impact on the current account balances with a subsequent improvement generating a j curve type reaction in contrast real output shocks have a positive and significant effect on the current account

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets

on fiscal deficits the real exchange rate and the world rate of interest we use a full general equilibrium two country two period model with perfect capital markets and intertemporal optimization and perfect foresight underlying private consumer behaviour in both countries to analyse effects of pure fiscal policy we demonstrate that higher government budget deficits in one country caused by a cut in commodity taxes today balanced by an equal present value increase tomorrow will not be offset one for one by higher private savings because of pure substitution effects triggered by the change in the intertemporal terms of trade the tax change causes the country with the increased government deficit will therefore run a larger current account deficit which in turn unambiguously leads to higher world real interest rates whether a real appreciation results in the country with the higher deficit is shown to depend on the metzler condition for an undereffected transfer if we spend more on our goods than they spend on our goods on the margin government deficits will lead to an appreciation of the exchange rate of the country with the government deficit and vice versa

tariffs quotas and welfare in a monetary economy abstract the effects of tariffs and quotas on welfare in a monetary economy are considered it is shown that while both policies improve the balance of payments they have different lifetime welfare implications even when they are equivalent in the long run the speed of adjustment is shown to be more rapid under a tariff than under a quota therefore adjustment costs associated with changes in money holdings are lower under a tariff while those associated with changes in consumption are higher simulation results are used to examined the implications of various structural parameters for lifetime utility under the two policies

tariffs and the current account abstract this paper examines the impact of a tariff on the current account in a model which emphasizes the fact that it takes time for the production sector of an economy to adjust to a change in relative prices income effects of the adjustment lead to a transitory current account surplus because the deleterious effect of the tariff on national income is larger in the long run than in the short run in addition relative prices overshoot in response to the tariff leading to an increase in the consumption rate of interest which in turn generates an increase in desired saving

redundancy payments and firm specific training this paper attempts to provide an economic rationale for the existence and pattern of redundancy payments a model of firm specific training with uncertain returns to training and uncertainty about the outside options of workers is constructed for this purpose the central result is that an optimal contract will involve the firm in bearing only a part of the training costs because workers may quit since workers bear part of the cost of training they will have to be compensated by a redundancy payment if dismissed furthermore the optimum level of this redundancy payment will vary across firms with large payments being offered by firms where the returns to training are highly variable these insights into the nature of redundancy payments differ from those of other models where they are viewed either as a transfer fee or as representing the difference between inside and outside wages for contracted workers

a dynamic model of tariffs output and employment under flexible exchange rates abstract a portfolio balance model of the open economy with imperfectly flexible wages and rational expectations is used to analyze the macroeconomic effects of commercial policy previous analyses have led to the counterintuitive and almost inconceivable conclusion that under flexible exchange rates a tariff is contractionary by considering a tariff in a dynamic setting and focusing on the process of adjustment it is shown that there may exist a tradeoff between a tariffs short run and long run effects in certain circumstances a tariff imposed under flexible exchange rates increases output and employment initially while reducing them subsequently

commodity windfalls polarization and net foreign assets panel data evidence on the voracity effect this paper examines the effects that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970 2007 the main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets but only in countries that are ethnically homogeneous in highly ethnically polarized countries net foreign assets significantly decreased to explain this asymmetry the paper shows that in ethnically polarized countries commodity windfalls lead to large increases in government consumption expenditures and political corruption the paper s findings are consistent with theoretical models of the current account that have a built in voracity effect