guarding the guardians good government requires some restraints on the powerful but how can those be impose if there is no one above them this paper studies the equilibrium allocation of power and resources established by self interested incumbents under the threat of rebellions from inside and outside the group in power commitment to uphold individuals rights can only be achieved if power is not as concentrated as incumbents would like it to be ex post power sharing endogenously enables incumbents to commit to otherwise time inconsistent laws by ensuring more people receive rents under the status quo and thus want to defend it

long live the doge death as a term limit on venetian chief executives can an electorate use the projected life expectancy of a lifetime appointed chief executive to enforce binding informal term limits informal term limits based on the life expectancy of a chief executive candidate at election would enable an electorate to exercise discretion in adjusting tenure lengths to minimize expected turnover and tenure length costs while also providing a strictly binding term limit death we provide a detailed historical case study of venice from 1172 to 1797 when the ruling patricians utilized informal term limits on their chief executive the doge relying on the projected life expectancy of ducal candidates

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

seigniorage and conventional taxation with multiple exogenous shocks abstract the correlation between seigniorage and conventional taxation is investigated in a dynamic optimizing model which contains three shocks to government expenditure and to the deadweight losses associated with conventional taxation and seigniorage asymmetric costs of adjusting revenue and potential absence of the availability of debt solutions and impulse response functions from the theoretical model are used to construct a three variable structural vector autoregression var and identify the empirical reduced form var judged by the parameter estimates empirical impulse response functions forecast error variance decompositions and historical decompositions of the time series identification is successful and the econometric results are supportive of the theoretical model

common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

the u s evidence on optimal taxation over time abstract this paper considers a tax rule in which a uniform tax rate over time becomes optimal its implications are that 1 changes in the tax rate should arise only when there are changes in permanent government expenditures and 2 no variable other than permanent government expenditures should be of any value in predicting the tax rate these implications are tested using u s data for 1937 82 empirical results of the tests reveal that in addition to responding to permanent government expenditures the tax rate also responds to temporary defense purchases the general price level and a time trend

optimal seigniorage the gold standard and central bank financing this paper extends the theory of optimal seigniorage to allow for money production costs an important implication is tha t high money production costs along with a requirement that the monet ary branch of government self finance its operation severs the connecti on between the tax rate on output and the tax rate on money using u s data the authors find that tax rates on output and money move together only during periods when the government controls both tax rates and there is a close correspondence between revenue produced b y the monetary authority and revenue transferred to the treasury copyright 1993 by ohio state university press

oligarchy democracy inequality and growth abstract this paper analyses the dynamics of inequality democratization and economic development in a political economy model of growth where education is both the engine of growth and a determinant of political participation in a context with imperfect capital markets we investigate the incentives for an educated oligarchy to subsidize the poor s education and to initiate a democratic transition we characterize the equilibrium patterns of political institutions income distribution and growth as a function of the initial income and inequalities in particular we identify circumstances under which the elite promotes the endogenous emergence of a middle class for purely political economy reasons a simple linear infinite horizon framework is then presented in this setting we discuss the importance of historical dependence for long run social stratification and redistribution

life is unfair in latin america but does it matter for growth summary i analyze the effect of inequality on economic growth in latin america where inequality is measured as the area of family farms as a percentage of the total area of agricultural holdings using data from 18 latin american countries during 1960 2004 i find that inequality has a nonlinear effect on economic growth overall for the countries included in this analysis the share of family farms has a positive significant effect on economic growth these findings are robust to controlling for several factors using a different indicator of inequality land gini and addressing for endogeneity

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

financial liberalization and reversals political and economic determinants what accounts for the dynamics of financial reforms this paper identifies the political regime as one of the main factors focusing on democratization and financial reform it puts forward novel evidence for a u shaped relation across countries and over time for different reform measures and a wide range of estimators partial democracy is a main obstacle to financial reforms and democratization when incomplete may lead to severe financial reform reversals nauro f campos and fabrizio coricelli

farewell to confucianism the modernizing effect of dismantling china s imperial examination system abstract this study uses 1899 1908 prefecture level panel data to assess how the likelihood of passing the civil service examination affected modernization before and after the examination system s abolition because higher quotas were assigned to prefectures with an agricultural tax of over 150 000 piculs we use a regression discontinuity design to generate an instrument that resolves potential endogeneity and ensures robust results we find that following abolition prefectures with higher quotas of successful candidates tended to establish more modern firms and send more students for overseas study in japan a subsequent analysis using an individual dataset further shows that the skill level of these overseas students increased after abolition especially in regions with higher per capita quotas this finding implies that the examination system led to substantial misallocation of talents

income distribution political instability and investment abstract this paper successfully tests on a sample of 71 countries for the period 1960 85 the following hypotheses income inequality by fuelling social discontent increases sociopolitical instability the latter by creating uncertainty in the politico economic environment reduces investment as a consequence income inequality and investment are inversely related since investment is a primary engine of growth this paper identifies a channel for an inverse relationship between income inequality and growth we measure socio political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two equation model in which the endogenous variables are investment and an index of socio political instability our results are robust to sensitivity analysis on the specification of the model and the measure of political instability and are unchanged when the model is estimated using robust regression techniques

political economy of growth with a taste for status abstract this paper investigates the political economy of growth when individuals prefer high levels of relative consumption a pivotal voter determines the equilibrium tax on capital the revenues from which fund the provision of productive public goods the taste for status and the distributions of wealth and political power interact to generate stylized versions of oligarchies middle class democracies and populist democracies a rise in the taste for status increases the role of distributional concerns in policy preferences lowering growth in an oligarchy or populist democracy but increasing it in a middle class democracy in addition the egalitarian redistribution of wealth or political power causes growth to first rise and then fall as the equilibrium tax rate approaches and then exceeds its growth maximizing level generating inverse u shaped relationships between democracy and growth and inequality and growth

political selection and persistence of bad governments we study dynamic selection of governments under different political institutions with a special focus on institutional flexibility a government consists of a subset of the individuals in the society the competence level of the government in office determines collective utilities e g by determining the amount and quality of public goods and each individual derives additional utility from being part of the government e g rents from holding office we characterize the dynamic evolution of governments and determine the structure of stable governments which arise and persist in equilibrium in our model perfect democracy where current members of the government do not have veto power over changes in governments always leads to the emergence of the most competent government however any deviation from perfect democracy to any regime with incumbency veto power destroys this result there is always at least one other less competent government that is also stable and can persist forever and even the least competent government can persist forever in office we also show that there is a nonmonotonic relationship between the degree of incumbency veto power and the quality of government in contrast in the presence of stochastic shocks or changes in the environment a regime with less incumbency veto power has greater flexibility and greater probability that high competence governments will come to power this result suggests that a particular advantage of democratic regimes with a limited number of veto players may be their greater adaptability to changes rather than their performance under given conditions finally we show that royalty like dictatorships may be more successful than junta like dictatorships because in these regimes veto players are less afraid of change

the rise and decline of general laws of capitalism economists have long been drawn to the ambitious quest of discovering the general laws of capitalism david ricardo for example predicted that capital accumulation would terminate in economic stagnation and inequality as a greater and greater share of national income accrued to landowners karl marx followed him by forecasting the inevitable immiseration of the proletariat thomas piketty s 2014 tome capital in the twenty first century emulates marx in his title his style of exposition and his critique of the capitalist system piketty is after general laws that will demystify our modern economy and elucidate the inherent problems of the system and point to solutions but the quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various different economic arrangements are distributed despite his erudition ambition and creativity marx was led astray because of his disregard of these forces the same is true of piketty s sweeping account of inequality in capitalist economies in the next section we review marx s conceptualization of capitalism and some of his general laws we then turn to piketty s approach to capitalism and his general laws we will point to various problems in piketty s interpretation of the economic relationships underpinning inequality but the most important shortcoming is that

inequality democracy and institutions a critical review of recent research this paper surveys the theoretical and empirical literature on the effect of economic and political inequality on institutions the current understanding suggests that unequal societies develop exploitative and inefficient institutions empirical research which is scant and has mainly concentrated at cross national level supports to some extent the existence of an inverse relationship between inequality and institutions but more analysis is needed future empirical research should undertake country state and micro level analysis which are a necessary complement to aggregate level studies the effect of inequality could also take place indirectly through the influence of inequality on democratization

first branch or root the congress the president and the federal reserve much of the literature on the power of elected officials and bureaucratic agencies argues from an empirical perspective that bureaus appears to exercise autonomy in this paper a theoretical model sets out the conditions under which the congress the president and one agency we use the u s federal reserve as an extended example can dictate policy outcomes the results of the paper include the congressional dominance theorem if more than 2 3 of house members and more than 2 3 of senate members agree on something they get it the theorem is obvious the proof is in the u s constitution but often forgotten in the substantive literature more realistic results are derived for situations where the preferences of members of congress are more diverse powers of the president to influence policy with and without appointments are also analyzed

economic effects of the syrian war and the spread of the islamic state on the levant this paper uses a global computable general equilibrium framework with new detail on six levant countries the arab republic of egypt iraq jordan lebanon the syrian arab republic and turkey to quantify the direct and indirect economic effects of the syrian war and the advance of the islamic state on the levant syria and iraq bear the brunt of the direct economic costs while the other levant countries lose in per capita but not in aggregate terms the fact that the islamic state s spread has undermined regional trade adds to varying degrees to the direct costs in all levant economies and in the case of syria and iraq doubles the welfare losses all these countries are foregoing opportunities to expand intra levant trade and the associated gains in economic efficiency and diversification the average welfare effects are not indicative of within country incidence which varies among workers landowners and capitalists

the impact of the arab spring on the tunisian economy this paper uses synthetic control methodology to estimate the output loss in tunisia as a result of the arab spring the results suggest that the loss was 5 5 percent 5 1 percent and 6 4 percent of gdp in 2011 2012 and 2013 respectively these findings are robust to a series of tests including placebo tests and are consistent with those from an autoregressive distributed lag model of tunisia s economic growth moreover this paper finds that investment was the main channel through which the economy was adversely impacted by the arab spring

payoffs from panels in low income countries economic development and economic mobility economic development is a dynamic process with a time scale of more than a few years the scarcity of household survey data covering long periods of time has meant that most empirical evidence on hypotheses about growth and development has come from cross country aggregate time series data one important limitation of such data is that they cannot provide information on economic mobility thus little is known about which households and individuals are the beneficiaries of economic growth or about the degree of persistence of poverty over sustained time periods or generations as development proceeds disaggregated within country panels covering different time dimensions have been used to shed light on a number of important development topics that go beyond what can be learned from the cross country database carefully planned social experiments or intensive areaspecific fieldwork including the differentiated effects on households of macroeconomic shocks paul glewwe and gillette hall 1998 elizabeth frankenberg et al 2003 the effects of longer term processes such as population growth and technological change on forestation andrew d foster and rosenzweig 2003 and the consequences of institutional change such as local democratization foster and rosenzweig 2002b however household level panel surveys that cover time periods of a decade or more and thus have the potential for studying economic mobility are not only scarce but have design limitations that may bar unbiased inferences about economic mobility for example the indian village level studies of the international crop research institute for the semi arid tropics icrisat which followed households in six villages starting in 1975 for ten years thomas walker and james ryan 1984 dropped the 14 percent of households that divided similarly the 1982 rural economic development survey reds of indian households prem s vashishtha 1989 excluded the one third of 1971 baseline households that had split by 1982 indeed the design of the world bank living standards measurement surveys lsms includes in the panel component of each survey only those members of sampled residences who do not leave glewwe and m grosh 1999 although there is evidence suggesting that panel survey rules that condition on residence provide nonrandom subsamples of the baseline households duncan thomas et al 2001 foster and rosenzweig 2002a little is known about how these selection rules affect inferences about economic mobility or poverty persistence in this article i use data from a new 18 year panel survey from bangladesh to assess whether and how residence based sampling rules affect estimates of economic mobility in the presence of nonrandom household division the results suggest that the biases are substantial

estimating the peace dividend the impact of violence on house prices in northern ireland this article exploits data on the pattern of violence across regions and over time to estimate the impact of the peace process in northern ireland on house prices after establishing a negative correlation between killings and house prices we estimate the parameters of a markov switching model with conflict and peace as latent states we use the model to estimate the size of the peace dividend as captured in house price changes jel d74 r23 r31 conflict in ireland has a long history even after the republic of ireland was created as an independent state in 1920 the status of the mainly protestant north remained contested from the late 1960s a violent conflict flared up which claimed around 3 500 lives only more than two decades later from 1993 onwards emerged a peace process which while initially fragile culminated in a cessation of violence and a return to devolved government by 2007 the conflict was a major source of social and economic dislocation but as peace took hold this has begun to be repaired this paper assesses the impact of peace by using variation in violence within northern ireland to study one important economic aspect of the peace process and the dividend that it brought to residents of northern ireland the impact on house prices houses are assets whose prices reflect the present and future expected attrac tiveness of living in an area even during the height of the conflict in northern ireland violence was not uniform for example belfast the capital city of the province of northern ireland was particularly hard hit looking for economic consequences of the peace process we would therefore expect benefits to be concentrated among areas where violence was most prevalent we exploit within region variability in violence and house prices over time having such variation is rare in studies of the economic consequences of conflict our specific measure of violence is conflict related deaths these have been well documented by sutton 1994 and the conflict archive on the

marginal income tax rates in the united states a non parametric approach abstract the objective of this paper is to estimate both the u s federal marginal income tax rate and the state and local marginal income tax rates we use the non parametric regression method and data on income and tax extracted from u s individual tax model files for the period 1985 1995 the flexibility of the non parametric approach and the information at the individual level enable us to construct a more reliable time series of the average federal marginal income tax rates and that of the average state and local marginal income tax rates our results suggest that the average federal marginal income tax rate varies from 18 2 to 21 8 and the average state and local marginal income tax rate varies from 4 7 to 5 6 we also find that the state and local income tax accounts for roughly 18 of the total income taxes paid during 1985 1995 moreover our analysis shows that stephenson journal of monetary economics 41 1998 pp 389 409 provides the most consistent tax rate series for use in applications that require estimates of tax rates for years prior to 1985

unequal societies income distribution and the social contract this paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political fundamentals can sustain such different systems of social insurance fiscal redistribution and education finance as those of the united states and western europe with imperfect credit and insurance markets some redistributive policies can improve ex ante welfare and this implies that their political support tends to decrease with inequality conversely with credit constraints lower redistribution translates into more persistent inequality hence the potential for multiple steady states with mutually reinforcing high inequality and low redistribution or vice versa

the rise of europe atlantic trade institutional change and economic growth the rise of western europe after 1500 is due largely to growth in countries with access to the atlantic ocean and with substantial trade with the new world africa and asia via the atlantic this trade and the associatedcolonialism affected europe not only directly but also indirectly by inducing institutional change where initial political institutions those established before 1500 placed significant checks on the monarchy the growth of atlantic trade strengthened merchant groups by constraining the power of the monarchy and helped merchants obtain changes in institutions to protect property rights these changes were central to subsequent economic growth

the optimum quantity of money rule in the theory of public finance this paper examines optimal tax policy in a monetary economy in which money serves as an intermediate good that helps facilitate the conversion of scarce resources into tinal consumption goods by enabling consumers to economize on the costs of transacting it is shown that in such an environment even though distorting taxes must be levied for revenue purposes the optimal tax structure calls for abstaining from inflationary finance and adopting the optimum quantity of money rule

princes and merchants european city growth before the industrial revolution as measured by the pace of city growth in western europe from 1000 to 1800 absolutist monarchs stunted the growth of commerce and industry a region ruled by an absolutist prince saw its total urban population shrink by one hundred thousand people per century relative to a region without absolutist government this might be explained by higher rates of taxation under revenue maximizing absolutist governments than under nonabsolutist governments which care more about general economic prosperity and less about state revenue

the demise of the public interest model of the federal reserve system the political economy of american monetary policy cambridge university press cambridge 19901 edited by thomas mayer is a collection of one previously published and eighteen unpublished works that seeks to review consolidate and extend the growing literature on a positive theory of the federal reserve system a major theme of the collection is that the traditional public interest view of the fed has little to offer as a guide to understanding the behavior of federal reserve officials at the same time the collection offers a word of caution to practitioners of the positive theory who use a naive public choice approach according to this subplot a narrow self interest approach to the fed is not much better than the traditional alternative a general theory of the federal reserve system requires the right blend of the best elements from the staid public interest view and the renegade public choice view as a review of the current state of the literature this collection of works has much to offer the book is at its best in posing questions that force not only the public interest proponent but also the naive public choice theorist to rethink their positions the book is less useful i think as a road map to future research in contrast to this book s premise the problem i see with the naive public choice approach is not that it has been too radical but that it has not been radical enough the renegade assumption that fed decisionmakers are self interested utility maximizers is misleading only when used within the context of a misspecified model of the macroeconomy i argue in this review essay that the next discrete step in the evolution of a positive theory of central banking is to supplement the self interest assumption with

if diversification is good why don t countries diversify more the political economy of diversification in resource rich countries abstract for resource rich countries diversification is claimed to represent a strategy for reducing resource curse problems this however depends on whether diversification has a positive effect on the country s institutions while there is a lot of evidence that exports of oil have a negative impact on institutions we know much less about the extent to which diversification leads to better institutions this article applies recent political economy theory to the phenomenon of diversification theoretical arguments suggest that it is the pattern of industrial activity rather than diversification per se which affects institutions like democracy in other words not all forms of diversification lead to better institutions furthermore where diversification has a positive impact on institutions diversification may be difficult to attain when it threatens the power base of the ruling elite a possible implication of these arguments is that policies for diversification should focus on international regulation affecting elite incentives rather than domestic industrial policy

democracy diversification and growth reversals there exists convincing evidence that democratic countries are less volatile this conclusion is usually reached with respect to volatility as measured by the standard deviation of annual growth rates of per capita gdp which includes both low and high frequency fluctuations however recently several studies have documented that significant changes in trend growth such as growth accelerations that last a decade or similar periods of negative growth are quite common in this paper we ask whether democracy also has a stabilizing effect on trend volatility i e whether more democratic countries experience fewer and milder swings of trend growth we find a common phenomenon medium term reversals of growth that is periods of exceptionally high growth are on average followed by periods of exceptionally low growth and vice versa the propensity to experience large swings of trend growth is not uniform across countries less democratic countries are more susceptible to it when compared with factors commonly associated with volatility such as measures of quality of institutions macroeconomic policies and financial development we find that democracy is the most robust predictor of a country s propensity for growth reversals we construct a model in which non democracies have high barriers of entry for new firms this leads to less sectoral diversification fewer sectors are operated but more resources are channeled to each in an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful however these accelerations are followed by large declines when fortunes change in favor of the missing sectors we present empirical evidence that confirms the positive relationship between democracy and industrial diversification

the political economy of growth democracy and human capital democracy is more than just another brake or booster for the economy we argue that there are significant indirect effects of democracy on growth through public health and education where economists use life expectancy and education as proxies for human capital we expect democracy will be an important determinant of the level of public services manifested in these indicators in addition to whatever direct effect democracy may have on growth we predict an important indirect effect through public policies that condition the level of human capital in different societies we conduct statistical investigations into the direct and indirect effects of democracy on growth using a data set consisting of a 30 year panel of 128 countries we find that democracy has no statistically significant direct effect on growth rather we discover that the effect of democracy is largely indirect through increased life expectancy in poor countries and increased secondary education in nonpoor countries t he relationship between democracy and economic growth has received considerable attention in recent years as yet however there is no consensus among analysts on the relationship between these two widely studied variables sound theoretical positions have been advanced suggesting that democracy is both an impediment and facilitator of growth careful quantitative tests of the relationship have produced contradictory results in our view existing studies fail to develop an adequate political theory of growth and as a result their empirical models are typically misspecified with competing arguments on both sides of the question many analysts merely add a variable for democracy to existing economic models and then look at the sign of the coefficient and its significance this is inadequate democracy is more than just another brake or booster for the economy we argue that there are important indirect effects of democracy on growth that are manifested through public health and education where economists typically use life expectancy and secondary school enrollment as proxies for human capital we expect that democracy will itself be an important determinant of the level of public services captured in these indicators thus in

the euro changeover and its effects on price transparency and inflation despite the expectations of economists that the euro changeover would have no effect on prices european consumers perceived the opposite to shed some light on this puzzle we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover retailers aware of consumers difficulties in adopting the new currency use currency changeovers to increase profits by increasing prices the lower the price transparency after the changeover the higher the euro related inflation using data on inflation eurostat and price levels economist intelligence unit we show that although the euro changeover did not significantly increase inflation it nevertheless had a distortionary effect on prices after the changeover cheaper goods had higher inflation and this effect was stronger in countries in which people found dealing with the new currency problematic

large newsvendor games we consider a game called newsvendor game where several retailers who face a random demand can pool their resources and build a centralized inventory that stocks a single item on their behalf profits have to be allocated in a way that is advantageous to all the retailers a game in characteristic form is obtained by assigning to each coalition its optimal expected profit we consider newsvendor games with possibly an infinite number of newsvendors we prove in great generality results about balancedness of the game and we show that in a game with a continuum of players under a nonatomic condition on the demand the core is a singleton for a particular class of demands we show how the core shrinks to a singleton when the number of players increases

political regimes and foreign intervention abstract we present a theory of endogenous political regimes that emphasizes foreign direct investment as a motive for foreign governments to either induce regime transitions or promote regime consolidations we characterize different forms of foreign intervention and identify the conditions under which they occur we highlight new channels through which economic factors affect political regime choices foreign intervention is most likely to originate from countries where the government has a substantial pro investor bias and to be directed at destinations where fdi is highly profitable and where income inequality is high foreign sponsored coups d etat are more likely to be directed at democratic governments of poor countries in destinations where fdi is highly profitable but the domestic elite is weak foreign intervention tends to be aimed at stabilizing dictatorships we relate the analysis to evidence on foreign intervention from around the world

inflation and taxation with optimizing governments this paper examines the empirical validity of the predictions that if governments minimize the deadweight loss from raising revenue through inflation and tax finance there should be a positive contemporaneous association between inflation and the level of tax burdens the authors examine the empirical validity of this prediction using data from great britain france germany japan and the united states inflation and tax rates are as likely to be negatively as positively correlated so the results cast doubt on the empirical relevance of simple models in which governments with time invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes copyright 1990 by ohio state university press

multivariate test for forecast rationality under asymmetric loss functions recent evidence from mms survey of inflation output forecasts abstract we propose a multivariate test for forecast rationality under asymmetric loss functions and test jointly the rationality of inflation output forecasts of the mms survey for the us our results indicate that even though the rationality of the forecasts individually may be rejected under two popular univariate asymmetric loss functions linlin and linex there is evidence that rationality of the joint forecasts of inflation and output cannot be rejected we find that allowing for multivariate asymmetric loss functions does improve the evidence for rationality

oligarchic versus democratic societies this paper develops a model to analyze economic performance under different political regimes an oligarchic society where political power is in the hands of major producers protects their property rights but also tends to erect significant entry barriers against new entrepreneurs democracy where political power is more widely diffused imposes redistributive taxes on producers but tends to avoid entry barriers when taxes in democracy are high and the distortions caused by entry barriers are low an oligarchic society achieves greater efficiency because comparative advantage in entrepreneurship shifts away from the incumbents the inefficiency created by entry barriers in oligarchy deteriorates over time the typical pattern is one of rise and decline of oligarchic societies an oligarchic society may first become richer but later fall behind a similar democratic society i also discuss how democracies may be better able to take advantage of new technologies how within elite conflict in oligarchies might cause a transition to democracy and how the unequal distribution of income may keep inefficient oligarchic institutions in place jel p16 o10

seigniorage and tax smoothing in the united states 1914 1986 abstract when monetary and fiscal authorities cooperate to minimize the distortionary costs of financing an exogenous stream of government expenditures barro s tax smoothing model implies a long run relationship between tax revenues and inflation previous empirical tests of this relationship are reinterpreted in light of recent work on cointegration and are shown to hold only when stochastic temporal variation in the excess burden of taxes and seigniorage is transitory in nature a new test that holds in the presence of nonstationary disturbances is developed and applied annual u s data from the period 1914 to 1986 reject the revenue smoothing hypothesis

does natural resource abundance increase latin american income inequality abstract why is income inequality higher in latin america than in east asia is this phenomenon related to the region s natural resource abundance is it a contributor to latin america s slow and narrowly focused human capital accumulation if so can anything be done to reverse the latin american trends or should we think of the region s fate as unalterable to help answer these questions this paper draws upon standard trade theory and cross sectional empirical analysis to demonstrate that natural resource intensive sectors particularly permanent agriculture absorb capital that might otherwise flow to manufacturing this depresses workers incentive to accumulate skill and delays industrialization

adverse selection and entrepreneurship in a model of development this paper presents a theory in which talented entrepreneurs are identified as the key agents driving the process of development and modernisation entrepreneurial skills are private information which prevents full risk sharing development into a modern industrial economy might fail to take place since potentially talented entrepreneurs may refrain from taking on the entrepreneurial risks as a way to avoid income shocks an interesting feature of the model is the fact that the informational asymmetries are endogenous to the process of development as they are related to the heterogeneity in entrepreneurial skills required in the manufacturing activities

dictators and oligarchs a dynamic theory of contested property rights in an economy with weak economic and political institutions the major institutional choices are made strategically by oligarchs and dictators the conventional wisdom presumes that as rent seeking is harmful for oligarchs themselves institutions such as enforcement of the property rights will emerge eventually we explicitly model a dynamic game between oligarchs and a dictator who can contain rent seeking the oligarchs choose either a weak dictator who can be overthrown by an individual oligarch or a strong dictator who can only be replaced via a consensus of oligarchs in equilibrium no dictator can commit to both i protecting the oligarchs property rights from the other oligarchs and ii not expropriating oligarchs himself we show that a weak dictator does not limit rent seeking a strong dictator does reduce rent seeking but also expropriates individual oligarchs we show that even though eliminating rent seeking is pareto optimal weak dictators do get appointed in equilibrium and rent seeking continues this outcome is especially likely when economic environment is highly volatile

congressional influence on u s monetary policy a reconsideration of the evidence abstract one of the few works that finds strong evidence of congressional influence on u s monetary policy is grier 1991 which finds a direct relationship between the liberalism of the senate oversight committee leadership and monetary base growth we extend this analysis by considering a longer sample period and by considering the preferences of house oversight committee leaders in addition to senators grier s evidence is not robust to these extensions where we do find correlation between congressional preferences and monetary base growth increased liberalism of congressional oversight committees is associated with lower monetary base growth

international trade and institutional change medieval venice s response to globalization international trade can have profound effects on domestic institutions we examine this proposition in the context of medieval venice circa 800 1600 early on the growth of long distance trade enriched a broad group of merchants who used their newfound economic muscle to push for constraints on the executive that is for the end of a de facto hereditary doge in 1032 and the establishment of a parliament in 1172 the merchants also pushed for remarkably modern innovations in contracting institutions that facilitated longdistance trade for example the colleganza however starting in 1297 a small group of particularly wealthy merchants blocked political and economic competition they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long distance trade over the next two centuries this led to a fundamental societal shift away from political openness economic competition and social mobility and toward political closure extreme inequality and social stratification we document this oligarchization using a unique database on the names of 8 178 parliamentarians and their families use of the colleganza in the periods immediately before and after 1297 we then link these families to 6 959 marriages during 1400 1599 to document the use of marriage alliances to monopolize the galley trade monopolization led to the rise of extreme inequality with those who were powerful before 1297 emerging as the undisputed winners jel codes d02 f10 n43

why did the west extend the franchise democracy inequality and growth in historical perspective during the nineteenth century most western societies extended voting rights a decision that led to unprecedented redistributive programs we argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution political transition rather than redistribution under existing political institutions occurs because current transfers do not ensure future transfers while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution our theory also offers a novel explanation for the kuznets curve in many western economies during this period with the fall in inequality following redistribution due to democratization i introduction the nineteenth century was a period of fundamental political reform and unprecedented changes in taxation and redistribution britain for example was transformed from an oligarchy run by an elite to a democracy the franchise was extended in 1832 and then again in 1867 and 1884 transferring voting rights to portions of the society with no previous political representation the decades after the political reforms witnessed radical social reforms increased taxation and the extension of education to the masses moreover as noted by kuznets inequality which was previously increasing started to decline during this period the gini coefficient for income inequality in england and wales had risen from 0 400 in 1823 to 0 627 in 1871 but fell to 0 443 in 1901 two key factors in the reduction in inequality were the increase in the proportion of skilled workers williamson 1985 and the redistribution of income toward the poorer segments of the society for example taxes rose from 8 12 percent of national product in 1867 to 18 8 percent by 1927 and the progressivity of the tax system increased substantially see lindert 1989

labor supply effects of the recent social security benefit cuts empirical estimates using cohort discontinuities abstract in response to a crisis in social security financing two decades ago congress implemented an increase in the normal retirement age nra of 2 months per year for cohorts born in 1938 and after these cohorts began reaching retirement age in 2000 this paper studies the effects of these benefit cuts on recent retirement behavior the evidence suggests that the mean retirement age of the affected cohorts has increased by about half as much as the increase in the nra if older workers continue to increase their labor supply in the same way there might be important implications for the estimates of social security trust fund exhaustion that have played such a major role in recent discussions of social security reform

income distribution and sociopolitical instability as determinants of savings a cross sectional model the purpose of this cross national study is twofold first it introduces income distribution and sociopolitical instability as arguments in the savings function second it presents some empirical evidence in relation to their quantitative effects on savings it is shown that sociopolitical instability has profound effects on the savings ratio it is also shown that the bulk of savings is produced by the middle income class as a result a redistribution of income at the expense of the upper income class yields a constant or an increased savings ratio developing on whether such a redistribution includes the lower income class or not

deficits and money growth in the united states 1872 1983 abstract this paper reports empirical evidence on the relation between government budget deficits and the growth of high powered money in the united states high powered money growth appears to be positively related to war spending during periods when such spending is a substantial fraction of gnp there is little evidence that the growth of high powered money is related to the non war government deficit measured either in cash or in real terms after controlling for the level of overall economic activity

vested interests in a positive theory of stagnation and growth we study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies the theory points to the fundamental role played by vested interests in determining policies which are key to the growth process some agents seek to prevent the adoption of new technologies we develop a model of technology adoption and show how technological innovation may sow the seeds of its own destruction in particular we find that the equilibrium is characterized by a long cycle of stagnation and growth over this cycle incumbents are phased out of the economy will new innovation occur in formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria when voters must forecast the effects of different current policies on future prices and policy outcomes

the macroeconomic consequences of terrorism abstract we perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000 which brings together information from the penn world table data set the iterate data set for terrorist events and data sets of external and internal conflict we explore these data with cross sectional and panel growth regression analysis and a structural var model we find that on average the incidence of terrorism may have an economically significant negative effect on growth albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict as well terrorism is associated with a redirection of economic activity away from investment spending and towards government spending however our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries in oecd economies in particular terrorist incidents are considerably more frequent than in other nations but the negative influence of these incidents on growth is smaller

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

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

private sector influences on monetary policy in the united states i examine the extent to which the federal reserve s monetary policy actions are correlated with the expressed wishes of private sector lobbying groups i update and extend work by havrilesky 1990 1993 regarding the effect of signals from the banking industry through the federal advisory council fac i also construct a new database containing statements from non financial interest groups i find that monetary policy actions are correlated with signals from non financial groups before 1979 but not after and are correlated with signals from the fac after 1979 but not before i also find that the fed s policy stance more closely matches the preferred stance of the banking industry after 1979

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

the estimation of prewar gross national product methodology and new evidence the paper develops new methodology for the estimation of prewar gnp taps previously unused data sources and develops new estimates for the periods 1869 1908 and 1869 1928 primary among the new data sources are direct measures of output in the transportation communications and construction sectors and estimates of the consumer price index new measures of real gnp nominal gnp and the gnp deflator are developed the new estimates of real gnp are as volatile on average over the business cycle as the traditional kuznets kendrick series but dampen the amplitude of some cycles while raising the amplitude of others the new estimates of the gnp deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period