|
|
Abstract:Without the rule of law, traders who incur trading costs can be held up by counter-parties who are stronger in anarchic bargaining. The favourable terms which the latter extract can overcrowd that side of the market, dissipating the benefits. We establish plausible necessary and sufficient conditions for a move from anarchy toward the rule of law to benefit all traders. The rule of law might be delayed, not only by the difficulties of setting up legal institutions, but by monopolistic traders that have meantime emerged to address the inefficiencies of anarchic trade. These monopolistic traders must also guarantee atomistic traders against holdup.
Abstract: Suppose that there are two congestible modes of travel from A to B - road and rail for concreteness - which are imperfect substitutes in demand. Road congestion from A to B is underpriced; this is an unalterable distortion. Compared to the first best, should the transportation planner choose a wider or narrower road, raise or lower the rail fare, and expand or contract rail capacity? This paper provides a synthetic review of the literature on the problem, presents some new results, and discusses directions for future research on this and related second-best problems.
Abstract: This paper explores whether within job and between job wage growth is lower for less-educated workers.While a simple model of heterogeneous learning ability predicts that individuals with low learning ability will have flatter wage profiles,this prediction has been largely ignored in the recent welfare reform debates. The key econometric problem in estimating returns to tenure and experience is that wages depend on the unobservable job match component, which is endogenous. We depart from the standard method for dealing with this problem in one important way.We show that this alternative implies that wages grow with the number of previous successful job matches. In our empirical work we show that this source of between job wage growth is large. Furthermore, we show that this source of wage growth,as well as the standard returns to tenure and experience,are substantially smaller for the least educated.
Abstract: This paper shows that the recent literature that tests for a long-run Fisher relationship using cointegration analysis is seriously flawed. Cointegration analysis assumes that the variables in question are I(1) or I(d) with the same d. Using monthly post-war U.S. data from 1959-1997, we show that this is not the case for nominal interest rates and inflation. While we cannot reject the hypothesis that nominal interest rates have a unit root, we find that inflation is a long-memory process. A direct test for the equality of the fractional differencing parameter for both series decisively rejects the hypothesis that the series share the same order of integration.
Abstract: Many recent open economy models de-emphasize the role of net foreign asset accumulation as a channel of macroeconomic interdependence between countries. But the empirical appeal of models in which net foreign assets do not react to shocks is limited. I develop a tractable, two-country, real model of macroeconomic interdependence with a role for net foreign asset dynamics. Absence of Ricardian equivalence in an overlapping generations structure ensures existence of a well-defined, endogenously determined, steady-state international distribution of asset holdings, to which the world economy returns following temporary shocks. The model offers a plausible explanation for the failure of statistical tests to reject the hypothesis of a unit root in series of net foreign assets. Market incompleteness can cause significant differences in the dynamics of the economy relative to internationally complete markets.
Abstract: This paper proposes a microfounded general equilibrium model of the U.S. and European economies suitable for analyzing the transmission of monetary and fiscal policy shocks between the U.S. and Europe. The focus is on understanding the determinants of transatlantic economic interdependence. A positive analysis of the consequences of policy changes in the U.S. and Europe is made and results about the transmission of such shocks are obtained. In the model, consumer preferences in the U.S. and Europe are biased in favor of goods produced in the continent where agents reside. Hence, PPP does not hold across the Atlantic, except in steady state. However, this is not sufficient to cause overshooting of the dollar exchange rate following policy shocks. U.S. current-account surplus can be achieved by means of a monetary expansion, a persistent increase in government spending, and/or higher long-run distortionary taxes relative to Europe.
Abstract: I estimate the structural parameters of a small open economy model using data from Canada and the United States. The model improves upon the recent literature in open economy macroeconomics from an empirical perspective. I estimate parameters by using non-linear least squares at the single-equation level. Estimates of most parameters are characterized by small standard errors and are in line with the findings of other studies. I also develop a plausible way of constructing measures for non-observable variables. To verify if multiple-equation regressions yield significantly different estimates, I run full information maximum likelihood, system-wide regressions. The results of the two procedures are similar. Finally, I illustrate a practical application of the model, showing how a shock to the U.S. economy is transmitted to Canada under an inflation targeting monetary regime.
Abstract: This paper shows that properly designed interest rate rules can be consistent with maintaining exchange rate stability. It sheds light on the relation between interest rate rules, exchange-rate regimes, and determinacy of the rational expectation equilibrium in a modern macroeconomic framework.
Abstract: This paper studies the impact of changes in the extent to which fiscal policy is distortionary on the short-run macroeconomic tradeoffs facing fiscal policymakers in an era of budget equilibrium. It does so in an open economy framework, that we use to interpret U.S.-European policy interactions. Our analysis features both fiscal and monetary policy to study how changes in the extent to which fiscal policy is distortionary affect the interaction between central banks and fiscal authorities, both intra- and internationally. In addition, strategic interactions among policymakersÑand the tradeoffs they faceÑare affected by the exchange-rate regime. When government spending is funded through distortionary taxes aloneÑa scenario that we call anti-Keynesian, changing spending moves both inflation and employment in the desired direction following a worldwide supply shock. Smaller and more open economies face a more favorable tradeoff than large relatively closed ones. Under a managed exchange rate regime, European governments face a better tradeoff than under flexible rates, but the improvement is more significant for the country that controls the exchange rate. When both European countries in our model join in a monetary union, the country that had control of the exchange rate under the managed exchange rate regime faces a worse tradeoff, while the tradeoff improves for the country that controlled money supply. In the fully Keynesian case, in which taxes are non-distortionary, all countries face the same positively sloped tradeoff regardless of the exchange-rate regime. Increases in spending cause both output and inflation to rise. When fiscal policy is neither fully anti-Keynesian nor fully Keynesian, the governmentsÕ tradeoffs lie in between the extreme cases, and the exact position depends on the extent to which fiscal policy is Keynesian. Under all European exchange-rate regimes, small increases in the fraction of firms that are subject to distortionary taxation at home are beneficial when the equilibrium is characterized by unemployment, while a less Keynesian fiscal policy abroad is harmful. Governments in the U.S. and Europe will want the ECB and the Fed to coordinate their reactions to an unfavorable supply shock, while monetary policymakers will have little incentive to do so. Intra-European fiscal cooperation can be counterproductive, whereas cooperation between governments and central banks inside each continent can be beneficial. Our study suggests that, if governments are concerned mainly about the relation between fiscal policy and the business cycle, maintaining some fiscal distortions may be optimal.
Abstract: I compare the performance of alternative monetary rules for Canada using an open economy model under incomplete markets. Different rules generate different paths for the markup and the terms of trade. A comparison of welfare levels suggests that flexible inflation targeting, the Bank of CanadaÕs current policy, dominates strict targeting rulesÑamong which a fixed exchange rate with the U.S.Ñand the Taylor rule. In contrast to other studies, strict targeting rules generate a more stable real economy by stabilizing markup dynamics. Flexible inflation targeting dominates because it yields a positive covariance between consumption and the labor effort, which provides agents with a source of risk diversification.
Abstract: I develop a tractable open economy model in which the current account channel of macroeconomic interdependence is not shut off. The model is more appealing than a large portion of the existing literature from an empirical perspective. I solve the stationarity problem that characterizes many existing contributions by adopting an overlapping generations structure. I model nominal rigidity by assuming that firms face explicit costs of output price inflation volatility. The specification generates an endogenous markup that fluctuates over the business cycle. To illustrate the functioning of the model, I identify the two economies I consider with Canada-a small open economy-and the United States-taken as an approximation of the rest-of-the-world economy and I show how a shock to the U.S. economy is transmitted to Canada under an inflation targeting monetary regime.
Abstract: Under conditions of risk neutrality and rational expectations in the foreign exchange market, there should be a one-to-one relationship between the forward rate and the corresponding future spot rate. However, cointegration-based tests of the unbiasedness hypothesis of the forward rate have produced mixed findings. In order to exploit significant cross-sectional dependencies, we test the unbiasedness hypothesis using a new multivariate (panel) unit-root test, the Johansen likelihood ratio (JLR) test, which offers important methodological advantages over alternative standard panel unit-root tests. When applied to a data set of eight major currencies in the post-Bretton Woods era, the JLR test provides strong and robust evidence in support of a unitary cointegrating vector between forward and corresponding future spot rates. However, the orthogonality condition is satisfied only for three major currencies.
Abstract: Past parametric tests of demand system rank have all employed polynomial Engel curve systems. However, by Gorman's (1981) theorem, the maximum possible rank of a rational (derived from utility maximization) polynomial demand system is three. Therefore, past parametric tests may have rejected ranks higher than three because the chosen models impose irrationality when rank exceeds three. The present paper proposes a class of demand systems that are rational, are close to polynomial, and have rank four. These systems nest rational polynomial demands, and so can be used to test ranks up to four. These systems are suitable for applications where high rank is likely, such as demands systems involving a large number of goods. A simple rank test using this new class of systems is applied to UK consumer demand data.
Abstract: In a sample selection or treatment effects model, common unobservables may affect both the outcome and the probability of selection in unknown ways. This paper shows that the distribution function of potential outcomes, conditional on covariates, can be identified given an observed instrument V that affects the treatment or selection probability in certain ways and is conditionally independent of either potential outcomes themselves or potential outcome equation error terms. Estimators based on this identification are provided, which take the form of simple weighted averages. A special case is a GMM or two stage least squares selection model estimator, which permits endogenous or mismeasured regressors. An application to estimation of firm investment decisions is provided.
Abstract: A plausible explanation for cointegration among spot currency rates determined in efficient markets is the existence of a stationary, time-varying currency risk premium. Such an interpretation is contingent upon stationarity of the forward premium. However, empirical evidence on the stochastic properties of the forward premium series has been inconclusive. We apply a panel unit-root testÐthe Johansen likelihood ratio (JLR) testÐto forward exchange premiums by utilizing cross-sectional information from their term structure. In contrast to earlier studies, the JLR test provides decisive and temporally stable evidence in support of stationary forward premiums, and therefore foreign exchange market efficiency, for six major currencies.
Abstract: In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions only on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run.
Abstract: This paper presents a framework for the evaluation and measurement of reversal and origin independence as separate aspects of economic mobility. We show how that evaluation depends on aversion to multi-period inequality, aversion to inter-temporal fluctuations, and aversion to second-period risk. We construct extended Atkinson indices that allow us to quantify the relative impact of reversal and time independence. We apply our approach to the comparison of income mobility in Germany and in the United States. We find that the ranking of Germany and the US on the extent of reversal depends on the degree of aversion to inequality. Reversal has a higher impact in the US than in Germany for lower degrees of aversion to multi-period inequality, while reversal has higher impact in Germany for higher degrees of inequality aversion. By contrast, Americans gain more than Germans from origin independence for a large range of degrees of inequality aversion.
Abstract: A small, structural model of the monetary business cycle implies that real money balances enter into a correctly-specified, forward-looking IS curve if and only if they enter into a correctly-specified, forward-looking Phillips curve. The model also implies that empirical measures of real balances must be adjusted for shifts in money demand to accurately isolate and quantify the dynamic effects of money on output and inflation. Maximum likelihood estimates of the model's parameters take both of these considerations into account, but still suggest that money plays a minimal role in the monetary business cycle.
Abstract: Misclassification in binary choice (binomial response) models occurs when the dependent variable is measured with error, that is, when an actual "one" response is sometimes recorded as a zero, and vice versa. This paper shows that binary choice models with misclassification are semiparametrically identified, even when the probabilities of misclassification depend in unknown ways on model covariates, and the distribution of the errors is unknown.
Abstract: A model is defined to be coherent if for each value of the regressors and errors there exists a unique corresponding value for the endogenous variables. This note provides necessary and sufficient conditions for the coherent specification of a simultaneous two equation system where one equation is a binary choice model, and the other is an arbitrary model (e.g. a nonlinear regression, a censored regression, or another binary choice). Some examples and extensions are provided, including a suggested functional form for simultaneous systems of binary choice equations. These models may be used to test if choices are substitutes or complements.
Abstract: Previous estimators of binary choice panel data models with fixed effects require strong parametric error asumptions, strictly exogeneous regressors, or both. This is because nonlinearity of the model precludes the use of the "moment conditions on differences" based estimators that are generally employed for linear models without strictly exogeneous regressors. Based on the cross section binary choice estimator in Lewbel (2000a), we show how discrete choice panel data models with fixed effects can be estimated with only predetermined regressors. The estimator is semiparametric in that the error distribution is not specified, it allows for some general forms of heteroskedasticity, and converges at rate root n.
Abstract: This paper provides estimators of discrete choice models, including binary, ordered, and multinomial response (choice) models. The estimators closely resemble ordinary and two stage least squares. The distribution of the model's latent variable error is unknown and may be related to the regressors, e.g., the model could have errors that are heteroscedastic or correlated with regressors. The estimator does not require numerical searches, even for multinomial choice. For ordered and binary choice models the estimator is root N consistent and asymptotically normal. A consistent estimator of the conditional error distribution is also provided.
Abstract: Price advertisement by retail stores is pervasive. If there exist non-negligible costs of consumer search, a retailer can increase the number of consumers visiting its location by advertising a low price, thus increasing consumers' expected utilities from search. If the increase in the number of consumers who visit the store is substantial, then the store's profit goes up even though low prices decrease profit margins. We show that this intuition extends to the case of a multi-product monopolist, who may choose to advertise very low prices for a limited number of items it carries, even when advertised and non-advertised commodities are substitutes. Finally, we analyze a retail duopoly in which both stores sell from the same location, showing that under some circumstances, there is an incentive for one of the retailers to free-ride on the other's advertisement.
Abstract: Tiebout's basic claim was that when public goods are local there is an equilibrium and every equilibrium is efficient. The literature seems fall short of verifying this conjecture: If the notion of equilibrium is too weak then equilibrium is nonempty yet some equilibria could be inefficient. On the other hand, if the notion of equilibrium is too strong, then every equilibrium is efficient yet equilibrium may be empty. This paper introduces a new equilibrium notion, a \textit{migration-proof Tiebout equilibrium}, which is a jurisdiction structure such that (i) no consumer wants to migrate unilaterally across jurisdictions (free mobility of consumers), and (ii) no subgroup of consumers want to form a new jurisdiction that would not create instability in population distribution (free entry of migration-proof jurisdictions). We show that there is always a unique migration-proof equilibrium and is asymptotically efficient when consumers are homogeneous.
Abstract: Much of the literature on the endogenous generation of a city employs increasing returns to scale in order to obtain agglomeration. In contrast, the model considered here focuses on the role of marketplaces or trading centers in the agglomeration of population as cities. Gains to trade in combination with transportation and marketplace setup costs suffice to endogenously generate a city or cities with one or multiple marketplaces. It is assumed that consumers are fully mobile while production functions are location-specific. The exchange of commodities takes place in competitive markets at the marketplaces, while the number and locations of the marketplaces are determined endogenously using a core concept. Unlike the standard literature of urban economics, our model can deal with differences in geography by letting the setup costs of marketplaces and the transportation system depend on location. After showing that an equilibrium exists and that equilibrium allocations are the same as core allocations, we investigate the equilibrium number and locations of marketplaces, the population distribution, and land prices. In contrast with earlier literature, the results are general in the sense that specific functional forms are not needed to obtain existence of equilibrium, equilibria are first best, and equilibria are locally unique (in our examples).