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Abstract: We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of U.S. and international business cycles.
Abstract: This paper discusses the use of Stata for the analysis of time series and panel data. The evolution of time-series capabilities in Stata is reviewed. Facilities for data management, graphics, and econometric analysis from both official Stata and the user community are discussed. A new routine to provide moving-window regression estimates-rollreg-is described, and its use illustrated.
Abstract: This paper examines R&D tax incentives in oligopolistic markets. We characterize the conditions under which tax incentives reach the socially desirable level of firm-financed R&D spending. The outcome of the market depends not only on the level of technological spillover in the industry but also on the degree of strategic interaction between the firms. One major result emerges from the model: The socially desirable level of R&D investment is not necessarily reached by subsidizing R&D. When the sector spillover is sufficiently low, the government might want to tax R&D investments, and this result does not necessarily arise because firms are overinvesting in R&D. There are also cases in which an R&D tax is desirable even though firms are underinvesting in R&D compared with the first-best optimum. In practice, this theoretical finding calls for a lower sales tax combined with an R&D subsidy in oligopolistic industries with high technological spillovers, and a lower sales tax combined with an R&D tax in oligopolistic industries with low technological spillovers.
Abstract: The paper examines the evolution of consumption patterns in Organization for Economic Co-operation and Development (OECD) countries from 1985 to 1999. Estimation of demand function parameters uncovered consistent evidence that differences in consumption patterns have recently diminished between the countries. The paper further uncovers an empirical relationship that indicates that increased bilateral trade and foreign direct investment (FDI) has contributed to the convergence of consumption patterns. The result is robust to the consideration of endogeneity in the trade and FDI variables.
Abstract: In models with heterogeneous agents, issues of distribution and redistribution jump to the fore, raising the question: which policies--monetary or fiscal--work most effectively in transferring income from one group to another? To begin answering this question, this note works through a series of examples using Townsend's turnpike model. Two basic results emerge. First, the zero lower bound on nominal interest rates often appears as an obstacle to redistribution by monetary means. Second, assumptions made about the government's ability to raise tax revenue without distortion and to discriminate between agent types in distributing that tax revenue play a large role in determining whether agents prefer to redistribute income by monetary or fiscal means.
Abstract: Much economic policy is deliberately shifted away from direct political processes to administrative processes - political pressure deflection. Pressure deflection poses a puzzle to standard political economy models which suggest that having policies to 'sell' is valuable to politicians. The puzzle is solved here by showing that incumbents will favor pressure deflection since it can deter viability of a challenger, essentially like entry deterrence. U.S. trade policy since 1934 provides a prime example, especially antidumping law and its evolution.
Abstract: This paper surveys the measurement of trade costs - what we know, and what we don't know but may usefully attempt to find out. Partial and incomplete data on direct measures of costs go together with inference on implicit costs from trade flows and prices. Total trade costs in rich countries are large. The ad valorem tax equivalent is about 170% when pushing the data very hard. Poor countries face even higher trade costs. There is a lot of variation across countries and across goods within countries, much of which makes economic sense. Theory looms large in our survey, providing interpretation and perspective on the one hand and suggesting improvements for the future on the other hand. Some new results are presented to apply and interpret gravity theory properly and to handle aggregation appropriately.
Abstract: This paper models an auction game in which two identical licenses for participating in an oligopolistic market are sold in a sequential auction. There is no incumbent. The auction for the first license is a standard first-price, sealed-bid type with an exogenously set reserve price, while the second uses the price of the first unit as the reserve price. This auction rule mimics the license auction for the Turkish Global Mobile Telecommunications in 2000. For some parameter values of the model, this auction setup generates less or equal revenue as selling the monopoly right with the second-price, sealed-bid auction. However, for other parameter values, the seller may get higher revenues.
Abstract: We present evidence that an increase in investment as a share of GDP predicts a higher growth rate of output per worker, not only temporarily, but also in the steady state. These results are found using pooled annual data for a large panel of countries, using pooled data for non-overlapping five-year periods, or allowing for heterogeneity across countries in regression coefficients. They are robust to model specifications and estimation methods. The evidence that investment has a long-run effect on growth rates is consistent with the main implication of certain endogenous growth models, such as the AK model.
Abstract: This paper takes a simple, informal suggestion by Broome and another more explicit suggestion by Kamm for how to deal with asymmetric claims and shows how they can be interpreted to be consistent with two different social welfare functions: Sum-of-square-roots of individual utilities, and product of utilities. These functions are then used to analyze more complicated situations but I show that the first yields more intuitive results, and a better compromise of efficiency and justice, than the other.
Abstract: If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple two-agent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.
Abstract: How much income would a woman living alone require to attain the same standard of living that she would have if she were married? What percentage of a married couple's expenditures are controlled by the husband? How much money does a couple save on consumption goods by living together versus living apart? We propose and estimate a collective model of household behavior that permits identification and estimation of concepts such as these. We model households in terms of the utility functions of its members, a bargaining or social welfare function, and a consumption technology function. We demonstrate generic nonparametric identification of the model, and hence of a version of adult equivalence scales that we call "indifference scales," as well as consumption economies of scale, the household's resource sharing rule or members' bargaining power, and other related concepts.
Abstract: This paper proposes a new method of obtaining identification in mismeasured regressor models, triangular systems, linear simultaneous equation systems, and structural vector autoregressions. Associated estimators take the form of ordinary two stage least squares or generalized method of moments. The method may be used in applications where other sources of identification such as instrumental variables or repeated measurements are not available. Identification comes from a heteroskedastic covariance restriction that is shown to be a feature of many models of endogeneity and of measurement errors. Identification is also obtained in some semiparametric partly linear models. An empirical application and a Monte Carlo study are provided.
Abstract: In this paper we analyze the pattern of employment adjustment using a rich panel of Norwegian plants. The data suggest that the frequency of episodes of zero net employment changes is inversely related to plant size. We develop and estimate a simple "q" model of labor demand, allowing for the presence of fixed, linear and convex components in adjustment costs. The econometric evidence supports the existence of purely fixed components, unrelated to plant size. As a result, the range of inaction is wider for smaller plants. The quadratic components of costs are also important. Finally, in most specifications both fixed and convex costs are higher for employment contractions.
Abstract: For vectors z and w and scalar v, let r(v,z,w) be a function that can be nonparametrically estimated consistently and asymptotically normally, such as a distribution, density, or conditional mean regression function. We provide consistent, asymptotically normal nonparametric estimators for the functions G and H, where r(v,z,w)=H[vG(z),w], and some related models. This framework encompasses homothetic and homothetically separable functions, and transformed partly additive models r(v,z,w)=h[v+g(z),w] for unknown functions g and h. Such models reduce the curse of dimensionality, provide a natural generalization of linear index models, and are widely used in utility, production, and cost function applications. We also provide an estimator of G that is oracle efficient, achieving the same performance as an estimator based on local least squares knowing H.
Abstract: We derive a new family of probability densities that have the property of closed-form integrability. This flexible family finds a variety of applications, of which we illustrate density forecasting from models of the AR-ARCH class for U.S. inflation. We find that the hypernormal distribution for the model's disturbances leads to better density forecasts than the ones produced under the assumption that the disturbances are Normal or Student's t.
Abstract: This paper proposes tests for comparing the accuracy of density forecasts. The evaluation makes use of scoring rules, which are loss functions defined over the density forecast and the realizations of the variable. In particular, a logarithmic scoring rule leads to the development of asymptotic and bootstrap 'weighted likelihood ratio' tests. I conclude with an application to S&P500 daily returns, comparing the performance of density forecasts obtained from GARCH models with different distributional assumptions.
Abstract: In this paper we compare the relative efficiency of different methods of forecasting the aggregate of spatially correlated variables. Small sample simulations confirm the asymptotic result that improved forecasting performance can be obtained by imposing a priori constraints on the amount of spatial correlation in the system. We also show that ignoring spatial correlation, even when it is weak, leads to highly inaccurate forecasts.
Abstract: In the transitional phase towards full economic integration, European countries have the possibility of re-shaping the continental geography of specialization. We use an Economic Geography model of industrial agglomeration to show how fiscal incentives can be critical in this phase. Differently from other work we concentrate on the role of indirect taxation, and sector specific state-aid, still important in the EU but little studied. While it is obvious that tax incentives could be used to attract some industries, it is not obvious that, in a general equilibrium analysis, such use of taxes is welfare improving. In the paper, we show that the optimal policy is to levy asymmetric taxes on the two sectors only during the phase of intermediate transport costs, when such a measure induces welfare improving agglomerations.
Abstract: We study investment in education in an overlapping generation model with altruism where credit market imperfections ration borrowing and cause persistent underinvestment in human capital. We characterize the optimal government policy and the policy that would emerge under majority voting in response to a technological change that raises the returns to education. The optimal government policy consists in a transfer of resources from future to current generations to finance investment in education and an increase in consumption for the current old generation. The policy chosen under majority voting accomplishes a generational transfer only if a majority of individuals are credit constrained. We consider two policy instruments: a labor income tax and an education subsidy. Current voters prefer a reduction in the current income tax rate to an education subsidy, as the former can finance an increase in their consumption.
Abstract: This paper tests empirically the strategic explanation of budget deficits suggested by Tabellini and Alesina and Persson and Svensson. Tabellini and Alesina suggest that governments with di erent political orientation provide different public goods. The model predicts that: a) public good provision follows a political pattern; b) the incumbent that anticipates her defeat at the next election runs budget deficits to tie the hands of the future government. Persson and Svensson suggest that liberal governments prefer more public good provision than conservative ones. The model predicts that: a) the conservative (liberal) incumbent that anticipates her defeat at the next election runs budget deficits (surpluses); b) budget imbalances have a political color. Using U.S. and pooled data for sixteen OECD countries, we find little evidence that the incumbent's probability of being voted out of office explains budget deficits, that the provision of public goods follows a political pattern or that budget imbalances have a political color.
Abstract: The history of international lending shows that countries default on external debt when their economies experience a downturn. This paper presents a theoretical model of international lending that is consistent with this evidence. In this model, output is stochastic, international capital markets are incomplete because borrowing can only occur via issuing bonds, and borrowers cannot com- mit to repay loans. Self-fulfilling and solvency debt crises arise when borrowers experience low output realizations; moreover, when lenders are atomistic, self- fulfilling crises may arise for debt levels that do not cause default when lenders are non-atomistic. Alternative reforms to eliminate liquidity crises are analyzed. An international lender of last resort can eliminate liquidity crises provided it implements full bailouts via purchasing debt at its market price.
Abstract: We study monetary and exchange-rate policies around successful and unsuccessful fiscal adjustments and find that successful adjustments are preceded by large nominal exchange rate depreciations, whereas unsuccessful adjustments are preceded by appreciations. Pre-adjustment depreciation is a significant and quantitatively important predictor of the success of adjustment. Our results are robust to the inclusion of other determinants of the success of adjustment and to the definition of the depreciation period, of the persistence of the adjustment, and of the exchange rate. Monetary policy does not affect the success of fiscal adjustments. This result is confirmed when the sample is divided into countries that follow a fixed exchange rate policy and those that do not: for both cases it is exchange rate depreciations that affect the likelihood of success. Our results suggest that the adoption of a single currency will make successful fiscal adjustments more difficult to attain within EMU.
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