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Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty
Get PDFThis paper is a contribution to the growing literature on constrained inefficiencies in
economies with financial frictions. The purpose is to present two simple examples, inspired
by the stochastic models in Gersbach-Rochet (2012) and Lorenzoni (2008), of deterministic
environments in which such inefficiencies arise through credit constraints. Common to both
examples is a pecuniary externality, which operates through an asset price. In the second
example, a simple transfer between two groups of agents can bring about a Pareto
improvement. In a first best economy, there are no pecuniary externalities because marginal
productivities are equalised. But when agents face credit constraints, there is a wedge
between their marginal productivities and those of the non-credit-constrained agents. The
wedge is the source of the pecuniary externality: economies with these kinds of
imperfections in credit markets are not second-best efficient. This is akin to the constrained
inefficiency of an economy with incomplete markets, as in Geanakoplos and Polemarchakis
(1986)
FDI, Trade Costs and Regional Asymmetries
Get PDFWe set up a trade model where three countries compete for an exogenous
number of firms. Our innovation lies in the geography of the model. Of the three
countries, one is the hub through which all trade takes place. First, we establish
the natural geography of the region, which is given by the equilibrium
distribution of industrial activity in the absence of taxes or subsidies. We then
examine the implications for corporate taxes when the countries compete with
each other to attract firms. We find that, even when all countries are the same
size, the centrality of the hub gives it an advantage in tax setting, such that its
equilibrium tax can be larger than that of the spokes and yet it still attracts a
disproportionate share of industry. Thus geographic advantage in tax
competition has a second dimension, centrality in addition to size
Income stratification and between-group inequality
Get PDFThe paper demonstrates that the ratio of the Yitzhaki (1994) to the conventional measure of
between-group inequality is in general equal to one minus twice the weighted average
probability that a random member of a richer (on average) group is poorer than a random
member of a poorer (on average) group, and may therefore be interpreted as an index of
stratification in its own right
Institutions and prosperity
Get PDFThis article reviews ‘Pillars of Prosperity’ by Timothy Besley and Torsten Persson and ‘Why Nations Fail’ by Daron Acemoglu and James Robinson. Both books are focussed on the role of institutions in determining the wealth of nations and the review compares and contrasts the different approaches contained in the two texts. The review also attempts to locate the texts within the broader literature in development and political economics and to link them to other
recent work in these areas
Competition for FDI and profit shifting: On the effects of subsidies and tax breaks
Get PDFWe investigate competition for FDI within a region when a foreign multinational
rm can profitably exploit differences in statutory corporate tax rates by shifting
taxable pro ts to lower-tax jurisdictions. In such framework we show that targeted
tax competition may lead to higher welfare for the region as a whole than lump-sum
subsidies when the difference in statutory corporate tax rates and/or their average
is high enough. Tax competition is also preferable from an efficiency point of view
(overall surplus) by changing the firm's investment decision when pro t shifting
motivations induce the rm to locate in the (before tax) least pro table country
Arch and Structural Breaks in United States Inflation
Get PDFUnited States Phillips curves are routinely estimated without accounting for
the shifts in mean inflation. As a result we may expect the standard estimates
of Phillips curves to be biased and suffer from ARCH. We demonstrate this
is indeed the case. We also demonstrate that once the shifts in mean inflation
are accounted for the ARCH is largely eliminated in the estimated model and
the model defining expected rate of inflation in the New Keynesian model
plays no significant role in the dynamics of inflation
No Good Deals - No Bad Models
Get PDFFaced with the problem of pricing complex contingent claims, an investor seeks to
make his valuations robust to model uncertainty. We construct a notion of a model-
uncertainty-induced utility function and show that model uncertainty increases the
investor's eff ective risk aversion. Using the model-uncertainty-induced utility function, we extend the \No Good Deals" methodology of Cochrane and Sa a-Requejo [2000] to compute lower and upper good deal bounds in the presence of model uncertainty. We illustrate the methodology using some numerical examples
Lock-in, path dependence, and the Internationalization of QWERTY
Get PDFThis paper looks at the emergence of what is described here as the QWERTY family of standards (QWERTY and its international adaptations QZERTY, AZERTY, and QWERTZ). QWERTY has been described as an inferior solution and an accident of history. However, the analysis here finds that each member of the family represented highly efficient adaptations to specific user needs and technical challenges encountered in their own
environments. These findings may be seen to have wider implications given QWERTY’s role as paradigm case in the literature on increasing returns and path dependence, and these are pursued in the pape
Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime
Get PDFThis paper investigates the conduct of monetary and fiscal policy
in the post-ERM period in the UK. Using a simple DSGE New Keynesian
model of non-cooperative monetary and fiscal policy interactions
under fiscal intra-period leadership, we demonstrate that the past policy
in the UK is better explained by optimal policy under discretion
than under commitment. We estimate policy objectives of both policy
makers. We demonstrate that fiscal policy plays an important role in
identifying the monetary policy regime
Monetary Policy Delegation and Equilibrium Coordination
Get PDFThis paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed
limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises
and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely