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Discretionary Policy in a Monetary Union with Sovereign Debt
Get PDFThis paper examines the interactions between multiple national fiscal policy-
makers and a single monetary policy maker in response to shocks to government debt in some or all of the countries of a monetary union. We assume that
national governments respond to excess debt in an optimal manner, but that
they do not have access to a commitment technology. This implies that national
fi scal policy gradually reduces debt: the lack of a commitment technology precludes a random walk in steady state debt, but the need to maintain national
competitiveness avoids excessively rapid debt reduction. If the central bank can
commit, it adjusts its policies only slightly in response to higher debt, allowing
national fiscal policy to undertake most of the adjustment. However if it cannot
commit, then optimal monetary policy involves using interest rates to rapidly
reduce debt, with signifi cant welfare costs. We show that in these circumstances
the central bank would do better to ignore national fiscal policies in formulating
its policy
An HEI-Disaggregated Input-Output Table for Northern-Ireland
Get PDFThis paper describes how the education sector of an Input-Output table for Northern Ireland is disaggregated to identify a separate sector for each of the four Northern Irish Higher Education
Institutions (HEIs). The process draws on accounting and survey data to accurately determine the incomes and expenditures of each institution. In particular we emphasise determining the HEIs incomes source of origin to inform their treatment, as endogenous or exogenous, in subsequent analyses. The HEI-disaggregated Input-Output table provides a useful descriptive
snapshot of the Northern Irish economy and the role of HEIs within it for a particular year, 2006.
The table can be used to derive multipliers and conduct various impact studies of each
institution or the sector as a whole. The table is furthermore useful to calibrate other multisectoral, HEI-disaggregated models of regional economies, including Social Accounting Matrix
(SAM) and computable general equilibrium (CGE) models
Non-cooperative incentives to share knowledge in competitive environments
Get PDFIn this paper we study a model where non-cooperative agents may exchange knowledge in a competitive environment. As a potential factor that could induce the knowledge disclosure between
humans we consider the timing of the moves of players. We develop a simple model of a multistage game in which there are only
three players and competition takes place only within two stages.
Players can share their private knowledge with their opponents and the knowledge is modelled as in uencing their marginal cost
of e¤ort. We identify two main mechanisms that work towards knowledge disclosure. One of them is that before the actual competition starts, the stronger player of the rst stage of a game may have desire to share his knowledge with the "observer", be-
cause this reduces the valuation of the prize of the weaker player
of that stage and as a result his e¤ort level and probability of winning in a ght. Another mechanism is that the "observer"
may have sometimes desire to share knowledge with the weaker player of the rst stage, because in this way, by increasing his
probability of winning in that stage, he decreases the probability of winning of the stronger player. As a result, in the second
stage the "observer" may have greater chances to meet the weaker
player rather than the stronger one.
Keywords: knowledge sharing, strategic knowledge disclosure, multistage contest game, non-cooperative game
Competitive Altruism, Mentalizing and Signalling
Get PDFThe human tendency to cooperate with nonkin even in short-run relationships remains
a puzzle. Recently it has been hypothesized that altruism may be a byproduct
of “mentalizing”, the process of understanding and predicting the mental states of
others. Another idea is based on sexual selection: altruism is a costly signal of good
genes. The paper shows that these two arguments are stronger when combined in
that altruists who can mentalize have a greater advantage over non-altruists when
they can signal their type, even though these signals are costly. Further, once such
an equilibrium is established, altruists will not be supplanted by mutants who have
similar mentalizing abilities but who lack altruism
Subsidies as Optimal Fiscal Stimuli
Get PDFIn the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the potential aggregate demand
externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘taxand-
spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with
imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. We also show that, within a two-country
setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between trading partners in setting these rates is more expansionary and
leads to an improvement upon the non-cooperative solution
Minu, Startu and all that:- Pitfalls in estimating the sensitivity of a worker’s wage to aggregate unemployment
Get PDFIn this paper we show that the inclusion of unemployment-tenure interaction variates
in Mincer wage equations is subject to serious pitfalls. These variates were designed to test whether or not the sensitivity to the business cycle of a worker’s wage varies according to her tenure. We show that three canonical variates used in the literature
- the minimum unemployment rate during a worker’s time at the firm(min u), the unemployment rate at the start of her tenure(Su) and the current unemployment rate
interacted with a new hire dummy(δu) - can all be significant and "correctly" signed
even when each worker in the firm receives the same wage, regardless of tenure (equal
treatment). In matched data the problem can be resolved by the inclusion in the panel
of firm-year interaction dummies. In unmatched data where this is not possible, we
propose a solution for min u and Su based on Solon, Barsky and Parker’s(1994) two
step method. This method is sub-optimal because it ignores a large amount of cross
tenure variation in average wages and is only valid when the scaled covariances of firm wages and firm employment are acyclical. Unfortunately δu cannot be identified in unmatched data because a differential wage response to unemployment of new hires and incumbents will appear under both equal treatment and unequal treatment
The Significance of Identifying Industrial clusters The Case of Scotland
Get PDFIndustrial clustering policy is now an integral part of economic development
planning in most advanced economies. However, there have been concerns in
some quarters over the ability of an industrial cluster-based development strategy
to deliver its promised economic benefits and this has been increasingly been
blamed on the failure by governments to identify industrial clusters. In a study
published in 2001, the DTI identified clusters across the UK based on the
comparative scale and significance of industrial sectors. The study identified
thirteen industrial clusters in Scotland. However the clusters identified are not a
homogeneous set and they seem to vary in terms of their geographic
concentration within Scotland. This paper examines the spatial distribution of
industries within Scotland, thereby identifying more localised clusters. The study
follows as closely as possible the DTI methodology which was used to identify
such concentrations of economic activity with particular attention directed towards
the thirteen clusters identified by the DTI. The paper concludes with some remarks
of the general problem of identifying the existence of industrial clusters
Exclusive Nightclubs and Lonely Hearts Columns: Nonmonotone Participation in Optional Intermediation
Get PDFIn many decentralised markets, the traders who benefit most from an exchange
do not employ intermediaries even though they could easily afford them.
At the same time, employing intermediaries is not worthwhile for traders who
benefit little from trade. Together, these decisions amount to non-monotone
participation choices in intermediation: only traders of middle “type” employ
intermediaries, while the rest, the high and the low types, prefer to search for
a trading partner directly. We provide a theoretical foundation for this, hitherto
unexplained, phenomenon. We build a dynamic matching model, where
a trader’s equilibrium bargaining share is a convex increasing function of her
type. We also show that this is indeed a necessary condition for the existence
of non-monotone equilibria
Optimism and commitment: An elementary theory of bargaining and war
Get PDFWe propose an elementary theory of wars fought by fully rational contenders.
Two parties play a Markov game that combines stages of bargaining with stages
where one side has the ability to impose surrender on the other. Under uncertainty
and incomplete information, in the unique equilibrium of the game, long
confrontations occur: war arises when reality disappoints initial (rational) optimism,
and it persist longer when both agents are optimists but reality proves
both wrong. Bargaining proposals that are rejected initially might eventually
be accepted after several periods of confrontation. We provide an explicit computation
of the equilibrium, evaluating the probability of war, and its expected
losses as a function of i) the costs of confrontation, ii) the asymmetry of the
split imposed under surrender, and iii) the strengths of contenders at attack
and defense. Changes in these parameters display non-monotonic effects
Investment and financing constraints in China: does working capital management make a difference?
Get PDFWe use a panel of over 120,000 Chinese firms of different ownership types over the period
2000-2007 to analyze the linkages between investment in fixed and working capital and
financing constraints. We find that those firms characterized by high working capital display high sensitivities of investment in working capital to cash flow (WKS) and low sensitivities of investment in fixed capital to cash flow (FKS). We then construct and analyze firm-level FKS and WKS measures and find that, despite severe external financing constraints, those firms with low FKS and high WKS exhibit the highest fixed investment rates. This suggests that
good working capital management may help firms to alleviate the effects of financing
constraints on fixed investment