Showing papers in "Economica in 1988"
TL;DR: Barr argues that the welfare state is necessary on grounds of efficiency as well as equity, and that its major efficiency role makes it relevant to the population at large, not just to the poor as mentioned in this paper.
Abstract: In this contribution to the debate on the public versus the private sector, Dr. Barr argues that the welfare state is necessary on grounds of efficiency as well as equity, and that its major efficiency role makes it relevant to the population at large, not just to the poor. This new edition takes account of the major reforms since 1987 in social security, the NHS and education, and explains the inability of the Thatcher-Reagan governments of the 1980s to roll back the frontiers of the welfare state.
612 citations
TL;DR: In this article, real dynamical macroeconomics models of real world macroeconomic models are presented. But the authors focus on real world economic models and do not consider the real world economy.
Abstract: Introduction References and Suggested Readings PART I REAL DYNAMIC MACROECONOMIC MODELS 1. Dynamic Programming A General Intertemporal Problem A Recursive Problem Bellman's Equations Nonstochastic Examples The Optimal Linear Regulator Problem Stochastic Control Problems Examples of Stochastic Control Problems The Stochastic Linear Optimal Regulator Problem Dynamic Programming and Lucas's Critique Dynamic Games and the Time Inconsistency Phenomenon Conclusions Exercises References and Suggested Readings 2. Search Nonnegative Random Variables Stigler's Model of Search Sequential Search for the Lowest Price Mean-Preserving Spreads Increases in Risk and the Reservation Price Intertemporal Job Search Waiting Times Firing Jovanovic's Matching Model Conclusions Exercises References and Suggested Readings 3. Asset Prices and Consumption Hall's Random Walk Theory of Consumption The Random Walk Theory of Stock Prices Lucas's Model of Asset Prices Mehra and Prescott's Finite-State Version of Lucas's Model Asset Pricing More Generally The Modigliani-Miller Theorem Government Debt and the Ricardian Proposition Remarks on Testing and Estimation Conclusions Exercises References and Suggested Readings PART II MONETARY ECONOMICS AND GOVERNMENT FINANCE 4. Currency in the Utility Function The Price of Inconvertible Government Currency in Lucas's Tree Model Issues and Models in Monetary Economics Government Debt in the Utility Function Government Currency in the Utility Function Seignorage and the Optimum Quantity of Currency A Neutrality Proposition Conclusions References and Suggested Readings 5. Cash-in-Advance Models A One-Country Model Fisher Equations Inflation-Indexed Government Debt Interactions of Monetary and Fiscal Policies Interest on Reserves A Two-Country Model Exchange Rate Indeterminacy Conclusions Exercises References and Suggested Readings 6. Credit and Currency with Long-Lived Agents The Physical Setup Optimal Allocations Competitive Equilibrium A Digression on the Balances of Trade and Payments The Ricardian Doctrine about Taxes and Government Debt The Model with Valued Currency and No Private Debt An Interventionist Optimal Monetary Equilibrium Townsend's \"Turnpike\" Interpretation Conclusions Exercises References and Suggested Readings 7. Credit and Currency with Overlapping Generations The Overlapping-Generations Model The Ricardian Doctrine about Taxes and Government Debt Again A Ricardian Proposition Currency, Bonds, and Open-Market Operations Computing Equilibria Interpretations as Currency Equilibria Optimality Four Examples on Inflation and Its Causes Seignorage and the Laffer Curve Dynamics of Seignorage Forced Saving International Exchange Rates Conclusions Exercises References and Suggested Readings 8. Government Finance in Stochastic Overlapping-Generations Models The Economy Some Examples A General Irrelevance Theorem Wallace's Modigliani-Miller Theorem for Open-Market Operations Chamley and Polemarchakis's Neutrality Theorem Interpretation as a Constant Fiscal Policy Indexed Government Bonds A Ricardian Proposition Further Irrelevance Theorems Conclusions Exercises References and Suggested Readings Appendix. Functional Analysis for Macroeconomics Metric Spaces and Operators First-Order Linear Difference Equations A Formula of Hansen and Sargent A Quadratic Optimization Problem in R A Discounted Quadratic Optimization Problem Predicting a Geometric Distributed Lead of a Stochastic Process Discounted Dynamic Programming A Search Problem Exercises References and Suggested Readings Index
564 citations
TL;DR: In this article, the main emphasis is on the Lagrange multiplier principle, which provides considerable unification, although several other approaches are also considered, including general checks for model adequacy that do not involve formulation of an alternative hypothesis.
Abstract: Misspecification tests play an important role in detecting unreliable and inadequate economic models. This book brings together many results from the growing literature in econometrics on misspecification testing. It provides theoretical analyses and convenient methods for application. The main emphasis is on the Lagrange multiplier principle, which provides considerable unification, although several other approaches are also considered. The author also examines general checks for model adequacy that do not involve formulation of an alternative hypothesis. General and specific tests are discussed in the context of multiple regression models, systems of simultaneous equations, and models with qualitative or limited dependent variables.
433 citations
TL;DR: This paper explored some anomalies in the foreign exchange market and found that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models.
Abstract: This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models. The interplay between speculation based on fundamentals, and on a random walk, or Chartist, approach, influences the outcome. This endorses the prior model of J. A. Frankel and K. A. Froot. Copyright 1988 by The London School of Economics and Political Science.
302 citations
TL;DR: In this article, a preliminary experimental study of the relative impact of regret and disappointment on individual choice under uncert ainty is followed up and extended in various ways, and the new results provide further evidence of the limitations of von Neumann-Morgenstern expected utility theory.
Abstract: A preliminary experimental study of the relative impact of regret and disappointment on individual choice under uncert ainty is followed up and extended in various ways. Taken in conjuncti on with the earlier work, the new results provide further evidence of the limitations of von Neumann-Morgenstern expected utility theory a nd indicate the potential power of the alternative models discussed. It is argued that there is sufficient weight of evidence to encourage further systematic investigation. Copyright 1988 by The London School of Economics and Political Science.
157 citations
TL;DR: In this paper, the authors describe the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the United Kingdom in the years 1961-85, based on a number of consumer surveys.
Abstract: This paper describes the construction and main features of a new monthly time series for the mean and standard deviation of consumer inflation expectations in the United Kingdom in the years 1961-85, based on a number of consumer surveys. This involves generalizing to four- and five-category tendency survey data the method used by J. A. Carlson and M. Parkin (1975) to quantify the results of a three-category tendency survey of inflation expectations. The new series exhibit very different time series properties from the original Carlson-Parkin data. Copyright 1988 by The London School of Economics and Political Science.
132 citations
TL;DR: In this paper, it is shown that a pure strategy perfect equilibrium in the two-stage location-price game exists only under very stringent conditions, which are in fact the conditions for profit to be concave in price for any given location pair.
Abstract: This paper considers a generalization of the Hotelling model of spatial competition. It is shown that a pure strategy perfect equilibrium in the two-stage location-price game exists only under very stringent conditions. These conditions are in fact the conditions for profit to be concave in price for any given location pair. When the solution concept is extended to allow for mixed strategies, there is no symmetric equilibrium involving pure strategies if transport costs are not sufficiently convex. The convexity of transport costs is crucial in determining whether there is excessive or insufficient diversity of products. Copyright 1988 by The London School of Economics and Political Science.
92 citations
TL;DR: In this article, an econometric model of trade union membership in the United Kingdom is presented, which utilizes cyclical variables in the explanation of membership changes, and separates the short and long-run dynamics explicitly.
Abstract: This paper presents an econometric model of trade-union membership in the United Kingdom. The empirical model utilizes cyclical variables in the explanation of membership changes, and separates the short- and long-run dynamics explicitly. It proves to be a superior specification to previous "business cycle" models estimated for the United Kingdom and predicts satisfatorily the recent decline in membership. The inclusion of a dummy variable reflecting the political complexion of the government is the only secular variable which significantly improves equation performance, but the composition of changes in employment plays no part in explaining the recent decline in membership. Copyright 1988 by The London School of Economics and Political Science.
90 citations
TL;DR: For example, this article examined the effect of deductibility of state and local taxes on the distribution of power and responsibilities among the various levels of government in the U.S. and found that deductibility affects the level and type of taxation.
Abstract: We often think of fiscal decisions as being made by a single government, but in the United States the reality is that an astounding number of entities have the power to tax and spend. State, local, and federal governments all play crucial roles in the U.S. fiscal system, and the interrelation has been the source of continuing controversy. This fact is the focus of the seven papers and commentaries presented in this volume, the result of a conference sponsored by the NBER. The contributors use various quantitative tools to study policy issues, obtaining results that will interest policymakers and researchers working in the areas of taxation and public finance. The first three papers study the distribution of power and responsibilities among the various levels of government. John Joseph Wallis and Wallace E. Oates look at the extend and evolution of decentralization in the state and local sector; Robert P. Inman examines the growth of federal grants and the structure of congressional decision making; and Jeffrey S. Zax investigates the effects of the number of government jurisdictions on aggregate local public debt and expenditures. The next three papers look at the deductibility of state and local taxes on federal tax returns. Using an econometric analysis, Douglas Holtz-Eakin and Harvey S. Rosen examine the effects of deductibility on revenue sources and level of expenditures. Lawrence B. Lindsey looks at how deductibility affects the level and type of taxation. George R. Zodrow uses a two-sector general equilibrium model to investigate revenue effects of deductibility. Finally, Charles R. Hulten and Robert M. Schwab analyze the problem of developing an accurate estimate of income for the state and local sector, finding that conventional accounting procedures have underestimated the income generated by a startling $100 billion.
TL;DR: In this paper, the authors examined the plant closing and exit strategies of firms operating in a declining industry using a dynamic, game-theoretic model and used the perfectness criterion to restrict the set of Nash equilibria.
Abstract: The plant closing and exit strategies of firms operating in a declining industry are examined. A dynamic, game-theoretic model is utilized. The perfectness criterion is used to restrict the set of Nash equilibria. There are two key equilibrium results. First, when firms have the same number of plants, high-cost plants close before lower-cost plants. Second, a larger firm (i.e., a firm operating more plants) begins closing plants before a smaller firm, as long as cost differences are not large. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: In this paper, the authors look at the role of international capital in the financing of trade and their dramatically increased role in the world economy in recent years, and examine the current economic theory and the policy implications of these changes.
Abstract: First published in 1988, this study of international capital movements looks at their historical role in the financing of trade and their dramatically increased role in the world economy in recent years. It examines the current economic theory and the policy implications of these changes. Beginning with an analysis of the balance of payments, the authors goes on to discuss international short-term and long-term capital movements, both historically and with reference to current events. A further chapter deals with financial deregulation and the progression during the last few years towards the integration of international capital markets. The author looks forward to two possible futures for international finance: a gradual federalisation of macro-economic behaviour on a world basis, or a move towards self-reliance and autarky. The book is based on the author's Marshall Lectures, given in the University of Cambridge. It will be of interest to those studying international and financial economies, graduate students and those involved in the formulation of policy.
TL;DR: A wide-ranging volume, written by leading economists in the field, contains detailed studies of the unemployment experience of most of the major developed economies, providing an invaluable guide to this global dilemma as mentioned in this paper.
Abstract: The rise in unemployment is one of the key world economic problems of our time. Its causes are complex, particularly since, although unemployment has risen in most countries, the size of the increase differs greatly. This wide-ranging volume, written by leading economists in the field, contains detailed studies of the unemployment experience of most of the major developed economies, providing an invaluable guide to this global dilemma.
TL;DR: In this paper, the authors present a model for a large econometric model of the UK economy, which is based on the MDM6 Bibliography Index of authors Index of subjects.
Abstract: List of tables List of figures Foreword Preface Conventions 1. Introduction Terry Barker Part I. The Model as a System: 2. Theory and method Terry Barker and William Peterson 3. The accounting framework and the data Terry Barker and Martin Weale 4. The complete model Terry Barker 5. Estimation William Peterson 6. Computer software for a large econometric model William Peterson Part II. Different Economic Sectors of the Model: 7. Consumers' expenditure Vani Borooah 8. Fixed investment William Peterson 9. Stockbuilding Michael Landesmann 10. Exports and imports Terry Barker 11. Employment William Peterson 12. The demand for energy William Peterson 13. Industrial prices and profits Martin Weale 14. Export and import prices Terry Barker 15. Incomes policy and earnings Tony Lawson 16. Social security benefits and personal income tax Don Sharpe 17. The company sector Andrew Goudie, Geoffrey Meeks and Martin Weale 18. Financial stocks and returns Martin Weale 19. Sterling exchange rate Andrew Snell Appendix List of variables in MDM6 Bibliography Index of authors Index of subjects.
TL;DR: Dornbusch as discussed by the authors presents a collection of essays addressing most if not all of the key current policy issues in open economy macroeconomics: the strong dollar, LDC debt problems, and deficit financing.
Abstract: This interesting and provocative collection of essays addresses most if not all of the key current policy issues in open economy macroeconomics: the strong dollar, LDC debt problems, and deficit financing. Although these three areas involve widely different policy problems, Dornbusch brings a common political economy perspective to bear on the issues, giving the essays a coherent perspective and revealing that more than ever, modern macroeconomics is useful as a framework for active policy. Professionals interested in the world economy and students of international finance will appreciate the author's strong analytical approach and the clear, cogent defense of his viewpoints.Three chapters in the book's first part, Exchange Rate Theory and the Overvalued Dollar, cover the rise in the dollar, equilibrium and disequilibrium exchange rates, and flexible exchange rates and interdependence. Those in the second part, The Debt Problems of Less Developed Countries, present three case studies in overborrowing, and discuss the world debt problem from 1980 to 1984 and beyond, and what we have learned from stabilization policy in developing countries. A concluding part, Europe's Problems of Growth and Budget Deficits, takes up public debt and fiscal responsibility, and sound currency and full employment.Rudiger Dornbusch is Ford International Professor of Economics at MIT. "Dollars, Debts, and Deficits" is based on three related lectures he gave in 1984 at the University of Leuven in the Gaston Eyskens Lecture Series. Dornbusch is the editor with Mario Henrique Simonsen of "Inflation, Debt, and Indexation," available in paperback from The MIT Press.
TL;DR: In this article, a modification to the theory of contestability is proposed, and the analysis of the costs of multiproduct firms may be more easily integrated with recent developments in industrial organization.
Abstract: Many claims have been made about the significance of the contribution of contestability theory to industrial organizat ion. This paper concludes that contestability theory leaves unanswere d questions about the identity of entrants and the source of their re sources. A modification to the theory is proposed. Rather than as a h indrance to potential entry, sunk costs are viewed as being of key si gnificance for the disciplining of oligopolists through potential ent ry. With the proposed modification, the analysis of the costs of mult iproduct firms may be more easily integrated with recent developments in industrial organization. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: In this paper, a model for an intra-EEC type of framework with due regard to such costs is constructed for a trade between the Republic of Ireland and Northern Ireland, and the model is supported by studies of trade between Northern Ireland and Ireland.
Abstract: Earlier models of smuggling involve indeterminate equilibria for individual firms, but they are deficient in their tr eatment of risk and/or transport costs. A model is constructed for an intra-EEC type of framework with due regard to such costs. Unique eq uilibria result. Smuggling of agricultural goods is an increasing-cos t industry, not because of implausible/unspecified externalities as i n some earlier papers, but because of increasing transport costs as t he extensive margin for smuggling is expanded. Predictions of the mod el are supported by studies of trade between the Republic of Ireland and Northern Ireland. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: A timely work which represents a major reappraisal of business cycle theory is as discussed by the authors, which revives, with the help of modern analytical techniques, an old theme of Keynesian macroeconomics, namely that market psychology may be a significant cause of economic fluctuations.
Abstract: A timely work which represents a major reappraisal of business cycle theory. It revives, with the help of modern analytical techniques, an old theme of Keynesian macroeconomics, namely that market psychology (i.e., volatile expectations) may be a significant cause of economic fluctuations. It is of interest not only to economists, but also to mathematicians and physicists.
TL;DR: In this article, the authors extend earlier work that examined the distortions in product quality created by a monopolist selling to consumers with different and unobservable tastes, and demonstrate that the monopolist may find it profitable to distort quality either at the low end or at the high end of a quality array.
Abstract: In this note, the authors extend earlier work that examined the distortions in product quality created by a monopolist selling to consumers with different and unobservable tastes. When consumers have differing absolute and marginal willingness to pay for quality, they demonstrate that the monopolist may find it profitable to distort quality either at the low end or at the high end of a quality array. This latter result has not previously been demonstrated. The authors also provide intuitive comparative statics and discuss policy implications. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: In this paper, the rationality of investment managers' expectations is tested using quantified survey data, including expectations of the annual percentage change in the U.K. FTA All Share and U.S. Standard and Poor's composite stock market indices.
Abstract: The rationality of investment managers' expectations is tested using quantified survey data. The variables examined include expectations of the annual percentage chan ge in the U.K. FTA All Share and U.S. Standard and Poor's composite s tock market indices, and the expected rates of U.K. price and wage in flation. Tests for the orthogonality of forecast errors to both small and large information sets known at the time of the forecast are car ried out, both with and without allowance for measurement errors in t he expectations series. The results decisively reject the rational ex pectations hypothesis as applied to investment managers' expectations . Copyright 1988 by The London School of Economics and Political Science.
TL;DR: In this article, the authors derived deterministic duration contracts of deterministic length as solutions to a moral hazard problem in a framework that extends E. Fama's (1980) single-period labor contracts model by introducing recontracting costs and long-term contracts.
Abstract: Contracts of deterministic duration are derived as solutions to a moral hazard problem in a framework that extends E. Fama's (1980) single-period labor contracts model by introducing recontracting costs and long-term contracts. A worker can be induced to put forth unobservable effort if he knows that his wages in future contracts will be related to his past overall productivity. As contract length is increased, the worker is more likely to shirk because the present value of future wage revisions associated with shirking is reduced. The optimal contract length minimizes the sum of explicit contracting costs and the costs of shirking. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: In this article, a game theoretic model of entry is presented, where a potential entrant into a given market is a currently producing firm, whose product is a substitute on the production side for the good being sold in the market.
Abstract: This paper presents a game theoretic model of entry. A potential entrant into a given market is postulated to be a currently produci ng firm, whose product is a substitute on the production side for the good being sold in the market. An entrant is capable of switching pr oduction between markets faster than firms in general can adjust thei r total outputs. To some extent, a market faced with entry as such wi ll resemble a contestable market, and limit pricing behavior will occ ur. Copyright 1988 by The London School of Economics and Political Science.
TL;DR: A necessary and sufficient condition for stability is derived for the mobile-capital Harris-Todaro model of rural-to-urban migration in developing countries when land is a scarce factor in agriculture as discussed by the authors.
Abstract: A necessary and sufficient condition for stability is derived for the mobile-capital Harris-Todaro model of rural-to-urban migration in developing countries when land is a scarce factor in agriculture. The stability condition when land is ignored--that the urban sector (comprising manufacturing industry and the urban unemployed) be more capital abundant--is no longer either necessary or sufficient for stability. Nevertheless this condition always enhances stability and it is sufficient (though not necessary) for stability in many circumstances (e.g. when land is separable in production from labour and capital). Intuitive explanations of these conditions are provided. (EXCERPT)
TL;DR: In this article, the authors derived the exact stability condition for the Harris-Todaro model with inter-sectoral capital mobility where land is explicitly included as a third scarce factor in agriculture.
Abstract: The present note derives the exact stability condition for the Harris-Todaro model with intersectoral capital mobility where land is explicitly included as a third scarce factor in agriculture. While the previous study by Neary states the difficulty of deriving a clear-cut result in such a case, this note demonstrates that if capital and land are never technologically substitutes in the agriculture production, Neary's condition that the urban sector is more capital abundant than the rural sector becomes a sufficient condition for local stability. In an important article in this Journal, Neary (1981) considered the stability of the Harris-Todaro model with intersectoral capital mobility. Among other things, Neary showed that, when relative commodity prices are fixed and capital and labour are subject to constant returns to scale in agriculture, an unspecialized equilibrium is dynamically stable if and only if the urban sector is capital-abundant relative to the rural sector. However, in the original work by Harris and Todaro (1970), the fixed availability of land is included in the agriculture production function. Hence, strictly speaking, the stability condition quoted above is not for the original Harris-Todaro model with intersectoral capital mobility. On this point, Neary concluded that the introduction of a third scarcefactor-land in agriculture greatly complicates the analysis, and makes it impossible to derive simple and clear-cut results. The present note argues that a definite result can be derived if the normality property of factors of production, which was utilized by Rader (1968) and Suzuki (1985), is assumed.