Econometric Analysis of Fiscal Policy Budget Constraints in Endogenous Growth Models

Kneller et al. (1999) examined the predictions of the public-policy endogenous growth models of Barro (1990) and others that suggest that unlike distortionary taxation and productive expenditures, nondistortionary taxation and nonproductive expenditures have no direct effect on the rate of growth. This paper provides an econometric theory with their empirical methodology and applies to work by Kneller et al. (1999) as a numerical example to show how the econometric theory works in practice. This paper also confirms from the viewpoint of econometric analysis that their study supports the Barro (1990)'s predictions.Fiscal budget constraint; multicollinearity; omitted variables, econometrics

Endogenous debt constraints in collateralized economies with default penalties

In infinite horizon financial markets economies, competitive equilibria fail to exist if one does not impose restrictions on agents' trades that rule out Ponzi schemes. When there is limited commitment and collateral repossession is the unique default punishment, Araujo, Páscoa and Torres-Martínez (2002) proved that Ponzi schemes are ruled out without imposing any exogenous/endogenous debt constraints on agents' trades. Recently Páscoa and Seghir (2009) have shown that this positive result is not robust to the presence of additional default punishments. They provide several examples showing that, in the absence of debt constraints, harsh default penalties may induce agents to run Ponzi schemes that jeopardize equilibrium existence.The objective of this paper is to close a theoretical gap in the literature by identifying endogenous borrowing constraints that rule out Ponzi schemes and ensure existence of equilibria in a model with limitedcommitment and (possible) default. We appropriately modify the definition of finitely effective debt constraints, introduced by Levine and Zame (1996) (see also Levine and Zame (2002)), to encompass models with limited commitment, default penalties and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002), Kubler and Schmedders (2003) and Páscoa and Seghir (2009) the concept of actions with finite equivalent payoffs. We show that, independently of the level of default penalties, restricting plans to have finite equivalent payoffs rules out Ponzi schemes and guarantees the existence of an equilibrium that is compatible with the minimal ability to borrow and lend that we expect in our model.An interesting feature of our debt constraints is that they give rise to budget sets that coincide with the standard budget sets of economies having a collateral structure but no penalties (as defined in Araujo,Páscoa and Torres-Martínez (2002)). This illustrates the hidden relation between finitely effective debt constraints and collateral requirements.

Sustainable Public Debt, Credit Constraints, and Social Welfare

Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth

Stable sunspot equilibria in a cash-in-advance economy

We analyze a monetary model with flexible labor supply, cash-inadvance constraints and seigniorage-financed government deficits. If the intertemporal elasticity of substitution of labor is greater than one, there are two steady states, one determinate and the other indeterminate. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases can in many cases eliminate the sunspot equilibria while raising consumption/labor taxes even enough to balance the budget may fail to achieve determinacy.Indeterminacy, learnability, expectational stability, endogenous fluctuations, seigniorage

Fiscal policy and growth with complementarities and constraints on government

This paper considers the implications of complementarity in private production and constraints on government for optimal fiscal policy. Using an endogenous growth model with public finance, it derives three central results which modify findings in the literature under standard assumptions. First, it shows that optimal public spending composition and taxation are interrelated so that first- and second-best fiscal policies differ. Second, it shows that the growth-maximizing fiscal policy is affected by preference parameters. Third, it shows that with budget rigidities and informational limitations, knowledge about the optimal fiscal policy parameter values is not necessary for growth-enhancing fiscal policy adjustments. --Imperfect Knowledge,Economic Growth,Productive Public Spending,Optimal Fiscal Policy

Auction with aftermarket for budget constrained bidders

The paper compares different auction formats for sale of a single patented innovation for budget constrained bidders. This unit decreases the marginal cost of production in the aftermarket for its owner by an amount which depends on the money invested on the development of this technology. As the bidders have a fixed budget that must be used to pay the final auction price and also to develop the new technology, the winner has incentives to pay a low amount for his unit to increase the amount available to invest in cost reduction. Conversely the loser has incentives to induce induce a higher price to be paid by the winner in order to increase aftermarket profits. This conflict of interest generates the willingness to pay (WTP) for the patent through an endogenous process, which may end up by stablishing a higher WTP for the lowest financed firm. Given this background, the case in which the players have different initial budgets may generate multiple equilibria for all studied auction mechanisms. These equilibria produce di¤erent consumer surplus and, thus, a central government with an unti-trust behavior is able to choose the auction that generates the re�ned equilibrium leading to the highest consumer surplus.Market design; auction; aftermarket; budget constraints; investment

The Soft Budget Constraint : A Theoretical Clarification

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.soft and hard budget constraints, rationality postulate, optimization

The Soft Budget Constraint: A Theoretical Clarification

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.soft and hard budget constraints, Say's Principle, Walras's Law

Competition, restructuring and firm performance: evidence of an inverted-U relationship from a cross-country survey of firms in transition economies

This paper examines the importance of competition in the growth anddevelopment of firms. We draw on a survey of 3,300 firms in 25transition countries to shed light on the factors that influencerestructuring by firms and their subsequent performance. These datahave three main advantages over those used in previous work. First,they measure directly the degree of competition perceived by each firmin its principal market rather than attempting to infer this from marketdata as measured by statistical agencies. Second, the fact that transitioncountries have market structures inherited from the past avoids some ofthe endogeneity problems associated with measures of competition inmarket economies. Third, the breadth of cross-country variationprovides a method of dealing with the fact that firm-level measures ofthe external environment will not be independent of the firm?s ownperformance. We find evidence of a robust inverted-U effect ofcompetition on performance that is both statistically and economicallysignificant. This paper examines the importance of competition in the growth anddevelopment of firms. We draw on a survey of 3,300 firms in 25transition countries to shed light on the factors that influencerestructuring by firms and their subsequent performance. These datahave three main advantages over those used in previous work. First,they measure directly the degree of competition perceived by each firmin its principal market rather than attempting to infer this from marketdata as measured by statistical agencies. Second, the fact that transitioncountries have market structures inherited from the past avoids some ofthe endogeneity problems associated with measures of competition inmarket economies. Third, the breadth of cross-country variationprovides a method of dealing with the fact that firm-level measures ofthe external environment will not be independent of the firm?s ownperformance. We find evidence of a robust inverted-U effect ofcompetition on performance that is both statistically and economicallysignificant

"Policy Scepticism" and the Impact of Welsh Higher Education Institutions (HEIs) on their Host Region : Accounting for Regional Budget Constraints

This paper replicates the analysis of Scottish HEIs in Hermannsson et al (2010b) for the case of Wales in order to provide a self-contained analysis that is readily accessible by those whose primary concern is with the regional impacts of Welsh HEIs. A "policy scepticism" has emerged that challenges the results of conventional regional HEI impact analyses. This denial of the importance of the expenditure impacts of HEIs appears to be based on a belief in either a binding regional resource constraint or a regional public sector budget constraint. In this paper we provide a systematic critique of this policy scepticism. However, while rejecting the extreme form of policy scepticism, we argue that it is crucial to recognise the importance of the publicsector expenditure constraints that are binding under devolution. We show how conventional impact analyses can be augmented to accommodate regional public sector budget constraints. While our results suggest that conventional impact studies overestimate the expenditure impacts of HEIs, they also demonstrate that the policy scepticism that treats these expenditure effects as irrelevant neglects some key aspects of HEIs, in particular their export intensity