Source versus Residence. A comparison from a New Economic Geography perspective

Recently, issues of international taxation have also been analysed from a New Economic Geography perspective. These discussions show that agglomerative forces play a non negligible role. In the paper, we introduce explicitly taxation into a Footloose Capital Model and compare implications of taxation according to the residence principle and the source principle from a New Economic Geography perspective. We confirm that agglomerative effects change the results substantially compared to the standard analysis and that the two taxation principles have different implications for industry agglomeration. (author's abstract)Series: Discussion Papers SFB International Tax Coordinatio

Dynamic Effects of Regulation and Deregulation in Goods and Labour Markets

Modern macroeconomic models with a Keynesian flavour usually involve nominal rigidities in wages and goods prices. A typical model is static and combines wage bargaining in the labour markets and monopolistic competition in the goods markets. As central policy implication it follows that deregulating labour and/or goods markets increases equilibrium employment. We reassess the consequences of deregulation in a dynamic model. It still increases employment at the fixed point, which corresponds to the static equilibrium solution. However, deregulation may also lead to stability loss and endogenous fluctuations.Labour and goods markets deregulation, monopolistic competition, business cycles

A propos Brexit: on the breaking up of integration areas – an NEG analysis

Inspired by Brexit, the paper explores the effects of splitting an integration area or "Union" on trade Patterns and the spatial distribution of industry. A linear three-region New Economic Geography (NEG) model is developed and two possible situations before separation are considered: agglomeration and dispersion. By analogy with the Brexit options, soft and hard separation scenarios are considered. Firms in the leaving region may move to the larger Union market, even on the periphery, relocation substituting trade; or firms in the Union may move in the more isolated leaving region, escaping from competition. The paper also analyses deeper Union integration following separation. Instances of multistability and complex Dynamics are found

Productive Public Expenditure in a New Economic Geography Model

We assess whether and how differences in productive public expenditure impacts on industrial location. Since productive public expenditure and taxation affect in opposite direction industrial location, it is not straightforward that following an increase in productive public expenditure in a region, that region will necessarily enjoy stronger agglomeration. As a major contribution to the literature, we consider jointly two effects arising from public policy: the demand effect and the productivity effect. The interplay of these two effects determines the final impact on the spatial distribution of firms. The result is influenced by the proportion in which tax payers of the two regions contribute to the financing of public expenditure.economic geography; public expenditure, footloose capital

Economic integration and agglomeration in a customs union in the presence of an outside region

New Economic Geography (NEG) models do not typically account for the presence of regions other than the ones involved in the integration process. We explore such a possibility in a Footloose Entrepreneur (FE) model aiming at studying the stability properties of long-run industrial location equilibria. We consider a world economy composed by a customs union of two regions (regions 1 and 2) and an "outside region" which can be regarded as the rest of the world (region 3). The effects of economic integration on industrial agglomeration within the customs union are studied under the assumption of a constant distance between the customs union itself and the third region. The results show that higher economic integration does not always implies the standard result of full agglomeration of FE models. This incomplete agglomeration outcome is due to the fact that the periphery region keeps a share of industrial activities in order to satisfy a share of "external demand". That is, the deindustrialization process brought about by economic integration in the periphery of the union is mitigated by the demand of consumers living in the rest of the world. In general, the market size of the third region affects the number of the long-run equilibria, as well as their stability properties. In addition to the standard outcomes of FE models, we describe the existence of two asymmetric equilibria characterised by unequal distribution of firms between regions 1 and 2, with no full agglomeration though. Interestingly, these equilibria are stable and therefore can be regarded as a likely long-run equilibrium state of the economy. (author's abstract)Series: Department of Economics Working Paper Serie

Human Capital in a Credit Cycle Model

We augment a model of endogenous credit cycles by Matsuyama et al.(2016) with human capital to study the impact of human capital on the stability of central economic aggregates. Thus we offer a linkage between human capital formation and credit market instability on a macrolevel combined with an analysis of functional income distribution. Human capital is modelled as pure external effect of production following a learning-by-producing approach. Agents have access to two different investment projects, which differ substantially in their next generations spillover effects. Some generate pecuniary externalities and technological spillovers through human capital formation whereas others fail to do so and are subject to financial frictions. Due to this endogenous credit cycles occur and a pattern of boom and bust cycles can be observed. We explore the impact of human capital on the stability of the system by numerical simulations which indicate that human capital has an ambiguous effect on the evolution of the output. Depending on the strength of the financial friction and the output share of human capital it either amplifies or mitigates output fluctuations. This analysis shows that human capital is an essential factor for economic stability and sustainable growth as a high human capital share tends to make the system's stability robust against shocks.Series: Department of Economics Working Paper Serie

On the significance of borders

We propose a prototype model of market dynamics in which all functional relationships are linear. We take into account three borders, defined by linear functions, which are intrinsic to the economic reasoning: non-negativity of prices; downward rigidity of capacity (depreciation) and a capacity constraint for the production decision. Given the linear specification, the borders are the only source for the emerging of cyclical and more complex dynamics. In particular, we discuss centre bifurcations, border collision bifurcations and degenerate flip bifurcations - dynamic phenomena the occurrence of which are intimately related to the existence of borders.Series: Department of Economics Working Paper Serie

The impact of Brexit on trade patterns and industry location: a NEG analysis

We explore the effects of Brexit on trade patterns and on the spatial distribution of industry between the United Kingdom and the European Union and within the EU. Our study adopts a new economic geography (NEG) perspective developing a linear model with three regions, the UK and two separated regions composing the EU. The 3-region framework and linear demands allow for different trade patterns. Two possible ante-Brexit situations are possible, depending on the interplay between local market size, local competition and trade costs: industrial agglomeration or dispersion. Considering a soft and a hard Brexit scenario, the ante-Brexit situation is altered substantially, depending on which scenario prevails. UK firms could move to the larger EU market, even in the peripheral region, reacting to the higher trade barriers, relocation representing a substitute for trade. Alternatively, some EU firms could move in the more isolated UK market finding shelter from the competition inside the EU. We also consider the post-Brexit scenario of deeper EU integration, leading to a weakening of trade links between the EU and the UK. Our analysis also reveals a highly complex bifurcation sequence leading to many instances of multistability, intricate basins of attraction and cyclical and chaotic dynamics.Series: Department of Economics Working Paper Serie

Codimension-two border collision bifurcation in a two-class growth model with optimal saving and switch in behavior

We consider a two-class growth model with optimal saving and switch in behavior. The dynamics of this model is described by a two-dimensional (2D) discontinuous map. We obtain stability conditions of the border and interior fixed points (known as Solow and Pasinetti equilibria, respectively) and investigate bifurcation structures observed in the parameter space of this map, associated with its attracting cycles and chaotic attractors. In particular, we show that on the x-axis, which is invariant, the map is reduced to a 1D piecewise increasing discontinuous map, and prove the existence of a corresponding period adding bifurcation structure issuing from a codimension-two border collision bifurcation point. Then, we describe how this structure evolves when the related attracting cycles on the x-axis lose their transverse stability via a transcritical bifurcation and the corresponding interior cycles appear. In particular, we show that the observed bifurcation structure, being associated with the 2D discontinuous map, is characterized by multistability, that is impossible in the case of a standard period adding bifurcation structure