A Nash Threat Game of Passing Through Exchange Rate Mechanism II

Following entrance into the European Union, Central Eastern European Countries (CEECs) are expected to join the European Monetary Union (EMU). These countries may incur considerable costs over the course of their passing through the required Exchange Rate Mechanism II (ERM-II). However, with enough bargaining leverage CEECs may be able to pass some of these costs on to current EMU-members. In turn, a CEECs leverage depends on their ability to wield successful brinkmanship via an exchange-rate policy characterized by a threaten-thy-neighbor strategy. A two-stage Nash-threat game captures the essentials of the CEECs phase of ERM-II pass through

Managerial delegation in a dynamic renewable resource oligopoly

I propose a differential oligopoly game of resource extraction under (quasi-static) open-loop and nonlinear feedback strategies, where firms are managerial and two alternative types of delegation contract are considered. Under open-loop information, delegation expands the residual steady state resource stock. Conversely, under nonlinear feedback information the outcome depends on the structure of managerial incentives. If sales are used, once again delegation favours resource preservation. On the contrary, if market shares are included in the delegation contract, this combines with an underlying voracity effect in shrinking the steady state volume of the resource

Procyclicality or Reverse Causality?

There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear

Capital Account Policies, IMF Programs and Growth in Developing Regions

This paper develops an adaptive learning model under uncertainty that examines evolution of capital account polices over time and across developing regions. In the framework, countries' past experiences and IMF programs influence policymakers' beliefs about the impact of capital account liberalization on growth, under the 'Mundell's trilemma constraint. The model, calibrated to data for Africa, Latin America and developing Asia, reflects relatively well capital account policies adopted in 1980-2010. It shows that even more developed countries with liberalized capital accounts may revert to controls under large output shocks. The outcomes of capital account switches are better and closer to policymakers' expectations in countries with the IMF programs, underscoring the role of complementarity of policies

Instability of Democracy as Resource Curse

We suggest a dynamic game theoretic model to explain why resource abundance may lead to instability of democracy. Stationary Markov perfect equilibria of this game with four players – Politician, Oligarch, Autocrat and Public (voters) – are analyzed. Choosing a rate of resource rent tax, potential Autocrat competes with conventional Politician for the office, and Oligarch, the owner of the resource wealth, bribes Politician to influence her decisions. Actual Autocrat's tax policy may be different from the announced one. If the difference is large, then Public may revolt or Oligarch may organize a coup to throw Autocrat down. It is shown that the probability of democracy preservation is decreasing in the amount of resources if the institutional quality is low enough. It does not depend on the amount of resources, if the institutional quality is higher than a threshold. The level of the threshold, however, depends positively on the resource wealth. We have found also that under very low institutional quality, a paradoxical effect takes place: the probability of democracy preservation may decrease with small improvements of institutional quality. It is shown as well that Oligarch earns larger part of rent under democracy than under autocracy. This result conforms to empirical observation which is demonstrated in the paper: under low quality of institutions, democratization leads to higher inequality and inequality entails worsening of the attitude to democracy

Spatial resource wars: A two region example

We develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two-location setup. In order to contrast the overexploitation of the resource (the tragedy of commons) that occurs when the player are free to choose where to fish/hunt/extract/harvest, the regulator can establish a series of spatially structured policies. We compare the three situations in which the regulator: (a) leaves the player free to choose where to harvest; (b) establishes a natural reserve where nobody is allowed to harvest; (c) assigns to each player a specific exclusive location to hunt. We show that when preference parameters dictate a low harvesting intensity, the policies cannot mitigate the overexploitation and in addition they worsen the utilities of the players. Conversely, in a context of harsher harvesting intensity, the intervention can help to safeguard the resource, preventing the extinction and also improving the welfare of both players