Optimal Tariffs in Consistent Conjectural Variations Equilibrium

This paper analyzes the determination of the optimal tariff under the assumption of Consistent Conjectural Variations (CCV). A general characterization of the CCV equilibrium is given. We show that (i) there are, in general, a multiplicity of such equilibria, and (ii) under certain restrictions, the Cournot equilibrium, which is based on the assumption of no retaliation can also be a CCV equilibrium. By contrast, free trade is never a CCV equilibrium. Finally the CCV equilibrium is solved explicitly in a simple example.

Optimal Monetary Policy and Wage Indexation Under Alternative Disturbances and Information Structures

The interdependence between the optimal degree of wage indexation and optimal monetary policy is analyzed for a small open economy under a variety of assumptions regarding: (i) relative information available to private agents and the stabilization authority; (ii) the perceived nature of the disturbances impinging on the economy. The distinctions between: (a) unanticipated and anticipated disturbances, and (b) permanent and transitory disturbances, are emphasized. The extent to which stabilization is achieved is shown to depend upon the nature of the disturbances and the available information. The policy redundancy issue is emphasized, implying that optimal rules can frequently be specified in many equivalent ways.

Exchange Market Intervention Under Alternative Forms of Exogenous Disturbances

This paper analyzes exchange market intervention in a stochastic model of a small open economy. The distinction is made between disturbances which are unanticipated and anticipated on the one hand, and those that are perceived as being transitory or permanent, on the other. The paper demonstrates how the appropriate form of exchange market intervention is sensitive to these aspects of the disturbances. Of particular interest is the case of an unanticipated permanent disturbance, when output may be stabilized perfectly about its frictionless level by the use of a very simple class of intervention rules.The optimal rules in other cases are also discussed.

Wage Indexation and Exchange Market Intervention in a Small Open Economy

The analysis of this paper stresses the interdependence between wage indexation on the one hand, and exchange market intervention on the other,as tools of'macroeconomic stabilization policy in a small open economy subject to stochastic disturbances. It is shown how the choice of eitherpolicy instrument impinges on the effectiveness of the other. In particular,if the domestic money wage is fully indexed to some weighted average of the domestic and foreign price levels, then irrespective of what that chosen weight may be, exchange market intervention is rendered totally ineffective insofar as the stabilization of the real part of the domestic economy is concerned. Likewise, if the monetary authority intervenes in the exchange market so as to exactly accommodate for nominal movements in the demand for money, thereby rendering the excess demand for money dependent only upon real variables, then any form of wage indexation is totally ineffective for the stabilization of the real part of the system. In either polar case, the respective instrument can stabilize the domestic price level. Alternative combinations of policy for the stabilization for domestic and foreign disturbances are considered.

The Gains from Fiscal Cooperation in the Two Commodity Real Trade Model

This paper analyzes the gains from fiscal cooperation within the context of the standard two commodity real trade model. It shows how the adjustment in terms of trade is the critical factor in determining the effects of moving from a noncooperative equilibrium. In general, a noncooperative equilibrium leads to an overexpansion of government expenditure on the export good and an underexpansion on the import good, relative to a cooperative equilibrium. The specific example of a logarithmic economy is also considered. The paper discusses further the welfare effects resulting from the formation of a coalition among two countries.

Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model

This paper analyzes the effects of an increase in the monetary growth rate within a dynamic optimizing macroeconomic model. Both the short-run and long-run effects, and therefore the adjustments along the transitional path, depend critically upon the tax structure and the firm's corresponding optimal financial decisions. With all bond financing, the effects depend upon the extent to which interest payments are tax deductible for corporations. If this is sufficiently high, the effects of an increase in the monetary growth rate are generally expansionary. With low interest deductibility, or if the tax structure induces equity financing, the effects arc generally contractionary.

Short-Term and Long-Term Interest Rates in a Monetary Model of a Small Open Economy

This paper analyzes the effects of both anticipated and unanticipated monetary and fiscal disturbances, on the dynamic behavior of a monetary model of a small open economy. It focuses on the adjustment of the short-term and long-term interest rates and the divergence of their transitional paths, particularly in anticipation of these disturbances. The analysis demonstrates how anticipation of a future policy change can generate perverse short-run behavior. The essential reason for the divergence between the short and long rates is that the latter is dominated by long-term expectations, while the former is primarily determined by current influences.

Monetary and Fiscal Policy Under Perfect Foresight: A Symmetric Two Country Analysis

This paper analyzes the effects of anticipated and unanticipated domestic monetary and fiscal expansions on both the domestic and foreign economies. The analysis is based on symmetric behavior, which is not only not an unreasonable first approximation, but also offers significant analytical advantages. Specifically, it enables the dynamics of the system to be decoupled into (a) averages and (b) differences of relevant variables. Not only does this render the analysis tractable, but it also helps provide economic insight. One striking aspect is that the differences, but not the averages, respond to announcements. The consequences of this for the dynamic adjustments of the two economies to the various disturbances are discussed at length.

The Term Structure of Interest Rates and the Effects of Macroeconomic Policy

This paper analyzes the effects of monetary and fiscal policy shocks on the term structure of interest rates. The effects of temporary versus permanent, unanticipated versus anticipated, policy disturbances and the responses of long versus short, and real versus nominal, rates are contrasted. The main results are summarized in a series of propositions. Among them, the finding that an unanticipated permanent fiscal expansion impacts more on long-term rates, may help explain their observed excessive volatility. The effects of structural changes on the relative variances are also discussed, with the effect which operates through the impact on private speculative behavior being emphasized.

Tied Versus Untied Foreign Aid: Consequences for a Growing Economy

This paper contrasts the effects of tied and untied foreign aid programs on the welfare and macroeconomic performance of a small open economy. We show that the acceptance of tied aid inevitably obligates the recipient economy to undertake certain internal structural adjustments, and the flexibility it possesses to undertake these adjustments eventually determines the effectiveness of the aid program. The economic consequences of tied and untied aid programs, their relative merits from a welfare standpoint, and the transitional dynamics depend crucially upon several characteristics of the recipient economy that summarize this flexibility. These include: (i) the costs of installing public capital relative to private capital (intertemporal adjustment costs), (ii) the substitutability between factors of production (intratemporal adjustment costs), (iii) the flexibility of labor supply (work effort), (iv) the recipient's degree of access to the world financial markets (capital market imperfections), and (v) the recipient's opportunities for co-financing infrastructure projects by domestic resourcesForeign aid, International transfers, Economic growth, Public investment