Ruling out multiplicity and indeterminacy: The role of heterogeneity

It is well known that economies of scale that are external to the individual decision makers can lead to self-fulfilling prophecies and the multiplicity or even indeterminacy of equilibrium. We argue that the importance of this source of multiplicity and indeterminacy is overstated in representative agent models, as they ignore the potential stabilizing effect of heterogeneity. We illustrate this point in a version of Matsuyama' s (1991) two-sector model with increasing returns to scale. Two main results are shown. First, sufficient homogeneity with respect to individual productivity leads to the instability and non-uniqueness of a given stationary state and the indeterminacy of equilibrium at that stationary state. Second, sufficient heterogeneity leads to the global saddle-path stability and the uniqueness of a given stationary state and the global uniqueness of equilibrium

Two Perspectives on Preferences and Structural Transformation

We ask what specification of preferences can account for the changes in the expenditure shares of broad sectors that are associated with the process of structural transformation in the U.S. since 1947. Following the tradition of the expenditure systems literature, we first calibrate utility function parameters using NIPA data on final consumption expenditure. We find that a Stone-Geary specification fits the data well. While useful, this exercise does not tell the researcher what utility function to use in a model that posits sectoral production functions in value added form. We therefore develop a method to calculate the value added components of consumption categories that are consistent with value added production functions, and use these data to calibrate a utility function over sectoral consumption value added. We find that a Leontief specification fits the data well. Interestingly, the two specifications display very different properties: for final consumption expenditure income effects are the dominant force behind changes in expenditure shares whereas for consumption value added relative price effects are dominant.

„A hiány” visszhangja Keleten és Nyugaton. (A recenziók tükrében)

Ismertetésünkkel annak bemutatására vállalkozunk, hogy miként fogadta a külföldi szakmai közvélemény Kornai János „A hiány” című művét. Ezt azért tartjuk fontosnak, mert a könyvben kifejtett elmélet véleményünk szerint alapvető jelentő­ ségű a szocialista gazdaság működésének megértése szempontjából. Tanulságos lehet, hogy a különböző beállítottságú szerzők milyen kérdésekre helyezik a hangsúlyt, hol látják az elméleti konstrukció erősségét vagy gyenge pontjait, és miként illesztik be „A hiány”-t a közgazdasági gondolatok fejlődési vonalába

Chapter 3: Banking Regulation

Section 3.2 of this chapter overviews the crisis and its regulatory failures. Section 3.3 deals with ongoing regulatory reform, while Section 3.4 analyses competition policy and its interaction with regulation. In Sections 3.5 and 3.6 we look at the reform of the European Union’s financial architecture and regulatory framework. The chapter then closes with some concluding remarks.

Chapter 2: The European Balance-of-Payments Problem

There are differing views on the causes of, and cures for, this crisis. At one end of the spectrum, some ultimately see it as a public debt crisis and advocate the strengthening of political constraints on government borrowing. Others primarily regard it as a confidence crisis, which should be addressed by setting up a very large rescue fund, i.e. by wielding a ‘big bazooka’. They count on the fact that, if the crisis is truly expectation-driven, the resources will never have to be used. This chapter begins by reconsidering these and other views, and later stresses the structural reasons for the crisis, particularly the loss of competitiveness on the part of some euro area countries and the resulting surge in private and public foreign indebtedness. The chapter closes with some policy conclusions and recommendations.

Authors: The Members of the European Economic Advisory Group at CESifo

Authors of the Report on the European Economy 2012

Recommendations for Europe

Chapter 2: The European Balance-of-Payments Problem: Introduce ‘euro-standard’ bills / Settle Target balances. Chapter 3: Banking Regulation: Promote European financial integration / Give national central banks a supervisory role / Redesign the euro area’s financial architecture. Chapter 4: Lessons from Sweden: Develop a culture of fiscal transparency and public debate / Frame budget decisions in the right way / Promote output growth to boost fiscal sustainability. Chapter 5: Lessons from Hungary: Decouple fiscal policy from election cycles / Set up independent fiscal watchdogs to ensure fair-play / Introduce stronger enforcement mechanisms. Chapter 6: Pricing Climate Change: Do not treat different renewable energy technologies inconsistently / Promote mitigation and introduce a common CO2-tax.

Chapter 6: Pricing Climate Change

Burning of fossil fuel is the main reason behind manmade climate change. By burning the carbon content, carbon dioxide is produced and quickly spreads in the global atmosphere. This increases the greenhouse effect, thereby changing the earth’s energy balance. Concern over the negative consequences of climate change has led to a vast array of policy measures aimed at reducing the use of fossil fuel. This chapter examines some aspects of these policies. It discusses the arguments for taxes and quantity restrictions on CO2-emitting activities, and especially on the burning of fossil fuel, as well as policies to subsidise substitutes for these activities, particularly the use and development of technologies producing non-fossil based “green energy”.