Thinking Beyond Credit

Credit is often seen as an indispensable vehicle for the poor to get out of poverty, or as the tool that allows farmers to get access to new technologies, to increase productivity and their incomes. But many existing credit programmes often undermine farmers’ independence, tie them into dependency relationships, and oblige them to take all the risk. There are better ways to help farmers build their own resource base and independenc

Fiscal Policy and Dutch Disease

In this paper we revisit the Dutch disease paying particular attention to the role of specific factors of production and capital stock dynamics. The main insight is that if the natural resource rich windfall is substantial but not large enough for the country to become a rentier, capital goods must be produced at home and adjustment to natural resource windfall takes time. It takes time to build this home-grown capital. Specific factors are crucial to explain the dynamic responses of the real exchange rate, capital intensities and wages in response to a natural resource windfall. If a country is small and the windfall is large, it may be able to import capital and migrant labour in which case the Dutch disease can be avoided.specific factors, real exchange rate, capital stock dynamics, factor intensity, international trade, Dutch disease, permanent income, fiscal policy rules, overlapping generations

Genuine Saving and the Voracity Effect

Many resource-rich countries have negative genuine saving rates, so deplete their exhaustible natural resource wealth faster than they build up wealth in other assets. This phenomenon is stronger in more fractionalized countries with poor legal systems. We explain this by a power struggle about the control of natural resources. Competing fractions in society thus have a private stock of financial assets and a common stock of natural resources. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. Resource depletion is faster than demanded by the Hotelling rule. As a result, the country has negative genuine saving rates and is running down its national wealth. The country saves more in financial assets than the current natural resource rents. Still, the erosion of natural wealth exceeds the accumulation of financial assets. Even though the power struggle boosts output, consumption is sub-optimally low. The highlighted political distortions are larger if the country is more fractionalized.Exhaustible natural resources, Hotelling resource rents, Hartwick rule, genuine saving, capital, sustainable consumption, rapacious rent seeking, common pool, voracity, fractionalization

Sustainable Social Spending and Stagnant Public Services: Baumol's Cost Disease Revisited

If demand for human services is inelastic or manufactured goods are necessities, labour shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labour supply is inelastic and there are few dependants. Otherwise, private affluence and public squalor result. More dependants boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. Extensions to market and public employment being imperfect substitutes, varying utility of money and public sector productivity depends on pay.Baumol's cost disease, Wagner's law, congestion, cost of public funds, dependency ratio

The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best

Democratic countries with substantial inequality and where people believe that success depends on connections and luck induce political support for high tax rates and generous welfare states. Traditional wisdom is that such policies harm the economy, but there is not much evidence that countries with a large welfare state and substantial redistribution have worse economic performance and welfare. One important reason is that governments have been careful to invoke the principles of reciprocity and mutual obligations in the design of the welfare state. Unemployment benefits conditioned on work experience, no misconduct and search effort harm the economy less. Indeed, conditional benefits may even boost employment in an economy with efficiency wages. A second reason is that people care about relative incomes and become unhappy if others earn and consume much more than they do. This explains why people do not seem to get happier, even though societies grow richer and richer. With such consumer rivalry the government wishes to correct for the rat race, even if there is no need for redistribution, by taxing labour. A third reason is that in modern economies many distortions are present and removing one at a time may worsen economic performance. Conversely, increasing tax progression in economies with non-competitive labour markets induces wage moderation and boosts employment. A final reason is that countries with large welfare states typically introduce various progrowth policies as well.mutual obligations, altruism, relative incomes, happiness, redistributive taxation, demand management, second best, design of welfare state

Back to Keynes?

After a brief review of classical, Keynesian, New Classical and New Keynesian theories of macroeconomic policy, we assess whether New Keynesian Economics captures the quintessential features stressed by J.M. Keynes. Particular attention is paid to Keynesian features omitted in New Keynesian workhorses such as the micro-founded Keynesian multiplier and the New Keynesian Phillips curve. These theories capture wage and price sluggishness and aggregate demand externalities by departing from a competitive framework and give a key role to expectations. The main deficiencies, however, are the inability to predict a pro-cyclical real wage in the face of demand shocks, the absence of inventories, credit constraints and bankruptcies in explaining the business cycle, and no effect of the nominal as well as the real interest rate on aggregate demand. Furthermore, they fail to allow for quantity rationing and to model unemployment as a catastrophic event. The macroeconomics based on the New Keynesian Phillips curve has quite a way to go before the quintessential Keynesian features are captured.Keynesian economics, New Keynesian Phillips curve, monopolistic competition, nominal wage rigidity, welfare, pro-cyclical real wage, inventories, liquidity, bankruptcy, unemployment, monetary policy

Risk aversion, intertemporal substitution and consumption: The CARA-LQ problem

Consumer Choice

Monetary interdependence under alternative exchange-rate regimes

EMS

Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights

For a country fractionalized in competing factions, each owning part of the stock of natural exhaustible resources, or with insecure property rights, we analyze how resources are transformed into productive capital to sustain consumption. We allow property rights to improve as the country transforms natural resources into capital. The ensuing power struggle about the control of resources is solved as a non-cooperative differential game. Prices of resources and depletion increase faster than suggested by the Hotelling rule, especially with many competing factions and less secure property rights. As a result, the country substitutes away from resources to capital too rapidly and invests more than predicted by the Hartwick rule. The power struggle boosts output but depresses aggregate consumption and welfare, especially in highly fractionalized countries with less secure property rights. The theory suggests that adjusted net saving estimates calculated by the World Bank using market prices over-estimate welfare-based measures of genuine saving.exhaustible resources, Hotelling rule, Hartwick rule, capital, sustainable consumption, fractionalization, seepage, insecure property rights, differential game, genuine saving, adjusted net saving

Budgetary aspects of economic and monetary integration in Europe

EEC;EMS