On Optimal Monetary Policy in a Liquidity Effect Model

This paper examines the implications of introducing a variable rate of time preference on the role of monetary policy in a dynamic general equilibrium framework explicitly designed to capture liquidity effects. Variable time preference is incorporated by allowing the discount factor applied to future utility to be decreasing in contemporaneous utility. The model is a more general one, in the sense that the fixed discount factor economy is nested as a special case. Numerical simulations of the more general model indicate that for a range of parameters optimal monetary policy can be qualitatively different. This is in spite of the fact that there are very small quantitative differences in the magnitude of monetary non-neutralities, such as liquidity effects, in the fixed and flexible discount factor environments. Furthermore, within this range, monetary policy is less activist, in the sense that it is procyclical to productivity shocks, as opposed to being countercyclical as in the fixed time preference model.

A Further Exploration of Some Computational Issues in Equilibrium Business Cycle Theory

This paper revisits some of the issues involved in the comparison of alternative computational procedures within the context of a dynamic stochastic general equilibrium model. The framework in question is a more general one, in which a “standard” or relatively simple model is nested as a special case. Results of numerical experiments suggest that different computational methods may be used interchangeably in the case of the standard model, but not in the case of the more general model. Varying a preference parameter allows us to compare what happens to solutions using alternative procedures as one moves away from the special case to the more general framework. On the basis of the numerical experiments conducted, we find that not only do differences in solutions become larger, but answers to several economic issues of interest can yield qualitatively different answers depending on the solution method used. Examples of such issues include how second moment features change as one varies the parameters of a model, and the relative contribution of different types of stochastic shocks to fluctuations in variables.

Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy

This paper examines the role of monetary policy in the presence of endogenous time preference. The framework in which this issue is addressed is a monetary model with cash-in-advance constraints and an additional trading friction that is typical of the class of “liquidity models†of the monetary business cycle. We find that the nature of the optimal policy designed to remove these distortions gets modified in the presence of endogenous utility discounting. Consequently the role of monetary policy is significantly altered. Specifically, for a range of parameters that is plausible from an empirical point of view, monetary policy is likely to be less activist relative to the model with a fixed rate of time preferenceoptimal monetary policy, liquidity effects

Tax Distortions in a Neoclassical Monetary Economy in the Presence of Administration Costs

This paper uses the neoclassical growth model to evaluate the size of distortions associated with different monetary and fiscal policies designed to finance government expenditures in the presence of administration costs. The model is calibrated to match important features of U.S. data, and used to evaluate welfare costs of monetary and fiscal policies. We find that the presence of administration costs increases the welfare costs of government policies involving different combinations of taxes on capital and labour income, consumption and money holdings. In addition, the welfare implications of tax reforms designed to replace the taxes on labor or capital income with less distorting forms of taxation are altered. Another implication of the results is that in economies with larger costs of administration, revenue replacement through seigniorage would be a more attractive option than other feasible forms of taxation.

Cooperation v/s Non-cooperation in R&D Competition with Spillovers

This paper seeks to analyse a case in which firms choose to divide their R&D expenditures into two components: competitive R&D and Joint-Venture R&D. The analysis is motivated by the fact that R&D outputs can have different degrees of non-excludability. It is therefore reasonable to expect that a firm will allocate a part of its funds to competitive R&D; this is the case in areas in which research is non-excludable to a smaller degree, and part of it to Joint-Venture R&D, in cases where R&D output is highly non-excludable. This issue is addressed in a three-stage model of a duopoly, in which joint-venture R&D and competitive R&D are chosen in the first and second stages while the quantity of the product is chosen in the third stage. The results confirm that allocation of expenditure to the joint-venture component increases as the spillover rate on the competitive component increases. Furthermore, if firms are able to coordinate their joint-venture R&D levels, there is greater incentive to increase this allocation. However, for these results to obtain, it is crucial that the two types of R&D are chosen sequentially; a simultaneous choice would lead to a corner solution in which only competitive R&D is chosen.

Public and Private Expenditures on Health in the Presence of Inequality and Endogenous Mortality: A Political Economy Perspective

In this paper we study an overlapping-generations model in which agents� mortality risks, and consequently impatience, are endogenously determined by private and public investment in health care. The proportion of revenues allocated for public health care is also endogenous, determined as the outcome of a voting process. Higher substitutability between public and private health is associated with a �crowding-out� effect which leads to lower public expenditures on health care in the political equilibrium. This in turn impacts on mortality risks and impatience leading to a greater persistence in inequality and long run distributions of wealth that are bimodal.health; inequality; political economy; income distribution dynamics

On inequality and the allocation of public spending

Empirical evidence on the link between inequality and redistribution mechanisms is inconclusive, and depends on the nature of the mechanism in question. We present a series of political economy models, and the associated results may be interpreted as being consistent with these facts. Specifically, we demonstrate that the link between inequality and redistribution depends on the nature of the mechanism relative to the alternatives that are available. Our analysis suggests that, in the presence of higher inequality, a median voter faced with the choice of the proportion of expenditure between two mechanisms is likely to choose in favour of public goods that are more efficient mechanisms of redistribution. In some cases, inequality does not matter and the proportion of spending on any particular public good is related only to the preference and technology related parameters of the model.

Concerning Technology Adoption and Inequality

Empirical evidence suggests that there has been a divergence over time in income distributions across countries and within countries. Furthermore, developing economies show a great deal of diversity in their growth patterns during the process of economic development. For example, some of these countries converge rapidly on the leaders, while others stagnate, or even experience reversals and declines in their growth processes. In this paper we study a simple dynamic general equilibrium model with household specific costs of technology adoption which is consistent with these stylized facts. In our model, growth is endogenous, and there are two-period lived overlapping generations of agents, assumed to be heterogeneous in their initial holdings of wealth and capital. We find that in a special case of our model, with costs associated with the adoption of more productive technologies fixed across households, inequalities in wealth and income may increase over time, tending to delay the convergence in international income differences. The model is also capable of explaining some of the observed diversity in the growth pattern of transitional economies. According to the model, this diversity may be the result of variability in adoption costs over time, or the relative position of a transitional economy in the world income distribution. In the more general case of the model with household specific adoption costs, negative growth rates during the transitional process are also possible. The model’s prediction that inequality has negative impact on technology adoption is supported by empirical evidence based on a cross country data set.inequality, technology adoption, international income differences, altruism, negative growth rates.

Concerning Inequality, Technology Adoption, and Structural Change

Empirical evidence suggests that there has been a divergence over time in income distributions across countries and within countries. In this paper we study a simple dynamic general equilibrium model of technology adoption which is consistent with these stylized facts. In our model, growth is endogenous, and agents are assumed to be heterogeneous in their initial holdings of wealth and capital. We find that in the presence of barriers or costs associated with the adoption of more productive technologies, inequalities in wealth and income may increase over time tending to delay the convergence in international income differences. The model is also capable of explaining the observed diversity in the growth pattern of transitional economies. According to the model, this diversity may be the result of variability in adoption costs, or the relative position of a transitional economy in the world income distribution.income distributions, inequality, technology adoption, structural change

On Skill Heterogeneity, Human Capital, and Inflation

This paper examines the welfare costs of inflation within a monetary dynamic general equilibrium framework with human capital that incorporates endogenous, ex ante skill heterogeneity among workers. Numerical experiments indicate that, overall, welfare costs are more likely to decrease with increases in skill heterogeneity. An implication of this feature is that a greater degree of skill heterogeneity may be associated with a higher tolerance for inflation, consequently implying a positive correlation between agent heterogeneity and inflation. Using a panel of several countries we empirically test this proposition. Our evidence lends some support to this hypothesis.