Future Fiscal and Budgetary Shocks

We study the effects of future tax and budgetary shocks in a non-monetary and possibly non-Ricardian economy. An (unanticipated) temporary labor tax cut to be effective on a given future datea delayed debt bombcauses at once a drop in the (unit) value placed on the firms business asset, the customer, with the result that share prices, the hourly wage, and employment drop in tandem. This paradox of reduced activity through announcement of future stimulus does not hinge on an upward jump of long interest rates. A future tax-rate cut lacking a sunset provision has the same negative effects.Future shocks, business assets, Employment

A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run

Open-economy macroeconomics contains a monetary model in the Keynesian tradition that is deemed serviceable for analyzing the short run and a nonmonetary neoclassical model thought capable of handling the long run. But do the Keynesian and neoclassical models meet the challenges thrown out by the main events of the past few decadesthe 80s shock to Europe from the sharp increase of external real interest rates; the kind of speculative shock experienced in the U.S. and parts of northern Europe in the second half of the 90s : the prospect of new industries emerging in the future with needs for new capital; and what may have been an important shock in the U.S. : the large Kennedy cut in income taxes in 1964? We first indicate that the effects of these shocks on the open economy are not well captured by either the standard Keynesian model or the standard neoclassical theory. Next we provide a careful development of a nonmonetary model of the equilibrium path of the real exchange rate, share price level, as well as natural output, employment and interest that contains trading frictions of the customer-market type. We then examine its implications for the above kinds of shocks not only over the medium run but over the short run and the long run as well. The structuralist model we develop also provides an explanation for the dollars weakening and accompanying decline in U.S. employment from early 2002 to late 2004 (and prediction of subsequent recovery) resting on belated apprehensions over the scheduled explosion over future decades of Medicare and Social Security outlays for the baby boomers and alarm over the large tax cuts enacted in spite of this prospect.structuralist model, share price, Real exchange rate, Employment

Future Fiscal and Budgetary Shocks

We study here the effects of future tax and budgetary shocks on present levels of economic activity and real interest rates in a nonmonetary and possibly non-Ricardian economy. The paper first takes up an (unanticipated) temporary tax cut to be effective on a given future date—a delayed “debt bomb.” The sudden prospect of this future-dated shock causes at once a drop in the (unit) value placed on the firms’ business asset, the customer, and accordingly on the price of shares—with the result that the hourly wage, hours worked and GDP drop in tandem. This paradox of reduced activity through announcement of future “stimulus” does not hinge on an upward jump of long rates of interest, which may or may not occur: the short rate of return on shares is increased by the initial drop in their price, but the price has so much farther to fall that this is more than offset for a time by the expectation of ongoing capital loss, so short rates of interest actually drop. The paper next studies a future tax cut lacking a “sunset” provision and requiring instead a gradual welfare benefit adjustment to retain solvency. The same negative effects on present activity result. Third, the paper shows that if the tax cut is effective immediately, its effect is ambiguous, as the Marshallian supply-sider effect works the other way. Finally, the paper also examines the new anticipation of a future increase in the number of retirees in a pay-as-you-go social security program. In conclusion, juxtaposing these results against recent US experience, we hypothesize that the legislation of an unsustainable fiscal gap—the cuts in tax rates and the rise of future obligations owing to the cumulative deficit and the approaching bulge in retirement benefits—is an important cause of the decline in hours worked per employee and in the participation rates over the period.Future shocks, business assets, employment

ICT-Producing Sector on Business Activity

It seems to be taken for granted by many commentators that the sharp decline in prices of computers, telecommunications equipment and software resulting from the technological improvements in the information and communications technology (ICT)-producing sector is good for jobs and is a major driving force behind the non-inflationary employment miracle and booming stock market in the latter half of the nineties in the U.S. and their recurrence since 2004. We show that, in our model, a technical improvement in the ICT-producing sector by itself cannot explain a simultaneous increase in employment and a risein firms’ valuation (or Tobin’s Q ratio). There are two cases. If the elasticity of equipment price (pI ) with respect to ICT-producing sector’s productivity is less than one, labor’s value marginal productivity increases thus pulling up the demand wage and expanding employment. However, the increased output by adding to the capital stock and thus driving down future capital rentals causes a decline in firms’ valuation, q per unit, even though Tobin’s Q (= q=pI ) is up. If the elasticity is greater than one, equipment prices fall so dramatically that labor’s value marginal productivity declines, employment in the ICT-using sector expands proportionately more than the increase in capital stock, thus raising future capital rentals, so both firms’ valuation and Tobin’s Q rise; but then real demand wage falls and employment contracts. The key to generating a booming stock market alongside employment expansion is to hypothesize that when technical improvement in the ICT-producing sector occurs, the market forms an expectation of future productivity gains to be reaped in the ICT-using sector. Then we can explain not only the stock market boom and associated rise in investment spending and employment in the period 1995-2000 but also the subsequent decline in employment, in Tobin’s Q and in investment spending in 2001, with consumption holding up well as productivity gains in the ICT-using sector were realized. An anticipation of a future TFP improvement in the ICT-using sector can once more play the role of raising the stock market.Business asset valuation, Tobin’s Q, investment spending,employment

A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run

Open-economy macroeconomics contains a monetary model in the Keynesian tradition that is deemed serviceable for analyzing the short run and a nonmonetary neoclassical model thought capable of handling the long run. But do the Keynesian and neoclassical models meet the challenges thrown out by the main events of the past few decades? We first indicate that the effects of these shocks on the open economy are not well captured by either the standard Keynesian model or the standard neoclassical theory. Next we provide a careful development of a nonmonetary model of the equilibrium path of the real exchange rate, share price level, as well as natural output, employment and interest that contains trading frictions of the customer-market type. We then examine its implications for these shocks not only over the medium run but over the short run and the long run as well.structuralist model, share price, Real exchange rate, Employment

Lie algebra cohomology and group structure of gauge theories

We explicitly construct the adjoint operator of coboundary operator and obtain the Hodge decomposition theorem and the Poincar\'e duality for the Lie algebra cohomology of the infinite-dimensional gauge transformation group. We show that the adjoint of the coboundary operator can be identified with the BRST adjoint generator $Q^{\dagger}$ for the Lie algebra cohomology induced by BRST generator $Q$. We also point out an interesting duality relation - Poincar\'e duality - with respect to gauge anomalies and Wess-Zumino-Witten topological terms. We consider the consistent embedding of the BRST adjoint generator $Q^{\dagger}$ into the relativistic phase space and identify the noncovariant symmetry recently discovered in QED with the BRST adjoint N\"other charge $Q^{\dagger}$.Comment: 24 pages, RevTex, Revised version submitted to J. Math. Phy

The Structuralist Perspective on Real Exchange Rate, Share Price Level and Employment Path: What Room is Left for Money?

The current sluggish performance of the US economy follows one of the more remarkable booms in modern history. The late 1990s was a period of simultaneous output and productivity growth, low unemployment and stable inflation, culminating in an unemployment rate of only 3.9% in the fourth quarter of the year 2000. The absence of rising inflation during this period came as a surprise to many since the level of the natural rate of unemployment was commonly estimated to be in the range of 5-6% by the mid 1990s. The non-inflationary boom, however, reminds one of another episode where non-monetary forces were strongly at work, namely, the non-deflationary slump in Europe and elsewhere in the 1980s and 90s, which appeared to signal a move to a higher natural rate of unemployment. The modeling of such structural slumps and booms is the task that we have tackled in a number of papers in recent years, the book Structural Slumps being a major milestone.