|
| Home | What's New | Events | Research | Publications | People at CEPA | Site Map | Economics Department |
|
CEPA
Working Papers |
CEPA Working Papers: Abstracts This page contains abstracts for some of CEPA's Working Papers. For a complete list of papers go to the main working paper page. 2004 (NEW)
CEPA Working Paper 2004-05 Standard sources of growth accounts are empty of content because they rely on neoclassical production theory. Rather, analysis can be based on productivity growth equations derived either from NIPA accounting conventions or algebraic identities. These complementary schemes impose valid restrictions on growth rates of the wage rate, profit rate, capital, labor, and their respective average productivities. A Solow-type growth model based on proper accounting can be shown to converge. Detailed results differ markedly from those of the standard model. Alternative, essentially Kaldorian supply-and demand-based alternatives to sources of growth based on a familiar output growth vs. productivity growth diagram with constant employment growth contours added in look like a useful alternative to the mainstream models. (NEW)
CEPA Working Paper 2004-04 It has become widely accepted that poor employment performance can only be effectively addressed with fundamental reforms of national labor market institutions. This call for extensive deregulation has long been a central tenet of orthodox economics, but has attained increasing prominence with the rise in European unemployment since 1973. Commissioned by the International Labor Organization, this paper extends our earlier assessment of the recent literature that makes use of cross-country statistical evidence to show that labor market institutions can explain the pattern of unemployment across the developed world since the 1960s. We focus here on a 2003 study by IMF researchers both because it was produced under the auspices of a leading multinational institution whose empirical work and policy recommendations are highly influential worldwide and because the IMF authors rely heavily on the data and methodology of several important recent studies. (NEW)
CEPA Working Paper 2004-03 This paper examines the inter-temporal association between capital assets, financed though credit expansion, and the stock of inactive balances. It is the opinion of the present author that Keynes's disavowed Say's Law because of a fundamental imbalance between the use of capital assets and monetary savings. Further, because of this disjoint, current economic activity is dependent upon demand injections financed through credit expansion. If debt financed demand is not forthcoming, then the economy will contract. Within this construct, the primary constraint is the ability to hold prior period income in an inactive state. The interest rate is the price of the constraint. CEPA Working Paper
2004-02 The paper provides a broad overview on the definition, determination and adjustment mechanism of the real exchange rate and the macro internal and external equilibrium conditions, in a wide range of macromodels. By adopting the method of the “alternative closures” we start from basic relations, add complementary hypotheses (real wage resistance, capital mobility, external balance, or full employment) and show how the different frameworks (Keynesian, Kaleckian, Neoclassical) depart and reach alternative policy implications. The mutual consistency and impact of those different assumptions are highlighted; in particular we show the role of price competitiveness and terms of trade in the international adjustment mechanism, the hidden linkages and real contribution of dynamic models relative to static ones and of general equilibrium relative to Keynesian models and the nexus between the short-run income effect of net exports and long-run general-equilibrium balanced trade and price equalization that allow for consistency between standard macro and trade policies. The evolution of the concept of equilibrium real exchange rate is also explored, while IMF medium- and long-run applications are also critically framed in the existing literature. CEPA Working Paper
2004-01 Turkey’s exchange rate based stabilization program had collapsed within just eleven months of its implementation. Unsustainable public debt dynamics and fragility of the banking system have been the main reasons blamed for the demise of the program. However, the banking sector fragility became an issue only after the economy was hit buy a liquidity crunch in November 2000. Because the central bank functioned as a quasi currency board, the liquidity crunch was caused by a reversal of the capital inflow. The onset of the stabilization program brought down interest rates as expected and thus created ample opportunities for speculative investors to make safe one-sided bets. Thus, in our view the real cause of the capital reversal was profit taking on the part of foreign speculative investors holding government securities who conjectured that falling interest rates had reached their limit at the time.
2003 CEPA Working Paper 2003-06 Structural adjustment policy packages sponsored by the IMF and the World Bank are a combination of monetary, fiscal and trade measures intended to curb inflation, improve the balance of payments, and foster economic growth. From a brief discussion of a typical structural adjustment policy package and the debate about its macroeconomic and distributional impacts, we derive a list of desirable characteristics for an adequate model thereof. Upon reviewing the literature on the issue, we see beginnings of a consensus on how to construct the sectoral structure of the real side of the economy and the formation of relative prices, and effective tools for analyzing distributional impacts also on population groups different from those used in formulating the model. However, the views on the proper relationship (in particular, directions of causality) between credit, prices, and real output are sharply divided between the monetarist and the structuralist school, with only one model allowing for an endogenous switch between the two corresponding modes of behavior. We also find that current methodologies are not very useful for representing the behavior of the economy prior to the achievement of the hypothetical equilibrium, thus not allowing for calibration of model behavior to time series and potentially resulting in low quality of parameter estimation. Furthermore, currently used formalisms for representation of stock-flow relationships involving capital account transactions are quite unwieldy, requiring the model builder to manually keep track of accounting identities and thus unnecessarily increasing the effort of model building. CEPA Working Paper 2003-05 Structural adjustment policy packages sponsored by the IMF and the World Bank are a combination of monetary, fiscal and trade measures intended to curb inflation, improve the balance of payments, and foster economic growth. From a brief discussion of a typical structural adjustment policy package and the debate about its macroeconomic and distributional impacts, we derive a list of desirable characteristics for an adequate model thereof. Upon reviewing the literature on the issue, we see beginnings of a consensus on how to construct the sectoral structure of the real side of the economy and the formation of relative prices, and effective tools for analyzing distributional impacts also on population groups different from those used in formulating the model. However, the views on the proper relationship (in particular, directions of causality) between credit, prices, and real output are sharply divided between the monetarist and the structuralist school, with only one model allowing for an endogenous switch between the two corresponding modes of behavior. We also find that current methodologies are not very useful for representing the behavior of the economy prior to the achievement of the hypothetical equilibrium, thus not allowing for calibration of model behavior to time series and potentially resulting in low quality of parameter estimation. Furthermore, currently used formalisms for representation of stock-flow relationships involving capital account transactions are quite unwieldy, requiring the model builder to manually keep track of accounting identities and thus unnecessarily increasing the effort of model building. CEPA Working Paper 2003-04 Projections of per capita income gaps between nine regional groups of transition/developing economies and the rich economies for the period 1998-2030 are made on the basis of an extended sources of growth equation taking into account Kaldor-Verdoorn effects, possible impacts on labor productivity of trade liberalization and/or astute industrial policy, human and physical capital accumulation, employment and population growth, shifting shares of labor in income and traded goods in output, shifts in capital productivity, productivity growth retardation due to convergence, and specific regional effects. Under optimistic assumptions about all these factors and in the historically unprecedented absence of adverse macroeconomic shocks over three decades, modest relative convergence of all regions to the rich countries may be possible. However, except for one region (the "Tigers") absolute income gaps are projected to widen. CEPA Working Paper 2003-03 There are regular counter-clockwise cycles involving capacity utilization u (horizontal axis) and the labor share Ψ (vertical axis) in the US economy since 1929. As in Richard Goodwin's cyclical growth model, Ψ can be interpreted as a Lotka-Volterra predator variable and u as prey. In a phase diagram, dynamics around the ú = 0 schedule respond to effective demand which econometric estimation (1948-2002) shows to be profit-led. Distributive dynamics around the Ψ = 0 curve demonstrate a long-term profit squeeze. Across cycles, the real wage and labor productivity grow at 0.57% per quarter, holding the wage share broadly stable. Modeling the cycle in the (u,
Ψ) plane provides a parsimonious description of demand and distributive dynamics, consistent with the macroeconomics embedded in the work of Michal Kalecki, Goodwin, and subsequent followers. CEPA Working Paper 2003-02 In the crises of 1980s, ever-increasing current account deficits, fueled by unsustainable economic expansions, were invariably the main cause of rising devaluation risk that eventually led to the reversal of capital flows. By contrast, in the 1990s, speculative expectations about changes in asset prices and sovereign risk have instead become the main determinants of capital flow reversals. The paper examines the nature of this transformation and tries to give a stylized account of these new 'capital account driven' crises. It is argued that although a country might seem to benefit for a time from capital inflows when asset prices are generally expected to rise, this can only be temporary since asset prices cannot keep increasing indefinitely and an abrupt reversal of capital flows ensues once it is taught that asset prices have peaked. CEPA Working Paper 2003-01 Long-term cycles in the equity-capital (q) and debt-capital (λ) ratios exist in the US, UK, and Japan. They follow a broadly clockwise pattern in the first two economies and counterclockwise in Japan. The data as constructed satisfy flows of funds for loans and a standard equation for the return to equity, which boil down to differential equations for λ and q. Under appropriate restrictions on the Jacobian, this system generates long-term predator-prey cycles. The clockwise variant arises when capital stock growth is "debt-led" and the debt ratio is "equity accelerated." "Debt-burdened" growth and "equity-decelerated" debt produce counterclockwise oscillations. A transcritical bifurcation involving the "required" return to equity in response to shifting "fundamentals" adds realistic equity price dynamics to both variants.
2002 CEPA Working Paper
2002-16 Several theories hold that income distribution affects
economic growth. Some of them use cross-section country regression analysis
to demonstrate their beliefs. This procedure has such a bulk of problems
that its results should be analyzed carefully. Theories supported by this
kind of empirical verification are most affected. Results suggest that
a relationship between income distribution and economic growth exists
but it seems to be nonlinear, complex and dynamic. Alternative statistical
methods can be used in combination with historical studies and case studies,
where institutions are included, for a better understanding of prevalent
linkages. CEPA Working Paper
2002-15 We investigate the agent-based modeling technique in a
model of wealth distribution. In the first part we discuss this modern
approach to economic modeling in the light of two major methodological
approaches in the history of economic analysis, classical political economy
and neo-classical economics. In the core part of the paper we present
a model which belongs to the large group of essentially neo-classical
models that neglect work, production, and productive relations, but rather
focuses on distributive interactions in a hunter-gatherer society. We
obtain interesting dynamics of inequality in the simulation of wealth
distribution. We analyze some causal links between the rules and parameters
on the one side and the results on the other side. In this way, we can
explain some results in terms of the mechanisms generating them instead
of just admiring an"emergent structure." The analysis of relative
inequality as measured by the Gini coefficient shows an inverse correlation
between the average degree of vision (agent's skills) and wealth inequality
expressed by the Gini coefficient. We also explored the effects of inheriting
initial wealth and vision. Finally, we do not succeed in simulating the
Pareto law, thus failing in replicating an empirical pattern of capitalist
distribution of wealth. CEPA Working Paper
2002-14 This study explores the impact of competition from international
trade on the gender wage gap in Taiwan and South Korea between 1980 and
1999. The dynamic implications of Becker’s (1959) theory of discrimination
lead one to expect that increased competition from international trade
reduces the incentive for employers to discriminate against women. This
effect should be more pronounced in concentrated sectors of the economy,
where employers can use excess profits to cover the costs of discrimination.
Alternatively, wage discrimination may increase with growing trade in
a context of employment segregation that limits women’s ability
to achieve wage gains. The empirical strategy controls for differences
in market structure across industries in order to isolate the effect of
competition from international trade. Estimation results are not consistent
with Becker’s theory, as greater international competition in concentrated
sectors is associated with larger wage gaps between men and women. CEPA Working Paper
2002-11 This paper presents an empirical estimation of the correlation
between wages and regional unemployment rates in Turkey, more specifically
it explores the role of regional unemployment rates in wage determination.
The analysis builds upon a series of recent empirical studies on the wage-unemployment
relationship, now commonly known as “the wage curve,” a downward
sloping curve in wage-unemployment space. The existing studies are for
most part in advanced market economies, while this paper presents one
of the few attempts at a wage curve analysis within the context of a developing
market economy. A cross-sectional estimation of micro level individual
wage data for the Turkish labor market in 1994, suggest a statistically
significant negative correlation between wages and regional unemployment
rates. Separate regressions for men and women, however, show a wage curve
to exist only in the male labor market. The study also presents the results
on other variables of wage determination such as returns to schooling,
returns to age, job tenure, gender, industrial and occupational affiliation
of the worker, economic sector and union status. CEPA Working Paper
2002-10 This paper tests whether a wage curve—a negative
relationship between unemployment and pay—existed in Santiago, Chile
during 1957-1996. The analysis is divided into two periods corresponding
to the distinct economic models in place in the country. For 1957-1973,
during the period of inward-led development, we reject the existence of
a wage curve. The second period, 1974-1996, corresponds to an external
opening of the economy and the deregulation of publicly controlled industries
and labor relations. For this period, we find a wage curve of –0.08,
which is similar to the United States and other western, capitalist economies. CEPA Working Paper 2002-09 This paper provides a framework for examining developing-country
financial crisis. It is based upon Hyman Minsky's financial fragility
thesis and applied to the case of Thailand 1984-1999. There is empirical
evidence for the evolution of the Thai economy through the Minskian regimes
(hedged through speculative to Ponzi) in the period prior to the onset
of the 1997 Asian crisis. Evidence also suggests that the Ponzi regime
has two stages and that the rate of return on nonproductive speculative
investment turns negative as the country entered the Ponzi regime. The
diversion of foreign capital inflows to speculative investment played
an important part in the deterioration of the Thai financial position.
These results, if general, have strong implications for the field of country
risk analysis, in particular, for the design of early warning models of
financial crisis for developing countries. CEPA Working Paper 2002-08 How do multinational firms affect both the demand for and supply of skills in host-country labor markets? On the demand side, inward can FDI stimulate demand for more-skilled workers in host countries through several channels. To date, most empirical evidence indicates that these channels work mainly within multinationals themselves, rather than through knowledge spillovers to domestic firms. On the supply side, the question of how inward FDI influences the development of human capital is much less clear, with possible links at both the micro- and macro-levels. This paper offers some new empirical evidence on the links between inward FDI and within-industry skill upgrading for a country-industry-year panel spanning both developed and developing countries. The main empirical finding is a robustly positive correlation between skill upgrading and the presence of affiliates of U.S. multinationals, with this correlation even stronger among the sub-sample of developing countries. This correlation is consistent with inward FDI stimulating skill upgrading in these developing countries. CEPA Working Paper 2002-07 This paper offers a fresh look at the economic theories
advanced by Keynes. Keynes correctly asserted that in a fractional reserve
banking system supply could not create its own demand when agents held
time and savings deposits as a longrun store and entrepreneurs were engaging
in the disinvestment of capital. There are two fundamental problems. The
first, disinvestment creates a disjoint between ex-ante supply and current
period income; the second, the banking sector cannot transfer real resources,
therefore, it cannot intermediate savings. Thus, the economy requires
demand injections, financed by bank debt, if it is maintain economic activity. CEPA Working Paper 2002-01 It is widely accepted that global forces of technology and trade have caused a profound shift in labor demand towards the most highly skilled, generating sharply rising earnings inequality in flexible labor markets (the U.S.) and persistently high unemployment in rigid labor markets (Europe). This paper critically assesses the evidence for this "Unified Theory." It finds little compelling empirical support for either the skill-biased demand shift explanation for high U.S. earnings inequality or the rigid labor markets explanation for high unemployment in Europe. This assessment challenges the policy orthodoxy of the 1990's that developed economies feature a strict inequality-unemployment tradeoff and that policy options are therefore limited to skills enhancement in the U.S. and labor market de-regulation in Europe. It is suggested that the theoretical dominance of the textbook supply/demand model has contributed to the neglect of labor market institutions for U.S. wage outcomes and tight macroeconomic policy for European unemployment. 2001 CEPA Working Paper 2001-06 This paper extends the balance-of-payments constraint
on growth known as Thirlwall's law to incorporate unbalanced trade and
debt accumulation. Assuming that small open economies face a liquidity
constraint, the text shows the growth and real-exchange-rate policy rules
consistent with a stable ratio of net exports to income. Given such rules,
the text shows how the trade balance of a small open economy is residually
determined by the ratio of foreign debt to income allowed by international
conditions. CEPA Working Paper 2001-05 This paper presents a one-sector model where investment
and autonomous expenditures determine the growth rate of income. The analysis
starts with the dynamics of demand-led growth and the interaction between
investment and autonomous expenditures. Since by definition investment
determines the growth rate of capital, the paper uses the relation between
demand-led growth, multifactor productivity growth, and labor-force growth
to analyze the alternative closures of the supply side. After discussing
how partially endogenous labor force and multifactor productivity may
relax supply constraints, the paper shows how changes in the average propensity
to save may accommodate investment and autonomous expenditures when the
economy reaches its maximum growth rate. Since nothing prevents the functional
distribution of income from changing before that happens, the paper concludes
with a two-species model (for the labor share of income and the income-capital
ratio) to illustrate how demand-led growth can generate business fluctuations
while remaining below supply constraints. CEPA Working Paper 2001-04 This paper analyzes the relation between international
liquidity and growth for Brazil in 1966-2000. Defining the former as the
ratio of foreign reserves to foreign (interest-bearing) debt, the objective
is to build a model connecting growth with international liquidity, and
then check whether the results from such a model hold up in practice.
The model builds upon Thirlwall's (1979) law and uses some basic accounting
identities to specify a liquidity constraint on small open economies.
The main implication of such a model is that, similar to what happens
with liquidity constrained agents in closed economies, small open economies
tend to adjust their current account, especially their trade balance,
to the availability of external finance. Thus, in face of fluctuations
in international liquidity, one should expect fluctuations in growth after
a time lag. This is exactly what the paper verifies for Brazil in 1966-2000,
that is, changes in Brazil's international liquidity tends to lead changes
in its growth rate. Overall, inertia and international liquidity explains
approximately 40% of the variation in Brazil's growth rate in 1966-2000. CEPA Working Paper 2001-03 We present a model with a monopolistic landlord and tenants
with unobservable ability. In this setting, the landlord should use a
wage contract to extract the full surplus due to ability since a share
or fixed rent contract leaves some of the surplus in the hands of the
tenants. We combine this issue with a standard moral hazard problem on
the tenants' side, which argues for a fixed rent contract. A share contract
is an optimal compromise between these two forces. CEPA Working
Paper 2001-02 Grounded in the standard supply and demand model, the conventional wisdom assumes a tradeoff between earnings inequality and unemployment, blames low skills for high earnings inequality in the U.S. and U.K., and attributes high European unemployment to institutional constraints. This paper finds little evidence of a tradeoff between earnings inequality and unemployment across OECD countries, and while welfare state institutions aimed at employment, unemployment, and wage protection matter a great deal for differences and changes in earnings inequality, they do not appear to be the main source of OECD employment problems. This evidence suggests a need to move beyond the policy implications of the simple textbook model. Specifically, returning to a more compressed wage distribution is not likely to create "European" levels of unemployment in the U.S., and greater earnings inequality is not likely to fix employment problems in Europe. Policy makers should give more credence to the view that the right kind of labor market institutions can further both egalitarian and efficiency goals. 2000 CEPA Working Paper 2000-21 With full stock/flow accounting respected, the two-country
open economy portfolio balance model has just two independent equations
for asset market clearing. It can determine home and foreign interest
rates but not the exchange rate. If asset market equilibria vary smoothly
over time, the balance of payments equation in the Mundell-Fleming model
is not independent and cannot set the exchange rate either. The familiar
fixed reserves/"floating rate" vs. endogenous reserves/"fixed
rate" dichotomy does not exist, and "fundamentals-based"
econometric models of the exchange rate are bound to fail. An alternative
is a two-country IS/LM model with exchange rate dynamics added. Its dynamic
properties under uncovered interest rate parity are briefly explored. CEPA Working Paper 2000-15 This paper develops a growth model with overlapping generations
of workers who save for life-cycle reasons and Ricardian capitalists who
save from a bequest motive. The population of workers accommodates growth,so
that the rate of capital accumulation is endogenous and determines the
growth of employment. Two regimes are possible, one in which workers’
saving dominates the long-run and a second in which the long-run equilibrium
growth rate is determined completely by the capitalist saving function,
sometimes called the Cambridge equation. The second regime exhibits a
version of the Pasinetti Paradox: changes in workers’ saving affect
the level, but not the growth rate, of capital in the long run. Applied
to social security, this result implies that an unfunded system relying
on payroll taxes reduces workers’ lifetime wealth and saving, creating
level effects on the capital stock without affecting its long-run growth
rate. These effects are mitigated by the presence of a reserve fund, various
levels of which are examined. Calibrating the model to realistic parameter
values for the U.S. facilitates an interpretation of the controversies
over the percentage of the national wealth originating in life-cycle saving
and the effects of social security on saving. The model is offered as
an analytical framework for the review of current topics in fiscal policy,
in particular identifying the social security reserve fund as a potential
vehicle for generating capital accumulation and effecting a progressive
redistribution of wealth. 1999 CEPA Working Paper 1999-06 This paper presents a demand-led growth model where an exogenous investment function drives capital accumulation through a Bernoulli differential equation. In such framework investment generates savings through changes in capacity utilization and/or income distribution, making economic growth totally demand-led. Taking a Structuralist perspective, the model is purposefully made to be consistent with different Keynesian closures for the investment function, as well as with different assumptions about savings' adjustment to investment. CEPA Working Paper 1999-04 With the recent events of the large-scale financial crisis in some parts of the world and the slowly declining inflation rate in major OECD countries debt deflation has again become an important topic in economic research. In a model with debt issuing firms, financing their investment, we explore the interaction of high nominal levels of debt, output prices, increase in real debt and declining economic activity. This destabilizing mechanism is explored in the context of a small-scale as well as in a large-scale Keynesian demand constraint economy. In both models labor market dynamics are emphasized. Our principle conclusion is that the small-scale as well as the large-scale models are prone to accelerating downward instability caused by over-indebtedness and declining prices if the process is not stopped by floors to deflation by appropriate government policies. Moreover, contrary to conventional views flexible exchange rates may add to downward instability. CEPA Working Paper 1999-01 Germany will be one of the core countries in the European Monetary Union (EMU). Currently there is therefore a great interest in issues of labor market and monetary policy in Germany. On the basis of a macroeconometric model we study the interaction of labor market and alternative monetary policies using German data sets. More specifically the paper has three objectives. We first present a macroeconometric framework of disequilibrium type that is useful for empirically studying the interaction of the goods market, financial market and the labor market. Second, we estimate the model with quarterly German time series data from 1970.1 - 1991.1. Third, we evaluate the effect of different monetary policy rules and their impact on output stabilization, labor market and inflation rates, employing stochastic simulations. Two alternative monetary policy rules are considered, namely the monetary authority 1) targeting monetary aggregates or 2) targeting the interest rate. The latter rule originates in Taylor (1993) and has also been called the Taylor rule. The model is econometrically estimated through ML estimation using the similated annealing as global optimization procedure. The role of monetary policy for the labor market and inflation are studied for Germany through stochastic simulations. For the EMU such a study has particular importance since there is still a debate over monetary policy rules under the EMU and its effect on the labor market and inflation rate. We also contrast the results to studies on the US concerning labor market and monetary policy be of great interest for policy makers. 1998 CEPA Working Paper 1998-21 This paper examines the relationship between unemployment and labor market flexibility. The latter is considered in the broadest sense - as it relates to labor markets at large (external flexibility) and to practices within firms (internal flexibility). The first part of the paper addresses the argument that differences in employment performance among the advanced economies result largely from differences in labor market flexibility. Empirical evidence is considered on nominal and real wage flexibility, labor market institutions, the trade-off between unemployment and inequality (the so-called unified theory), social policy, and Beveridge curves. With the exception of ambiguous evidence on the duration of unemployment insurance benefits, there is little solid evidence that high unemployment results from labor market rigidities. The second part of this paper addresses the argument that Japan's low rate of unemployment results from high internal labor market flexibility. This assertion is suspect, or at least overstated, for several reasons. Japanese firms' reliance on internal flexibility is not an alternative to but rather is complemented by external flexibility. This external flexibility is provided disproportionately by women workers, who serve as a buffer workforce. Rather than being counted as unemployed, Japanese women who lose their jobs tend to leave the labor force altogether. This is manifested in the remarkably high proportions of discouraged workers in Japan, the vast majority of them women. Thus the Japanese unemployment rate as well as unemployment volatility are deceptively low, much more so than for the other advanced economies. Most studies examining wage flexibility in relation to unemployment conclude that wage flexibility is comparatively high in Japan. But studies that examine the relationship between changes in nominal or real wages and output conclude that Japan does not have comparatively high wage flexibility. The point is of relevance not only for the literature on comparative wage flexibility but also for that on labor market institutions and unemployment, in which is is assumed that Japan has comparatively high wage flexibility. JEL classification: J6, J7, L2. CEPA Working Paper 1998-20 In an empirical investigation of the interactions between
industrial structure and macro outcomes, an accounting framework was applied
to relate changes in sectoral employment and output compositions to changes
in overall productivity growth over time. The numerical results were interpreted
using a taxonomy describing industrialization and deindustrialization
in developing countries. The findings suggest that, in particular, industrial
performance correlates with the overall performance of an economy, and
therefore is the key sector in explaining the sustainability of different
regional patterns in overall productivity and employment growth. That
is, negative rates of productivity growth in the industrial sector are
strongly associated with negative productivity growth for the economy
as a whole, and vice versa. Further, slow industrial growth may lead to
low road development, in which productivity growth trades off with employment
growth, while high road development is defined as simultaneously expanding
employment and overall productivity growth. CEPA Working Paper 1998-19 A new data set shows the extensive use of sharecropping in modern U.S. agriculture particularly in wheat, rice, corn, soybeans, and cotton. For these five crops, I investigate the importance of risk and three types of incentive problems that are commonly regarded to 'cause' sharecropping. A direct measure of risk from county level weather data is constructed and this measure is a major explanation in the choice between cash and share contracts. The potential for exploitation of the land by the tenant is also an important determinant of tenancy choice. Finally, for three inputs, fertilizer, petroleum products, and herbicides & pesticides, incentive problems in the provision of inputs by the tenant are shown to exist. For these inputs, I show that sharecroppers use less than cash renters, but this difference is eliminated when the costs of these inputs are also shared. CEPA Working Paper 1998-17 This paper provides an empirical analysis of the effects
of foreign trade expansion on men and women's employment and earnings
in Germany and Japan since the early-1970s. The analysis is prompted by
trade studies identifying manufacturing industries appearing most vulnerable
to foreign trade, industries in which German and Japanese women are disproportionately
represented. Evidence is found that foreign trade expansion had a more
adverse effect on women's than men's manufacturing employment in Japan
and a more equal effect in Germany. In spite of this, demand shifted away
from women's employment in Germany after the early-1970s, for both the
manufacturing sector as a whole and for manufacturing industries with
high female percentages of employment. No such demand shifts occurred
in Japan. In the face of these differences in demand and of remarkable
similarity in female labor supply, male-female wage differences narrowed
in Germany and widened in Japan, for both manufacturing and non-agricultural
employees. These diverging patterns of male-female wage differences are
explained by the more marginal basis on which Japanese women were integrated
into the workforce, reflected in the character of women's part-time and
temporary employment as well as union representation. To some extent,
the more marginal basis on which Japanese women were integrated into the
workforce resulted from the explicit policies of Japanese firms, referred
to as "Operation Scale-Down" (genryo keiei). In Germany, too, the character
of women's integration into the workforce appears to result in part from
explicit policies undertaken by The Federation of German Trade Unions
(Deutscher Gewerkschaftsbund), the largest German federation of unions. CEPA Working Paper
1998-11 A principal message of this paper is that external financial crises are not caused by an alert private sector pouncing upon the public sector’s foolish actions such as running an unsustainable fiscal deficit or creating moral hazards. They are better described as private sectors (both domestic and foreign) acting to make high short-term profits when policy and history provide the preconditions and the public sector acquiesces. This conclusion emerges from a review of balance of payments crises in the Southern Cone around 1980, Mexico in 1994-95, East Asia in 1997-98, and Russia in 1998 in light of existing theories - speculative attack models and moral hazard - and a synthesis of ideas proposed by Salih Neftci and Roberto Frenkel. The standard theories do not explain history well. The Frenkel-Neftci framework supports a better description of crisis dynamics in terms of five elements:(1) the nominal exchange rate is fixed or close to being pre-determined; (2) there are few barriers to external capital inflows and outflows; (3) historical factors and the conjuncture act together to create wide financial "spreads" between returns to national assets and borrowing rates abroad - these in turn generate capital inflows which push the domestic financial system in the direction of being long on domestic assets and short on foreign holdings; (4) regulation of the system is lax and probably pro-cyclical; (5) stock-flow repercussions of these initially microeconomic changes through the balance of payments and the financial system’s flows of funds and balance sheets set off a dynamic macro process which is unstable. Policy alternatives are discussed in terms of these five conditions and the present global macroeconomic environment, in particular the destabilizing interventions of the International Monetary Fund in East Asia. CEPA Working Paper 1998-05 Arguments regarding trade and other forms of liberalization in developing countries are reviewed. Microeconomically, the standard case for liberalization is dubious under increasing returns to scale and when firms can invest directly in productivity enhancement. Distributional effects of commercial policy changes can be regressive and large, but the "rents" they generate can serve as a basis for effective policy intervention contingent on firms' performance. Macroeconomically, the case of liberalization rests on Say's Law, which is not always enforced. It is complicated by the facts that recent combined current and capital market liberalizations have been associated with strong exchange rates and high interest rates, and that output and productivity growth have positive mutual feedbacks which liberalization may well suppress. All these effects can only be sorted out by institutional and historical analysis at the country level, as opposed to cross-country regressions or computable general equilibrium models with causal structures favoring trade liberalization already built in. CEPA Working Paper 1998-04 In the framework of a Keynesian based monetary macromodel we study the implications of alternative monetary policy rules. Our monetary macromodel exhibits the following features: asset market clearing, disequilibrium in the product and labor markets, sluggish price and quantity adjustments, two Phillips curves for the wage and price dynamics and expectations formulation which represents a combination of adaptive and forward looking behavior. Two alternative monetary policy rules for controlling inflation are considered: the monetary authority (1) targeting monetary aggregates or (2) targeting the interest rate. For those two policy rules the model's dynamic features are explored given certain parameter constellations. Then the key parameters of the model variants are estimated through GMM and single equation estimations employing US time series data 1960.1-1995.1. Stochastic simulations are performed and contrasted with US macroeconomic data in terms of standard deviations of macro variables as well as their cross-correlation to output. The model can be viewed as an alternative to equilibrium macromodels in fitting macroeconomic data. With respect to out two monetary regimes it seems that in terms of volatility the model variant with the second policy rule gives a better fit whereas for cross-correlation with output the variant with the first policy rule performs better. CEPA Working Paper 1998-02 This paper takes up a question frequently raised but rarely addressed empirically - do macroeconomic policy changes and exogenous macro shocks have significant impacts on poverty and income inequality more generally? For 15 countries in Latin America and the Caribbean over the past two decades, the answer is unequivocally "Yes." Specifically, poverty reduction appears to be generally associated with increases in GDP and GDP per capita, reductions in unemployment, reductions in inflation, increases in the minimum wage, reductions in overall inequality, and increases (or at least stability) of the share of social expenditures in GDP. The foregoing relationships are observed over macro "episodes" (typically bounded by substantial economic disturbances and/or major realignments in policy). Countries and overall time periods examined include Argentina, 1974-96; Bolivia, 1980-96; Brazil, 1985-96; Chile, 1974-96; Colombia, 1978-95; Costa Rica, 1989-96; Cuba, 1989-96; Dominican Republic, 1981-96; Ecuador, 1970-96; Jamaica, 1960-95; Mexico, 1984-94; Nicaragua, 1980-93; Paraguay, 1970-96; Peru, 1985-95; and El Salvador, 1980-96. Within this data set, the authors identify 49 episodes. Poverty incidence is estimated for 45 of them: it stays stable or rises in 26 and decreases in the remaining 19 cases. The sample appears to be large enough to provide insight into distributional processes which operate across nations, or at least developing countries in the Western Hemisphere. The paper concludes with some implications for economic policy. CEPA Working Paper 1998-01 Measured by changes in real wages, earnings inequality and unemployment, the economic position of lower skilled workers has declined sharply over the past two decades across the developed countries of the OECD. In this paper we survey a wide-ranging empirical literature for evidence bearing on the Unified Theory - the popular idea that strong shifts in demand away from low-skilled workers, caused mainly by computerization and related forms of advanced technology, explain both the declining wages of low skilled workers in the "flexible" labor market of the United States and high and rising unemployment in "rigid" European labor markets. On the U.S. side, we find little evidence of large or accelerating skill-biased demand shifts after the early 1980s as measured by standard indices of the skill-intensity of employment. This is significant since most of the impact of computerization on the organization and skill requirements in the workplace has occurred in precisely this later period. There is also little unambiguous evidence of a close link between computerization and relative wage change. Nor do we find that the conventional skill-biased demand-shift story offers a compelling explanation for the rise in unemployment rates experienced by most European countries. Across the OECD, rising low-skilled unemployment does not appear to drive much of the increase in the overall rate; measures of wage rigidity are not closely correlated with unemployment problems; and no clear empirical link has been established between the recent rise in unemployment and the presence of strong wage-setting institutions and social policies. If the empirical basis of the Unified Theory is so shallow, what accounts for the broad consensus in its favor? We speculate that at least part of the answer lies in the natural attraction of a simple story, particularly one that is so consistent with the textbook demand-supply model of the labor market. We conclude with some conjectures on the direction an alternative account might take that places less weight on technology driven demand shifts and greater weight on the effects of fundamental political, institutional and structural changes. 1996 CEPA Working Paper 1996-05 Half the people and two-thirds of the countries in the world lack full control over their own economic policy decisions. To a great extent, expatriate "experts" managed by industrial country nationals and based in Washington DC regulate their macroeconomics, investment projects, and patterns of social spending. The principles guiding these decisions from afar are known as the Washington Consensus. They are based on the "neoliberal" or "market-friendly" brand of economic policy analysis that has become predominant over the past dozen years. In some cases local policy-makers have been even more enthusiastic about neoliberalism than their colleagues from Washington. Such "globalization" of economic policy, however, has precedents. In fact, the dramatic shifts in economic and social policy of the 1980s go far toward recreating the environment prior to the Great Depression; advocates of "neo"liberalism say little that is unfamiliar from the debates of the 1920s. The world has come full circle - institutionally, ideologically, and politically. Out of the disaster of World War II emerged an international consensus of economic collaboration of governments and the liberty to organize national life at will which was manifested in the establishment of the World Bank and the International Monetary Fund. Paradoxically, for developing countries these same institutions today represent the intellectual backbone and political force behind the dismantling of the truly utopian ideas of the 1940s. By first providing a historical account of the origins and evolution of the World Bank and the IMF, the paper attempts to speak to the present debate on the issues of "globalization", when the capacity to reconcile market and social contradictions is more and more impaired by growing economic and financial imbalances that come with increasing interdependence of liberalized global markets. These issues are then illustrated in the context of concrete country experiences with structural adjustment policies and their distributional outcomes in a globalized economy. The paper concludes by suggesting ways to reform the two agencies. CEPA Working Paper 1996-04 This paper analyzes the causes of the massive peso devaluation of December 1994 and the ensuing economic crisis in Mexico. The paper argues that, while earlier devaluation might have been helpful, Mexico's economic growth strategy in the early 1990s was fraught with internal inconsistencies that made a collapse of that strategy inevitable. Especially, Mexico's use of the nominal exchange rate as an "anchor" to control inflation resulted in a real overvaluation of the peso in 1990-94, which combined with the liberalization of foreign trade led to unsustainable current account deficits financed by volatile inflows of "hot money." Since the devaluation, the Mexican government is counting on increased net exports and direct foreign investment to be the "engine of growth," while maintaining tight fiscal and monetary policies that suppress domestic demand in order to control inflation. The paper argues that Mexico is trying an economic strategy based on a redistribution of income from wages to profits, and evaluates the prospects for this regressive redistributional strategy to succeed or fail. CEPA Working Paper 1996-03 Proposing far-reaching reforms to the pension systems,
the World Bank has recently suggested that the existing pay-as-you-go
pension systems in many rich as well as poor countries, should be replaced
by fully funded, mandatory, preferably private pensions, as the main pillars
of the new system. It argues that these reforms will not only benefit
the pensioners, but also enhance savings, promote capital formation and
economic development. This paper provides a critical examination of the
Bank's theses and concludes that it has adopted a one-sided view of the
relationships between the key critical variables. The proposed reform
may therefore neither protect the old nor achieve faster economic growth. CEPA Working Paper 1996-02 Given that financial markets operate as a Keynesian beauty contest and the real economy has no automatic tendency to converge to full-employment growth, then the simple rules of the game embodied in the policy positions believed by market participants to be held by other market participants will be imposed on the economy. The downside risks involved in flaunting the rules of the game will create a deflationary bias in government policy. This is reinforced by the very high costs of debt in a situation in which real interest rates typically exceed growth rates by a substantial margin. High interest rates are themselves the outcome of the attempt to maintain financial stability in a potentially volatile world. So the post-war goal of "a high and stable level of employment" is abandoned, and replaced by the goals of "long-term price stability" - the path to which is defined according to the rules of the game. A liberalised, sophisticated financial system, with a premium placed on the possibility of exit, is a fragile financial system. That fragility is manifest in liquidity crises, some of which have substantial reverberations in reduced real output; in risk aversion in the private sector which produces a bias toward the short-term, and a corresponding reluctance to invest for the long-term; in risk aversion in the public sector, producing a bias toward deflationary policies; and in persistent demands for greater "flexibility" to increase the possibilities of exit. It is often argued that nothing can be done to change the present system, since capital flows can overwhelm the actions of any one government. This is certainly true. But it is equally true that the foundation stones of the world financial system are the monetary instruments issued by a small number of major governments. Ultimately, those governments acting together have the potential to control capital flows. But that potential will only be manifest if governments themselves have a different theory of economic policy than the theory which currently dominates economic and political debate. As Peter Temin has made clear, the Depression of the 1930s was a product both of the loss of international financial control and the fact that governments were convinced of the necessity of deflationary policies. They had no alternative theory. Without a change of theory by governments, without an active willingness to pursue expansionary monetary and fiscal policies, no formal structure of financial controls would deliver recovery. It took the experience of the Depression and of World War II economic management to change the theory. In the same way, it is unlikely today that a significant reassertion of control over international financial structures is possible without an equally major change in priorities and analyses by all major governments. Such seismic changes have historically been associated with the aftermath of world-wide economic and political disruption. CEPA Working Paper 1996-01 The causal relation between saving and investment has
momentous implications for fiscal policy. If saving causes investment,
this lends support for policies of fiscal austerity. Neither the national
income accounts nor economic theory can resolve issues of causality. This
paper presents a VAR analysis that examines the saving - investment relation.
The principal findings are that investment spending is negatively impacted
by personal saving and independent of government saving. Increases in
personal saving have a negative effect on government saving. These patterns
are consistent with the Keynesian paradox of thrift. |
|||