The dot-com bubble, the Bush deficits and the US current account

Over the past decade the US has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming US stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing US government debt. A somewhat surprising aspect of the current debate is thatstock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the dot-com bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the Bush deficits). The benevolent view holds that a change in investorsentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The cynical view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the US economy and, in particular, its net foreign asset position.

Monetary policy and exchange rate volatility in a small open economy

We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to simple representation in domestic inflation and the output gap. We use the resulting framework to analyze the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference amongthese regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules.

Endogenous business cycles and stabilization policies

The paper reports results on the effects of stylized stabilization policies on endogenously created fluctuations. A simple monetary model with intertemporally optimizing agents is considered. Fluctuations in output may occur due to fluctuations in labor supply which are again caused by volatile expectations which are ``self fulfilling'', i.e. correct given the model. It turns out that stabilization policies that are sufficiently countercyclical in the sense that government spending (on transfers or demand) depends sufficiently strongly negatively on GNP-increases can stabilize the economy at a monetary steadystate for an arbitrarily low degree of distortion of that steady state. Such stabilization has unambiguously good welfare effects and can be achieved without features such as positive lump sum taxation or negative income taxation as part of the stabilization policy.

Social spending and demographics: The role of public policies in the intergenerational redistribution of income. Empirical evidence from Spain and Catalonia

The demographic shift underway in Southern Europe requires a revision of some of thefundamental principles of the traditional welfare state. We analyze the evolution of several aspects of welfare and social expenditure over the last two decades. We find that in the context of the present demographic changes and real estate boom current social and pension policy leads to a new distribution of benefits and burdens which is highly intergenerationally unequal. We argue for a revised definition of public policy based on Musgrave's proposition as a possible rule for an intergenerationally fair distribution.

The economics of organized crime and optimal law enforcement

This paper extends the optimal law enforcement literature to organized crime.We model the criminal organization as a vertical structure where the principal extracts some rents from the agents through extortion. Depending on the principal's information set, threats may or may not be credible. As long as threats are credible, the principal is able to fully extract rents.In that case, the results obtained by applying standard theory of optimal law enforcement are robust: we argue for a tougher policy. However, when threats are not credible, the principal is not able to fully extract rents and there is violence. Moreover, we show that it is not necessarily true that a tougher law enforcement policy should be chosen when in presence of organized crime.

The variability of money velocity in a generalized cash-in-advance model

This paper presents a general equilibrium model of money demand wherethe velocity of money changes in response to endogenous fluctuations in the interest rate. The parameter space can be divided into two subsets: one where velocity is constant and equal to one as in cash-in-advance models, and another one where velocity fluctuates as in Baumol (1952). Despite its simplicity, in terms of paramaters to calibrate, the model performs surprisingly well. In particular, it approximates the variability of money velocity observed in the U.S. for the post-war period. The model is then used to analyze the welfare costs of inflation under uncertainty. This application calculates the errors derived from computing the costs of inflation with deterministic models. It turns out that the size of this difference is small, at least for the levels of uncertainty estimated for the U.S. economy.

A search theory of money and commerce with Neoclassical production

This paper advances a highly tractable model with search theoretic foundations for money and neoclassical growth. In the model, manufacturingand commerce are distinct and separate activities. In manufacturing,goods are efficiently produced combining capital and labor. In commerce,goods are exchanged in bilateral meetings. The model is applied to studythe effects of inßation on capital accumulation and welfare. With realisticparameters, inflation has large negative effects on welfare even though itraises capital and output. In contrast, with cash-in-advance, a deviceinformally motivated with bilateral trading, inflation depresses capitaland output and has a negligible effect on welfare.

The determinants of the prevalence of single mothers: A cross-country analysis

This paper examines the effect of public assistance, labor market and marriage marketconditions on the prevalence of single mother families across countries and over time. Amultinomial logit derived from a random utility approach is estimated using individualleveldata for 14 countries. I find evidence that increases in the level of public support are significantly and positively associated with a higher incidence of both never marriedand divorced mothers. The results also suggest that single mothers are more prevalentwhen female wages are lower. Higher male earnings and employment opportunities in awoman s marriage market appear to lead to fewer never married mothers, but more divorced mothers. Higher child support or alimony payments are associated with a higher prevalence of divorced mothers.

The social value of health programs: Is age a relevant factor?

In cost-effectiveness analysis (CEA) it is usually assumed that a QALY is of equal value to everybody, irrespective of the patient's age. However, it is possible that society assigns different social values to a QALY according to who gets it. In this paper we discuss the possibility of weighting health benefits for age in CEA. We also examinethe possibility that age-related preferences depend on the size of the health gain. An experiment was performedto test these hypotheses. The results assessing suggest that the patient's age is a relevant factor when assessing health gains.

Intergenerational justice when future worlds are uncertain

Let there be a positive (exogenous) probability that, at each date, the human species will disappear.We postulate an Ethical Observer (EO) who maximizes intertemporal welfare under thisuncertainty, with expected-utility preferences. Various social welfare criteria entail alternativevon Neumann- Morgenstern utility functions for the EO: utilitarian, Rawlsian, and an extensionof the latter that corrects for the size of population. Our analysis covers, first, a cake-eating economy(without production), where the utilitarian and Rawlsian recommend the same allocation.Second, a productive economy with education and capital, where it turns out that the recommendationsof the two EOs are in general different. But when the utilitarian program diverges, thenwe prove it is optimal for the extended Rawlsian to ignore the uncertainty concerning the possibledisappearance of the human species in the future. We conclude by discussing the implicationsfor intergenerational welfare maximization in the presence of global warming.

Sweet diversity: Colonial goods and the rise of European living standards after 1492

When did overseas trade start to matter for living standards? Traditional real-wage indices suggest that living standards in Europe stagnated before 1800. In this paper, we argue thatwelfare rose substantially, but surreptitiously, because of an influx of new goods as a result ofoverseas trade. Colonial luxuries such as tea, coffee, and sugar transformed European diets afterthe discovery of America and the rounding of the Cape of Good Hope. These goods became household items in many countries by the end of the 18th century. We use three different methodsto calculate welfare gains based on price data and the rate of adoption of these new colonialgoods. Our results suggest that by 1800, the average Englishman would have been willing to forego 10% or more of his income in order to maintain access to sugar and tea alone. These findings are robust to a wide range of alternative assumptions, data series, and valuation methods.

Single mothers and incentives to work: The French experience

This paper analyzes the effect of the 1998 reform of the French single parents allowanceon the labor supply of single mothers with very young children. The reform aimed atencouraging participation by allowing eligible single parents to accumulate benefits andlabor earnings for a limited period of time. Using data from the French EmploymentSurvey, the analysis shows that single mothers affected by the reform had experienced asignificant increase in their employment rate four years after the reform wasimplemented. During the same period, the employment rate of married mothers withyoung children did not experience a significant change, suggesting that at least part ofthe increase was a consequence of the reform. These results provide some evidence thatbenefit schedules that provide financial incentives to work can have significant effectsin getting single moms back to work, even in the presence of very young children.

Asset prices and the measurement of wealth and saving

The paper defines concepts of real wealth and saving which take into account the intertemporal index number problem that results from changing interest rates. Unlike conventional measures of real wealth, which are based on the market value of assets and ignore the index number problem, the new measure correctly reflects the changes in the welfare of households over time. An empirically operational approximation to the theoretical measure is provided and applied to US data. A major empirical finding is that US real financial wealth increased strongly in the 1980s, much more than is revealed by the market value of assets.

Unemployment insurance with endogenous search intensity and precautionary saving

A welfare analysis of unemployment insurance (UI) is performed in a generalequilibrium job search model. Finitely-lived, risk-averse workers smooth consumption over time by accumulating assets, choose search effort whenunemployed, and suffer disutility from work. Firms hire workers, purchasecapital, and pay taxes to finance worker benefits; their equity is the assetaccumulated by workers. A matching function relates unemployment, hiringexpenditure, and search effort to the formation of jobs. The model is calibrated to US data; the parameters relating job search effort to the probability of job finding are chosen to match microeconomic studies ofunemployment spells. Under logarithmic utility, numerical simulation shows rather small welfaregains from UI. Even without UI, workers smooth consumption effectivelythrough asset accumulation. Greater risk aversion leads to substantiallylarger welfare gains from UI; however, even in this case much of its welfareimpact is due not to consumption smoothing effects, but rather to decreased work disutility, or to a variety of externalities.

Will EMU increase eurosclerosis?

In this paper we study the relationship between labor market institutions and monetary policy. We use a simple macroeconomic framework to show how optimal monetary policy rules depend on labor institutions (labor adjustment costs, and nominal and real wage rigitidy) and social preferences regarding inflation, employment, and real wages. We also calibrate our model tocompute how the change in social welfare brought about by giving up monetary policy as a result of joining the Economic and Monetary Union (EMU) depends on institutions and preferences. We then use the calibrated model to analyze how EMU affects the incentives for labor market reform, both for reformsthat increase the economy's adjustment potential and for those that affect the long-run unemployment rate.