Economic Policy in the International Economy: Essays in Honor of Assaf Razin

Half-title......Page 3
Title......Page 5
Copyright......Page 6
Contents......Page 7
List of Contributors......Page 9
Preface......Page 13
Introduction......Page 15
PART ONE FINANCIAL ISSUES IN OPEN ECONOMIES: THEORY......Page 27
ONE Crises: The Next Generation?......Page 29
1. A Brief History of Currency Crisis Modeling......Page 30
2. The Balance-Sheet View of Crises......Page 34
3. Asset Prices and Crises......Page 40
4. Financial Crisis in a Closed Economy......Page 42
References......Page 46
1.Introduction......Page 47
2.The Self-Fulfilling Crisis Model of Obstfeld (1996)......Page 49
3.1. Imposing an Exit Penalty or Reputational Constraint (à la Barro–Gordon (1983))......Page 50
3.3. Designing an Incentive Contract for the Central Banker (à la Walsh (1995))......Page 52
3.4. An Assessment of the Practicality of the Three Solutions (and Their Equivalents)......Page 54
4. Are Currency Boards Different from Regular Pegs?......Page 56
5. Conclusion......Page 60
6.Appendix: Salient Features of Currency Boards......Page 61
References......Page 63
1. Introduction......Page 66
2. Conceptual Framework......Page 68
2.1. Distortions......Page 71
2.2. Investment and Debt Denomination......Page 72
2.3. Real Exchange Rate Risk......Page 75
2.4. Equilibrium Dynamics......Page 77
3. Policy Evaluation......Page 80
3.1. Policies During a Boom......Page 81
4.Conclusions......Page 86
References......Page 87
FOUR Risk and Exchange Rates......Page 88
1.1. Preferences and Technology......Page 91
1.2. Prices, Demand, and Budget Constraints......Page 92
2. Goods Market Clearing and the Redundancy of Securities Markets......Page 94
3. Producer Behavior under Preset Prices......Page 95
3.1. The Price Setting Problem......Page 96
3.2. Implications for Ex Ante Terms of Trade......Page 98
3.3. Implications for Ex Ante Consumption......Page 99
4.1. First-Order Conditions for Consumption and Money......Page 101
4.2. Log-Linearization and the Exchange-Rate Risk Premium......Page 102
4.3. Equilibrium Exchange Rates and the “Level” Risk Premium......Page 104
4.4. The Short-Run Effects of Monetary Shocks......Page 106
5. Solving for Exchange Risk Premia......Page 108
6. The Magnitude of the “Level” Exchange Rate Risk Premium......Page 112
7.1. Calculating Ex Ante Utility......Page 113
7.2. Equality of Expected Home and Foreign Utilities......Page 115
7.3. Country Size and the Cost of Currency Volatility......Page 116
7.4. Quantifying the Cost of Currency Volatility......Page 117
8. Summary......Page 118
A.1. Equilibrium Output with Flexible Prices......Page 119
A.2. Government Spending Shocks......Page 120
Appendix B. Optimal Price Setting by Producers Facing Monetary and Productivity Shocks......Page 121
Appendix C. An Important Special Case with an Exact Solution......Page 123
D.1. Calculating Ex Post Welfare Effects......Page 125
D.2. The Terms of Trade and Asymmetric Transmission......Page 127
References......Page 130
PART TWO FINANCIAL ISSUES IN OPEN ECONOMIES: EMPIRICS......Page 133
1. Introduction......Page 135
2. Conceptual Issues......Page 139
3. A Stylized Model of Fluctuations......Page 142
4. Measuring the Asymmetry of Fluctuations......Page 143
4.1. A Utility-Based Measure of Fluctuations Asymmetry......Page 144
5. Measuring Specialization in Production......Page 148
6.1. Data Used......Page 149
6.2. Asymmetry Measures and Specialization Indices......Page 150
6.3. Regression Analysis......Page 154
6.4. Regressions Using a Pairwise Correlation Measure of Fluctuations Asymmetry......Page 158
7. Income Asymmetry versus GDP Asymmetry......Page 159
8. Summary......Page 162
Appendix: A Utility-Based Measure of Fluctuations Asymmetry......Page 163
References......Page 167
1. Introduction......Page 171
2. Methodology......Page 173
3. The Data Set......Page 174
4. UIP Regression Analysis......Page 179
5.1. The Framework......Page 183
5.2. The Role of Excess Returns......Page 184
References......Page 189
1. Introduction......Page 191
2. Previous Literature......Page 193
3. Basic Results......Page 197
4. Sensitivity Analysis......Page 202
5. Do These Patterns Reflect Stages of Financial and Institutional Development?......Page 206
6. Sequencing......Page 209
7. Conclusion......Page 216
Data Appendix......Page 217
References......Page 219
1. Introduction......Page 221
2. Econometric Method......Page 223
3. Data......Page 224
4.1. Ordering of the Variables......Page 228
4.2. Importance of the Six Factors as Influences on Inflation......Page 231
4.3. Response of Inflation to Shocks......Page 236
4.4. Sensitivity Analysis......Page 239
5. Conclusions......Page 242
References......Page 243
PART THREE ECONOMIC GROWTH: THEORY AND EMPIRICS......Page 245
1. Introduction......Page 247
2. A Model of Endogenous Growth......Page 252
2.1. Growth Effects through the Level of Investment......Page 257
2.2. Growth Effects through Investment Volatility......Page 260
3. Quantitative Analysis......Page 263
4. Conclusion......Page 270
References......Page 271
TEN Explaining Economic Growth......Page 273
2. A Note on Technology......Page 274
3. Explanations – An Overview......Page 275
4. Empirics of the Solow and Related Models......Page 277
5. The Implemented Technology......Page 279
5.1. Some Implications......Page 280
6. Consequences......Page 283
7. Cross-Country Agricultural Production Function......Page 284
8. Empirical Results......Page 286
9. Concluding Remarks......Page 289
Appendix: Estimates of Growth Models......Page 290
References......Page 294
PART FOUR PUBLIC ECONOMICS......Page 297
ELEVEN Simulating Fundamental Tax Reform in the United States......Page 299
1.1. Demographic Structure......Page 303
1.2. Preferences and Household Budget Constraints......Page 304
1.3. The Government......Page 305
1.4. Firms and Technology......Page 306
2.1. Earnings Ability Profiles......Page 308
2.2. Fiscal Structure......Page 310
2.3. Preferences and Technology......Page 313
2.4. Solving the Model......Page 314
2.5. The Benchmark Equilibrium......Page 316
3.1. A Proportional Income Tax......Page 318
3.2. A Proportional Consumption Tax......Page 323
3.3. The Flat Tax......Page 325
3.4. The Flat Tax with Transition Relief......Page 328
3.5. The X Tax......Page 330
4. Sensitivity Analysis......Page 332
5. Summary and Conclusion......Page 333
Labor Supply Elasticities......Page 337
Calculation of Earnings Ability Profiles......Page 338
References......Page 341
1. Introduction......Page 343
2. A ‘Workhorse’ Dynamic Equilibrium Model of Taxation in Open Economies......Page 348
2.1. Structure of the Model......Page 349
2.2. Stationary Equilibrium, Calibration and Design of Tax Policy Experiments......Page 353
2.3. The International Transmission Channels of Tax Policy......Page 363
3. The Case Against European Tax Harmonization......Page 367
3.1. Identifying the Tax Policy Transmission Channels: Unilateral Tax Cuts......Page 368
3.2. European Tax Harmonization......Page 375
4. Concluding Remarks: If Harmonization Is Undesirable, What Then?......Page 379
References......Page 382
THIRTEEN Home Bias in Portfolios and Taxation of Asset Income......Page 385
1. Portfolio Specialization in an Open Economy......Page 389
1.1. Equilibrium When Domestic Prices Are Stabilized......Page 393
1.2. Equilibrium When Exchange Rates Are Stabilized......Page 395
2. Price vs. Exchange Rate Stability and International Capital Mobility......Page 397
3. Implications of Stochastic Prices for Taxes on Asset Income......Page 400
3.1. Tax Policy in a Nonstochastic Setting......Page 401
3.2. Tax Policy When Exchange Rates Are Stochastic......Page 402
3.3. Tax Policy when Domestic Prices Are Stochastic......Page 410
4. Conclusions......Page 414
References......Page 416
1. The Accusation of Social Dumping......Page 419
2. Redistribution vs. Wages in Kind......Page 420
3. Why Are the Differences in Direct and Indirect Wage Costs So High?......Page 422
4. A Simple Model of the Economic Catching-up Process......Page 425
5. The Policy of the National Government......Page 430
6. The Overall Welfare Optimum......Page 431
7. The Properties of the Catching-Up Process......Page 433
8. Lessons from German Unification......Page 439
9. Why Low Wages and Social Standards Do Not Indicate Social Dumping......Page 441
References......Page 442
PART FIVE POLITICAL ECONOMY......Page 443
1. Initial Remarks......Page 445
2.1. An Organizing Framework......Page 447
2.2. General Ideas......Page 448
2.3.Specific Predictions......Page 450
2.4. Discussion......Page 453
3. Data and Specification......Page 454
4.1. Size of Government......Page 457
4.2. Composition of Government......Page 464
4.3. Corruption......Page 465
5. Final Remarks......Page 467
References......Page 469
Author Index......Page 471
Subject Index......Page 479