COSTLY INTERMEDIATION AND CONSUMPTION SMOOTHING

This paper studies quantitatively how intermediation costs affect household consumption loans and welfare. Agents face uninsurable idiosyncratic shocks to labor productivity in a production economy with costly financial intermediation and a borrowing limit. Reducing intermediation costs has two effects: (1) For a given decrease in the interest rate on borrowing, agents' ability to smooth consumption over time improves. (2) The demand for loans increases, which increases the interest rate. The net welfare gain of reducing intermediation costs from 3.927% (U.S. level) to 1% is about 1.14% of equivalent consumption in the baseline economy for an endogenous interest rate and 1.90% for an exogenous interest rate. The gains are distributed unevenly: households at the bottom wealth decile improve welfare by 3.96% and 5.86% of equivalent consumption, while those at the top decile have welfare gains of 0.35% and 0.2%, respectively. Sufficiently high intermediation costs eliminate borrowing and hence the welfare gain of reducing costs is not substantial. The welfare analysis includes transitional dynamics between steady states. (JEL D91, E60, G38)     

WHY DO GOVERNMENTS END UP WITH DEBT? SHORT‐RUN EFFECTS MATTER

This paper reconsiders the impact of public debt in an economy with heterogeneous households and incomplete markets to emphasize the short‐run effects of an increase in public debt. As compared to models that rest on steady‐state analysis, we show that the welfare gains of a public debt increase are substantially higher when transitional dynamics are accounted for. The additional debt issue allows for a temporary reduction in the income tax rate, which stimulates labor supply and generates an overshooting of the interest rate. The short‐run gains create a temptation to deviate toward higher levels of debt. Debt increases continue to generate welfare gains even when debt is considerably higher than its long‐run optimal level. (JEL E60, H60)     

WHY DOES CHILD LABOR PERSIST WITH DECLINING POVERTY?

We develop a dynamic overlapping generations model to highlight the role of income inequality in explaining the persistence of child labor under declining poverty. Differential investment in two forms of human capital—schooling and health—in the presence of inequality gives rise to a nonconvergent income distribution in the steady state characterized by multiple steady states of relative income with varying levels of education, health, and child labor. The child labor trap thus generated is shown to preserve itself despite rising per capita income. Policy recommendations include public provision of education targeted toward reducing schooling costs for the poor or raising the efficacy of public health infrastructure. (JEL I1, J2, O1, O2)     

CORPORATE TAX GAMES WITH CROSS‐BORDER EXTERNALITIES FROM PUBLIC INFRASTRUCTURE

We construct a model of corporate tax competition in which governments also use public infrastructure investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for cross‐border infrastructural externalities. Depending on the externality, governments are shown to strategically over‐ or underinvest in infrastructure. We also examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is the case when infrastructure is very effective in raising the tax base and generates a large negative cross‐border externality. (JEL F23, H40)     

OPTIMAL AGRICULTURAL POLICY: SMALL GAINS?

Agricultural subsidies distort the allocation of workers across sectors, and may keep too many workers in agriculture. We use a general equilibrium model with endogenous sector selection calibrated to the U.S. economy to assess the efficiency loss and redistribution effect of the current transfer system. Eliminating current subsidies has two main effects: (1) small efficiency gains (around 4% of agricultural output) and (2) a corresponding rise in the price of agricultural goods. We find high-productivity farmers to be the main beneficiaries of the existing policies, although some of the transfers generate a redistribution effect toward low-productivity agents, which extends beyond the agricultural sector. (JEL H21, H25, H30, J24, J31, J43)     

STABILIZATION POLICY: A RECONSIDERATION

Should stabilization policy be a macroeconomic priority? Most central banks consider it a goal, but Robert Lucas has contended that policies to stabilize output, even if effective, yield negligible welfare gains. This article critiques Lucas's argument. Existing literature suggests nontrivial benefits from stabilization due to nonlinearity of the social welfare function and of the short‐run Phillips curve. Our analysis and examination of the evidence from periods of prolonged high unemployment also suggest further significant gains to stabilization since the “accelerationist” hypothesis does not seem to hold in times of very low inflation. (JEL E61, E63)     

LABOR MARKET DYNAMICS WITH SEARCH FRICTIONS AND FAIR WAGE CONSIDERATIONS

Fairness considerations in wage setting can improve the ability of the Diamond‐Mortensen‐Pissarides search and matching model to account for U.S. labor market dynamics. Firms' production is influenced by workers' effort input, which depends on whether workers consider the employment relation as fair. A typical worker's effort is determined in a comparison of individual current wage with wage norms, including the outside option, the individual past wage, and the wage level in the steady state. The fairness considerations in the search framework give rise to endogenous real wage rigidity, and realistic volatilities of unemployment, vacancies, and labor market tightness. (JEL E24, E32, J64)     

NOMINAL WAGE CONTRACTS AND THE MONETARY TRANSMISSION MECHANISM

We introduce staggered and synchronized nominal wage contracts into a one‐sector monetary dynamic general equilibrium model to analyze the importance of the monetary transmission mechanism. We find a stronger monetary propagation mechanism under a synchronized setting as compared to a staggered setting. This causes the economy under staggering to be less volatile, better matching the data, as well as bringing about lower welfare costs (measured in terms of consumption). However, our results are mixed when it comses to evaluating the contemporaneous correlations and cross‐correlations. We conclude that overall staggered contracts do better in matching the U.S. economy. (JEL E32, E51, J41)     

PUBLIC INFRASTRUCTURE MAINTENANCE AND THE DISTRIBUTION OF WEALTH

When considering how to allocate scarce resources for the development of public infrastructure, many countries have a tendency to neglect maintenance in favor of new infrastructure investment projects. We examine the role of maintenance expenditures on output and on the distribution of wealth in a heterogeneous agents model. In our model, maintenance affects the quality of existing infrastructure and thus the flow of services derived from it. Furthermore, maintenance expenditures also affect the depreciation rates of both public infrastructure and private capital. We calibrate our model to Mexico and consider several policies that increase the flow of resources to infrastructure and find that a policy that allocates all additional resources to new investment is dominated by policies that allocate at least some of the additional resources to maintenance. Specifically, focusing all additional resources on maintenance is shown to generate the largest reduction in inequality, while a more balanced policy that increases both investment and maintenance maximizes output growth. (JEL E00, E62, H54)     

ON GENDER GAPS AND SELF‐FULFILLING EXPECTATIONS: ALTERNATIVE IMPLICATIONS OF PAID‐FOR TRAINING

This paper presents a model of self‐fulfilling expectations by firms and households which generates multiplicity of equilibria in pay and housework time allocation for ex‐ante identical spouses. Multiplicity arises from statistical discrimination exerted by firms in the provision of paid‐for training to workers, rather than from incentive problems in the labor market. Employers' beliefs about differences in spouses' reactions to housework shocks lead to symmetric (ungendered) and asymmetric (gendered) equilibria. We find that: (1) the ungendered equilibrium tends to prevail as aggregate productivity in the economy increases (regardless of the generosity of family aid policies), (2) the ungendered equilibrium could yield higher welfare under some scenarios, and (3) gender‐neutral job subsidies are more effective that gender‐targeted ones in removing the gendered equilibrium. (JEL J16, J70, J71)     

Improving Africa's Roads: Modelling Infrastructure Investment and Its Effect on Sectoral Production Behaviour

Given the scarce resources for public investment in developing countries, policy analysis should include a detailed perspective on the effects of infrastructure. This article develops a modelling framework for analysing the effects of improved road infrastructure on the economy of African countries. The theoretical framework is tested empirically and used for simulations in a Computable General Equilibrium (CGE) model, and the effects on production and welfare are analysed. The model also serves to investigate the effect of roads on the economic participation of rural households.     

SECTORAL COMPOSITION OF GOVERNMENT SPENDING AND MACROECONOMIC (IN)STABILITY

This article examines the quantitative interrelations between sectoral composition of public spending and equilibrium (in)determinacy in a two‐sector real business cycle model with positive productive externalities in investment. When government purchases of consumption and investment goods are set as constant fractions of their respective sectoral output, we show that the public‐consumption share plays no role in the model's local dynamics, and that a sufficiently high public‐investment share can stabilize the economy against endogenous belief‐driven cyclical fluctuations. When each type of government spending is postulated as a constant proportion of the economy's total output, we find that there exists a trade‐off between public consumption versus investment expenditures to yield saddle‐path stability and equilibrium uniqueness. (JEL E32, E62, O41)     

MILITARY SPENDING AND THE GROWTH‐MAXIMIZING ALLOCATION OF PUBLIC CAPITAL: A CROSS‐COUNTRY EMPIRICAL ANALYSIS

In this paper we present an endogenous growth model to analyze the growth maximizing allocation of public investment among N different types of public capital. Using this general model of public capital formation, we analyze the stability of the long‐run equilibrium and we derive the growth‐maximizing values of the shares of public investment allocated to the different types of public capital, as well as the growth‐maximizing tax rate (amount of total public investment as a share of GDP). Then we proceed with an empirical investigation of the theoretical implication of the model that both the effects of the shares of public investment and the tax rate on the long‐run growth rate are non‐linear, following an inverse U‐shaped pattern. Using data of public investment in infrastructure and military capital formation, we derive empirical estimations that confirm the theoretical implications of the model. (JEL E62, H56, O40).     

INVESTMENT SHOCKS,CONSUMPTION PUZZLE,AND BUSINESS CYCLES

A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. (JEL E3, E7)     

THE WELFARE EFFECT OF ACCESS TO CREDIT

I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption‐risk sharing more inefficient. I calibrate the model using U.S. data on credit‐card use and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare. (JEL E51, E41)     

MEASURING THE WELFARE GAIN FROM PERSONAL COMPUTERS

The welfare gain to consumers from the introduction of personal computers (PCs) is estimated. A simple model of consumer demand is formulated that uses a slightly modified version of standard preferences. The modification permits marginal utility, and hence total utility, to be finite when the consumption of computers is zero. This implies that the good will not be consumed at a high enough price. It also bounds the consumer surplus derived from the product. The model is calibrated/estimated using standard national income and product account data. The welfare gain from the introduction of PCs is 2%–3% of consumption expenditure. (JEL E01, E21, O33, O47)     

WELFARE IMPACT OF A BAN ON CHILD LABOR

This article presents a new rationale for imposing restrictions on child labor. In a standard overlapping generation model where parental altruism results in transfers that children allocate to consumption and education, the Nash‐Cournot equilibrium results in suboptimal levels of parental transfers and does not maximize the average level of utility of currently living agents. A ban on child labor decreases children's income and generates an increase in parental transfers bringing their levels closer to the optimum, raising children's welfare as well as average welfare in the short run and in the long run. Moreover, the inability to work allows children to allocate more time to education, and it leads to an increase in human capital. Besides, to increase transfers, parents decrease savings and hence physical capital accumulation. When prices are flexible, these effects diminish the positive welfare impact of the ban on child labor. (JEL D91, E21)     

Employment and the Risk of Domestic Abuse Among Low‐Income Women

This paper uses data from 2 randomized evaluations of welfare‐to‐work programs—the Minnesota Family Investment Program and the National Evaluation of Welfare‐to‐Work Strategies—to estimate the effect of employment on domestic abuse among low‐income single mothers. Unique to our analysis is the application of a 2‐stage least squares method, in which random assignment enables us to control for omitted characteristics that might otherwise confound the association between employment and domestic abuse. We find that increased maternal employment decreases subsequent reports of domestic abuse in both studies. In the Minnesota Family Investment Program—a program with an enhanced income disregard that allowed welfare mothers to keep a portion of their welfare income as earnings rose—an increase in household incomes appears to have contributed to reductions in reports of domestic abuse.     

THE WELFARE IMPACT OF TRADE LIBERALIZATION

This paper analyzes the distributional welfare impact of trade liberalization reforms on heterogeneous households. We develop a static applied general equilibrium model, and using a Social Accounting Matrix and Household Expenditure Survey, we calibrate it to match Slovenian data. We simulate the case of Slovenia joining the EU and quantify its welfare impact on households that differ in terms of age, income, and education. Additionally, we compare this benchmark case with two alternative scenarios: (1) a free trade agreement between Slovenia and the EU and (2) a custom union arrangement where tariff revenues are rebated proportionally to the households. We find that while trade liberalization leads to falling consumer prices, increased production in the export sectors, and aggregate welfare gains, the differentiated welfare impacts across heterogeneous households vary in their degrees. (JEL D58, F14, F15)     

DISINFLATION,INEQUALITY, AND WELFARE IN A TANK MODEL

We investigate the redistributive and welfare effects of disinflation in a two-agent New Keynesian model characterized by limited asset market participation and wealth inequality. We highlight two key mechanisms driving our long-run results: (1) the cash in advance constraint on firms working capital; (2) dividends endogeneity. These two channels point in opposite directions. Lower inflation softens the cash in advance constraint and, by raising labor demand, lowers inequality. But disinflation also raises dividends and this increases inequality. The disinflation is always welfare-improving for asset holders. We obtain ambiguous results for non-asset holders, who suffer substantial consumption losses during the transition. (JEL E31, E5, D3, D6)