Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0401 Title: Inequality and Industrialization Author-Name: Parantap Basu Author-Name: Alessandra Guariglia Abstract: Why do some countries industrialize later than others? Recent literature suggests that the prime reason is low agricultural productivity. This paper argues that the initial inequality of human capital could also be a contributing factor to the delayed process of industrialization characterizing some countries. We develop a neo-classical growth model which predicts that countries with a greater initial knowledge gap between rich and poor agents industrialize slowly, and that human capital inequality, although declining, tends to be persistent. Our cross-country data lend support to these predictions. Creation-Date: 2004-08 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0401.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0402 Title: Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints Author-Name: V. Anton Muscatelli Author-Name: Patrizio Tirelli Author-Name: Carmine Trecroci Abstract: This paper derives a New Keynesian dynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The model is then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targeting form. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers affects output and inflation variability in the presence of such a monetary policy rule. Creation-Date: 2004-02 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0402.pdf File-Format: Application/pdf Classification-JEL: E58, E62, E63. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0403 Title: A Model of Job and Worker Flows Author-Name: Nobuhiro Kiyotaki Author-Name: Ricardo Lagos Abstract: We develop a model of gross job and worker flows and use it to study how the wages, permanent incomes and employment status of individual workers evolve over time and how they are affected by aggregate labor market conditions. Our model helps explain various other features of labor markets, such as the size and persistence of the changes in income that workers experience due to displacements or job-to-job transitions, the length of job tenures and unemployment duration, and the amount of worker turnover in excess of job reallocation. We also examine the effects that labor market institutions and public policy have on the gross flows, as well as on the resulting wage distribution, employment and aggregate output in the equilibrium. From a theoretical point of view, we study the extent to which the competitive equilibrium achieves an efficient allocation of resources. Creation-Date: 2004-03 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0403.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0404 Title: Habit Formation and Interest Rate Smoothing Author-Name: Luisa Corrado Author-Email: Luisa.Corrado@uniroma2.it Author-Name: Sean Holly Author-Email: Sean.Holly@econ.cam.ac.uk Abstract: Following a conjecture of Kozicki and Tinsley (2002) we generalise the habit formation model of consumption to allow for both a multiplicative utility function and a habit-aspiration function which is a geometrically weighted average of past consumption. The geometric form of the aspiration function addresses the recent concerns of Wendner (2002) who shows that a combination of a multiplicative utility function and an aspiration function that is an arithmetic weighted average of past consumption violates some important assumptions of utility theory. In addition, the geometric form allows us to derive an optimising model of the IS-PC form in which there is a greater degree of inertia in both inflation and output that arises from the role given to habit formation. Because the welfare function of the policymaker is that of the representative agent, and consumers dislike large changes in consumption relative to the level of consumption to which they aspire, the optimal (one-period) rule penalises changes in income and also responds sluggishly to shocks. This goes some way towards accounting for the common observation that the responses of output and inflation to shocks are drawn out, and the interest rate used for policy is persistent. We calibrate the model and find that we can replicate the persistence in interest rate setting by a monetary authority over and above that attributable to the persistence in inflation and the output gap. Creation-Date: 2004-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0404.pdf File-Format: Application/pdf Classification-JEL: D12; E52; E42. Keywords: Habit formation; interest rate smoothing; AIM method. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0405 Title: Consumption and Real Exchange Rates with Incomplete Markets and Non-traded Goods Author-Name: Gianluca Benigno Author-Email: g.benigno@lse.ac.uk Author-Name: Christoph Thoenissen Author-Email: ct30@st-andrews.ac.uk Abstract: This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector. Creation-Date: 2004-09 Revision-Date: 2006-12 Publication-Status: Forthcoming in Journal of International Money and Finance. File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0405.pdf File-Format: Application/pdf Classification-JEL: F31; F41. Keywords: Consumption-real exchange rate anomaly; incomplete financial markets; non-traded goods. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0406 Title: Performance of Inflation Targeting Based on Constant Interest Rate Projections Author-Name: Seppo Honkapohja Author-Name: Kaushik Mitra Abstract: Monetary policy is sometimes formulated in terms of a target level of inflation, a fixed time horizon and a constant interest rate that is anticipated to achieve the target at the specified horizon. These requirements lead to constant interest rate (CIR) instrument rules. Using the standard New Keynesian model, it is shown that some forms of CIR policy lead to both indeterminacy of equilibria and instability under adaptive learning. However, some other forms of CIR policy perform better. We also examine the properties of the different policy rules in the presence of inertial demand and price behaviour. Creation-Date: 2004-06 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0406.pdf File-Format: Application/pdf Classification-JEL: E52; E61; E32. Keywords: Indeterminacy; instability under learning; inflation targeting; inertia in demand; inflation inertia. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0407 Title: Public Expenditures, Bureaucratic Corruption and Economic Development Author-Name: Keith Blackburn Author-Name: Niloy Bose Author-Name: M. Emranul Haque Abstract: This paper presents a dynamic general equilibrium analysis of public sector corruption and economic growth. In an economy with government intervention and capital accumulation, state-appointed bureaucrats are charged with the responsibility for procuring public goods which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to appropriate public funds by misinforming the government about the cost and quality of public goods provision. The incentive for each bureaucrat to do this depends on economy-wide outcomes which, in turn, depend on the behaviour of all bureaucrats. We establish the existence of multiple development regimes, together with the possibility of multiple, frequency-dependent equilibria. The predictions of our analysis accord strongly with recent empirical evidence on the causes and consequences of corruption in public office. Creation-Date: 2004-06 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0407.pdf File-Format: Application/pdf