This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses “dirty” machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.

We propose a model in which economic relations and intritutions in advanced and less developed countries differ as these societies have access to different amounts of information. The lack of information in less developed economies makes it hard to evaluate the performance of manager, and leads to high "agency costs". Differences in the amount of information have a variety of sources. As well as factors related to the informational infrastructure, we emphasize that societies accumulate information partly because the scarcity of capital restricts the repetition of various activities. Two implications of our model are: (i) as an economy develops and generates more information, it achieves better risk-sharing at a given level of effort, but because agents are exerting more effort and the types of activities are changing, the overall level of risk-sharing may decline; (ii) with development, the share of financial intermediation carried out through market institutions should increase.

Many technologies used by the LDCs are developed in the OECD economies, and as such, are designed to make optimal use of the skills of these richer countries' workforces. Due to differences in the supply of skills, some of the tasks performed by skilled workers in the OECD economies will be carried out by unskilled workers in the LDCs. Since the technologies in these tasks are designed to be used by skilled workers, productivity in the LDCs will be low. Even when all countries have equal access to new technologies, this mismatch between skills and technology can lead to sizable differences in total factor productivity and output per worker. Our theory also suggests that productivity differences should be highest in medium-tech sectors, and that the trade regime and the degree of intellectual property right enforcement in the LDCs have an important effect on the direction of technical change and on productivity differences.

The paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy. The equilibrium under discretion is characterised by inflation and a deficit. Commitment of the exchange-rate instrument only, e.g., through membership in a European monetary union with low inflation, contributes to price stability but increases the deficit. Whether the government will prefer this outcome to the discretionary one depends on the structure of the economy: commitment appears more favourable, the more open is the economy. The time-consistency arguments strengthen the case for simultaneous commitment of monetary and fiscal policy for inflation-prone countries joining a monetary union.

Basic welfare economics tells us that many types of externalities can be remedied by proper use of corrective taxes and subsidies. This paper shows that this notion also extends to the macroeconomic externalities discussed in recent Keynesian literature on nominal price rigidities. The derived policy rules are lindred in spirit to standard Keynesian policy prescriptions: Progressive income taxes may serve a useful role in combating wasteful economic fluctuations. However, unlike older fix-price models of automatic stabilizers, progressive taxes work in our monopolistic economy because they directly affect the pricing mechanism.

Are competitive wage premia an obstacle to growth? The answer of the architects of the Scandinavian "model" in the 1950s and 60s was in the affirmative: By punishing expansive and growth enhancing sectors of the economy competitive wage premia put an unwarranted drag on the rate of structural change. We formalize this intuition using a two sector endogenous growth model, considering both open and closed economy cases. We also show that egalitarian pay compression, combined with active labor market policies, works exactly in the same way as an industrial policy of subsidizing sunrise industries.

We show how an extended theory of fair wages, in which workers also care about the functional distribution of income, can be incorporated in the two-by-two Heckscher-Ohlin model. An important feature of the model is the existence of involuntary unemployment. Several results stand out. First, there is no longer a simple relation between measures of factor abundance and trade patterns. First, there is no longer a simple relation between measures of factor abundance and trade patterns. Second, factor-price equalization will generally not occur. Third, differences in social norms explain why terms of trade shocks produce nonuniform adjustments in real wages and unemployment across otherwise similar countries. Fourth, losses from trade may occur. Finally, in countries where fairness considerations are important, tariffs may increase overall employment.

It is commonly believed that tax arbitrage is anti-egalitarian. The present paper shows that this is not necessarily true; tax arbitrage might actually reduce inequality as well as increase efficiency. It is also shown that the introduction of tax arbitrage will linearize the tax system. Thus complicated, non-linear tax scedules in the spirit of Mirrlees (1971) cannot be sustained.

In this paper, we analyze government budget balance within a simple model of endogenous growth. For the AK model, simple analytical conditions for a tax cut to be self-financing can be derived. The critical variable is not the tax rate per se, but the "transfer-adjusted tax rate". We discuss some conceptual issues in dynamic revenue analysis, and we explain why previous studies have arrived at seemingly contradictory results. Finally, we perform an empirical study of the transfer-adjusted tax rates of the OECD countries to see which country has the highest potential for fiscal improvements; it turns out that only a few countries have any potential for such "dynamic scoring".

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the basic labor supply model. We show that tax arbitrage has potentially dramatic implications for positive, normative and econometric analysis of how taxes affect work incentives.

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the emipircal study of labor supply. We discuss the implications for tax policy analysis, and we show that a failure to account for avoidance responses may lead to huge errors when predicting how tax reform affects labor supply, tax revenue, and the welfare cost of taxation. in conclusion we argue that our model may explain a number of otherwise hard to understand dimensions of tax payer response.

We examine the potential importance of consumer ambiguity aversion for asset prices and how consumption fluctuations influence consumer welfare. First, considering a simple Mehra-Prescott-style endowment economy with a representative agent facing consumption fluctuations calibrated to match U.S. data, we study to what extent ambiguity aversion can deliver asset prices that are consistent with data: a high return on equity and a low return on riskfree bonds. For some configurations of preference parameters – a discount factor, a degree of relative risk aversion, and a measure of ambiguity aversion – we find that it can. Then, we use these parameter configurations to investigate how much consumers would be willing to pay to reduce endowment fluctuations to zero, thus delivering a Lucas-style welfare cost of fluctuations. These costs turn out to be very large: consumers are willing to pay over 10% of consumption in permanent terms.

A set of strategy profiles is here said to be closed under rational behavior (curb) of it contains all its best replies. Each curb set contains the support of at least one Nash equilibrium in mixed strategies, but there are perfect Nash equilibria that are not contained in any minimal curb set. It is shown that every game with compact strategy sets and continuous payoff functions possesses at least one minimal curb set, that every minimal curb set is identical with its best replies and that it is contained in the set of rationalizable strategy profiles.

Do males differ from females in terms of self-confidence? The structure of the Economics I exam at Stockholm University provides an opportunity to shed some light in this question. By answering an extra, optional question, the students can aim for a higher mark. We find a clear gender difference in that male students are inclined than female students to take this opportunity. This difference in self-assessment is more pronounced among younger than among older students.

The capital market equilibrium is derived in a model where asset returns follow a mixed Poisson jump-diffusion process, rather than a simple diffusion process as in the traditional ICAPM. In the resulting JCAPM (CAPM with Jumps) expected returns are still linear in beta, but in addition premia have to be paid for jump risk. When jump risk is diversifiable in the market portfolio the JCAPM reduces to the standard ICAPM, as in Jarrow and Rosenfeld (1984).

Jumps are found to be prevalent in the daily returns of the market indices in the 18 countries investigated, during the time period 1985-89. However, when the year of the crash, 1987, is excluded from the sample, the simple diffusion process gives an adequate description of the market returns in seven countries.

We study two related Granger noncasualty hypotheses. First, money equation innovations cannot predict future income. Second, the coefficients on money in the income equation are zero. Furthermore, we test if income is neutral in the long run with respect to money equation innovations. The first and third hypotheses are addressed in the moving average represenation of a cointegrated vector autoregression. Focusing on monthly U.S. data (1959-89) on income, prices, interest rates, and money we obtain weak evidence against the first hypothesis and mixed evidence about the second. Finally, our results suggest that income is not influence by money innovations in the long run.

In the model of this paper, an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur. We provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time. The model produces realistic patterns of covariation between exchange rates and interest rate differentials, and provides interesting interpretations of available empirical evidence. We also specify how to infer devaluation risk from target zone data.

This paper uses exogenous variation in rainfall across districts in Uganda to estimate the causal effects of household income shocks on children's enrollment and cognitive skills conditional on gender. I find negative income shocks to have large negative and highly significant effects on female enrollment in primary schools and the effect grows stronger for older girls. The effect on boys' enrollment is smaller and only marginally significant. Moreover, I find that a negative income shock has an adverse effect on test scores in general and test scores of female students in particular. The results imply that households respond to income shocks by varying the quantity and quality of girls' education while boys are to a large extent sheltered -- a finding consistent with a model where parents' values of child labor differ across sexes.

Identifying and implementing incentives that give rise to a strong relationship

of accountability between service providers and beneficiaries is viewed by many as critical

for improving service delivery. How to achieve this in practice and if it at all works,

however, remain open questions. Systematic evaluation of service delivery innovations

to increase accountability can show what works, what doesn’t and why, a first step to

scaling up success. This paper discusses one such attempt: a randomized evaluation of a

Citizen Report Card project at the community level in primary health care in Uganda.

The Citizen Report Card project collected quantitative information on the quality and

quantity of health service provision from citizens and public health care providers. This

information were then assembled in "easy access" report cards that were disseminated,

together with practical information on how best to use this information, in community,

staff, and interface meetings by local community organizations in order to enhance citizens’

ability to monitor the health care providers. The intervention improved both the quality

and quantity of health service provision in the treatment communities: One year into

the program, average utilization was 16 percent higher in the treatment communities; the

weight of infants higher, and the number of deaths among children under-five markedly

lower. Treatment communities became more extensively involved in monitoring providers

following the intervention, but we find no evidence of increased government funding. These

results suggest that the improvements in the quality and quantity of health service delivery

resulted from increased effort by the health unit staff to serve the community.

This paper shows how a well known class of rational expectations hypothesis using linear vector autoregressions (VAR:s) can be extended to allow for unobservable Markov switching. The regime shift model used falls into the general framework of Hamilton (1990), but differs to the centered model actually implemented by Hamilton and others. The model here has the advantage that it is easier to estimate, and the intuitive appeal that the state dependence is symmetric. THe contribution of the paper is to derive testable restrictions implied by rational expectations, which are linear when the forecast horizon is infinite. The restrictions on the autoregressive parameters are the same as those that appear in the centered model. As an illustration, we duplicate a test of the expectations hypothesis (EH) in Sola & Driffill (1994) on 3 and 6 month US bills on quarterly data, and find that their results may be fragile.

If individuals differ not only in their inherent capacity to earn income, but also in the probability that they will fall ill, can subsidized public health insurance be justified on the grounds that it serves as an efficient tool to redistribute welfare? This question is analyzed in a model where the social welfare function is a weighted average of individual expected utilities, and where taxation is by a linear income tax. The answer is "yes", except in certain special cases.

This paper studies the relationship between investor protection, the development of financial markets and income inequality. In the presence of market frictions, investor protection promotes financial development by raising confidence and reducing the costs of external financing. Developed financial systems spread risks among financiers and firms, allocating them to the agents bearing them the best. Therefore, financial development plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between financial development and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-nine countries, as well as a panel of fifty-two countries over the period 1976-2000, supports the predictions of the model.

This paper assesses the effects of international financial liberalization and banking crises on investments and productivity in a sample of 93 countries (at its largest) observed between 1975 and 1999. I provide empirical evidence that financial liberalization spurs productivity growth and marginally affects capital accumulation. Banking crises depress both investments and TFP. Both levels and growth rates of productivity respond to financial liberalization and banking crises. The paper also presents evidence of conditional convergence in productivity across countries. However, the speed of convergence is unaffected by financial liberalization. These results are robust to a number of econometric specifications.

The paper analyzes the effects on the demand for owner-occupied housing that are likely to result from the Swedish 1983-85 tax reform. This is done by means of a microsimulation model which takes into account the dichotomous nature of the demand for housing: the consumers choose the mode of tenure (owning versus renting) as well as the quantity of housing conditional on the choice of the mode of tenure. The tax reform consists of a general reduction of marginal tax rates (i.e. an increase in disposable income) together with limitations in the deductibility of mortgage interests. The simulations show that this will cause an increase in home-ownership in the sense that more households will demand owner-occupied housing. At the same time, however, the households will demand smaller houses in the average, and thus aggregate demand for small and medium-sized units will increase while demand for large units will fall sharply.

A fundamental overhaul of EU economic governance is needed. The most important reform is a strengthening of national fiscal frameworks, including the establishment of independent fiscal watchdogs in Member States that do not yet have such institutions. At the European level, a permament crisis resolution mechanism should be integrated with both broader macroeconomic surveillance and the sanction system. An independent European fiscal council could, based on macroeconomic risk considerations, decide in advance appropriate haircuts in the event of future sovereign debt restructuring.

The paper analyzes the effects of job sharing, i.e. a reduction of working time, on wages and output with a monopoly trade union. The effects are related to how working time is determined initially: the wage increases if initial working time is smaller or equal than the trade union optimum, whereas the result is unclear when it is larger. It is never optimal for the trade union to reduce both wages and working time in response to recessionary supply shocks such as those in the seventies. The analisys may help to explain varying attitudes towards work sharing in different countries.

The paper discusses three aspects of the system for unemployment support. First, active labour market programmes as a means of re-allocating labour from high-unemployment to low-unemployment sectors are analysed, and it is concluded that wage-raising accommodation effects may be a serious problem. Second, the possibility of strengthening incentives for wage moderation by differentiating employee and/or employer contributions to unemployment insurance are discussed. Third, the question is raised whether there may exist other institutional set-ups for providing unemployment support that are more efficient in terms of returning the unemployed to work than government-run systems.

The likely impact of the EMU on the variability and level of employment is analysed. The major conclusions are: (1) Although an inflation-target regime will constrain monetary policy of a non-participant in the EMU, it still leaves considerable scope for exchange-rate changes in the case of country-specific demand shocks, provided that there is some nominal price and wage flexibility. (2) Variations in payroll taxes can be used as a substitute for exchange-rate changes in the EMU, but it will be an imperfect substitute. (3) Money-wage flexibility is likely to be larger inside than outside the EMU, but probably not by much. (4) There are various mechanisms through which the EMU may affect incentives for labour-market reform to reduce equilibrium unemployment, but the net impact is highly uncertain.

The paper demonstrates that policy makers may have a precautionary motive to undertake more labour-market reform - an hence attain lower equilibrium unemployment - inside a monetary union than outside. The reason is a desire to reduce the utility cost of variations in employment when assymetric shocks can no longer be stabilised through domestic monetary policy.

The paper analyses how independent fiscal watchdogs (fiscal policy councils) can strengthen the incentives for fiscal discipline. Several countries have recently established such institutions. By increasing fiscal transparency they can raise the awareness of the long-run costs of current deficits and increase the reputational costs for governments of violating their fiscal rules. Councils that make also normative judgements, where fiscal policy is evaluated against the government's own pre-set objectives, are likely to be more influential than councils that do only positive analysis. To fulfil their role adequately, fiscal watchdogs should be granted independence in much the same way as central banks. There are arguments both in favour and against extending the remit of a fiscal policy council to include also tax, employment and structural policies. Whether or not this should be done depends on the existence of other institutions making macroeconomic forecasts and analysing fiscal policy, the existence of institutions providing independent analysis in other economic policy areas, and the severity of fiscal problems.

The paper discusses the roles of stabilization policy and wage setting for macroeconomic stability in economies with centralized wage setting such as in the Nordic countries, Austria, the Netherlands and Germany. because of their economy-wide character labout market organizations in these countries are forced to consider the macroeconomic effects of and likely government responses to their behavior. The paper gives aan account of how the allocations of responsibilities for various macroeconomic goals between the government and labour market organizations have developed during the post-war period with the emphasis on the responses to the recent supply shocks.

The country experiences are used to draw conclusions on the advantages or disadvantages of various policy regimes and recent theoretical work on the behavior of trade unions is applied to explain the observed outcomes.

The Swedish Fiscal Policy Council, established in 2007, has small resources but a broad remit. In addition to monitoring the long-run sustainability of fiscal policy, the council evaluates the short-run fiscal stance from a cyclical perspective. The council also analyses long-run employment and growth developments. Another task is to evaluate the motives, explanations and research basis for government policies. There is no unique best set-up of a fiscal policy council. Instead, it has to be adapted to the special characteristics of each country. The set-up of the Swedish council appears consistent both with the pre-existing institutional framework, with also other bodies making detailed budget evaluations and macroeconomic forecasts, and with a strong tradition of academic participation in the policy debate. The broad remit could lead to less focus on the fiscal watchdog role. On the other hand, the council plays a "supervicory" role in the general economic policy debate, helping to raise the standards of the doscussion, which is a fundamental democratic objective.

The paper analyses various mechanism through which monetary union in Europe may affect unemployment. The focus is on the political incentives for labour-market reform. There will be more reform outside than inside the EMU to the extent that a national inflation bias can be reduced. But if there is a precautionary motive for low average unemployment in order to reduce the utility cost of macroeconomic variability, there could be more reform in a monetary union. Labour-market reform to increase wage fexibility as a substitute for domestic monetary policy and transition costs of reform are also analysed. The net effect of monetary union on unemployment is ambiguous.

The paper distinguishes between the impact of th EMU on nominal wage flexibility and on equilibrium real wage and unemployment levels. A preceived need to increase nominal wage flexibility as a substitute for domestic monetary policy and a tendency to less real wage moderation in the EMU are likely to promote informal bargaining co-ordination and social pacts in the medium run. But such co-ordiantion is not likely to be sustainable in the long run, as it conflicts with other forces working in the direction of decentralization and deunionisation. This could lead to more government intervention in wage setting during a transitional period. Although monetary unification will strengthen the incentives for higher-level transnational co-ordination of wage bargaining, such a development is improbable in view of the co-ordination costs involved. If transitional co-ordination develops, it is most likely to occur within multinational firms.

The issue of low-wage competition in services trade involving posted workers is controversial in the EU. Using Swedish survey data, people’s attitudes are found to be more negative to such trade than to goods trade. The differences depend on both a preference for favouring social groups to which individuals belong (here the domestic population) and altruistic justice concerns for foreign workers. In small-group experiments we find a tendency for people to adjust their evaluations of various aspects of trade to their general attitude. This tendency is stronger for those opposed to than those in favour of low-wage trade competition. This may indicate that the former group forms its attitudes in a less rational way than the latter group.

Differences in macroeconomic performance among countries are often attributed to differences in wage setting structures. This paper examines the effects of varying degrees of centralization of wage bargaining. The analysis is both theoretical and empirical, and also includes numerical examples. The upshot is that both highly centralized systems with national bargaining (such as in Austria and the Nordic countries), and highly decentralized systems with wage setting at the level of individual firms (such as Japan, Switzerland and the US) are likely to perform well. The worst outcomes with respect to employment are to be expected in systems with an intermediate degree of centralization (such as in Belgium and the Netherlands). These conclusions challenge the conventional wisdom according to which more "corporatist" economies always perform better then less "corporatist" ones.