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This article presents an overview of this issue in relation to the periodical's twentieth anniversary. The author discusses the organization of a anniversary panel in London, England to mark the occasion, and to review articles from the history of the periodical focusing on economic-policy development during these 20 years. The article also provides an introduction to other articles presented in this issue, including one concerning the evolution of exchange-rate management, the effects of government debts on interest rates, and higher education reform in Europe.

During the past few decades, developing countries have been pushed by international economic institutions and developed countries to effectively abandon promotion of industrialization and structural transformation as a key developmental agenda. In addition, the 'development' debate of recent decades has tended to focus solely on internal factors as if external economic forces are always benign. Within this context, this paper analyzes the key ideas of Gebrehiwot Baykedagn (GHB) (1886–1919), traces their lineages and considers their feasibility and relevance for current developing economies. In a nutshell, for GHB, the main keys to economic development are the creation, accumulation and use of knowledge and skill, technology, innovation and technical change and the means of economic development are deliberate, dynamic and comprehensive sets of state-directed, synergistic interventions that aim at moving an economy away from 'nature-intensive' economic activities towards knowledge-, skill-, technology- and innovation-based ones. Based on analysis of historical and theoretical evidence, this paper argues that the main ideas of GHB and his colleagues are still valid, feasible and relevant for today's developing economies as long as they are innovatively tailored to the unique context of each country and to the broader international policy context. [ABSTRACT FROM AUTHOR]

The four papers in the July 2004 issue of the journal "Economic Policy" were presented at the Economic Policy Panel hosted by the Bank of Italy in Rome in October 2003. The contributions of the papers to scientific understanding and to current policy debates were discussed. The entry of the European Union's new members on May 1, 2004 is one of the most important political and constitutional development of recent years. The distribution of voting power between European Union members was examined. Social unrest related to attempted reform of pension systems has been a recent feature of the political scene in a number of European countries. The impact of pensions contributions on the functioning of labor markets was outlined. The paper by Felix Eschenbach and Ludger Schuknecht sheds important light on the issue by considering a broad range of theoretical possibilities and empirical experiences.

Public subsidies in support of new firm foundation are among the most frequently used instruments of industrial policy in the Euro zone. This paper analyses their effectiveness and efficiency vis-à-vis some features of the overall process of industry dynamics in Italian manufacturing. To this end, the survival and growth patterns of new small firms are investigated using a unique dataset on electrical and electronic engineering in Italy. As regards survival, our results confirm the findings of other studies, namely that the hazard rates are particularly high in the early stages of firm's lifecycle. As far as growth is concerned, the main finding in this study is that Gibrat's Law fails to hold in the years immediately following start-up, when smaller firms must 'rush' in order to achieve a size large enough to enhance their likelihood of survival; conversely, in later stages of a firm's lifecycle this Law cannot be ignored. These results radically question the use of subsidies as an optimal policy for the support of new entries, since the subsidy brings about a major bias in the process of market selection (including substitution and deadweight effects) and hampers the post-entry scale adjustment of newborn firms. [ABSTRACT FROM AUTHOR]

This article introduces the topics of the papers featured in the October 1993 issue of "Economic Policy." The first paper focuses on economic reform in Sweden. It discusses the restoration of efficiency through enhanced competition in all sectors of the economy. The author of the second paper presents the idea of a new geographical identity in Europe. The author likewise proposes that all secessions be organized under the principle of distributive neutrality. The third paper concerns the republics of the former Soviet Union, many of which face spiraling inflation and shrinking output.

This paper uses data on unemployment flows and job vacancies to shed light on the phenomenal rise of unemployment in Britain, from under 3% in the 1960s to over 15% (male) unemployment in the 1980s. It finds that most of the rise is due to a fall in the demand for labour. A more expansionary fiscal policy and improved international competitiveness would have ameliorated this fall. Some of the fall, however, can also be attributed to supply pressure, which stopped wages from falling fast enough. Social security and a more relaxed attitude by the state in the provision of unemployment and supplementary benefits also contributed to the rise in unemployment, by making workers more choosey. The paper investigates whether it is possible for any given set of underlying factors to give rise to more than one equilibrium unemployment rate. If so, a temporary stimulus might release the economy from a low-level equilibrium. However the conditions necessary for this do not appear to hold in practice. Thus fiscal and monetary policy can permanently affect unemployment only if they can permanently alter aggregate demand. Microeconomic policy, like marginal employment subsidies, can, however, have a permanent effect on unemployment and the paper investigates whether there are any grounds for wishing to use such policy tools to alter the free-market equilibrium unemployment rate. There is evidence that the allocation of workers to jobs is done more efficiently at a fairly high level of overall labour demand. It follows that, unless job vacancies exceed unemployment, job creating policy measures will be beneficial. [ABSTRACT FROM AUTHOR]

Introduces a series of articles on economic policy.

The formal representation of economic theories normally takes the shape of a model, that is, a system of equations which connect the endogenous variables with the values of the parameters which are taken as given. Sometimes, it is possible to identify one or more equations which are able to determine a subset of endogenous variables priory and independently of the other equations and of the value taken by the remaining variables of the system. The first group of equations and variables are thus said to causally determine the remaining variables. In Pasinetti's works, this notion of causality has often been emphasized as a formal property having the burden of conveying a profound economic meaning. In this paper, we will go through those works of Pasinetti where the notion of causality plays a central role, with the purpose of contextualizing it within the econometric debate of the Sixties, enucleate its economic meaning and show its connections with other fields of the modern classical approach. [ABSTRACT FROM AUTHOR]

This paper highlights the significance of open-economy considerations in the analysis of tax reforms. When the open-economy considerations are ignored then under some conditions, income and consumption taxes are known to be equivalent in the sense that the economic effects of each one can be replicated by the other. Obviously, under such conditions shifts between income- and consumption-tax systems are irrelevant. This equivalence between the two tax systems breaks down once one allows for discrepancies between national income and national spending, as permitted by international borrowing and lending. Accordingly for the open economy the tax systems are linked through another equivalence relation involving four tax systems: income tax, consumption tax, international borrowing tax, and external interest-earning tax. In this paper we analysed the domestic and international consequences of tax reforms associated with shifts between income- and consumption-tax systems. Since such tax reforms involve only two of the four tax systems connected through the equivalence relationship, their effects on the economic system are not neutral. The paper identifies the key factors, mechanisms, and channels through which such tax reforms exert their effect. Finally, our analysis of the consequences of tax reforms focused on issues in positive economics. However, being grounded on solid microeconomic foundations, the analytical framework developed in this paper is capable of addressing also normative issues.[21] Accordingly, extensions of the analysis would evaluate alternative tax systems in terms of their consequent excess burdens associated with distortionary taxes, as well as in terms of the inter- and intra-generational distribution of welfare associated with the dynamic patterns of tax policies. [ABSTRACT FROM AUTHOR]

Presents information on the views of David Laidler involving the stability of the money demand function. Discussion on the structural equations of macroeconomics; Impact of the works of Laidler on the economy; Reaction of the reliance on empirical findings in the works of Laidler.

This paper investigates the process of decision-making within the Bank of England and the Monetary Policy Committee (MPC): specifically, the extent of triangulation in the process. Triangulation is the mixing of two or more methods, investigators, theories, or data in a single investigation. Extensive evidence of limited triangulation is found within the MPC process. It is suggested that to enhance the logical consistency of their recommendations, the Bank engages in greater method triangulation. Further, in keeping with the moves towards transparency in the MPC process, it is proposed that procedures for employing the existing triangulation be codified. [ABSTRACT FROM AUTHOR]

Introduces the themes of the articles featured in the October 2005 issue of the journal "Economic Policy." Membership of countries in the European Union; Phenomenon of parallel trade; Occurrence of low inflation.

This paper studies some empirical implications of models with limited risk sharing due to the imperfect enforceability of contracts. We test whether the amount by which public transfers reduce private transfers is affected by features of the economy, such as the variance of income and its persistence. These implications are unique to models with imperfect enforceability. We use data from Mexico collected to evaluate a public transfer programme. It included a randomised component that we exploit as a source of exogenous variation. Our results support the theoretical model in that the crowding out of private transfers is larger in villages where the variance of income is smaller. [ABSTRACT FROM AUTHOR]

The question of what should determine the boundaries between public and private firms in an advanced capitalist economy is a highly topical one. In this paper I discuss some recent theoretical thinking on this issue. I divide the paper into two parts. First, I make some general remarks about the relationship between the theoretical literature on privatization and incomplete contracting theories of the firm. Second, I use some of the ideas from this literature to develop a very preliminary model of public-private partnerships. [ABSTRACT FROM AUTHOR]

This paper considers three models on the role of education in economic growth: human capital theory, a threshold effect, and interaction effects between education and both R&D and investment. The sample consists of twenty-four OECD countries over the 1950-1990 period. Five measures of education are used. The descriptive statistics show convergence in both labor productivity levels and schooling levels among these nations. However, regressions of labor productivity growth on education provide mixed results on the threshold effect and the interaction effects. Almost no support is provided for the human capital model. [ABSTRACT FROM AUTHOR]

This paper presents an approximate analytical solution to the optimal consumption and portfolio choice problem of an infinitely lived investor with Epstein-Zin-Weil utility who faces a constant riskless interest rate and a time-varying equity premium. When the model is calibrated to U. S. stock market data, it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one. The optimal portfolio policy also involves timing the stock market. Failure to time or to hedge can cause large welfare losses relative to the optimal policy. [ABSTRACT FROM AUTHOR]

The textbook model of international trade is set in a world of perfectly competitive markets where products are homogenous and economies of scale are absent. Yet empirical evidence of two-way trade in similar products and of the importance of scale economies suggests this model is unrealistic. This paper examines the implications of imperfect competition for trade and industrial policy and evaluates the robustness of the conventional recommendation of free trade. Although policy design should be sensitive to the degree of competition, some general and intuitive principles emerge. Good policies target and promote activities which imperfect competition had previously overrestrirted. Since trade affects the degree of competition in domestic and foreign markets, it is important that trade, industrial, and anti-trust policy should be complementary. To quantify these insights, the paper develops empirical models of two industries, refrigerators and footwear, which are then used to compare the effects of trade policy (tariffs or export subsidies), with or without foreign retaliation, and industrial policy (a production subsidy). Free trade is rarely the best policy. Whilst some forms of subsidy benefit some or even all countries, reciprocal tariffs are likely to harm the world economy. A strong rationale remains for negotiated and reciprocal reductions in trade barriers. [ABSTRACT FROM AUTHOR]

This paper considers the implications of heterogeneity in information-processing abilities for macroeconomic models that exhibit ‘strategic complements.’ The latter is the same concept that has received much attention in the recent macro literature under the headings Keynesian coordination problems and positive trading externalities. We consider environments in which agents vary in terms of their ability to form expectations, and ask whether it is the ‘sophisticated’ agents or the ‘naive’ agents who have a disproportionately large effect on macroeconomic equilibrium. We find that if macroeconomic interaction exhibits strategic complementarity, then it is the naive agents who have a disproportionate impact. [ABSTRACT FROM AUTHOR]

This article presents that the five papers in the October 1995 issue of "Economic Policy," are presented at the twenty-first meeting of the Economic Policy Panel held in Paris, France on April 21-22, 1995. Each paper is preceded by a summary and principal conclusions. Partly because of the Maastricht convergence conditions, and partly because many countries have emerged from the recession of the early 1990s with large public debts and unsustainable budget deficits, most Organisation for Economic Co-operation and Development countries are trying to re-establish fiscal rectitude.

The present paper formalizes the idea that improved monitoring helps coordination in long term relationships. Specifically, the pure-strategy sequential equilibrium payoff set is shown to expend (in the sense of set inclusion) in repeated games with imperfect monitoring, when the quality of the signal improves in Blackwell's sense. Furthermore, the directions of the expansion are identified. [ABSTRACT FROM AUTHOR]

This paper studies reputation effects in games with a single long-run player whose choice of stage-game strategy is imperfectly observed by his opponents. We obtain lower and upper bounds on the long-game player's payoff in any Nash equilibrium of the game. If the long-run player's stage-game strategy is statistically identified by the observed outcomes, then for generic payoffs the upper and lower bounds both converge, as the discount factor tends to J. to the long-run player's Stackelberg payoff, which is the most he could obtain by publicly committing himself to any strategy. [ABSTRACT FROM AUTHOR]

This paper explains how and why entrepreneurship has emerged as a key component of economic policy to enhance the economic growth performance. Understanding the linkages between entrepreneurship and economic growth requires drawing upon four disparate literatures: international trade and growth, innovation, entrepreneurship, and economic geography. Integrating the key insights from these literatures provides a framework highlighting the important role played by entrepreneurship in economic policy knowledge to enhance the economic growth performance, particularly at the local and regional levels. [ABSTRACT FROM AUTHOR]

This paper applies an institutional approach to contemporary mainstream economics. It identifies some mental and behavioral rules of mainstream economics as a whole and of the mainstream segment of two important subdisciplines, namely, macroeconomics and financial economics. There are social reasons behind the sharing of these rules. They are institutions. More specifically, academics who do not comply with these rules are subject to punishment, while conformists may be rewarded. At the same time, many supporters of mainstream economics have internalized these rules as legitimate, in part because of the prestige of their advocates. Social sanctions and internalization characterize social norms. These institutions are also conventions. Through various mechanisms, some academics follow these rules at least in part because others have done so; in addition, the prevailing rules are not necessarily superior to existing or conceivable alternatives. The combination of social norms and conventions may have negative consequences for the discipline. [ABSTRACT FROM AUTHOR]

Biodiversity is crucial for the production of a range of marketed and non-marketed ecosystem goods and services. This paper reviews the empirical evidence for the role of terrestrial biodiversity and biodiversity conservation in economic development and poverty, at both the macro (e.g. country) and micro (e.g. farm) scales. It first examines general relationships between biodiversity and economic development before showing how biodiversity influences ecosystem services. Second, future scenarios and challenges for biodiversity and development are examined, given projections for further changes in global population, economic growth, and consumption. Third, the relationship between biodiversity protection and incomes is investigated. Two specific policies, protected areas and bioprospecting, are reviewed with respect to their impacts on the welfare of the resource-dependent poor. In conclusion, improvements in policy design and implementation could help minimize the possibility of earth’s sixth mass extinction event, at least within a few generations, while ensuring that the poor are not made worse off as a result of policy implementation. [ABSTRACT FROM PUBLISHER]

Frederic S. Lee's collection of essays makes a substantial contribution to our understanding of the history of heterodox economics, and to our sense of heterodox economics as a community. This paper explores issues arising from the collection in relation to the characterisation of this history, the understanding of heterodox economics itself and the nature and role of such a history from a historiographical perspective. The paper concludes with a discussion of the future of heterodox economics and an argument for a pluralist strategy for its promotion. [ABSTRACT FROM AUTHOR]

This paper explores the impact of elections on economic policies and governance in developing countries. We distinguish between a structural effect, which increases accountability, and a cyclical effect which may be disruptive. Since the effects are offsetting, neither can be analysed in isolation. We implement an econometric analysis on more than 80 developing countries using positive changes in the Country Policy and Institutional Assessment of the World Bank and the International Country Risk Guide as signalling improvements in economic policy and governance. We find that both structural and cyclical effects matter. The cyclical effect suggests that mid-term is the best moment for policy change. We investigate the structural effect by comparing different frequencies of elections. Except at the extremes, a higher frequency of elections improves both policy and governance net of any cyclical effect. The important exception to this benign net effect is if the electoral process is badly conducted. Badly conducted elections have no structural efficacy for policy improvement. A reasonable interpretation of our results is that honest elections increase accountability and thereby discipline governments to improve economic policy and governance, but that if candidates can win by fraud this chain is broken. — Lisa Chauvet and Paul Collier [ABSTRACT FROM AUTHOR]

According to the development approach to exchange rates, competitive currencies have been a key factor in most East and Southeast Asian successful growth strategies. There is also today an important empirical literature that relates overvaluations to low per capita growth rates. While the econometric literature on this issue is relatively rich, theoretical analysis of channels through which real exchange rate levels could affect economic development are very scarce. This paper intends to contribute to the debate by bringing more theoretical elements and providing new econometric evidence to the connections between real exchange rate levels and development. [ABSTRACT FROM AUTHOR]

This paper surveys the recent theoretical and empirical literature that explores the relations between aid and trade and asks about the complementarity or substitution effects at work. We distinguish between the effects of aid on trade flows and on trade policies, of the donor as well as the recipient countries. Special focus is given on trade facilitation, or 'aid for trade'. [ABSTRACT FROM AUTHOR]

This paper examines three distinguishing features of caring: that it involves the development of a relationship, that caring responsibilities and needs are unequally distributed and that social norms influence the allocation of care and caring responsibilities, to draw out their implications for analysing caring and its movement between unpaid and paid economies. Rising opportunity costs of caring are found to produce pressures experienced in different ways across different sectors of the economy. These, coupled with inequalities in care responsibilities and labour market opportunities, influence the movement of care between paid and unpaid economies. This analysis is then used to examine the likely evolution of caring norms and practices and how policy might intervene to avoid an uncaring future. [ABSTRACT FROM AUTHOR]

The recent literature contains many stories of how foreign aid affects economic growth. Aid raises growth in countries with good policies, or with difficult economic environments, or outside the tropics, or on average but with diminishing returns. The diversity of the results suggests that many are fragile. Seven important aid-growth papers are tested for robustness, using 14 minimally arbitrary tests deriving mainly from differences among the studies themselves. This approach investigates the importance of potentially arbitrary specification choices while minimizing the arbitrariness in testing choices. All of the results appear fragile, especially to sample expansion. [ABSTRACT FROM AUTHOR]

Tony Lawson's and Uskali Mäki's respective realist projects rely on an ontology of the economy. This paper will not focus on these research projects but will instead try to shed light on them by introducing an ontology of the economy according to Aristotle. Oikonomiké, the seminal term used by him, is not a noun but an adjective. For Aristotle, nouns express entities or beings, both self-sufficient beings and accidental properties. Adjectives almost always express accidents. What kind of being is ‘the economic’? This analysis will suggest some conclusions about the constraints of economic science and the need for institutions according to the peculiar ontological condition of ‘the economic’ as conceived by Aristotle. [ABSTRACT FROM AUTHOR]

This paper examines the empirical relevance of the capital controversy. The price model of Sraffa and the dual models of the price and quantity systems of von Neumann become the basis of the investigation. In the course of the controversy, it proved easy to construct theoretical examples which contradicted the fundamental neoclassical hypothesis of an inverse capital demand function. This paper presents empirical examples for the first time. Thiry-two input-output tables from the OECD database serve as data. As a result, one envelope is found which involves re-switching. Reverse substitution of labour or reverse capital deepening are observed in about 3.65% of tested cases: they involve at least two switchpoints. [ABSTRACT FROM AUTHOR]

The appetite for fiscal discipline has been steadily declining among most industrial countries. In the past, fiscal profligacy would have been punished by markets with higher interest rates and, in some cases, also exchange rate depreciation. However, in post-EMU Europe, exchange rate markets no longer discipline the fiscal behaviour of national governments. Perhaps more crucially, even the interest rate punishment to fiscal indiscipline is highly uncertain, with academic opinions being quite divided on this issue. This paper takes a close look at the link between fiscal policy and interest rates in the European context. The key finding is that an expansionary fiscal policy in one EMU member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole, with the second effect, however, being quantitatively much more significant. This suggests that there are indeed substantial spillovers, through the interest rate channel, among fiscal policies of member countries. To limit countries' incentive to run expansionary fiscal policies, a set of rules, like those embedded in the Stability and Growth Pact, is then needed. Some (weak) evidence is also found that after EMU, interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies, reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress. There may be a case then for imposing tighter rules on high debt countries. [ABSTRACT FROM AUTHOR]

Following a brief review of the conception of freedom as employed in economic discourse, this paper focuses on the evolution of the concept of freedom in the work of Amartya Sen. It traces the development of Sen's thought from the capability analysis of the late 1970s to his more recent separation of freedom into its opportunity and process aspects. While broadly appreciative of Sen's development of the concept of positive freedom, the paper identifies some difficulties arising from his definition of capability as a set of options as well as from his separation of the opportunity and process aspects of freedom. Aspects of the relationship between Sen's conception of freedom and that of Marx are discussed briefly in the context of Sen's recent discussion of the market as a source of freedom. [ABSTRACT FROM AUTHOR]

This paper discusses the major tenets of ecological economics--including value pluralism, methodological pluralism and multi-criteria policy assessment. Ecological economics offers viable alternatives to the theoretical foundations and policy recommendations of neoclassical welfare economics. A revolution in neoclassical economics is currently taking place, and the core assumptions of welfare economics are being replaced with more realistic models of consumer and firm behaviour. This paper argues that these new theoretical and empirical findings are largely ignored in applied work and policy applications in environmental economics. As the only heterodox school of economics focusing on the human economy both as a social system and as one imbedded in the biophysical universe, and thus both holistic and scientifically based, ecological economics is poised to play a leading role in recasting the scope and method of economic science. [ABSTRACT FROM AUTHOR]

Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least three potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. Second, the choice of a specific data series to represent a general economic concept such as "real activity" is often arbitrary to some degree. Third, impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policy-maker care about. In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets. We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism. Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy. [ABSTRACT FROM AUTHOR]

Situational analysis (SA) is currently the method of mainstream microeconomics, and this paper maintains that it may also perform an important role in heterodox research programmes in economics. Its most elaborate version in economics, the 'single-exit' modelling approach, is an epistemologically driven endeavour which does not take full account of the way our world works. In this paper, it is argued that a fully consistent SA that is firmly grounded on sound human ontological foundations can be pursued if it is detached from the Rationality Principle, if closed-system modelling is abandoned, and if a retroductive mode of inference is embraced. [ABSTRACT FROM AUTHOR]

This paper discusses empirical evidence for interdependent preferences from the point of view of the neurosciences, of heritability studies, and of cross-cultural and developmental psychology: it shows how interdependent preferences are determined to a significant degree by environmental factors. This result has meaningful implications for economic theory, policy and experimentation. A theory of interdependent preferences should also be a theory of their endogenous determination. Normative analyses ignore the endogeneity of interdependent preferences at their own peril. Caution is required in experimental analyses attempting to measure the distribution of interdependent preferences in the population. [ABSTRACT FROM AUTHOR]

In this paper we take a critical look at current European regional policies. First, we document the motivation for such policies, that is, the large income disparities across the regions of the EU15. Large disparities are certainly present. Second, we illustrate the various instruments adopted and discuss their underpinnings in established economic theories. Next, we look at available data, searching for three kinds of evidence: (1) if disparities are either growing or decreasing, we conclude they are neither; (2) which are the major factors explaining such disparities and, in particular, if they are the factors predicted by the economic models adopted by the Commission to justify current policies, we conclude this is most certainly not the case; (3) if there are clear signs that EU policies, as opposed to other social and economic factors, are actually reducing such disparities, we cannot find any clear sign of such desired impact. Our conclusion is that regional and structural policies serve mostly a redistributional purpose, motivated by the nature .of the political equilibria upon which the European Union is built. They have little relationship with fostering economic growth. This casts a serious doubt on their social value and, furthermore, strongly questions extending such policies to future members of the European Union. A successful EU enlargement, in our view, calls for an immediate and drastic revision of regional economic policies. [ABSTRACT FROM AUTHOR]

This paper proposes an alternative stability and growth pact to the one which accompanied the introduction of the euro in January 1999. The latter is part of the third stage of economic and monetary union and, will govern the economic policies of the member countries which have joined the single currency and strongly constrain the policies of those who do not join. The alternative proposed in this paper is a Full Employment, Growth and Stability Pact and would have a number of features, the most important of which is the creation of new institutional arrangements, including the creation of an investment bank. [ABSTRACT FROM AUTHOR]

This paper presents an analysis of the long-run implications of short-term stabilisation policy. The analysis is based on a simple, stochastic model of an imperfectly competitive economy with nominal rigidities and an endogenous technology. By virtue of the latter, temporary shocks have permanent effects such that the cyclical and secular properties of output are related. In particular, smoother cyclical fluctuations may be associated with flatter secular trends, implying a trade-off between short-term stabilisation and long-term growth. [ABSTRACT FROM AUTHOR]

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilisation can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances thus increasing the yield of the inflation tax for any given rate of inflation. This study extends the work of Drazen and Helpman (1990) by including a stochastic budgetary process and using option pricing theory. It uses parameter values of the semi-elasticity of demand for money to provide estimates of the maximum viable real deficit. [ABSTRACT FROM AUTHOR]

The determination of long-run aggregate supply is a feature which short-run models of macroeconomic policy coordination tend to neglect but which has implications for the setting of interest rates. In this paper we develop an open-economy model of output maximisation, where investment and capital flows are crucial determinants of output and are in turn influenced by interest rate policy and credible control of inflation. The model represents an extension to short-run models of government policy-making, and emphasises that coordination of relative interest rates is as important as control of inflation. [ABSTRACT FROM AUTHOR]

This article focuses on the topics of the April 1992 issue of "Economic Policy." This special issue is entirely devoted to Eastern Europe. It features five papers presented at the 14th Economic Policy Panel Meeting held in Prague, Czech Republic on October 18-19, 1991. One way or another, Western Europe will channel resources to help the East. As different official agencies contemplate the appropriate nature and scale of support, there is renewed interest in the role of the Marshall Plan in Western European reconstruction after World War II.

This paper examines the relation between capital markets and corporate control in France, Germany and the UK. It compares levels of takeover activity in the three countries and describes the degree to which takeovers are associated with changes in corporate control. The paper examines the influence of regulation on forms of corporate ownership and control. It compares regulation pertaining to the rights of employees, managers and shareholders in the three countries and finds that regulatory rules are related to patterns of ownership and control changes. The paper suggests that a fundamental objective of control changes is to correct managerial failure, and that takeovers are suited to the correction of particular classes of managerial failure that cannot be readily rectified by contracts. Thus, markets with low levels of takeovers may suffer from a low level of correction of managerial failure. However, by changing ownership, takeovers may give rise to an inability of owners to commit themselves to the long-term interests of managers and employees. As a consequence, financial systems with active takeover markets may be associated with inadequate investment in firm-specific assets and an unduly short-term investment horizon. There is, therefore, a tradeoff between alternative methods of correcting managerial failure. This is particularly important for European countries facing an extension of UK takeover activity to the Continent. The process is being encouraged by the European Commission which aims to harmonize regulation on a UK-style takeover code. Harmonization of regulation may have far-reaching consequences for the structure of different countries' capital markets and, in view of the tradeoff, is of uncertain merit. [ABSTRACT FROM AUTHOR]

This paper examines how the benefits and costs of the internal market programme will be shared across Member States. The main conclusion is that the Northern European countries stand to gain little from 1992. The only exception is the UK which will benefit from integration because initially it is less integrated than its Northern neighbours. The main beneficiaries will be the Southern European countries. They will benefit both from a better exploitation of their comparative advantage in labour-intensive commodities and from the gains from unexploited scale economies which have already been substantially exploited in Northern Europe. Although Northern countries have a comparative advantage in goods which are intensive in human capital, Southern markets for these goods are relatively small. That is why it is the Southern countries which stand to gain most. Even if, in addition, EC trade with the rest of the world is liberalized at the same pace as within the EC, labour-intensive production (especially clothing and footwear) in the South could increase by as much as 14% after 1992. Areas in the North where such industries are concentrated may be the largest losers from 1992. [ABSTRACT FROM AUTHOR]

This article presents an author's comments to the papers on economic policy, which are the following: "Reaganomics," by Olivier Jean Blanchard; "Mrs. Thatcher's Economic Policies, 1979-87," by Kent Matthews and Patrick Minford; "Germany Under Kohl," by Martin Hellwig and Manfred Neumann, and; "The Swiss Case," by Jean-Pierre Danthine and Jean Christian Lambelet. The author's interpretation of conservative economic policy is rather different from that implicit in the papers. The difference has to do with goals in the first instance.

This paper evaluates the likely effects of linking a part of a worker's pay to the employer's profits. It has been suggested, by Weitzman, that this would raise employment by lowering the cost of taking on an extra worker. However, this can only happen if existing workers are willing to let their share of value added fall, and experience of those firms in the UK who already operate profit-sharing schemes suggests that the Weitzman mechanism is not operative. There is, however, some evidence that profit-related pay does boost productivity; but there are other ways of raising productivity, such as performance-related pay, which may be more effective. Productivity-enhancing effects are likely to be greatest when employees are involved in decision-making as well, but this is likely to undermine the Weitzman case still further. Even if the argument that profit-sharing raises employment is not compelling, it is sometimes suggested that it can do little harm. However, there is evidence that it may well be inflationary, in which case the government would be advised to proceed cautiously. We argue that there is very little case for the introduction of a permanent subsidy to encourage increased profit-sharing, although there may be a case for a temporary one to overcome managerial inertia. However, there is a danger that a subsidy will promote ‘cosmetic’ schemes designed to be eligible for the subsidy but which do not reflect any real change in behaviour. [ABSTRACT FROM AUTHOR]

Credit ceilings have been adopted by many OECD countries in the belief that they allow rapid and precise control of activity, inflation and the balance of payments. This paper addresses three key issues. First, are credit ceilings effective when there exist sizeable non-bank financial intermediaries? The answer is clearly more a matter of degree than kind; evidence from Italy suggests that ceilings were initially very powerful but progressively lost their effectiveness as new financial markets developed during the 1970s and the 1980s. However, they remained important as a tool for influencing capital flows. Second, it is often suggested that credit ceilings are effective because they reduce the money supply in addition to constraining spending. We argue they are more likely to affect the demand rather than the supply of money and this may imply a perverse effect through the financial markets. However such an effect is empirically very small in the case of Italy. Finally the paper investigates the costs of controls. Italian evidence indicates that they significantly reduced competition between banks. Ceilings also constrained borrowers to grow at more uniform rates, thus affecting the allocation of resources. [ABSTRACT FROM AUTHOR]

While French economic performance has not conformed to the enthusiastic promises of early 1981, this paper argues that the widely held view that it has been an unmitigated failure is unwarranted. First, the general deterioration can largely be dated back to the early seventies. Second, the early and unfortunate attempt at a demand-led expansion was both moderate in size and quickly reversed. Finally, the post-1983 anti-inflationary policies have been successful so that, overall, the disappointing French performance has been on a par with, and in some ways better than, the rest of Europe. But the main theme of the paper is the emphasis on the supply side. The analysis is organized around the NAIRU, the threshold rate of unemployment below which inflation rises. In an attempt to explain the factors which have led to a continuous rise of the NAIRU since 1973, the paper focuses on labour costs, particularly on the ‘wedge’ between the costs borne by employers and net take-home pay. To achieve and sustain a significantly lower level of unemployment, labour taxes must be cut, thus reducing the wedge and the NAIRU, and there must be a corresponding demand stimulus so that actual unemployment can fall to this level. [ABSTRACT FROM AUTHOR]