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In the data, individual prices change frequently and by large amounts. In standard sticky price models, frequent and large price changes imply a fast response of the aggregate price level to nominal shocks. This paper presents a model in which price setting firms optimally decide what to observe, subject to a constraint on information flow. When idiosyncratic conditions are more variable or more important than aggregate conditions, firms pay more attention to idiosyncratic conditions than to aggregate conditions. When we calibrate the model to match the large average absolute size of price changes observed in the data, prices react fast and by large amounts to idiosyncratic shocks, but prices react only slowly and by small amounts to nominal shocks. Nominal shocks have persistent real effects. We use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms' environment.Key words and phrases: rational inattention ; sticky prices ; real effects of nominal shocks

his paper surveys models of voting on redistribution. Under reasonable assumptions, the baseline model produces an equilibrium with the extent of redistributive taxation chosen by the median income earner; if the median is poorer than average, redistribution is from rich to poor. Increasing inequality increases redistribution. However, under diŽerent assumptions about the economic environment, redistribution may not be simply rich to poor, and inequality need not increase redistribution. Several lines of argument are presented, in particular, political participation, public provision of private goods, public pensions, and tax avoidance or evasion.

There is a general agreement that (a) climate change is one of the most serious environmental problems, that (b) the analysis of climate change is confronted with a large degree of uncertainty and (c) that these uncertainties need to be taken into account to arrive at meaningful policy recommendations. The main contribution of economics to this interdisciplinary task is to provide formal frameworks and techniques for analyzing climate policy in the context of uncertainty. The aim of this paper is to give a comprehensive survey of existing approaches and findings and thus to give a broad picture of what economics has contributed and can contribute to the debate.

Classical single-factor comparable company valuation (CCV) like e.g. valuation using the price-earnings ratio is associated with several shortcomings. The two most important are the non-applicability of negative values in the basis of reference and the high requirements to the qualitative characteristics of comparable companies. This paper develops a multi-factor CCV model based on substance and performance related accounting attributes that largely overcomes these drawbacks. Additionally, the model allows to depict expected future earnings development economically sounder than single-factor models. Furthermore, by accounting for management?s option to adapt firm assets differently or to liquidate the company the model can conclusively assign positive stock prices to currently negatively performing companies.

This paper develops a model in which a continuum of consumers choose froma continuum of locations indexed by school quality. It computes equilibria that are sustained by a price function that matches consumers to different locations based on their willingness to pay for school quality. In equilibrium each location is inhabited by a set of people with varying levels of education, ability, intensity of preference for education, and income. The distributions of characteristics within each location are determined by the structural elements of the model. The paper also develops a set of computational algorithms that solve several complex numerical problems. These problems include the calculation of a number of diffcult integrals, the calculation of asymptotic approximations to those integrals, the solution of an implicitly defined differential equation that depends on the integrals previously calculated, and the maximization of a likelihood function that depends on the solution of the differential equation. Finally, this paper demonstrates how the equilibrium implications of a structural economic matching model can be used to solve two important econometric identification problems. First, it is likely that regressions that seek to estimate the effects of school quality on educational outcomes produce biased and inconsistent estimates because people choose where their children go to school. The model in the paper solves this problem by using a consumer location choice equation and an equilibrium pricing relation to create a valid instrument for the school quality variable. Second, hedonic estimation problems in a single market are unidentified because the marginal price function is unknown or collinear with the level of the product demanded. This paper solves this problem by exploiting the restrictions that equilibrium in the sorting economy imposes on the equilibrium price function. The equilibrium price equation introduces a non-linearity into the system that is suffcient for identification.

Economists traditionally tackle normative problems by computing optimal policy, i.e. the one that maximizes a social welfare function. In practice, however, a succession of marginal changes to a limited number of policy instruments are implemented, until no further improvement is feasible. I call such an outcome a ?restricted local optimum?. I consider the outcome of such a tatonnement process for a government which wants to optimally set taxes given a tax code with a fixed number of brackets. I show that there is history dependence, in that several local optima may be reached, and which one is reached depends on initial conditions. History dependence is stronger (i.e. there are more local optima), the more complex the design of economic policy, i.e. the greater the number of tax brackets. It is also typically stronger, the greater the interaction of policy instruments with one another – which in my model is equivalent to agents having a more elastic labor supply behavior. Finally, for a given economy and a given tax code, I define the latter?s average performance as the average value of the social welfare function across all the local optima. One finds that it eventually sharply falls with the number of brackets, so that the best performing tax code typically involves no more than three brackets.

The issue of the impact of trade on specialisation structures and the effects of trade liberalisation on employment and labour markets has been intensively discussed in the recent literature on trade liberalisation and globalisation. In Europe this debate has gained new momentum in the discussion on the effects of the catching-up processes of the transforming economies in Eastern European Countries. But the bulk of the existing literature in this area employs almost without exception a static Heckscher-Ohlin framework based on factor-endowment differences and thus seems not to be a suitable tool for analysing dynamic issues of technology catching-up and dynamic adjustment processes. In this paper I present a model to explore the issue of productivity catching-up, international specialisation and labour market effects in a dynamic multi-sectoral framework with heterogenous labour. The model is basically an input-output model, but also has some Schumpeterian features. These Schumpeterian features are the impact of transitory rents, emerging from (labour) productivity-enhancing technological progress or catching- up processes, upon the price-, wage- and quantity system of the trading economies. Relative productivity and relative wage rate dynamics across sectors determine comparative cost advantages and trade specialisation. The second part of the paper presents some simulation studies of the evolution of prices, output, employment and wage structures, where various stylized types of technological progress and industrial catching-up processes are modelled. In the appendix of the paper the equilibrium solutions of the model are derived.

The overwhelming importance of multinational activities as well as the coexistence of exporters and multinationals within the developed countries demand for theoretical models which provide a convincing explanation of simultaneous two-way trade and horizontal multinational activities. We present a model with three factors of production to disentangle the twofold importance of headquarters for their affiliates into a know-how and a capital serving part (FDI). Multinationals trade-off the incentives for a high proximity to the market and a concentraion of production facilities. We simulate the model to derive predictions about the impact of trade costs, plant set-up costs, relative country size and factor endowments on the factor prices of labor, human and physical capital on the one hand and three main output variables, exports, multination sales and FDI, on the other. We find that the effects are not uniform for multinational sales and FDI. Hence, one shuld be careful with interpreting the simulation results of previous work for sales as simply holding for FDI as well.

This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a "currency crisis" equilibrium with low output and a depreciated domestic currency, results from the following mechanism: if nominal prices are "sticky", a currency depreciation leads to an increase in the foreign cur- rency debt repayment obligations of firms, and thus to a fall in their profits; this reduces firms' borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, fiscal, or expectiational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.

Die Klimaschutzdiskussion wird von der Frage dominiert, welche gesamtwirtschaftlichen Kosten mit der Umgestaltung des Energiesystems zu klimaverträglichen Strukturen verbunden sind. Höhe und Verteilung dieser Kosten entscheiden darüber, ob sich umweltpolitische Strategien zum nachhaltigen Schutz der Erdatmosphäre durchsetzen lassen. Für Kostenschätzungen des Klimaschutzes werden typischerweise quantitative Modelle des energie- oder volkswirtschaftlichen Systems eingesetzt. Allerdings weisen modellgestützte Studien erhebliche Unterschiede in den Kostenschätzungen aus, was zu widersprüchlichen politischen Handlungsempfehlungen führen kann. Ziel des folgenden Beitrages ist es, die mit quantitativen Wirtschaftsmodellen ermittelten Kosten von Klimaschutzstrategien vor dem Hintergrund wichtiger Determinanten zu analysieren. Das Verständnis für wichtige Determinanten der Kostenschätzungen ist eine Voraussetzung für die richtige Interpretation von Kostengrößen und damit Grundlage für eine rationale Klimapolitik.

This paper analyzes the optimal interest rate policy in currency crises. Firms are credit constrained and have debt in domestic and foreign currency, a situation that may easily lead to a currency crisis. An interest rate increase has an ambiguous effect on firms since it both makes more difficult to borrow and may decrease the foreign currency debt burden. In some cases it is actually best to decrease the interest rate. We also show how these issues are related to development of the financial system.

There is an increasing awareness of the potential of nonlinear modeling in regional science, which can partly be explained by the recognition of the limitations of conventional equilibrium models in complex situationsand partly by the easy availability and accessibility of sophisticated computational techniques. Among the class of nonlinear models chaos theory stands out as an interesting approach, in which notable progress hasbeen made in economic research. However, the operational significance– in terms of solid empirical tests on chaos – has still been rather limited and a rigorous statistical-econometric treatment of chaos phenomena isstill lacking. This paper is concerned with a methodological and empirical analysis of chaos in spatial systems. It seeks to break new research ground by linking the classical diagnostic tools developed in spatial econometrics to nonlinearity tests for empirical data series, in particular the so-called BDS (Brock, Dechert, Scheinkman) test. A spatial variant of the BDS test is developed, and subsequently applied in the context of a shift-share model for Dutch regional labor markets.

This paper surveys recent advances in climate models by emphasising how quantitative instruments can answer the main crucial questions addressed by the policymakers involved and therefore aid the formulation of effective global climate policies. The limits of existing models are highlighted and new ideas and developments are shown to increase the reliability of climate models for policy analysis. It is also suggested that the complexity and uncertainties surrounding climate issues are difficult to translate into adequate policies without the help of sophisticated and integrated global quantitative modelling.

In this article we examine how model selection in neural networks can be guided by statistical procedures such as hypotheses tests, information criteria and cross validation. The application of these methods in neural network models is discussed, paying attention especially to the identification problems encountered. We then propose five specification strategies based on different statistical procedures and compare them in a simulation study. As the results of the study are promising, it is suggested that a statistical analysis should become an integral part of neural network modelling.

This paper presents the technical background for our computable general equilibrium (CGE) analysis of different worldwide liberalization scenarios in agricultural markets. The main features of the examined agricultural protection policies are explained and descriptions of the applied economic model and the construction of a disaggregated multi-country dataset are provided, as well as documentation of calibration for a benchmark year. Finally we present some preliminary results of simulated liberalization schemes. The explanation of these results is not included. This will be done in more specific papers.

Chiron, Bd. 41 (2011), Coin debasement in the third-century CE is traditionally seen as a main cause for the collapse of Rome���s long-lasting monetary system. The article stresses the significance of public trust in the currency for the stability of the Roman monetary order and investigates the relation between public trust and coin debasement. Essential for understanding this relation is Aurelian���s monetary reform of 274, with its grave consequences on coin value. The article offers an economic model which explains why Aurelian���s monetary reform was the coordinating event that triggered the decline in public trust, eventually leading to the end of the existing monetary order.