Working papers results

There exists a continuum of prices between Bertrand and joint-profit maximization prices which can be interpreted as the outcome of a two-stage game where firms first invest to increase product differentiation and then compete in prices. The lower the costs of differentiating their products from each other the more relaxed competition in the product market and the closer firms will be to the collusive outcome of the one-shot game for given degree of differentiation. The higher the costs the harsher competition in the market and the closer to the Bertrand solution of the one-shot game with given degree of differentiation.

The empirical VAR literature on the monetary transmission mechanism in closed economies has been successful in providing evidence with which theoretical models of the monetary transmission mechanism are now confronted. The empirical VAR literature on the monetary transmission mechanism in open economies has not enjoyed the same success and it is still marred with a number of empirical puzzles. In this paper we firstly assess the relevance of the progress made estimating VAR in closed economies for the specification of VAR in open economies. Second, we propose to solve the simultaneity between exchange rate and policy interest rates by using information extracted from financial markets independently from the VAR. Lastly, we evaluate the relative importance of macroecomnomic and monetary policy variables in explaining short-term fluctuations in the nominal exchange rates. Our main results are that a commodity price index is an important variable in any VAR analysis of the monetary transmission mechanism, that the simultaneity between German policy rates and the US dollar/D mark exchange rate is not an empirically relevant problem, and that monetary factors are dominated by macroeconomic factors for the explanation of exchange rate fluctuations.

This paper evaluates VAR models designed to analyze the monetary policy transmission mechanism in the United States by considering three issues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggest that only VAR models estimated on a single monetary regime feature parameters stability and do not show signs of mis-specification. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yeld similar descriptions of the monetary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctuations in long-term interest rates are an important determinant of the monetary authoritys reaction function.

The aim of this paper is to demonstrate how to obtain robust (with respect to outlying observations) consistent estimates of the linear model when the fundamental orthogonality condition is not fulfilled. With this end in view, we develop two estimation procedures: Two Stage Generalized M (2SGM) and Robust Generalized Method of Moments (RGMM). Both estimators are consistent, asymptotically normally distributed, and B-robust, i.e. their associated influence function is bounded. Our simulation results indicate that the relatively efficient RGMM estimator (in regressions with heteroskedastic and/or autocorrelated errors) provides accurate parameter esrtimates of a panel data model whose explanatory factors are subject to measurement errors, even if a substantial portion of the data is contaminated with aberrant observations. The traditional estimation techniques such as 2SLS and GMM break down when outliers corrupt the data.

The primary objective of this paper is to develop a political economy of public funding of education that accounts for the large disparities observed across countries in the share of GNP allocated to public education. In a general equilibrium overlapping generations model in which parents care about their childrens lifetime utility the rational and forward looking agents vote for a level of public funding of education. The model mirrors the observed cross-country disparities in the share of GNP allocated to public funding of education. This share increases with per capita income levels as well as with the fertility rate and it decreases with the degree of inequality in the economy. For higher levels of inequality the model can generate a politico-economic equilibrium where private and public investment on education coexist. In contrast to existing theories the paper does not assume that the factor prices are invariant and I study the importance of the effects of an education policy on the factor prices in the determination of the equilibrium level of this policy.

This paper presents an endogenous growth model in which technological change increases the share of reproducible factors at the expense of the share of non-reproducible factors. This model may explain some empirical facts of the last two decades: i) the negative growth of uneducated workers wages in contrast with the positive growth in per capita output, ii) the reduction of the share of uneducated workers in favor of educated ones, iii) the increase of inequality in income distribution, iv) the slow down of growth. The model may also explain the stagnation that many developing countries suffer.

In this paper we analyze how the creation of a single currency regime changes the strategic relationship between policy makers, both within and across countries. in particular we look at the role of cross-country externalities and lack of commitment. When labor taxation is excessive, due to terms of trade externalities, the ECB may be tempted to raise inflation above the flexible exchange rate equilibrium in order to induce governments to substitute seignorage for income taxes. Therefore the equilibrium rate of inflation in EMU typically exceed the flexible exchange rate level. When the ECB cannot credibly commit to inflation, multiple equilibria may arise, where inflation is excessive and labor taxes too low (Workers Europe), or viceversa, where taxation is excessive and inflation too low(Bankers Europe). Finally, if the ECB cannot commit to a fixed scheme for redistributing seignorage, the outcome is excess inflation and suboptimal taxation. Both governments anticipate that the ECB will redistribute seignorage in favor of the country with lower tax revenue, and tend to lower tax rates accordingly.

The delegation of monetary policy to a supranational central bank creates a conflict of interest between residents of different countries. For example, the country in recession may favor more inflation to boost output, while the country in boom prefers exactly the opposite.This conflict gives rise to an adverse selection problem. Provided each government has private information about the current state of the economy, it may try to exploit it in order to shift the common monetary policy to his own preferred way. The paper shows that problems of this kind can generate both an inflation and primary deficit bias (in line with the worries of Workers Europe addressed by the "stability pact") as well as an excess monetary discipline and recession bias (in line with the worries addressed by the Bankers Europe concern).When information problems are particularly severe, monetary and fiscal policy becomes relatively insensitive to business cycle conditions, and too little "smoothing" is done over the business cycle.

Are differences in growth possible with international capital markets? This paper presents a model in which techological progress affects the financial intermediaries productivity. As a consequence, technological progress speed and growth rates of production and consumption may diverge across countries, even with free capital mobility. A liberalization of international capital movement increases the growth rates of consumption and National Income in every country. Such a liberalization increases the technological progress speed and the Domestic Income growth rate in fast-growing countries but reduces the technological progress speed, the Domestic Income growth rate and the income equality in slow-growing countries.

Voting Theory generally concludes that -in first-past-the-post elections- 1) All voters should go to effective candidates (Duvergers Law); 2) Parties platform should converge (Median Voter Theorem). Observations, though, suggest that such predictions are not met in practice. We show that divergence and dispersion of votes is a natural election outcome when there is uncertainty and repetition of elections. "Voting for Losers" increases the informational content of elections, and forces main parties to relocate towards extremists. As a result, they maximize their probability of being elected, not by converging to the median but by diverging to a certain extent. Ideological behavior results then from optimizing considerations alone.