Arman Mansoorian

On the consequences of government objectives for economies with mobile populations

Abstract We compare the efficiency and social welfare properties of equilibria resulting from different governmental objectives in a federal system with a mobile population. The objectives considered are total utility, average utility, representative residents utility, and profit maximization. The representative resident approach is unique in that it depends only on utility. It yields the best efficient allocation from the perspective of a governments residents. Average utility yields an efficient allocation that non-residents prefer. Both the profit-maximizing and total utility approaches may lead to inefficient allocations. We also show that the representative resident approach is socially preferred to a total utility approach.

Habits and durability in consumption, and the dynamics of the current account

A model in which consumption exhibits durability, and habits develop over the flow of services provided by them is used to study current account dynamics. Durability leads to adjacent substitutability in consumption, while habits are assumed to lead to adjacent complementarity. The adjustment of the current account may be non-monotonic. If habit effects are dominant in the short run, and durability effects in the long run, then after a terms of trade deterioration we will have a current account deficit followed by a surplus (the J-curve). In the opposite case a surplus will be followed by a deficit.

Durable goods, habits, time preference, and exchange rates

Abstract We work out the role of durable goods regarding the effects of exchange-rate policies in the money-in-utility model. If for whatever reason the stock of durables is above its steady-state level, then along the adjustment path consumption expenditures would be rising and the current account would be in surplus, but real money holdings would be constant. Without habits, money is super-neutral. Habits break super-neutrality. With habits and durable goods, the adjustment of consumption expenditures and the current account after a change in the rate of depreciation will likely be non-monotonic, while the adjustment of real balances will be monotonic. With Uzawa preferences and durable goods, the adjustment of real money balances will also be monotonic, while the adjustment of consumption and the current account will be non-monotonic.

Tariffs, Habit Persistence, and the Current Account

This paper emphasizes the importance of habit persistence in determining the effect of a permanent distortionary tariff on the current account. A distortionary tariff reduces real permanent income, requiring a fall in the standard of living. If the marginal utility of real consumption is strongly increasing in the habitual standard of living, then aggregate savings falls and the country runs a current account deficit. However, if the marginal utility of real consumption is not sufficiently strongly increasing (or is decreasing) in the habitual standards, then the tariff leads to a rise in savings and a current account surplus.

Habits and Durability in Consumption, and the Effects of Exchange Rate Policies

The effects of exchange rate policies are worked out in a model in which consumption goods are durable, and money enters the utility function. The interaction of habits and durability results in a non-monotonic adjustment of consumption expenditures, and the current account. As money does not exhibit durability, its dynamics are montonic, and determined mainly by habits effects. Hence, an increase in the rate of depreciation of the domestic currency will very likely lead to a nomonotonic adjustment of consumption and the current account, while the adjustment of real money holdings will be monotonic [F31, F32, F41]The effects of exchange rate policies are worked out in a model in which consumption goods are durable, and money enters the utility function. The interaction of habits and durability results in a non-monotonic adjustment of consumption expenditures, and the current account. As money does not exhibit durability, its dynamics are montonic, and determined mainly by habits effects. Hence, an increase in the rate of depreciation of the domestic currency will very likely lead to a nomonotonic adjustment of consumption and the current account, while the adjustment of real money holdings will be monotonic [F31, F32, F41]

Habits and Durability in Consumption, and the Effects of Tariff Protection

Some recent empirical findings are used to motivate employing a model in which consumption exhibits durability, and habits develop over the flow of services provided by them, in order to study the effects of tariff protection on the current account. Durability leads to adjacent substitutability in consumption, while habits are assumed to lead to adjacent complementarity. If durability effects are dominant in the short run, and habit effects in the long run, then tariffs will lead to a current account surplus, which will be followed by a deficit. In the opposite case, a deficit will be followed by a surplus.

Private Sector Versus Public Sector Externalities

Abstract In federations with a multi-dimensional public sector, externalities may originate in the private sector (private sector externalities) or in the local public sector (public sector externalities). It is well established that correction of public sector externalities will require a central authority. We show that with only private sector externalities, local government equilibria are efficient. We thus have a simple rule for the assignment of corrective policies to levels of government.

Income Effect, Wealth Effect, and the Terms of Trade with Finite Horizons

The two-sector model is incorporated into Blanchards OLG framework. The total effect of a terms-of-trade deterioration on aggregate savings is decomposed into an income effect and a wealth effect. The income effect comes about because a terms-of-trade deterioration changes the value of the GDP. Its sign depends on the value of the rate of time preference relative to the interest rate. The wealth effect comes about because financial wealth is insurable and so income from capital is discounted at a lower rate than labor income. Its sign depends on the relative factor intensities of the goods.

Risk Sharing in a Federation with Population Mobility and Long Horizons

This paper considers risk sharing among individuals within and across regions in a federation with population mobility and infinite horizons. It is shown that the regional authorities will not fully exploit gains from inter-regional risk sharing when population mobility is imperfect. However, in the Nash equilibrium there is complete risk sharing among the individuals within each region, which corresponds to the policies of the central authority. Regional authorities who care about their reputation may be able to commit to an efficient allocation. It is possible that improvements in the degree of mobility will make such commitments less likely.

Measuring the contribution of durable goods to the welfare cost of inflation

In this paper, we measure the contribution of durable goods to the welfare cost of inflation, in the context of an endogenous growth model with durable and nondurable goods, where purchases of the latter require only a partial cash payment compared with the former. Unlike existing measures, our proposed welfare measure is computationally efficient and relatively easy to implement.We find that durability adds a significant component to the welfare costs of inflation.