Frederick van der Ploeg

Pollution control and the Ramsey problem

Pollution is an inevitable by-product of production and is only gradually dissolved by the environment. It can be reduced by producing less and by cleaning up the environment, but neither occur when they are left to the market. Cleaning activities and the optimal emission charges increase with the stock of pollutants. When one allows for pollution of the environment in the classical Ramsey problem, the capital stock is less than in the market outcome and a fortiori less than under the golden rule. The analysis distinguishes between stock and flow externalities arising from pollution. An increase in impatience can lead to more capital accumulation, even though this leaves less room for current consumption.

Intramarginal Interventions, Bands and the Pattern of EMS Exchange Rate Distributions*

The authors document an empirical puzzle for European Monetary System exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e., exchange rate distributions are hump-shaped rather than U-shaped as predicted by the standard target zone model. The authors offer an explanation of this puzzle that is based on the combination of two realistic features, namely the presence of intramarginal interventions and wage/price sluggishness. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

A differential game of international pollution control

Abstract Pollution is an inevitably by-product of production and damages the environment. The trade-off between production as a good and pollution as a bad over time can be analysed in the framework of a control model, which yields a path of emission charges that force the producers to behave in associally optimal way. Pollution that crosses national borders calls for international coordination of emission charges. In order to estimate the benefits of coordination one must use a realistic non-cooperative equilibrium concept. A natural extension of the control model implies unrealistic assumptions on information and commitment, and under-estimates the damage to the environment of not coordinating emission charges. In this note the more realistic subgame-perfect non-cooperative equilibrium is derived, which reinforces the case for international agreement og on pollution control.

Conflict over arms accumulation in market and command economies

Publisher Summary This chapter discusses conflict over arms accumulation in market and command economies. Conflict over arms accumulation has in recent years become a more prevalent feature of the relations between the West and the East. The political aspects of the arms race receive a great deal of attention both in the press and in academic studies. Much of the theoretical analysis of arms conflict has a game-theoretic nature. A decentralized market economy where distortionary taxes finance the investment in arms is contrasted with a centrally planned economy. The chapter presents an analysis based on a utility function, which depends on consumption, leisure, and defense. It also highlights the impact of information on the investment strategies, especially information on both the own and the foreign weapon stock over time. If the analysis is restricted to two countries, important adverse responses from third countries are overlooked. Cooperation may no longer lead to multilateral disarmament, that is, a moratorium on investment in weapons, as this might provoke an arms build-up or even an attack of third countries.

Rationing in open economy and dynamic macroeconomics: A survey

SummaryA survey of rationing in micro theories of macroeconomics is presented. The survey starts with a closed economy with money and inventories, which consists of a representative household, a firm and government. After a discussion of the notional demands and supplies and the properties of the Walrasian equilibrium, a discussion of the effective demands and supplies leads to an analysis of the four regimes (Keynesian unemployment, classical unemployment, repressed inflation and underconsumption). A fiscal and monetary contraction decreases sales and employment when there is Keynesian unemployment, but is expansionary (neutral) when there is repressed inflation (classical unemployment). The survey continues with an analysis of the effects of rationing in a small open economy. It considers the one-sector model and a model with a traded and a nontraded sector. The latter model is used to discuss the effects of an oil discovery on the Gulf countries and on Latin American countries. The survey ends with a discussion of rationing in dynamic economies, which leads to an analysis of the effects of expectations about future constraints on current regimes and to a discussion of ‘boot-strap’ equilibria.

Election outcomes and the stockmarket

Abstract A macroeconomic model with sluggish labour markets and efficient financial markets is formulated. The consequences of uncertainty about election outcomes for share prices, interest rates, output and employment in the pre-election period are analysed. Also, the nature of the jumps in the stockmarket and the real economy on the morning after the election are analysed. This provides an alternative to the conventional theory of political business cycles and is able to explain large swings in the economy when election ‘news’ becomes known. It is shown that the stockmarket crashes (booms) when a Labour administration is elected into office with the promise that it will engage in a fiscal (monetary) expansion.

International coordination of monetary policies under alternative exchange-rate regimes

Publisher Summary nThis chapter provides an overview of the international interdependence and coordination of the monetary policies of different economies under alternative exchange-rate regimes. A regime of irrevocably fixed exchange rates is not that different from full monetary union with a common currency unit. It implies that each central bank has no control of its money supply, because it is very much determined by the balance of payments. Under full employment, monetary policy is neutral and has no real effects. The chapter focuses on two channels of transmission. The first one is a public-finance view, which states that any change in monetary policy must be accompanied by a change in distortionary taxes and, therefore, has real effects. The second one relies on the interdependent Mundell–Tobin effect that argues that an increase in monetary growth reduces the world real interest rate and, therefore, increases capital accumulation in all countries. The chapter also discusses the characteristics of international coordination of a regime of managed exchange rates such as the European Monetary System.

Wage Rigidity and Capital Mobility in an Optimizing Model of a Small Open Economy

SummaryThis paper formulates an optimizing model of a small open economy with a representative (immortal) household, a firm and a government. The asset menu consists of domestic currency, non-traded bonds and traded bonds. There is a risk premium on traded bonds, which leads to deviations from perfect capital mobility and uncovered interest parity. Taxes are lump-sum, so that finance by bonds and by taxation are equivalent. The model allows for current-account and wealth dynamics. The model assumes either purchasing power parity or imperfect substitution between home and foreign goods and either labour market equilibrium, nominal wage rigidity or real wage rigidity. The steady-state effects of a fiscal contraction, a monetary disinflation and an increase in the world interest rate are discussed. The transient effects of these policies are analysed with the aid of a ‘multiple shooting’ algorithm.