Karl Farmer

Reducing CO2-Emissions Under Fiscal Retrenchment: A Multi-Cohort CGE-Model for Austria

The stabilization of budget deficit and budget debt ratios by fiscal retrenchment in order to fulfill the Maastricht criteria for the EMU is of central focus in most EU countries. At the same time the national policy dimension of acute environmental problems such as global warming has receded in the public eye. The environmental dimension nonetheless remains urgent, and a re-evaluation of the prospects of CO2-policy is needed against the background of fiscal retrenchment required by supranational obligations. We shall do this for the small, open, Austrian economy by constructing a dynamic multi-cohort CGE model enabling us to assess quantitatively the lifetime welfare impacts on the cohorts affected by three different options for using CO2-permit revenues. The distribution of welfare costs of (Toronto-) CO2-policy across cohorts significantly differs with use. This is explained by income, inheritance and price effects.

Modeling financial integration, intra-EMU and Asian-US external imbalances

Intra-EMU external imbalances in the pre-crisis period up to 2008 are traditionally explained by EMU-oriented factors, e.g. euro-related financial integration. Chen et al. (2013) also emphasize external trade shocks, such as the competitive challenge of emerging Asia and oil exporters to EMU-periphery’s exports. Moreover, Asian-U.S. external imbalances are attributed to financial integration between East Asia and the USA in the aftermath of the East-Asian currency crises in the late 1990s (Angeletos and Panoussi 2011). Acknowledging these empirical facts this paper develops a Buiter (1981) three-country (EMU, Asia, US), two-region (EMU core, EMU periphery) OLG model to investigate the effects of both intra-EMU and Asian-U.S. financial integration on intra-EMU, Asian and U.S. external imbalances. We find that the widening of the intra-EMU external imbalances, in particular of trade imbalances, is related to the growth in Asian-U.S. imbalances and the dynamic inefficiency of the world economy, caused by excessive saving in Asia.

Public Debt, Terms of Trade and Welfare: The Role of Capital Production Shares, External Balances, and Dynamic (In)efficiency

In view of still large external imbalances across the world economy and dramatically risen public debts in major advanced economies, this paper reconsiders the relationship between public debt, the terms of trade and welfare in a two-good, two-country overlapping generations model with technological differences across countries. We find that the terms of trade effect of a public debt shock depends only on international differences in capital production shares and the dynamic (in)efficiency of the world economy. As in a model with similar capital production shares, domestic welfare rises and foreign welfare decreases when Home has a positive external balance and the Golden Rule holds. Under dynamic efficiency, welfare decreases in the debt-expanding, net foreign creditor country if she has a relatively smaller capital production share, and if the welfare effect through the accumulation channel is negative. In contrast, under dynamic inefficiency she can increase her welfare by debt expansion.

Factor Proportion, Inter-Sectoral Trade, and Product Life Cycle

This chapter is devoted to work out main propositions of neoclassical trade theory in a temporary equilibrium of the two-country OLG model of the previous chapter. Mathematically spoken, the neoclassical trade theory consists of three lemmas and one proposition: the Stolper-Samuelson Theorem, the Rybczynski Theorem, the Heckscher-Ohlin-Samuelson Theorem and the Heckscher-Ohlin Theorem. We prove all these theorems by using the log-linear utility functions and the Cobb-Douglas production functions of our basic two-country OLG model without money and government bonds. We illustrate the main claims graphically and provide intuitive explanations for them. We also point out empirical limitations of the factor proportion theory (Leontief paradox) and present theoretical advancements like the neo-factor-proportion theory and the product-cycle hypothesis to cope with the restrictions of the basic theory.

The notion of the rate of profit and the stability of the market dynamics in a model with linear technology

This paper analyzes the local stability properties of the equilibrium solution of a multi-sectoral model with a linear production technology. The pivotal magnitudes in the adjustment process are the market rates of profit. Three different definitions of the market rates of profit are introduced which correspond to different types of the implicit decision behavior. It is shown that the stability properties of the market process depend essentially on this specification.

Existence and Efficiency of Stationary States in a Renewable Resource Based OLG Model with Different Harvest Costs

Abstract In a renewable resource based overlapping generations (OLG) model without harvest costs, a complex combination of the time discount factor, the resource production share, and the natural regeneration rate ensure the existence of a stationary market equilibrium and its intergenerational efficiency when the own rate of return on natural capital is positive. This paper investigates to what extent previous findings carry over to an OLG economy with two types of unit harvest costs (constant, inverse stock dependent) arising from the competition for labor between resource harvesting and resource processing. In contrast to the model without harvest cost, we show why large unit harvest costs, surprisingly, do not require a complex combination of basic parameters for the existence of a stationary state, and that in the model with stock dependent costs intergenerational efficiency might occur even when the own rate of return on natural capital is negative.

Innovation, Growth and Trade in a Two-Country OLG Model

While international trade in produced commodities and services raise national welfare by exploiting comparative cost advantages and increasing the number of intermediate products, it is by no means clear how international trade raises the GDP growth rate, a conjecture widely held among lay persons. It is the objective of this chapter to introduce trade in intermediate goods into a two-country version of the OLG model of Chap. 6 in order to be able to analyze the growth-enhancing effects of international trade. It turns out that due to the cost-saving effect of a larger number of intermediate-product variants the price of final products steadily decreases and the growth rate of the final product rises compared to the autarky situation.

“New“ Growth Theory and Knowledge Externalities in Capital Accumulation

This chapter probes into the pioneering approach of the so-called “new” growth theory, i.e. Romer’s (Journal of Political Economy, 94, 1002–1037, 1986) knowledge externalities in private capital accumulation. After listing the empirical and theoretical shortcomings of the “old” growth theory, the main approaches of the new growth theory are briefly outlined. In Sect. 5.3, knowledge externalities associated with private capital accumulation are introduced into our basic OLG model and the fundamental equation of motion is then derived from the FOCs for utility and profit maximization, and under market clearing. In the subsequent section the deficiencies of the old growth theory are reconsidered from the perspective of the knowledge externalities of new growth theory. In Sect. 5.5, public debt is introduced in our new growth model and the effects of variation in the politically fixed net deficit ratio on capital and public debt are investigated. Finally, it is shown that stochastic shocks to total factor productivity in the CD production function, together with investment adjustment costs, can in fact generate GDP time-series which resemble empirical evidence.

Endogenous Technological Progress and Infinite Economic Growth

This chapter presents a neo-Schumpeterian OLG model of self-propelled growth of intermediate-product innovations and over time rising GDP rates. A one-period patent system generates monopoly rents for producers of recently innovated intermediate goods which serve together with competitively produced intermediates as inputs in final-good production. The rising variety of intermediates reduces the unit cost and the price of the final good which enables the financing of an ever-increasing rate of intermediate-product innovations by the savings of younger households. Growth in the OLG model of this chapter is attributed to a continuous innovation process driven by rational choices of short-lived agents.

Product Differentiation, Decreasing Costs, and Intra-sectoral Trade

This chapter leaves (neo-) classical trade theory in order to be able to address the astonishing phenomenon of enormous international trade among similarly developed industrialized countries. The traditional assumptions of perfect competition in all markets, of trade with standardized homogeneous goods and of constant returns to scale are replaced by monopolistic competition in output markets, product differentiation and decreasing average production costs. This change in the market and cost structure enables us to address intra-industry (intra-sectoral) trade among highly developed countries. In formalizing Linder’s (An essay on trade and transformation. New York: Wiley, 1961) pioneering work on a demand-oriented trade theory in line with the already classic Dixit-Stiglitz (American Economic Review, 67, 297–308, 1977) approach, we present a full-fledged monopolistic equilibrium solution with a 100 % of intra-sectoral trade.