Keshab Bhattarai

Determinants of Wages and Labour Supply in the UK

We explore characteristics of the UK labour market with special emphasis on explanation of the existing wage inequalities, determinants of participation and variation in the magnititude of hours of labour supplied among individuals.

Welfare impacts of equal-yield tax reforms in the UK economy

A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal-yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal-yield tax experiments welfare gains up to 1.4% of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05% of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.

The Division and Size of Gains from Liberalization in Service Networks

This paper emphasizes the different nature of cross border liberalization in network related services, such as telecoms, compared to liberalization in goods. In the presence of network externalities, it argues that if two disjoint country service networks involving a small and large country are connected as part of international liberalization, the per capita gain for the small country from access to a large network will be large, and the per capita gain for the large country will be small. Benefits of liberalization in network related serv ices, unlike goods, are more likely to be approximately equally divided between large and small countries than is true of trade in goods, where benefits accrue disproportionately to the small country. We also argue that non-cooperation in network related services trade may involve more extreme retaliation than suggested for trade in goods from the optimal tariff literature, so that relative to a non-cooperative outcome, gains from liberalization in network related services become larger than from liberalization in goods. An empirical implementation of global telecoms liberalization for the US, Europe, Canada, and the Rest of the World using the framework developed in the paper shows larger gains to larger regions, consistent with the theme of the paper that goods and services liberalization differ.

Macroeconomic Impacts of Consumption and Income Taxes: A General Equilibrium Analysis

Macroeconomic impacts of consumption and income taxes are higher when both of them rather than only one of them are employed to raise a fixed amount of revenue that is given back to households as transfers. We apply a general equilibrium model to assess no tax, only consumption tax or only labour income tax policy alternatives in comparison to a benchmark economy in which both taxes apply to the consumption and labour income of a representative household in an economy. We find that switching to only consumption tax would improve efficiency while raising the target level revenue than in the mix of two tax case. These gains are about 80 percent of the no tax scenario. Taxing only on consumption to raise a given amount of revenue is better in terms of labour supply, lower optimal tax rates and level of utility of the household from consumption and leisure. Model applied to the UK also confirms that the consumption taxes have significantly lower burden than the labour income tax or of the combination of both consumption and labour income taxes.

An Empirical Study of Interest Rate Determination Rules

This paper finds empirical support for a Taylor (1993) type interest rate determination rule. The model is solved analytically, estimated and used for simulation, impulse response analyses and forecasting with quarterly time series data for the UK and annual time series data for Germany, France, Japan, the UK and the US. The results confirm that such rules implicitly exists during the period of analysis.

Impact of exchange rate and money supply on growth, inflation and interest rates in the UK

Growth rates, inflation and interest rates are determined simultaneously in the UK. Depreciations of Sterling pounds contribute to the growth by enhancing international competitiveness. Inflation from the growth of money, depreciation of Sterling and higher interest rates, impacts adversely on it. London being a hub of the global financial market higher interest rates are persistent and coexist with greater liquidity of the financial system, making money supply non-neutral in the short run as in Desai and Weber (1988), Fisher and Whitley (2000), Mellis and Whittaker (2000), Wallis (1969, 1989) for the UK and Sargent (1976) and Fair (1993).

Cognitive Skills, Openness and Growth*

A significant positive relationship exists between the ratios of trade and educational spending to gross domestic product, implying that countries which are more open on the trade front also spend more on education. An open economy endogenous growth model with human capital is developed to understand this stylised fact. The model predicts that countries with greater cognitive skills spend more on education, and grow faster. These countries open up on the trade front to finance importation of raw materials for investment goods production, which becomes scarce due to the diversion of resources to education. The model highlights the importance of the productivity of human capital or cognitive skill as an important economic fundamental determining the cross-country correlation between growth, trade share and education share.

Financial Deepening and Economic Growth in Advanced and Emerging Economies

While over-financing caused crises and slow growth in advanced economies including Germany, France and the UK after 2008, more prudent financial deepening sustained higher economic growth in China and India—two major emerging economies in the world. The actual financial deepening ratios (AFDR) observed in the non-consolidated balance sheet from the OECD exceeded by factors of 3.5, 2.4 and 5.1 the optimal financial deepening ratios (OFDR) obtained from the solutions of dynamic general equilibrium (DGE) models of those three advanced economies. The corresponding factors were 2.3 and 0.49 for China and India respectively. Labor intensive production technology and a low OFDR relative to a high AFDR in China allowed it to grow at 10% between 1990 and 2010 period that ended with the global financial crisis. With a reasonable OFDR and low AFDR India also managed to grow at 6.5%. Thus huge gaps between the optimal and actual financial deepening ratios led to massive macroeconomic consequences as observed after the crises in 2008. Smooth, sustainable and efficient economic growth requires adoption of strategies for separating equilibria in line of Miller–Stiglitz–Roth mechanisms avoiding problems of asymmetric information in the process of financial intermediation with as narrower gaps as possible between the AFDRs and OFDRs.

Financial Deepening and Economic Growth

The core of Shapley–Shubik games and general equilibrium models with a Venn diagram is applied for a theory on the role of real finance in economic growth among advanced economies. Then the dynamic computable general equilibrium (DCGE) models for Germany, France, the UK, Japan and the USA are constructed to assess the validity of the over-financing hypothesis that has reappeared after the financial crisis of 2008. Actual financial deepening ratios observed in the nonconsolidated balance sheet of the OECD exceeded by factors of 3.5, 2.4, 5.1, 11.6 and 4.8 than the optimal financial deepening ratios implied by DCGE models, respectively, in these countries because of excessive leveraging and bubbles up to 19 times of GDP which were responsible for this great recession. Containing such massive fluctuations for macroeconomic stability and growth in these economies are not possible in conventional fiscal and monetary policy models and require a DCGE analysis like this along with adoption of separating equilibrium strategy in line of Miller–Stiglitz–Roth mechanisms to avoid problem of asymmetric information in the process of financial intermediation so that the gaps between actual and optimal ratios of financial deepening remain as small as possible.

Government Bias in Education, Schooling Attainment, and Long-Run Growth

A surprising cross-country stylized fact is that higher public spending on education tends to lower the long-run growth rate of per capita GDP and the returns to schooling. This is contrary to the conventional wisdom that education is a major driver of growth. In this article, we revisit this issue and try to understand these puzzling facts in terms of an endogenous growth model. Our cross-country calibration of the growth model predicts that countries with a greater government involvement in education experience lower schooling efforts and lower growth.