Radhika Lahiri

THE INFLATION TAX, VARIABLE TIME PREFERENCE, AND THE BUSINESS CYCLE

This paper investigates the impact of anticipated inflation on features of the business cycle in the presence of recursive but intertemporally dependent tastes. Intertemporal dependence is induced by the presence of a variable or endogenous individual rate of time preference. Quantitative experiments indicate that variability in the rate of time preference can enhance the contribution of monetary shocks to the fluctuations of real variables. Another implication of the variable-time-preference model is that, unlike the fixed time preference model, the business cycle features in high inflation and low inflation economies can be very different. The contribution of monetary shocks to fluctuations increases partly because endogenous time preference accentuates inflation-tax effects, which are already present in the standard framework because of the presence of cash-in-advance constraints. The change in the relative role of monetary shocks is also related to how variable time preference alters the effects of technology shocks, which can be quantitatively or qualitatively different in comparison to the standard model, depending on the parameters of the model.

Growth Patterns and Inequality in the Presence of Costly Technology Adoption

The stylized facts that motivate this article include the diversity in growth patterns that are observed across countries during the process of economic development and the divergence over time in income distributions both within and across countries. We construct a dynamic general equilibrium model in which technology adoption is costly and agents are heterogeneous in their initial holdings of resources. We interpret the adoption cost as the resources expended in acquiring skills associated with new technologies. Endogenous growth occurs in our model largely as a result of human capital deepening. The analytical results of the model characterize three growth outcomes associated with the technology adoption process depending on productivity differences between the technologies. These outcomes are labeled ‘poverty trap,’ ‘dual economy,’ and ‘balanced growth.’ The model is then capable of explaining the observed diversity in growth patterns in addition to the divergence of incomes over time and across countries.

Technical Change, Variable Elasticity of Substitution and Economic Growth

Purpose - The purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it. Design/methodology/approach - The VES production function is incorporated into an otherwise standard Diamond overlapping generations model. Findings - Depending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth. Research limitations/implications - The paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study. Practical implications - The VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature. Social implications - In the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice. Originality/value - The study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.

Institutional Development, Technology Adoption and Redistribution: A Political Economy Perspective

We examine technology adoption and growth in a political economy framework where two alternative mechanisms of redistribution are on the menu of choice for the economy. One of these is a lump-sum transfer given to agents in the economy. The other is in the form of expenditure directed towards institutional reform aimed at bringing about a reduction in the cost of technology adoption in the presence of uncertainty. The choice over these mechanisms is examined under three alternative approaches to collective decision making. In the first setting, voting takes place to determine the proportion of revenue allocated to adoption-cost-reducing institutional expenditure. In the second setting, the government chooses this proportion to maximize a ‘Benthamite’ social welfare function, i.e. the sum of utilities of agents in the economy. The third setting applies the Rawlsian social welfare function, which is the most “egalitarian” in that this proportion is chosen to maximize the minimum level of utility attained in the heterogeneous agent economy. We find that the extent of uncertainty, working through the political economy mechanism, has a positive impact on long run average wealth levels in the economy in all settings. The voting mechanism leads to the fastest transition to sustained balanced growth in all cases, while the slowest transition is experienced in the case of the Rawlsian economy. Expenditures on institutional development are higher in the voting and Benthamite economies relative to the Rawlsian economy. All economies converge to the same inequality and growth rates in the long run. Transitional inequality, however, is highest in the Rawlsian framework.

Productivity differences, technology adoption and economic growth: The case of India: Changing Paradigms?

When the acronym of eBRICi was coined in 2001 by Jim OiNeill of Goldman Sachs, it was expected that economic growth rates in India, Brazil and Russia would eventually catch up with that of China. However, China has continued to outperform the other economies in the group, even after it was renamed eBRICSi to reflect the inclusion of South Africa in 2010. The focus of this chapter is on one of the BRICS economies, namely India. Its aim is to examine from an economic perspective, why Indiais performance has not lived up to expectations, and comment on the key challenges it faces in meeting them. We begin with some descriptive statistics regarding the progress of the Indian economy since 1990. While it has been growing at a rapid rate since the reforms it introduced in the1990s, there has been a slowdown in its overall GDP growth rates since 2008. The rate of growth experienced in the period 2003n07 was an average of 10.5 per cent. However, since the recession following the Global Financial Crisis (GFC) of 2008, the growth rate has fallen. From the period 2008n12 it has only registered an average growth rate of 6.5 per cent (World Bank, 2013). This chapter suggests that one of the major factors underpinning this slowdown is the performance of Indiais agricultural sector. The importance of the agricultural sector is highlighted by the following stylized facts.

Health Expenditures and Inequality: A Political Economy Perspective

We consider an overlapping generations model with heterogeneous agents where a persons probability of survival into old age is determined by a variable elasticity of substitution health production function with public and private expenditures as inputs. Analytical and numerical results reveal that higher substitutability between private and public expenditures at the aggregate level and a higher share of public spending in the production of health lead to higher long run wealth levels and lower inequality. In the political equilibrium, higher aggregate substitutability is associated with higher public health expenditure. For most parameter combinations, the political economy and welfare maximising proportions of tax revenue allocated towards public health care converge in the long run. These results provide a political economy explanation for the low investments in public health care in developing countries, where aggregate substitutability between public and private health expenditures is likely to be lower. Our results indicate that policies to improve institutional aspects that yield higher substitutability between public and private health expenditures and returns to public health spending could lead to better long run economic outcomes.