Macroeconomic Trade-offs Research Articles

Optimising policies to achieve agricultural transformation objectives: an application for Ethiopia

ABSTRACT Policymakers seek objectives that can be conflicting under a budget constraint. Solving this problem requires a multi-criteria decision-making technique whereby equations of a dynamic computable general equilibrium model are constraints to a policy optimisation problem. We illustrate this approach in the framework of agricultural transformation objectives. Using data for Ethiopia we show the potential conflict between policy objectives and how policies are optimally determined to arrive at the best possible compromise. Should Ethiopian policymakers pursue increasing agri-food GDP, rural household welfare, or agri-food exports, for example, they will not necessarily observe strong trade-offs between these objectives. However, if they invest in different agricultural sectors to achieve such objectives, the way in which they finance the investment will result in macroeconomic trade-offs. Only when the new investment is mostly allocated to oilseeds and coffee will there be not only simultaneous but also maximised improvement in all three policy objectives.

Prioritizing public investment in agriculture for post-COVID-19 recovery: A sectoral ranking for Mexico

Mexico's economy contracted unprecedentedly in 2020. Agriculture remains important for the economy and job creation, but it lacks strong productive dynamism and exhibits high informality. We show that investing in agriculture’s infrastructure can contribute to economic recovery and welfare post-COVID-19. On the basis of a dynamic computable general equilibrium model, we allocate to agriculture sectors public investment in productive infrastructure equivalent to 0.25% of GDP during three immediate years and analyze effects up to 2030. We see improvement in GDP, agri-food output and private consumption with rural poverty reduction. Based on the impact on these variables, a ranking suggests that new investments should prioritize the sugar cane sector. Highly ranked are also cereals, mainly maize, and other export-oriented crops such as flowers and coffee. Not only should investments prioritize these sectors, but the government should also finance them with foreign borrowing to speed up recovery and avert the short-term macroeconomic trade-offs of domestic financing.

Adapting to Climate Change in Vietnam: Insights from a Structural Model

Vietnam is increasingly exposed to climate change. The COVID-19 crisis offers an opportunity to push for green investment and climate-resilient adaptation. In this context, the paper uses a DSGE structural model, calibrated to features of the Vietnamese economy, to simulate the macroeconomic trade-offs of investing in resilient infrastructure. Compared to scenarios of a baseline no policy change and additional standard infrastructure spending, the model findings illustrate the long-term benefits of adaptation infrastructure investments on growth and public debt dynamics. Specifically, while adaptation infrastructure is initially slightly costlier during the scale-up period, it can better withstand natural disaster shocks, and over time, would have lower maintenance costs and higher return than conventional infrastructure. Other model scenarios illustrate the trade-offs of different financing sources as well as the benefits of public financial management reforms that improve investment efficiency.

Consumption and production-based CO2 pricing policies: macroeconomic trade-offs and carbon leakage

This paper applies a DYNK (Dynamic New Keynesian) model to compare the traditional environmental tax reform for greenhouse gas (GHG) emissions with a taxation scheme that taxes GHG emissions embodied in consumption within the framework of a unilateral policy of the EU-27. The embodied emissions of different commodities are taxed independently of their origin. The GHG tax rates applied are identical and new revenues are in both cases recycled via lower social security contributions of employers. The results show the macroeconomic results, driven by the different impact of the taxation schemes on price competitiveness of EU-27 firms. These differences drive the leakage and show negative leakage in the case of taxing embodied GHG emissions. Both taxation schemes are also regressive for household incomes emphasizing the importance of the choice of revenue recycling. In terms of emission reduction, we find the taxation of emissions embodied in consumption less effective.

Endogenous labor share cycles: Theory and evidence

Based on long US time series we document a range of empirical properties of the labor’s share of national income. We identify its substantial medium-to-long run, pro-cylical swings and show that most of its variance lies beyond business-cycle frequencies. We explore the extent to which these empirical regularities can be explained by a calibrated micro-founded, nonlinear growth model with normalized CES technology and endogenous labor- and capital augmenting technical change driven by purposeful directed R&D investments. We demonstrate that dynamic macroeconomic trade-offs created by arrivals of both types of new technologies can lead to prolonged swings in the labor share (and other model variables) due to oscillatory convergence to the balanced growth path as well as emergence of limit cycles via Hopf bifurcations. Both predictions are consistent with the empirical evidence.

Macroeconomic trade-offs and external vulnerabilities of human development in Nicaragua

Nicaragua is making progress towards the Millennium Development Goals, but is set to miss a number of targets in 2015. This paper’s general equilibrium analysis shows that it is unfeasible for the government to step up spending in order to meet these targets by the 2015 deadline. Any boost to public spending and financing would have to be front-loaded, which would entail pernicious macroeconomic trade-offs. A more realistic scenario would be to postpone meeting the goals until 2020. In that case, the allocation of public spending would spur economic growth without causing macroeconomic hardships, although the country would nevertheless remain highly vulnerable to external shocks.

Trade-offs and Payoffs of Investing in Human Development

Summary We apply a general equilibrium model to quantify economic and social payoffs from investing in human development. The analysis revolves around scenarios of public spending that allow four developing countries to meet targets of the Millennium Development Goals (MDGs). Public spending rises significantly to meet the targets by 2015. The ultimate effect on aggregate demand depends on the macroeconomic trade-offs of the financing source. The supply effect is that production factors accumulate and productivity rises as larger numbers of better-educated workers become employed. The magnitude of the GDP growth gains and options to magnify them after 2015 are identified.

Illusions and Disillusions with Poverty Reduction Strategies: Growth, Crisis and the MDGs in Bolivia, Honduras and Nicaragua

The Poverty Reduction Strategy Papers typically made little provision for coping with economic volatility and hardly paid attention to macroeconomic trade-offs when scaling up public spending for poverty reduction. This article assesses such trade-offs in the case of Bolivia, Honduras and Nicaragua, using economy-wide models and accounting for the impact of the global economic crisis. The analysis shows that the crisis will not only cause severe setbacks in progress towards poverty reduction targets and other millennium development goals, but will also significantly raise the costs of the strategies to reach those goals. Given domestic financing constraints, more non-debt creating development assistance will be required to finance the strategies and to avoid an insurmountable rise in public debt in the three countries. This finding is worrisome in the light of existing aid dependence and complex relations with donors. Reducing such dependence may only be possible in the medium run and will require better alignment of macroeconomic policies with long-term development goals.

Latin America and the Caribbean's Challenge to Reach the MDGs: Financing Options and Trade-Offs

The present study analyzes the determinants of improving outcomes in education, health and basic sanitation and the macroeconomic trade-offs caused by scaling up public spending for the Millennium Development Goals (MDGs), using an integrated modelling approach. At variance with other assessments, the analysis shows that most countries in Latin America and the Caribbean are “off track” towards many of the goals. The study shows that while achieving the goals is affordable for most countries in the region, governments will need to put greater emphasis on tax reforms to mobilize resources for increased social spending while avoiding undesirable macroeconomic trade-offs.

LONG‐RUN EQUILIBRIA IN AN ECONOMY WITH A GREENHOUSE EFFECT

This paper examines perfect foresight inter‐generational macroeconomic tradeoffs associated with climate change. Consumption of perfectly competitive agents is associated with exacerbation of the climate change problem. Saving and investment reduce exposure to a negative production externality caused by the greenhouse effect, through a non‐probabilistic catastrophic threshold. In this overlapping generations economy, saving and investment provide benefits to future generations that current individuals are unable to capture. Two kinds of equilibria are shown to exist. The gas stock may remain at a constant or declining level so the threshold does not matter in steady‐state equilibrium even with population growth, where consumption, investment and production are all constant in per capita terms. When the threshold does matter because the gas stock is growing in steady state, agents flirt with catastrophe, make strategic economic decisions based on what other agents are doing, and optimize by walking a knife‐edge of disaster at the threshold. Like the private provision of a public good, price‐taking agents internalize the public bad. This is the focal point symmetric Nash equilibrium, but the potential for a coordination failure is also shown to exist where agents with perfect foresight would find it optimal not to end the economy, but are unable to avoid doing so.

Comment on E. Malinvaud, "The Macroeconomic Tradeoffs of Price and Income Policies"

Comment on E. Malinvaud, "The Macroeconomic Tradeoffs of Price and Income Policies"

Comment on E. Malinvaud, "The Macroeconomic Tradeoffs of Price and Income Policies"

Comment on E. Malinvaud, "The Macroeconomic Tradeoffs of Price and Income Policies"

The Macroeconomic Tradeoffs of Price and Income Policies

Under some conditions, price and income policies may succeed in reaching the objective they pursue. But, in all cases, tradeoffs place limits on what they can achieve. These tradeoffs are discussed for three kinds of objectives: reducing inequalities, solving the inflation-unemployment dilemma, and restoring business profitability. The uncertainties, particularly the relationship between wages and employment, are emphasized. Copyright 1990 by The editors of the Scandinavian Journal of Economics.

The Consequences of Budget Reform for Congressional-Presidential Relations

The struggle between Congress and the president over spending and taxing was altered significantly by the Congressional Budget and Impoundment Control Act of 1974 and the Gramm-Rudman-Hollings Act of 1985. The purpose of this article is to evaluate the impact of these reforms on congressional-presidential budgeting. The analysis answers two questions: What are the major budgetary reforms that have influenced congressional-presidential relations, and what have been the consequences of these changes? The article concludes that the budget reforms have strengthened the congressional role vis-à-vis the president's role in the budget-making process. Macro-budgetary and macro economic trade-offs between Congress and the president are highlighted. In sum, the reforms have made budgeting between the president and Congress more difficult. They have increased the number of budgetary participants, made the budget process more open, forced the president to work more closely with Congress, and allowed Congress gradually to tighten control over executive spending discretion.