Unconditional Welfare Research Articles

THE NEW KEYNESIAN WAGE PHILLIPS CURVE: CALVO VS. ROTEMBERG

We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

Predetermined interest rates in an analytical RBC model

We solve a version of the analytical Real Business Cycle (RBC) model with a predetermined rate of return on household saving. The solution differs from that of the benchmark RBC model along two dimensions: (i) Policy functions depend on the variance of the technology shock. (ii) There is a suboptimal pattern of excess saving. We discuss the economic intuition underlying these properties. We also demonstrate that unconditional welfare can be higher in the suboptimal model with predetermined interest rates, providing a clear illustration of the pitfall with unconditional welfare comparisons.

Commodity price risk management and fiscal policy in a sovereign default model

Commodity prices are an important driver of fiscal policy and the business cycle in many developing and emerging market economies. We analyze a dynamic stochastic small-open-economy model of sovereign default, featuring endogenous fiscal policy and stochastic commodity revenues. The model accounts for a positive correlation of commodity revenues with government expenditures and a negative correlation with tax rates. We quantitatively document the extent to which the utilization of different financial hedging instruments by the government contributes to lowering the volatility of different macroeconomic variables and their correlation with commodity revenues. An event analysis illustrates how financial hedging instruments moderate fiscal adjustment in response to significant falls in the price of commodities. We evaluate the conditional and unconditional welfare gains for the representative household, generated by financial derivatives and commodity-indexed bonds.

Conditional Versus Unconditional Utility as Welfare Criterion: Two Examples

This paper provides two illustrative examples on how a choice of social welfare criterion (conditional vs. unconditional utility) can generate different welfare implications. The first example is based on the standard linear-quadratic permanent income model, and the other example uses a simple two-country DSGE model under autarky and under complete markets. When the conditional welfare criterion is used—with the social discount factor set at the private discount factor—we obtain the well-known results that the government should not intervene when there are no market imperfections and that complete markets generate risk sharing gains over autarky. In contrast, using an unconditional welfare criterion—which effectively implies that the social discount factor is set to unity—can generate unconventional welfare results.

Something for Nothing: Liberal Justice and Welfare Work Requirements

Welfare reform legislation enacted in 1996, which created the Temporary Assistance for Needy Families (TANF) program, makes entitlement to federal poor relief conditional on fulfilling work requirements. The article addresses the following timely question: whether just liberal societies should require work as a condition of public assistance for the able-bodied, or whether aid should be provided unconditionally through, for example, a basic guaranteed income for all. Drawing on the work of liberal egalitarian theorists, the article investigates whether standard liberal theories of justice can help make sense of arguments commonly voiced in favor of work requirements: that unconditional welfare guarantees, such as a universal basic income, exploit workers, license free riding, and violate basic principles of social reciprocity. The article concludes that the view that unconditional benefits are unfair or exploitative is difficult to derive from liberal notions of just societies. Liberal egalitarians start from a baseline of equal initial shares of resources, skepticism about desert and market allocations, and an obligation to hold persons harmless for unlucky outcomes and endowments that does not clearly yield a bedrock obligation to work for a living. Drawing on an evolutionary analysis, the article concludes that any tension between liberal theories and politically popular notions of fairness are due to the failure of political theory to capture dynamic historical conditions that gave rise to basic norms against shirking. The logic of evolutionary development is fundamentally at odds with the static, contractarian thought experiments that liberal theorists favor. The article speculates on the implications of this explanation for the divergence between principles derived from rational analysis and the realities of political psychology.

Estimating and Predicting Household Expenditures and Income Distributions

A reliable prediction of unconditional welfare distributions, like income or consumption, is essential for welfare analysis, and in particular for inequality, poverty or development studies. Where observations of expenditures or income are missing, the mean prediction based on available covariates is not just a poor estimator of the unconditional distribution; it fails to predict the required information about tails and quantiles. A new estimation method is introduced which can be combined with any mean prediction model. It is used to calculate the income distribution of a survey based on subsample information, to estimate the unconditional income distribution for the non-responding households, and to predict the household expenditures of a future panel wave. It allows for imputing welfare distributions for a census from a survey or for synthetic populations under specific scenarios. Further inference is straight-forward, including prediction of Lorenz curves, indexes like the Gini, or distribution quantiles, including confidence intervals.

Ordering Policy Rules with an Unconditional Welfare Measure

The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.

Monetary-Fiscal Interactions When Public Debt is Stationary

Recent prominent contributions to the literature on optimal policy coordination have suggested it might be optimal to allow a permanent drift in the debt-to-GDP ratio in response to shocks under nominal rigidity. Policy makers are, however, often constrained to keep the debt ratio stable over the economic cycle. We analyze the wider implications of such fiscal goals using a general formulation of the joint monetary-fiscal policy target. We find that the interest rate feedback rule consistent with stationary debt dynamics features a pro-cyclical response to the output gap in addition to responding to inflation. We show that the best stationary policy in terms of an unconditional welfare measure is characterized by highly persistent debt dynamics, a weaker interest rate response to inflation and lesser reliance on debt finance following shocks compared with the optimal Ramsey plan.

Unconditional welfare benefits and the principle of reciprocity

Stuart White and others claim that providing welfare benefits to citizens who do not, and are not willing to, work breaches the principle of reciprocity. This, they argue, justifies placing a minimum work requirement on welfare recipients. This article seeks to rebut their claim. It begins by rejecting the attempt to ground the work requirement on a civic obligation to work. The article then explores the principle of reciprocity, and argues that the practice of reciprocity depends on the particular conception of distributive justice adopted. An examination of different interpretations of egalitarian justice and their corresponding patterns of reciprocity demonstrates that unconditional welfare benefits are compatible with, and sometimes even warranted by, the principle of reciprocity. Thus, imposing a work requirement on welfare recipients is by no means a mandate of reciprocity.

Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate

Recent treatments of the issue of a zero floor on nominal interest rates have been subject to some important methodological limitations. These include the assumption of perfect foresight or the introduction of the zero lower bound as an initial condition or a constraint on the variance of the interest rate, rather than an occasionally binding non-negativity constraint. This paper addresses these issues offering a global solution to a standard dynamic stochastic sticky price model with an explicit occasionally binding non-negativity constraint on the nominal interest rate. It turns out that the dynamics and sometimes the unconditional means of the nominal rate, inflation and the output gap are strongly affected by uncertainty in the presence of the zero lower bound. Commitment to the optimal rule reduces unconditional welfare losses to around one-tenth of those achievable under discretionary policy, while constant price level targeting delivers losses which are only 60% larger than under the optimal rule. Even though the unconditional performance of simple instrument rules is almost unaffected by the presence of the zero lower bound, conditional on a strong deflationary shock simple instrument rules perform substantially worse than the optimal policy.

Welfare, Work Requirements, and Dependant‐Care

abstract This article considers the justice of requiring employment as a condition of receiving public assistance. While none of the main theories of justice prohibits work requirements, the arguments in their favour are weak. Arguments based on reciprocity fail to explain why only means‐tested public benefits should be subject to work requirements, and why unpaid dependant care work should not count as satisfying citizens’ obligations to reciprocate. Arguments based on promoting the work ethic misattribute recipients’ nonwork to deviant values, when their core problem is finding steady employment consistent with supporting a family and meeting dependant care responsibilities. Rigid work requirements impose unreasonable costs on some of the poor. A welfare system based on a rebuttable presumption that recipients will work for pay, conjoined with more generous work supports, would promote justice better than either unconditional welfare or strict requirements [1].

Workfare: the Subjection of Labour

abstract When viewed as a question of distributive justice the evaluation of workfare typically reflects exclusively on the distribution of income: do the physically capable have a justified claim for state support, or is it fair to demand from those who do work to subsidise this support? Rarely is workfare appraised in terms of how it affects other parties such as employers or other workers, and on the structural effects the pattern of incentives it generates brings about, or as an issue of distributive justice related to a more extensive range of objects of distribution such as access to pleasing jobs. We propose to evaluate workfare by looking at its effects more broadly: (1) we discuss and dismiss on empirical grounds the two most common arguments in favour of workfare, namely that workfare develops self‐reliance among participants and it is more economical in the use of altruism among taxpayers. (2) We suggest that workfare focuses on work as a burden and as a means to income, ignoring other beneficial aspects that are conducive to the worker’s self expression. These other benefits are distributed unevenly between two main groups: the privileged well off and the disadvantaged. (3) we argue that workfare functions as a mechanism to preserve these privileges to one class of workers at the expense of another. Or, to put it the other way, the payment of unconditional welfare to the long term unemployed might be justified as one method of mitigating unjustified privileges.

Experiments Behind the Veil: Structural Influences on Judgments of Social Justice

In two experiments, participants judged the fairness of different distributions of wealth in hypothetical societies. In the first study, the level of meritocracy in the hypothetical societies and the frame of reference from which participants judged alternative distributions of wealth interacted to influence fairness judgments. As meritocracy increased, all participants became more tolerant of economic inequality, particularly when they judged fairness from a redistribution frame of reference that made salient transfers among socioeconomic classes. Liberal participants, however, placed a greater emphasis on equality than did conservative participants across all conditions. In the second study, reactions to income transfers depended on the efficiency of the transfers and the identity of the groups receiving the benefits, but conservatives placed a greater emphasis in their fairness judgments on tying benefits to workfare requirements, whereas liberals did not distinguish between unconditional welfare transfers and workfare transfers.

Experiments Behind the Veil: A Hypothetical Societies Approach to the Study of Social Justice

In two experiments, participants judged the fairness of different distributions of wealth in societies. In the first study, the level of meritocracy in the and the frame of reference from which participants' judged alternative distributions of wealth interacted to influence fairness judgments. As meritocracy increased, all participants became more tolerant of economic inequality, particularly when participants judged fairness from a redistribution frame of reference that made salient transfers among classes. Liberal participants, however, placed a greater emphasis on equality than conservative participants across all conditions. In the second study, reactions to income transfers depended on the efficiency of the transfers and the identity of the groups receiving the benefits, but conservatives placed a greater emphasis in their fairness judgments on tying benefits to workfare requirements while liberals did not distinguish between unconditional welfare transfers and workfare transfers. The implications of these results and this hypothetical societies paradigm for the empirical study of social justice are discussed.