The Basel Committee (Committee on Banking Regulations and Supervisory Practices) ... on the new framework, e.g. The Application of Basel II to Trading Activities and the Treatment of Double default Effects (July 2005) are ...
Story - antoq - 10/30/2010 - 07:39 - 0 comments - 0 attachments
We re-examine the optimality of tax smoothing from the point of view of frictional labor markets. Since Barro’s (1979) partial-equilibrium intuition, Lucas and Stokey’s (1983) general-equilibrium analysis, and continuing through to today’s quantitative DSGE models used to study optimal fiscal policy, the prescription that governments ought to hold labor tax rates virtually constant in the face of aggregate shocks is well-known to macroeconomists. We show that this cornerstone optimal-policy prescription and the intuition underlying it depend crucially on a Walrasian view of labor markets. If one instead takes what has emerged as the standard search and bargaining view of labor markets, tax-smoothing ceases to be important for empirically-relevant labor market parameters. If wages are determined in bilateral bargaining after workers and firms meet, not only is tax-smoothing unimportant, but purposeful tax-rate volatility is actually welfare-enhancing by partially offsetting cyclical bargaining-induced wedges.
Our baseline search and bargaining environment is identical to the one that has come into widespread use in recent DSGE modeling efforts. We quantitatively demonstrate the optimality of labor tax-rate volatility in this environment. In an effort to recover tax smoothing, we then incrementally alter the environment in a number of ways, each of which in principle reduces the severity of search and bargaining frictions. In particular, we change the timing of labor market flows, introduce a labor-force participation margin, and allow for wages to be determined in a competitive fashion, rather than through ex-post bilateral bargaining. Changing the timing of labor market flows and allowing a labor-force participation choice each, as well as together, only modestly reduces the degree of optimal tax-rate volatility.
Many developing countries design their trade policies to discriminate against importation of second-hand goods through import bans, licensing requirements, or higher tariff rates. Discrimination against used products is even found among the ranks of the industrialized countries; witness Australia's additional $12,000 tariff on used cars.
The motivation for these policies is a combination of a desire to protect domestic industries from competition from low-priced goods, an attempt to avoid becoming a "dumping-ground" for cast-offs from high-income countries, and an attempt to push industries toward the "technological frontier" and avoid the use of "obsolete" technologies.
Despite a marked tendency for laboratory markets to converge to competitive price predictions, laboratory sellers are sometimes able to maintain prices above competitive levels. A variety of factors have been associated with supra competitive prices in laboratory markets. Plott and Smith (1978) showed that the rules of the market institution are important: prices are higher when sellers choose prices simultaneously in a posted-offer (PO) auction than when buyers and sellers make bids and offers sequentially in an oral double auction (ODA). Smith (1965) attributed price deviations (in an ODA) during an adjustment phase to a relatively low excess supply at supra competitive prices. Dolbear et al. (1968), Isaac and Reynolds (2001), Wellford (1990), Huck, Normann and Oechssler (2000b), and others report that a decrease in the number of sellers tends to increase price levels in several distinct trading institutions.
Information conditions also appear to affect pricing. Dolbear et al. (1968) find that prices are more likely to exceed noncooperative levels when sellers are given complete cost and demand information, as compared with the case in which they must learn about market demand and supply conditions through experience. Huck, Normann and Oechssler (2000a) find more competitive pricing when sellers are given information about the strategic decisions of others and the profit consequences of these decisions.
