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Tariffs and the Macroeconomy  

Xiangtao Meng, Katheryn N. Russ, and Sanjay R. Singh

For hundreds of years, policymakers and academics have puzzled over how to add up the effects of trade and trade barriers on economic activity. The literature is vast. Trade theory generally focuses on the question of whether trade or trade barriers, like tariffs, make people and firms better off using models of the real economy operating at full employment and a net-zero trade balance. They yield powerful fundamental intuition but are not well equipped to address issues such as capital accumulation, the role of exchange rate depreciation, monetary policy, intertemporal optimization by consumers, or current account deficits, which permeate policy debates over tariffs. The literature on open-economy macroeconomics provides additional tools to address some of these issues, but neither literature has yet been able to answer definitively the question of what impact tariffs have on infant industries, current account deficits, unemployment, or inequality, which remain open empirical questions. Trade economists have only begun to understand how multiproduct retailers affect who ultimately pays tariffs and still are struggling to meaningfully model unemployment in a tractable way conducive to fast or uniform application to policy analysis, while macro approaches overlook sectoral complexity. The field’s understanding of the importance of endogenous capital investment is growing, but it has not internalized the importance of the same intertemporal trade-offs between savings and consumption for assessing the distributional impacts of trade on households. Dispersion across assessments of the impacts of the U.S.–China trade war illustrates the frontiers that economists face assessing the macroeconomic impacts of tariffs.

Article

Problem Structuring in Economic Evaluation  

Rita Faria

Economic evaluation provides a framework to help inform decisions on which technologies represent the best use of healthcare resources (i.e., are cost-effective) by bringing together the available evidence about the benefits and costs of the alternative options. Critical to the economic evaluation framework is the need to accurately characterize the decision problem—this is the problem-structuring stage. Problem structuring encompasses the characterization of the target population; identification of the decision options to compare in the model (e.g., use of the technology in different ways, standard of care, etc.); and the development of the conceptual model, which maps out how the decision options relate to the costs and benefits in the target population. Problem structuring is central to the application of the economic evaluation framework and to development of the analysis, as it determines the specific questions that can be addressed and affects the relevance and credibility of the results. The methodological guidelines discuss problem structuring to some extent, although the practical implications warrant further consideration. With respect to the target population, questions emerge about how to define it, whether and which sources of heterogeneity to consider, and when and in whom to consider spillovers. Relating to the specification of decision options are questions about how to identify and select them, including restricting the comparison to standard of care, sequences of tests and/or treatments, and “do-nothing” approaches. There are also issues relating to the role and the process of development of the conceptual model. Based on a review of methodological guidelines and reflections on their implications, various recommendations for practice emerge. The process of developing the conceptual model and how to use it to inform choices and assumptions in the economic evaluation are two areas where further research is warranted.

Article

The Role of Uncertainty in Controlling Climate Change  

Yongyang Cai

Integrated assessment models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs assume that all of the future information is known. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, and economic risks. For example, climate sensitivity, a well-known parameter that measures how much the equilibrium temperature will change if the atmospheric carbon concentration doubles, can range from below 1 to more than 10 in the literature. Climate damages are also uncertain. Some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. The spatial distribution of climate damages is also uncertain. Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain as well. Future international cooperation and implementation of international agreements in controlling climate change may vary over time, possibly due to economic risks, natural disasters, or social conflict. In the face of these uncertainties, policy makers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly.

Article

Modern Swedish Economic History  

Svante Prado and Jakob Molinder

The Swedish growth trajectory began in the mid-19th century as external demand for its staples added an important impetus to industrialization and structural transformation. Since then, GDP per capita has increased by a factor of 21, which means that GDP per capital has doubled 4.4 times. At the same time, the population has increased from about 3.5 million to 9.5 million. The manufacturing industry has been the outstanding force propelling the economy forward since the 1870s. It was early on based on the exploitation of the domestic supply of raw materials. From the 1890s, it was gradually producing products higher up in the value-added chain, manifested by the growth of the mechanical engineering industry and the emergence of the electro-mechanical industry. The share of manufacturing in employment terms peaked at about 35% in the 1960s but then declined to about 18% in the 2010s. Yet, the importance of it as a locomotive for economy-wide growth has not declined by nearly as much. Another principal characteristic of Swedish development is large public sector-spending, implying high taxes and ambitions welfare state arrangements. Much of the expansion in social spending occurred in the post-World War II decades by the emergence of the welfare state based on universal principles and income-related benefits. A third attribute of the Swedish economic history is far-reaching compression of incomes. Thanks to wide-spread unionization and centralized agreements between the major organizations in the labor markets, the road was paved for far-reaching compression of the wage structure, which occurred in brief episodes during the 1940s, the late 1960s, and the 1970s. The joint force of these compressions and the welfare state produced a remarkable flat income distribution by the early 1980s, testified by a Gini of about 0.2, perhaps unparalleled among developed countries. As in many other similar countries, the income distribution has widened since the early 1980s, and the other Nordic countries had lower Gini coefficients than Sweden by the mid-2010s. Migration has set a deep mark in Swedish society. Whereas the latter half of the 19th century witnessed a massive outflow of Swedes going to the United States, two different waves of immigration dominated population movements after World War II. The first wave comprised workers from Finland, former Yugoslavia, and South Europe seeking employment in the prospering labor markets of the post-World War II period. This wave ebbed out in the 1970s. The second one comprised mostly asylum seekers from conflict-ridden countries. It began in the 1980s, and it continues. Combined, these waves of immigrations have transformed the Swedish population from being very homogenous into a blend of different origins.

Article

Economic Theory of Criminal Law  

Keith N. Hylton

Criminal law consists of substantive and procedural parts. Substantive law is the set of rules defining conduct that violates the law. Procedural criminal law is the set of rules regulating the process of punishment. Substantive rules apply mostly to individual actors, and procedural rules apply to public enforcement agencies and adjudicators. Economic theory of criminal law consists of normative and positive parts. Normative economic theory, which began with writings by Beccaria and Bentham, aims to recommend an ideal criminal punishment scheme. Positive economic theory, which appeared later in writings by Holmes and Posner, aims to justify and to better understand the criminal law rules that exist. Since the purpose of criminal law is to deter socially undesirable conduct, economic theory, which emphasizes incentives, would appear to be an important perspective from which to examine criminal law. Positive economic theory, applied to substantive criminal law, seeks to explain and to justify criminal law doctrine in economic terms—that is, in terms that emphasize the incentive effects created by the law. The positive economic theory of criminal law literature can be divided into three phases: Classical deterrence theory, neoclassical deterrence, and modern synthesis. The modern synthesis provides a rationale for fundamental criminal law doctrines and also more puzzling portions of the law such as the doctrines of intent and necessity. Positive economic theory also provides a rationale for the allocation of enforcement responsibilities.