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ABSTRACTLabour market friction is viewed in terms of the market value of an employed worker as opposed to the position of the Beveridge curve. This market value of an installed worker, which I call Tobin's Q of a worker, is inversely proportional to the average quality of the match between employers and workers. Based on this measure, I find that the labour market friction rises during a period of productivity boom. This phenomenon is indirectly supported by the data where it is found that the relative value of a worker with respect to tangible capital shows a positive association with the total factor productivity. The model suggests that firms may be compromising the quality of a skill match during a period of tight labour market conditions.

We develop an endogenous growth model to address a long standing question whether sustainable green growth is feasible by re-allocating resource use between green (natural) and man-made (carbon intensive) capital. Although the model is general we relate it to the UKís green growth policy objective. In our model, Önal output is produced with two reproducible inputs, green and man-made capital. The growth of man-made capital causes depreciation of green capital via carbon emissions and related externalities which the private sector does not internalize. A benevolent government uses carbon taxes to encourage Örms to substitute man-made capital with green capital in so far the production technology allows. Doing so, the damage to natural capital by emissions can be partly reversed through a lower socially optimal long run growth. The trade-o§ between environmental quality and long-run growth can be overcome by a pollution abatement technology intervention. However, if the source of pollution is consumption, the optimal carbon tax is zero and there is no trade-o§ between environment policy and growth. A corrective consumption tax is then needed to Önance a public investment programme for replenishing the green capital destroyed by consumption based emissions.

This paper aims to explore the role of the universal banking system in contributing to the stock market bust in the wake of the financial crisis 2008–2009 when bankers might have incentive to hide information from shareholders. We set up a stylized model of consumption smoothing involving universal banks that undertake both investment and commercial banking activities. Banks have private information about the outcome of a project that it funds. In the wake of bad news about the project, the banker has an incentive to sell lemon shares in a secondary market with the pretence of a liquidity crunch. Our model shows that such an incentive results in (i) a sharp discounting of stock prices, (ii) greater loan demand (iii) higher fraction of bank ownership of the borrowing firms, and (iv) heightened consumption risk resulting in precautionary savings by households. The magnitude of these effects depends on the market's perception about the preponderance of lemons in the stock market. A credible punishment scheme implemented by the government in the form of fines may moderate the stock market decline and consumption volatility due to information friction. However, it imposes a deadweight loss on private citizens because of a fall in all banks' expected profit. On the other hand, a "ring-fenced" banking arrangement along the way suggested by the Vickers Commission may entail a first order welfare loss due to the lack of diversification opportunities.

We examine the efficacy of a popular anti-poverty programme, namely the National Rural Employment Guarantee Act (NREGA) of the Government of India. We argue that a chronic friction of wage payment delay in this flagship programme could adversely affect the welfare of the poor through two channels. First, it causes deferred consumption. Second, it turns labour into a credit good which makes an indebted household work harder to clear off his existing debt. The loss of welfare persists even when the worker has an outside employment option. If a programme of financial inclusion increases the indebtedness of the poor, a wage payment delay in the NREGA programme could escalate this welfare loss although the official indicator of success (i.e., participation) may not reveal this friction.

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro‐theories predict an appreciation of the real exchange rate. We argue that this prediction might reflect the conventional assumption that government purchases are unproductive. Using a simple frictionless model with efficient international risk sharing, we show that the real exchange can depreciate in response to a rise in government purchases, if these purchases increase domestic private sector productivity, and labor supply is highly elastic. Empirically plausible marginal products of government purchases are sufficient to generate this result.

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result. ; info:eu-repo/semantics/published

An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.

Abstract.  We present a neo‐classical model that explores the determinants of growth‐inequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of the growth‐inequality relationship. The initial distribution of human capital determines the long‐run income distribution and the growth rate by influencing the occupational choice of the agents. The steady‐state proportion of adults that innovates and updates human capital is path dependent. The output elasticity of skilled‐labour, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady‐state equilibria. From a calibration experiment we report that a skill‐intensive technology, low barriers to knowledge spillovers, and high degrees of redistribution characterize the industrial countries with a positive growth‐inequality correlation. A negative correlation between growth and inequality arises for the group of non‐industrial countries with the opposite characteristics. JEL classification: E1, O4

We construct a production‐based model, which compares the investment return behaviour of liquidity‐constrained firms with that of unconstrained firms. The key testable implication that emerges from the model is that the investment returns of the constrained firms are predictable, while those of the unconstrained firms are not. We test this implication indirectly, verifying whether the capital stock and investment returns of the latter firms lead those of the former, and directly, via the estimation of an Euler equation. Our results are consistent with the model's prediction.