Macroeconomics - Which Way Now?

Recent developments in macroeconomics are reviewed, and it is argued that a better understanding of the role of market failures and institutions is a major achievement. The insights in when and how policy intervention may be called for have thus been improved. However, the progress does not imply that we are approaching a situation where business cycles can be “controlled”; rather it implies that we better understand why this would be very difficult if not impossible.

Taxes and employment - is there a Scandinavia puzzle ?

Recent debates have suggested that taxation is very detrimental to labour force participation and employment. However, some countries - notably the Scandinavian - stand out as contradictions to this view since they have managed to sustain high labour force participation despite high tax rates and a generous social safety net.This paper considers the experience of European countries and Scandinavia compared to the US and asks whether Scandinavian countries are outliers. First, it is argued that the simple "tax argument" does not capture the European experience since labour force participation for some age groups is at the same or a higher level than the US. Second, it is argued that even though the social safety net is generous in Scandinavian countries, it is also very employment conditional. It is shown that these conditionalities can make high labour force participation consistent with a high marginal effective taxation of labour, and that it on the margin lowers the marginal costs of public funds. The design of the social safety net is therefore important in accounting for the Scandinavian experience.Taxes and employment, is there a Scandinavia puzzle? taxation of labour, employment, labour force participation, social safety net, Andersen

On Myopia As Rationale for Social Security

It has been argued that "paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems." This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for pay-as-you-go pensions. In that case, sufficently-strong myopia may justify such pensions only if agents cannot borrow against their future pension, and are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.myopia; pensions; social security; dynamic efficiency

Nominal rigidities and the optimal rate of inflation

This paper analyses two reasons why inflation may interfere with price adjustment so as to create inefficiencies in resource allocation at low rates of inflation. The first argument is that the higher the rate of inflation the lower the likelihood that downward nominal rigidities are binding (the Tobin argument) which implies a non-linear Phillips-curve. The second argument is that low inflation strengthens nominal price rigidities and thus impairs the flexibility of the price system resulting in a less efficient resource allocation. It is argued that inflation can be too low from a welfare point of view due to the presence of nominal rigidities, but the quantitative importance is an open question

Longevity, Growth and Intergenerational Equity - The Deterministic Case

Challenges raised by ageing (increasing longevity) have prompted policy debates featuring policy proposals justified by reference to some notion of intergenerational equity. However, very different policies ranging from pre-savings to indexation of retirement ages have been justified in this way. We develop an overlapping generations model in continuous time which encompasses different generations with different mortality rates and thus longevity. Allowing for trend increases in both longevity and productivity, we address the issue of intergenerational equity under a utilitarian criterion when future generations are better off in terms of both material and non-material well being. Increases in productivity and longevity are shown to have very different implications for intergenerational distribution.

Wage formation and European integration

European integration is likely to affect labour market performance through various routes. One important channel is the effects product market integration has on labour markets. This paper reviews how product market integration may strengthen labour market interdependencies between integrating economies and therefore affect both the level of employment and the flexibility by which wages adjust to shocks.integration, european integration, labour market performance, product market integration, wage formation, wages, employment, Andersen