Abstract: This paper provides a coherent, logical framework that connects the main issues concerning fiscal policy in an economic and monetary union. The focus is on normative issues within the European Union.

Abstract: The answer to this question is "yes". We re-examine noncooperative and cooperative equilibria under perfect capital mobility. To this end, we develop a two-country optimal growth model with endogenous national fiscal policies. The channel for interdependence is distortionary income taxes. We study both the Residence and Source principle of international taxation. National governments play Stackelberg vis-a-vis private agents, while they can play either Nash or cooperate vis-a-vis each other. We solve for Markov-perfect (time consistent) equilibria. We show that the pertinent Nash equilibria are degenerate. Thus, under both the Residence and Source principle, only cooperative equilibria can exist. The driving force is perfect capital mobility. This is a new result that provides a strong argument for world tax coordination. When we solve for cooperative equilibria, we show that it is optimal to set a common tax rate across countries, irrespective of the principle of international taxation (Residence or Source) and differences across countries. A cooperative solution under the Source principle may be more difficult to implement than under the Residence principle. 

Abstract: In this paper we look at the behaviour of maintenance, utilization and physical depreciation over the business cycle. We do so within the context of a real business cycle model where the decisions of firms about physical capital utilization, maintenance, and improvement or scrapping are endogenous. We distinguish between labour input devoted to output production and labour input devoted to maintaining and improving or scrapping existing capital. Firms must first decide the total number of work hours and then how to allocate workers between output production and capital maintenance. The model encompasses the baseline real business cycle model, where the depreciation rate is fixed, or versions of that model where the depreciation rate is an exogenous stochastic process. It also encompasses versions of the real business cycle model where capital utilization is an explicit endogenous variable or enters implicitly a variable work effort. Our model is capable of providing a unified explanation of several stylized facts of business cycle behaviour, including (a) a low correlation between labour productivity and output, (b) a low correlation between wages and productivity and (c) a relatively strong correlation between real wages and hours worked. Making the business cycle propagation richer reduces the variance of the Solow residual needed to match output volatility.

Abstract: This paper examines the past growth performance of the Greek economy and examines the outlook for future growth in light of the macroeconomic stabilization that was achieved over the last half of the 1990s and Greece's admission to the Euro currency zone.  The Greek economy performed very poorly over the quarter century from 1970 to 1995, during which it was the poorest country in the European Union.  We develop a set of growth accounts that attribute part of the deteriorating performance to a falloff in capital formation, but the most dramatic factor is a sharp deterioration in multi-factor productivity, or the efficiency of the economy.  Part of the explanation lies with the collapse of macroeconomic policy that took the form of large fiscal deficits and very high rates of inflation; but the Greek economy also fares poorly in other dimensions of its economic institutions, such as competitiveness of its tradable goods sectors, a highly constrained labor market, and a reputation as an unattractive market for foreign capital.

Abstract: In this paper, we investigate the relation between public and private consumption, by constructing a general government spending data set, by function, for twelve European Union countries. In particular, we split government consumption into two categories. The first category includes defense, public order, and justice (“public goods”). The second category includes health, education, and other services that could have been provided privately (“merit goods”). Equations from a relatively general theoretical model of household behavior are estimated by GMM. The estimates are fairly robust in showing that public goods substitute while merit goods complement private consumption, and, that the relation between merit goods and private goods is stronger than that between public goods and private goods. So that, in the aggregate government and private consumption are complements. It also suggests that the potential calibration/estimation bias by ignoring the composition of government consumption might be quitesubstantial.