Economic Policy in the Age of Globalisation

by Nicola Acocella , Translated by Brendan Jones

• ISBN13: 9780521540384
• ISBN10: 0521540380
• Format: Paperback
• Copyright: 2005-03-28
• Publisher: Cambridge University Press

Summary

In the age of globalisation both domestic and foreign economic policies play an important role in determining firms' strategies. Understanding such policies is an essential part of the cultural background of managers at all levels of a firm. At the same time, firms' choices have a greater impact on economic policymaking in a global economy, as the range of alternatives open to them expands. In this textbook, Professor Acocella analyses both sides of this relationship. Special emphasis is placed on current issues: in policymaking on the basis of social choice principles and the normative and positive theory of economic policy; and issues concerning the establishment of international public institutions that can match the global reach of the private institutions (markets and firms) that generate many of today's economic challenges. Broad in scope, this book is aimed at students who have completed an introductory course in both micro and macroeconomics.

Table of Contents

List of boxes	xv
List of tables	xvii
List of symbols, abbreviations and acronyms	xix
Preface	xxv
1 Introduction	1	(8)
1.1 Economic policy	1	(2)
1.2 Economic reality and social preferences	3	(1)
1.3 Outline of the text and organisation of the discipline	4	(1)
1.4 Summary	5	(4)
Part I The market, efficiency and equity
2 Market failures: microeconomic aspects	9	(36)
2.1 The role of the market and government	9	(1)
2.2 Criteria for the choice of institutions: efficiency and equity	10	(2)
2.3 Pareto efficiency and competitive equilibrium: the first fundamental theorem of welfare economics	12	(2)
2.4 Efficiency and equity: the second fundamental theorem	14	(1)
2.5 Market failures and the first theorem of welfare economics	14	(1)
2.6 Perfect competition and markets in the real world	15	(5)
2.6.1 Numerosity of agents and returns to scale	16	(1)
2.6.2 Free market entry and exit	17	(3)
2.6.3 The other assumptions of perfect competition	20	(1)
2.7 Incomplete markets and externalities	20	(3)
2.8 Externalities and the Coase theorem	23	(3)
2.9 Public goods	26	(6)
2.10 Transaction costs and asymmetric information	32	(3)
2.11 Perfect competition and 'imperfections': the theory of the second best	35	(3)
2.12 Income distribution and equity	38	(2)
2.13 Merit wants	40	(1)
2.14 Dynamic efficiency and market failures	41	(1)
2.15 Dynamic efficiency and market forms	42	(1)
2.16 Summary	43	(2)
3 Market failures: macroeconomic aspects	45	(44)
3.1 The instability of a capitalist market economy: macroeconomic failures	45	(1)
3.2 Unemployment	46	(4)
3.3 Inflation	50	(4)
3.4 The short-run analysis of unemployment and inflation	54	(19)
3.4.1 The theory of Keynes and Kalecki	54	(6)
3.4.2 'Natural' unemployment and the limits of government according to Friedman	60	(5)
3.4.3 The ineffectiveness of government intervention in new classical macroeconomics	65	(4)
3.4.4 Some recent theories of involuntary unemployment	69	(4)
3.5 Growth and development	73	(3)
3.6 Market failure in growth theories	76	(4)
3.6.1 The Harrod-Domar growth model	76	(1)
3.6.2 Neoclassical and post-Keynesian growth models	77	(1)
3.6.3 Endogenous growth theories	78	(2)
3.7 The balance of payments	80	(4)
3.8 Summary	84	(5)
Part II Normative and positive theory of economic policy
4 The normative theory of economic policy	89	(27)
4.1 The government as a rational agent	89	(1)
4.2 Planning	89	(3)
4.2.1 Meaning and foundation	89	(1)
4.2.2 The constituent elements of the plan	90	(1)
4.2.3 An example	91	(1)
4.3 Economic policy objectives	92	(7)
4.3.1 Fixed targets	93	(1)
4.3.2 The priority approach	94	(1)
4.3.3 Flexible targets: social welfare function with variable MRS	95	(2)
4.3.4 Flexible targets: social welfare function with constant MRS	97	(2)
4.4 The instruments of economic policy	99	(7)
4.4.1 Definition	99	(1)
4.4.2 The different types of instrument	100	(6)
4.5 The model	106	(4)
4.5.1 The structural form of the model	106	(2)
4.5.2 The reduced form model	108	(2)
4.6 Limits and extensions of the classical approach	110	(1)
4.7 The Lucas critique	111	(3)
4.8 Summary	114	(2)
5 Government failures: elements of a positive theory of economic policy	116	(23)
5.1 Representing social groups	116	(3)
5.2 Agency problems: the objectives of politicians and the political business cycle	119	(4)
5.3 Agency problems: bureaucracy	123	(3)
5.4 Social groups, institutions and economic policy	126	(1)
5.5 Market and 'non-market' failures	127	(3)
5.6 The process of defining government intervention	130	(1)
5.7 The decentralisation of central government functions and the federal state	131	(2)
5.8 Independent authorities	133	(2)
5.9 Summary	135	(4)
Part III Microeconomic policies
6 Property rights, corporate governance and public enterprises	139	(19)
6.1 Introduction	139	(1)
6.2 Making the market work: the minimal state and the attribution of property rights	140	(1)
6.3 Property rights and corporate governance	140	(7)
6.4 Public enterprises and privatisation	147	(8)
6.5 Non-profit institutions	155	(1)
6.6 Summary	156	(2)
7 Competition policies; policies for externalities and public goods	158	(27)
7.1 Competition policy instruments: market liberalisation and international opening	158	(1)
7.2 Regulation	159	(1)
7.3 Regulation and deregulation of entry; regulation of effective competition	160	(3)
7.4 Competition legislation	163	(11)
7.4.1 Foundations and nature	163	(1)
7.4.2 Antitrust legislation in the United States	164	(1)
7.4.3 EU competition legislation	165	(8)
7.4.4 Competition legislation in EU member states	173	(1)
7.4.5 International coordination of national legislation	173	(1)
7.5 Other competition policy instruments; price controls and public enterprises	174	(4)
7.5.1 Price controls	174	(3)
7.5.2 Public enterprises and competition policies	177	(1)
7.6 Externalities, public goods and public policies	178	(5)
7.6.1 Taxation	178	(1)
7.6.2 Incentives for eliminating external diseconomies	179	(1)
7.6.3 Tradable permits to produce diseconomies	180	(1)
7.6.4 Regulation	181	(1)
7.6.5 Financing and producing public goods	182	(1)
7.7 Summary	183	(2)
8 Industrial and regional policies; redistributive policies	185	(24)
8.1 Dynamic efficiency and industrial policies	185	(1)
8.2 The evolution and the tools of post-war industrial policy	186	(3)
8.3 Public demand management policies	189	(4)
8.4 Regional policy	193	(4)
8.5 Redistribution policies and the welfare state	197	(10)
8.6 Summary	207	(2)
9 Social choice and cost-benefit analysis	209
9.1 Choice criteria in private and public projects	209	(5)
9.2 Identifying the effects of a project	214	(1)
9.3 Evaluating the effects	215	(1)
9.4 Shadow prices	216	(3)
9.4.1 Shadow prices in non-competitive markets	217	(1)
9.4.2 Shadow wages	217	(1)
9.4.3 Choosing the social discount rate	218	(1)
9.5 Valuing non-marketed goods	219	(7)
9.5.1 Valuing life	219	(1)
9.5.2 Valuing the environment	220	(5)
9.5.3 Valuing time	225	(1)
9.5.4 Cost-effectiveness	225	(1)
9.6 Summary	226	(5)
Part IV Macroeconomic policies
10 Macroeconomic schemes of analysis in an open economy	231	(18)
10.1 The balance of payments, the foreign exchange market and the exchange rate	231	(6)
10.1.1 The balance of payments and the exchange rate	231	(4)
10.1.2 Foreign exchange transactions	235	(2)
10.2 Theory of the balance of payments	237	(3)
10.2.1 The current account and capital account (movements of goods)	237	(2)
10.2.2 Capital movements	239	(1)
10.2.3 The balance of payments	240	(1)
10.3 International openness, analytical frameworks and economic policy	240	(1)
10.4 The Mundell-Fleming model	241	(5)
10.5 The limitations of the Mundell-Fleming model and ways to overcome them	246	(2)
10.6 Summary	248	(1)
11 Macroeconomic objectives and monetary policy	249	(35)
11.1 Objectives, instruments and models of macroeconomic policy	249	(1)
11.2 The monetary economy	250	(1)
11.3 Financial intermediaries	251	(2)
11.4 Money as a liability of financial intermediaries	253	(2)
11.5 The central bank and monetary base	255	(8)
11.6 Banks and deposits	263	(5)
11.6.1 Banks' balance sheet and the deposit multiplier	263	(5)
11.7 Controlling monetary base and the money supply	268	(4)
11.8 (Final) objectives and agents of monetary policy	272	(2)
11.9 Monetary policy under fixed and floating exchange rates	274	(3)
11.10 The operation of monetary policy; indicators, operative and intermediate targets	277	(3)
11.11 Considerations on the effectiveness of monetary policy	280	(2)
11.12 Summary	282	(2)
12 Macroeconomic objectives and fiscal policy	284	(24)
12.1 The budget and its components	284	(2)
12.2 Income, employment and taxes	286	(4)
12.2.1 Lump-sum taxation	287	(1)
12.2.2 Proportional taxation	287	(1)
12.2.3 Progressive taxation	288	(2)
12.3 Expenditure financing	290	(8)
12.3.1 Balancing the budget	290	(1)
12.3.2 Deficit financing	291	(1)
12.3.3 Monetary base financing	292	(4)
12.3.4 Debt financing	296	(2)
12.4 Fiscal policy under fixed and floating exchange rates	298	(4)
12.5 Public debt	302	(5)
12.5.1 Historical developments in selected countries	302	(1)
12.5.2 The determinants of the growth in public debt	302	(2)
12.5.3 Limits to debt growth	304	(1)
12.5.4 Debt-reduction policies	305	(2)
12.6 Summary	307	(1)
13 Incomes and price policies	308	(13)
13.1 Introduction	308	(1)
13.2 Income distribution, full cost and incomes policy	308	(3)
13.3 Coercion and incomes policies	311	(1)
13.4 Statist policies	311	(2)
13.5 Market-based policies	313	(1)
13.6 Institutional policies	314	(1)
13.7 Incomes policy and productivity policies	315	(1)
13.8 Incomes policy in the real world	315	(5)
13.9 Summary	320	(1)
14 Balance-of-payments policies	321	(22)
14.1 Balance of payments: equilibrium and disequilibrium	321	(1)
14.2 Automatic adjustment mechanisms	322	(2)
14.2.1 Price changes	322	(1)
14.2.2 Income changes	323	(1)
14.3 Adjustment policies and the causes of disequilibrium	324	(1)
14.4 Policies for adjustment of capital movements	325	(3)
14.5 Adjustment policies for excess or insufficient demand	328	(1)
14.6 Policies for competitiveness	328	(1)
14.7 The controllability of the exchange rate	329	(1)
14.8 The effectiveness of exchange rate adjustment	330	(6)
14.8.1 Demand elasticity conditions	330	(2)
14.8.2 The pass-through of exchange rate variations to prices	332	(2)
14.8.3 The elasticity of supply	334	(1)
14.8.4 The effect lag: the j-curve	335	(1)
14.8.5 The effect on capital movements	335	(1)
14.9 The asymmetric effects of a variation in the exchange rate	336	(1)
14.10 Internal and external equilibrium: decentralisation and the appropriate assignment of instruments to targets	337	(4)
14.11 Summary	341	(2)
15 Trade policies: free trade and protectionism	343	(16)
15.1 Trade policies and the foundation of free trade	343	(2)
15.2 Protectionist instruments	345	(1)
15.3 The effects of tariff and non-tariff protection	346	(2)
15.4 Protecting 'infant industries'	348	(3)
15.5 Protection as a tool for improving the terms of trade	351	(1)
15.6 Protection from cheap labour and social dumping	352	(1)
15.7 Protection as an employment policy	353	(1)
15.8 Industrial policies and trade policies	354	(1)
15.9 Summary	355	(4)
Part V Public institutions in an international setting
16 Monetary systems and exchange rate regimes	359	(20)
16.1 Monetary systems	359	(1)
16.2 The Gold Standard	359	(3)
16.3 The Gold Exchange Standard and the International Monetary Fund	362	(3)
16.4 Centrally created reserves	365	(1)
16.5 Floating exchange rates and the evolution of the IMF	366	(5)
16.6 The European Monetary System	371	(5)
16.6.1 Objectives	371	(1)
16.6.2 Objectives and achievements	372	(1)
16.6.3 European Economic and Monetary Union	373	(1)
16.6.4 Nominal and real exchange rates in the European Monetary System	374	(2)
16.7 Fixed versus flexible exchange rates: reflections from experience	376	(1)
16.8 Summary	377	(2)
17 Development and trade organisations	379	(13)
17.1 The system of cooperative institutions created in the post-war period	379	(1)
17.2 The World Bank	380	(2)
17.3 Multilateral governance of trade: GATT and the WTO	382	(5)
17.3.1 GATT	382	(1)
17.3.2 The Uruguay Round	383	(2)
17.3.3 The WTO	385	(2)
17.4 The impact of domestic economic policies and international cooperation on trade	387	(2)
17.4.1 Foreign investment and multinational companies	388	(1)
17.4.2 Environmental policy	388	(1)
17.4.3 Competition policies	388	(1)
17.4.4 Social dumping	389	(1)
17.5 Inequality of starting points among countries and permissive and distortive policies	389	(1)
17.6 Summary	390	(2)
18 Regional public institutions: The European Union	392	(29)
18.1 European integration	392	(1)
18.2 The institutions of the European Union	393	(1)
18.3 The operation of a monetary area	394	(2)
18.4 Monetary policy	396	(10)
18.4.1 Institutions and organs	396	(1)
18.4.2 Tasks, functions and status of the ESCB	397	(1)
18.4.3 Modes of intervention and monetary policy instruments of the ESCB	398	(5)
18.4.4 The structure of the financial sector	403	(1)
18.4.5 Considerations on the monetary policy arrangements of European Monetary Union	404	(2)
18.5 Exchange rate policy	406	(1)
18.6 Fiscal policy	407	(4)
18.7 The structural funds and redistributive policies	411	(1)
18.8 Industrial and trade policies	412	(3)
18.9 Environmental policy	415	(1)
18.10 Summary	416	(5)
Part VI Globalisation and the quest for a new institutional setting
19 The internationalisation of private institutions: the globalisation of markets and production	421	(16)
19.1 Forms of globalisation	421	(5)
19.2 The new features of globalisation	426	(1)
19.3 The causes of globalisation	427	(3)
19.4 The impact of globalisation	430	(1)
19.5 Globalisation and competitiveness	431	(3)
19.6 The consequences of globalisation for economic policy	434	(1)
19.7 Summary	435	(2)
20 The challenges of globalisation for public policies	437	(28)
20.1 International payments imbalances since the 1970's	437	(3)
20.2 The role of capital mobility	440	(6)
20.2.1 Nature and size of international capital movements	440	(4)
20.2.2 Speculative capital movements and currency crises	444	(2)
20.3 The role of international institutions in recent currency crises	446	(2)
20.4 The case for international coordination	448	(12)
20.5 International coordination in formal terms	460	(3)
20.6 International coordination (multilateralism) and regionalism	463	(1)
20.7 Summary	464	(1)
Bibliography	465	(27)
Author index	492	(6)
Subject index	498