This paper examines a class of interest rate rules that respond to public expectations and to lagged variables and considers varying levels of commitment that correspond to varying degrees of response to lagged output. Under commitment the policymaker adjusts the nominal rate with lagged output to impact public expectations. Within this class of rules, I provide a condition for nonexplosive and determinate solutions. Expectational stability obtains for any nonnegative response to lagged output. Simulation results show that modified commitment is best under least-squares learning. However, in the presence of parameter uncertainty and/or measurement error in the policymaker's data on public expectations, the best policy is one of partial commitment, where the response to lagged output is less than under modified commitment. The case for partial commitment is strengthened if the gain parameter in the learning mechanism is high, which can be interpreted as the use of few lags by public agents in the formation of expectations or as an indication of low credibility of the policymaker. The appointment of a conservative central banker ameliorates these concerns about modified commitment.

This paper offers possible explanations for three generally observed facts about fiscal policy and development: (F1) the relative size of government increases as an economy develops, (F2) the rise in government and taxation are associated with rising or constant economic growth rates, and (F3) today's developing countries have larger government sectors than today's developed countries had at similar stages of development. The explanations for these facts are based on the structural transformation from traditional to modern production, rising public infrastructure investment, and less democratic governments in many of today's developing economies.

In a two-country world economy, endogenous interest rate adjustment makes one country's consumption-habit dynamics affected by the other country's habit. External indebtedness depends crucially on international differences in habit-adjusted net output less habitual living standard. Interest rate adjustment enlarges the consumption impact of an income shock. Consistent with the empirical facts, the habit parameter of a large country would thus be underestimated, and the current account volatility overestimated, if they were estimated using a small-country model. An increase in fiscal spending in one country can benefit the country and harm the neighbor one due to reversed intertemporal terms-of-trade effects.

New technology has been credited with solving environmental problems by mitigating the effects of pollutants. We construct a general equilibrium model in which abatement technology is a real option and pollution's (negative) amenity value alters both risk aversion and the intertemporal elasticity of substitution. We derive the tax scheme such that in a decentralized economy agents adopt the abatement technology at the time that is socially optimal. We show that the higher the greenness of preferences, the earlier the adoption and the higher the optimal tax rate. We also obtain that adoption is fostered by uncertainty if the effective intertemporal elasticity of substitution is large enough, but is not affected by uncertainty if this elasticity is low. Moreover, the optimal tax rate, which only exists if the effective intertemporal elasticity of substitution is high, is an increasing function of uncertainty.

The purpose of this note is to analyze the capability of bandpass filters to extract a known periodicity. The specific bandpass filters considered are a conventional discrete Fourier transform (DFT) filter and the filter recently proposed by Iacobucci and Noullez. We employ simulation methods to investigate cycle extraction properties. We also examine the implications arising from the Gibbs effect in practical settings that typically confront applied macroeconomists

Bullard and Mitra [Journal of Monetary Economics 49 (2002), 1105–1130] find that, in a New Keynesian economy without capital and under four variants of the Taylor rule, the Taylor principle is sufficient to guarantee both determinacy and E-stability of equilibrium in most cases. Xiao [Macroeconomic Dynamics 12 (2008), 22–49] claims that with capital and mild increasing returns the Taylor principle cannot guarantee either determinacy or E-stability with any of the four rules. In this paper we show that in the Calvo-type sticky price models a second-order condition for profit maximization must be satisfied in firms' pricing decision problem, and we point out that the examples given in Xiao's paper to support his conclusion violate this condition. After imposing this condition, we find that increasing returns have little effect on determinacy and E-stability under two of the policy rules but significant effects under the other two. These results are obtained in models both with and without capital.