Dynamic Approaches to Global Economic Challenges : Festschrift in Honor of Karl Farmer

This book addresses three big economic challenges from a dynamic perspective: European integration, economic growth, and global climate change. In the light of the recent crises of the European Union (EU), the first part of the book deals with challenges to the real, monetary and fiscal integration of the EU and required institutional adjustments. The second part of the book addresses fundamental challenges of advanced market economies like economic growth and changes of technologies. The final part focuses on the global challenge of climate change from an economic perspective and discusses policy strategies for a successful mitigation of climate change. Contents 6 Contributors 8 Introduction 10 References 14 Part I Real, Monetary and Fiscal Integration in the European Union 15 A Prototype Model of European Integration: The Case of Austria 16 1 Introduction 16 2 Austria's Integration into Europe 17 3 An Integration Model for Austria 19 3.1 Four Integration Steps Since 1989 20 3.1.1 Opening Up of Eastern Europe in 1989 20 3.1.2 EU Membership in 1995 21 3.1.3 EMU Membership in 1999 22 3.1.4 EU Enlargement in 2004/2007 23 3.2 Model Results 24 3.2.1 Opening Up of Eastern Europe in 1989 24 3.2.2 EU Membership in 1995 24 3.2.3 EMU Membership in 1999 25 3.2.4 EU Enlargement in 2004/2007 25 3.3 Overall Effects of Austria's EU Integration Since 1989 27 4 Conclusions 28 Appendix 1: The Estimated Integration Model for Austria 30 Appendix 2: Quantitative Model Inputs of Four Integration Scenarios (Additional Effects Compared to the Baseline Scenario Without EU Integration) 33 References 36 Trade Agreements and Regional Disparities 38 1 Introduction 38 2 Modeling Strategy and Related Studies 39 2.1 Heckscher-Ohlin or NEG? 39 2.2 Isoelastic or Linear Demand Functions? 40 2.3 Which of the Productive Factors is Mobile? 41 3 Linear Footloose Entrepreneur Model 42 3.1 Fundamentals: Factor Endowments, Technology, Utility, and Geography 42 3.2 Short-Run Equilibrium 44 3.3 Long-Run Equilibrium 47 4 Dynamic Analysis and Fixed Point Properties 49 4.1 Local Stability Properties 49 4.2 Properties of the Symmetric Fixed Point 50 4.3 Transition to a Core Periphery Equilibrium 53 4.4 Further Dynamic Considerations 55 5 Conclusions 58 References 59 Strategic Macroeconomic Policies in a Monetary Union 60 1 Introduction 60 2 Nonlinear Dynamic Tracking Games 61 3 The MUMOD1 Model 64 4 Optimal Macroeconomic Policies 68 4.1 Baseline Scenario 68 4.2 Impacts of a Temporary Demand Side Shock 72 4.3 Impacts of a Reverse Demand Side Shock 75 4.4 Impacts of a Persistent Demand Side Shock 76 5 Concluding Remarks 79 References 79 Determinants of Maximum Sustainable Government Debt 81 1 Introduction 81 2 The Model 82 2.1 Households 83 2.2 Government 85 2.3 Firms 87 2.4 Intertemporal Equilibrium 87 2.5 Steady State Equilibrium 89 3 Maximum Sustainable Debt 91 4 Conclusion 94 Appendix 94 References 97 The Long Italian Stagnation and the Welfare Effects of Outsourcing 99 1 Introduction 99 2 Economic Stagnation and Inability of Gaining from Globalization 102 3 The Model 107 3.1 Households 107 3.2 Firms 108 3.3 Foreign Trade 110 3.4 Market Clearing Conditions and Walras Law 110 4 Results 111 5 Conclusions 114 Appendix: Proof of Propositions 115 References 117 Part II Economic Growth, Technological Change, and Climate Policy 120 Status, Wealth Distribution, and Endogenous Economic Growth 121 1 Introduction 121 2 Status 122 3 The Distribution of Relative Wealth 124 4 Relative Wealth Distribution and Endogenous Growth 127 5 Discussion of the Results 131 Appendix 131 References 132 Technological Change in Information and Communication: Consequences for Science 134 1 Introduction 134 2 Changes in the System of Science 135 3 Time of Oblivion 137 4 Doom of Causality? 140 5 Conclusions 142 References 143 Deepening the Scope of the “Economic Model”: Functionalities, Structures, Mechanisms and Institutions 144 1 Introduction 144 1.1 What Might Have Gone Wrong with Economics 145 1.2 Why Economics Is Struggling with the Very-Long Term 145 1.3 How a Few Conceptual Extensions Could Make Economics More Useful 146 2 Enlarging the Scope of Economic Activity 146 2.1 Responding to the Issue of Well-Being by Introducing the Concept of Functionalities 147 2.2 Responding to the Issue of Resource Use by Extending the Resource List 148 2.3 Looking for an Encompassing Modeling Framework 148 3 Separating Mechanisms from Structures 150 3.1 Structures May Reflect Complex Mechanisms for Coordination 150 3.2 Getting Prepared for New Institutional Settings 151 4 A Case Study: The Transformation of the Energy System 151 4.1 The Deepened Structure of an Energy System 152 4.2 The Technology Choices 152 4.3 Developing Transition Strategies 153 4.4 How the Transition to a Low-Energy and Low-Carbon Energy System Looks Like 153 5 Some Tentative Conclusions for Policy Design 154 5.1 Supporting the Design of Transition Strategies 155 5.2 Resolving Historical “Green” Controversies 155 5.3 Setting New Agenda for Economic Policy 156 References 157 Is There a First-Mover Advantage in International Climate Policy? 158 1 Introduction 158 2 International Burden Sharing in Climate Policy 160 3 The Model 161 4 Climate Policy Coordination Among Industrialized Countries 164 5 Climate Policy Coordination Between Industrialized Countries and Emerging Economies 166 6 Unilateral Climate Policy and Sequential Policy 168 7 Conclusions 170 References 171 Environmental Policy in an Open Economy: Refocusing Climate Policy to Address International Trade Spillovers 174 1 The Current Challenge in Climate Policy 174 2 Climate Policy in an Open Economy: The Issue of Carbon Leakage 176 3 Measuring Carbon Emissions 178 3.1 Emissions Accounting and Indicators Available 178 3.2 The Information Content of These Indicators 179 3.3 Many More Factors Determining Global Emissions 180 4 Enlarging the Range of Policy Instruments 181 4.1 Extension by Consumption-Oriented Policy Instruments 181 4.1.1 Consumption-Based Policy Instruments to Complement Existing Instruments 182 4.1.2 Consumer-Oriented Policy Instruments 183 4.2 Extension by Extraction-Orientation 184 4.2.1 The Rationale for Extraction-Oriented Policy Instruments 184 4.2.2 Discussion of Extraction-Oriented Policy Instrumentsand Their Assessment in the Literature 186 4.3 Extension by Income-Orientation 188 5 Conclusions 189 References 190 Front Matter....Pages i-viii Introduction....Pages 1-5 Front Matter....Pages 7-7 A Prototype Model of European Integration: The Case of Austria....Pages 9-30 Trade Agreements and Regional Disparities....Pages 31-52 Strategic Macroeconomic Policies in a Monetary Union....Pages 53-73 Determinants of Maximum Sustainable Government Debt....Pages 75-92 The Long Italian Stagnation and the Welfare Effects of Outsourcing....Pages 93-113 Front Matter....Pages 115-115 Status, Wealth Distribution, and Endogenous Economic Growth....Pages 117-129 Technological Change in Information and Communication: Consequences for Science....Pages 131-140 Deepening the Scope of the “Economic Model”: Functionalities, Structures, Mechanisms and Institutions....Pages 141-154 Is There a First-Mover Advantage in International Climate Policy?....Pages 155-170 Environmental Policy in an Open Economy: Refocusing Climate Policy to Address International Trade Spillovers....Pages 171-190