In the first chapter we investigate the strategy of exchange rate pegging as a solution to the lack of credibility of domestic monetary policy in the context of the European Monetary System (EMS). Existing theoretical models cannot explain the following features of the EMS and its crisis in 1992: its progressive hardening from 1987 onwards; the fact that credibility was 'shared'; the progressive deterioration of credibility after the first Danish referendum without changes in the economic fundamentals. We argue that the reason lies in the fact that the literature has not incorporated the changes in the perceived prospects of EMU. We show that an adjustable peg regime that incorporates those prospects can explain the three features listed above and provide an alternative interpretation of the EMS crisis. We then focus our attention on the short-run dynamics of U.S. inflation. U.S. price inflation exhibits substantial inertia. The source of that inflation inertia is however controversial. In the second part of the thesis, we derive a wage contracting specification that implies inflation persistence to investigate the role of nominal rigidities to explain that degree of inertia. The contracting specification is derived from intertemporal optimisation under two basic assumptions: (i) wage staggering; (11) relative wage concern by wage-setters. The novelty is the analysis of relative wage concern. In chapter 2 we review the existing evidence and theoretical support pointing at relative wage concern as a fundamental factor in the wage contracting process. In chapters 3 and 4, we build a dynamic general equilibrium macromodel to study its implications. In chapter 3 we investigate two potential sources of inflation inertia: the contracting specification described above, and the lack of rationality of expectations. We then carry out a test for the source of inflation inertia. Our empirical results suggest that alternative sources of inertia beyond that imparted by the lack of full rationality of expectations are needed to characterise U.S. inflation dynamics. In chapter 4 we focus our investigation on the persistence of the real effects of money shocks. In contrast to previous models of staggered wages/prices, output and inflation persistence are robust findings of the model. Moreover, persistence results hold for all the sensible parameterisations. Given the empirical evidence in favour of the existence of a strong relative wage concern, we conclude that relative concern may be the missing piece in the money shocks persistence puzzle raised by recent literature.

The thesis consists of three chapters of self-contained empirical and theoretical studies. In Chapter 1, I examine whether the Balassa-Samuelson effect is indeed the reason behind the behaviour of the currencies of transition economies. So far, in the literature, transition Economies appear to be subject to the Balassa-Samuelson effect. This implies that their currencies experience a prolonged appreciation in real terms as their convergence goes on. However, in the current literature, the effects of the capital account have not been analyzed extensively. In this paper I show that the capital account, rather than productivity, is a key determinant of the appreciation of the currencies of transition economies. I find that a long-run relationship exists between the real exchange rate, productivity, the real interest rate differential and the capital account. Moreover, those variables are found to cointegrate in a nonlinear fashion according to a smooth transition autoregressive model. This implies that a multivariate smooth transition error correction model is the appropriate model to describe their short-run and long-run dynamics. In Chapter 2, I examine the importance of a real exchange rate target in the monetary policy of a central bank. I address that question both empirically and theoretically. Using monthly data I estimate of a structural VAR model for the Eurozone providing evidence in favour of real exchange rate targeting. I examine this case theoretically using a twocountry DSGE model; I find that when the home central bank includes a real exchange rate target in its interest rate rule, it achieves lower welfare losses compared to the Taylor rule. Contrary to similar papers, I compute the optimized coefficients in the interest rate rules considered. I show that the benefits from real exchange rate targeting at home rise as persistence in inflation and output increases. In the robustness analysis I show that a rise in the fraction of backward looking consumers affects negatively the performance of the real exchange rate targeting rule and positively that of the Taylor rule. Asymmetries in the degree of rule-of-thumb behavior in consumption have important effects, as regards the performance of a real exchange rate targeting rule. The performance of both rules is not sensitive to variations in the degree of backward looking price setting behavior . In Chapter 3, I show, using both empirical and theoretical analysis, that changes in monetary policy in one country can have important effects on other economies. My new empirical evidence shows that changes in the monetary policy behaviour of the Fed since the start of the Euro, well captured by a Markov-switching Taylor rule, have had significant effects on the behaviour of inflation and output in the Eurozone even though ECB’s monetary policy is found to be fairly stable. Using a two-country DSGE model, I examine this case theoretically; monetary policy in one of the countries (labelled foreign) switches regimes according to a Markov-switching process and this has nonnegligible effects in the other (home) country. Switching by the foreign central bank renders commitment to a time invariant interest rate rule suboptimal for the home central bank. This is because home agents expectations change as foreign monetary policy changes which affects the dynamics of home inflation and output. Optimal policy in the home country instead reacts to the regime of the foreign monetary policy and so implies a time-varying reaction of the home Central Bank. Following this time-varying optimal policy at home eliminates the effects in the home country of foreign regime shifts, and also reduces dramatically the effects in the foreign country. Therefore, changes in foreign monetary regimes should not be neglected in considering monetary policy at home.

This thesis analyses two issues in public economics: (1) water allocation in Israel; and (2) malaria prevention in Ghana. In both cases a computable general equilibrium modelling approach has been applied for policy analysis. Part I: In Israel, parliamentary investigative committees and water researchers have concluded that for decades, the administrative water allocation mechanism has mismanaged water allocation. Over subsidising of the agricultural sector, and underfunding of desalination plants, had led to a severe hydrological deficit. Critics argue that a water market allocation could solve these issues. However, the administrative allocation is crucial because it protects social value, which is not represented in a market mechanism. Part I of the thesis compares these two alternative allocation mechanisms using a general equilibrium model, for the case of Israel. The model concludes that from 1995 to 2006, the upper-bound water misallocation in Israel was relatively small, on the average of 5.5% of the potable water supply. The lower-bound value of agricultural amenities is imputed at approximately 2.3 times agricultural economic output. At the margin, introducing a water market in Israel is not recommended, i.e., net-social welfare would fall. Part II: Research that links between malaria and economic growth have, so far, used econometric approaches. These provide results that are too broad, and not particularly useful for policy analysis. We, therefore, develop a multi-region multihousehold dynamic computable general equilibrium (DCGE) model, which is calibrated to Ghana as a case study. Households are disaggregated by five epidemiological malaria regions, urban-rural divide, and income level quintiles. The model links with malaria through regional demographic effects, and labour effectiveness indices. Hypothetical interventions simulate reducing malaria prevalence by 50%, for children under-five years with varying degrees of coverage. We find that even under this limited intervention, malaria prevention clearly adds to economic growth and reduces income inequality. Our approach is particularly useful for policy makers to compare alternative intervention strategies using cost-benefit methods, which are not commonly used in health policy.

The purpose of this thesis is to analyze mechanisms that implement a social objective for two environments in which agents have incomplete information about the others’ characteristics. Agents’ beliefs about the characteristics of any particular agent are common knowledge. We consider the case where monetary transfers or costly signals are undesirable or unavailable. Chapter 1 gives an overview of the contents of the thesis. Chapter 2 studies mechanisms for resolution of bilateral conflict over a prize of common value. This conflict may be settled by a peaceful agreement or may lead to a socially inefficient outcome of war. We model explicitly the cost of war as dependent upon opponents' types which are private information. The social choice function is the probability of peaceful resolution. We assess the chances for peace in the case of no communication and a simultaneous choice by agents whether to agree to a given split proposal. We compare these chances with the probability of peaceful settlement achieved by a mechanism which solicits partial disclosure of private information. We require the truthful revelation of this information to be a dominant strategy for agents in the game induced by the mechanism. In this framework we show that unmediated communication always improves the probability of peace upon the agreement game. In chapter 3 we study a cardinal mechanism for allocation of heterogeneous indivisible goods among agents with private valuations. We assume that agents and the mechanism designer hold the same beliefs about the ex ante distribution of the multidimensional types. We relax the dominant strategy requirement for the truthful revelation to the requirement of Bayesian incentive compatibility. We provide a necessary condition for Bayesian incentive compatibility of such mechanisms for any finite number of goods and agents. We characterize the set of Bayesian incentive compatible mechanisms for the case of three objects and three agents and we analyze efficiency and fairness properties of these mechanisms. In particular, we show that in this framework an ex post efficient and envy-free mechanism may not exist for some systems of beliefs.

My thesis is a collection of three essays that consider various aspects of a skillbiased technology diffusion as well as skill premium, human capital acumulation and redistributive policies. The first chapter, co-authored with Christian Hellström, investigates the effects of skill-bisead technology change (SBTC) on income inequality and skills supply in the last 30 years in the US. In spite of the intensive debate about the effects of SBTC, its general equilibrium effects on the accumulation of skills and labor supply have been neglected. Thus, we build a dynamic general equilibrium model, in which growth is driven by skill-biased technology diffusion. Households have forward-looking expectations, and differ in terms of innate and idiosyncratic acquisition of skills. Contrary to pure technology progress models, technology diffusion models provide an explanation for the slowdown of the skill premium in the 70s compatible with the slow productivity growth. We find that first, technology diffusion raises the demand for skills and, consequently, the supply of skills. Second, skill-biased technology diffusion explains both the slowdown and the sharp increase of the skill premium observed in the 70s and 80s, respectively. In spite of the slowdown of the skill premium in the 70s, households anticipate the speed up of the technology diffusion and raise their investment in education, even during the economic slowdown. Therefore, the skills supply has continually increased since the 70s. Through a calibration exercise, we replicate the US trends for the skill-premium, skills supply, unskilled wages, consumption inequality and labor supply. The second chapter is motivated by the finding that the skill-biased technology diffusion increases both the skill-premium and skills supply in the last 30 years in the US . This chapter analyzes the effectiveness of redistributive policies in periods of technology diffusion. We build a microfounded general equilibrium model with skill-biased technology diffusion, endogenous labor supply, schooling decisions and redistributive policies. We show that, under endogenous schooling decisions, lump-sum transfers are ineffective. This policy raises the skill premium, in particular during the economic boom and in the long run, and reduces the social welfare during almost all of the technology cycle. Yet education subsidies incentivize the investment in education, decreasing the skill premium, raising the skills supply and social welfare. The investment in education tends to be counter-cyclical. On the one hand, forward-looking individuals anticipate the increase of demand for skills during the economic boom, increasing their investment in education during the economic recession. On the other hand, they also anticipate the maturation of the technology diffusion, reducing their investment in education during the economic boom. Finally, we show that education subsidies are Pareto-effcient, increasing welfare of both high- and low-skilled individuals. The third chapter endogenizes the technology diffusion path assumed in the first chapter. This chapter presents a two-sector growth model that explains the adoption of a skill-biased technology. There are two types of technology: low-tech and high-tech, and the latter is more productive and skill-biased. Technology is not embodied. To adopt high-technology, users must pay an instantaneous adoption cost, which decreases over time due to technology progress. Firms are homogeneous and act strategically, maximizing their profits given their rivals' behavior, leading to a technology sequential adoption pattern due to stock effects. We found that the decrease of the adoption cost and the increase of the technology knowledge due to learning effects leads to an increasing technology diffusion over time. The former has an constant effect over time, but for the latter, although positive, the effect is not constant, changing the speed of the technology diffusion over time.

The aim of this thesis is to study the effects of inflation persistence due to rule-of-thumb behaviour by price setters on optimal monetary policy. We start with a canonical log-linearised New Keynesian model, which we extend by allowing a fraction of price setters to follow a rule-of-thumb when setting a new price. We consider different specifications for the rule-of-thumb. In all models, steady-state distortions are assumed to be small so to guarantee the feasibility of optimal monetary policy analysis within a linear-quadratic framework. We derive utility-based objective functions for the monetary authority and analyse a range of optimal commitment policies. We perform welfare analysis in order to rank the range of optimal commitment policies. We analytically derive the optimal steady-state inflation rates associated with each commitment policy. We show that rule-of-thumb behaviour by price setters generates an incentive for positive steady-state inflation. A type of timeless perspective commitment policy is also capable of delivering positive steady-state inflation, even in the absence of rule-of-thumb behaviour by price setters. The optimal steady-state inflation rates are directly proportional to the gap measuring the steady-state distortions and turn out to be small in magnitude. We depart from the assumption of small steady-state distortions and consider the case of a largely distorted steady state within a nonlinear medium-scale model, which adds both nominal rigidities and real rigidities to the basic New Keynesian model. We extend the model by allowing a fraction of price setters to follow a rule-of-thumb when posting a new price. We numerically characterise the optimal rate of inflation in the Ramsey steady state. We find that rule-of-thumb behaviour implies optimal positive inflation only in the absence of transactional frictions. We find that the gap reflecting steady-state distortions is only slightly larger than in the case of small steady-state distortions. Finally, we study Ramsey dynamics and the implementation of optimal monetary policy via simple interest-rate rules, which we expand to explore the importance of welfare-relevant output gaps.

This thesis describes an operational research study applying decision theory and quantitative methods to the problems of competitive bidding. The study was provided with data and information by four English building construction companies. First a preliminary feasibility study was conducted which indicated that the potential for substantial benefits exists. Then the decision problem was formulated in a quantitative manner, which allows treatment of the variation due to estimating uncertainty, and of the constraining effect of resources. The Friedman model and some of the published variants were presented and discussed. This led to the development of i General Distribution decision model which incorporates managerial assessment of the competition into a probabilistic framework. This Model, four Friedman variants, and a feedback model were tested with data supplied by the participating companies. The sample was too small for the results to be conclusive but they did indicate that the basic Friedman Model and the General Distribution Model can equal or outperform actual company behaviour. Partial implementation of the General Distribution Model indicated that it may be practicable.

1. Twenty five years ago the Adminalty Board approved recommendations for a radically new procedure for selection of officer cadets for the Royal Navy. 2. Under the new procedure candidates were ranked using a judgmental measure of personality and their performance in educational examinations. The former was an interpretation of candidates' behaviour in individual and group tasks and interview, performance in psychological tests, and headmasters' reports, and has remained essentially unchanged to the present day. 3. Selected candidates were given extensive training initially in general naval matters, later in specialist subjects, to prepare them for service in Seaman, Supply and Secretariat, Engineer and Electrical branches. 4. The first 300 officers selected have not passed through the zone of promotion to Commander. Records of their performance in selection, training and subsequent career have been analysed to, identify the abilities associated with success and the effectiveness of selection and training criteria for determination of these abilities. 5. Investigations of data structure using Principal Component Analysis and Factor Analysis have revealed the inter-relationship of examination and test scores, interview board marks, biographical items, training course results, superiors' assessments, and a synthetic variable denoting career success. Vectors representing these variables have been located in a three-dimensional framework with axes defined as personality, verbal-educational ability and spatial-mechanical ability. Comparative analyses of more recent samples show that the basic structure of this framework is stable. 6. The relation is depict in the-'-three-dimensional model, together, with results of predictive studies using Discriminatory Analysis and Multiple Regression Analysis, show that success up to Commander's rank is associated with markedly different abilities in the various branches of the service and that short-term and long-tern, success are also distinct. 7. The conclusion is reached that discriminatory techniques could make a powerful contribution to present-day selection by facilitating optimum selection and placement of candidates in terms of relevant abilities.

The question of optimal asset allocation strategy for defined contribution (DC) pension plans is addressed. A primary motivation for this study is provided by the recent literature on behavioural finance and intertemporal life-cycle investment theory. In this thesis two alternative utility forms are considered: loss aversion and Epstein-Zin recursive utility. We develop a dynamic-programming-based numerical model with uninsurable stochastic labour income and borrowing constraints. In the loss aversion case, members are assumed to be loss averse with a target replacement ratio at retirement and a series of suitably defined interim target prior to retirement. We also extend the intertemporal life-cycle saving and investment theory to the dynamic asset allocation problem of DC pension schemes. A new approach to model contribution and investment decisions with focus on the member’s desired pattern of consumption over the lifetime (based on Epstein-Zin utility preference) is proposed. The thesis draws on empirical evidence of salary scales and loss aversion parameters from UK households, with labour income progress estimated from the New Earnings Survey and loss aversion parameters estimated on the basis of face-to-face interviews with 966 randomly selected UK residents.

This thesis proposes an empirical analysis of performance in the telecommunications industry, in relation to the regulatory framework in place in the sector. We first provide an introduction and overview of the related literature on performance measurement and regulatory institutions. Chapters 1 and 2 focus on level measures of productivity components and, in particular, of technical change and efficiency. This analysis is motivated by the form of incentive regulation in force in the industry, which links future price increases allowed by the regulator to certain measures of the operators performance. Chapter 1 investigates embodied technical change in the U.S. industry relying on rm-level panel data It builds on the definition of capital as a sum of vintages of different qualities and incorporates this definition into a cost function. Estimates of embodied technical change in this sample vary depending on the specification, but do not appear large enough to affect productivity. Chapter 2 analyses the variation of efficiency over time in the same sample of U.S. operators. This is done by applying estimators that allow for (freely) time-varying efficiency to an input stochastic distance function. Estimates confirm that standard panel estimators, which are commonly used by regulators to assess relative efficiency, do not adequately capture the time-varying component of efficiency. Finally, Chapter 3 studies how cross-country differences in sector performance, measured in terms of access to mobile networks, can be explained by regulatory and country governance. In particular, using a system approach, it considers whether the impact of regulatory governance on penetration can be an indirect result of country institutions. In addition, feedback effects between access to infrastructure and income are incorporated in the analysis. The analysis is carried out on a panel of low and middle-income countries. The empirical results show that the establishment of a separate telecommunications regulator is associated to higher penetration levels, and that this is more important for low-income countries. The effect is partly related to the quality of wider country governance rather than sector specific institutions.