Proquest Dissertations
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UMI AN OPTIMAL GOVERNMENT FINANCE MODEL OF THE RESERVE COMPONENT OF SEIGNIORAGE IN DEVELOPING COUNTRIES DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Graduate School of The Ohio State University By Renée Drury Nieberding, B.S., M.A. ***** The Ohio State University 2000 Dissertation Committee; Approved by Dr. Douglas Graham, Adviser Dr. Cameron Thraen _________ _ y AdviseryVHvîœr Dr. David Kraybill Department of Agricultural, Environmental, and Development Economics UMI Number 9962437 Copyright 2000 by Nieberding. Renee Drury All rights reserved. UMI* UMI Microform9962437 Copyright 2000 by Bell & Howell Information and Learning Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. Bell & Howell Information and beaming Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor. Ml 48106-1346 Copyright by Renée Drury Nieberding 2000 ABSTRACT Optimal government finance models illustrating trade-offs between different policy instruments, such as seignior%e and income taxes, have focused on the United States and other industrialized countries. This dissertation examines the trade-ofi* between the effective reserve ratio and currency growth in developing countries. Because developing countries have significantly higher reserve requirement rates than industrialized countries, the disaggregation of money into reserves and currency is particularly important for understanding seigniorage revenue. Governments may use the reserve requirement to increase the base on which the inflation tax is levied while minimizing welfare losses and maintaining a given level of seigniorage. In addition, if the government uses reserve money for its own consumption, the reserve requirement constitutes a form of forced lending. The welfare loss function presented in this dissertation includes the effective reserve ratio and currency growth rate as instruments. A democracy variable, the interaction of democracy and currency growth, and trade as a proportion of gross domestic product are also included in the final regression. The model is estimated for twenty-nine developing countries via feasible generalized least squares and instrumental variables. The results indicate that the u governments in the sample are using the reserve requirement to minimize the welfare losses associated with seignior%e revenue and that they exhibit a preference for currency growth over reserve growth as democracy increases. The effective reserve ratio is also positively associated with the level of democracy. These results are robust to the inclusion of other government revenue in the regression. The results for the effect of opeimess to trade are mixed. m To Grace IV ACKNOWLEDGMENTS First and foremost I would like to thank my adviser. Dr. Douglas Graham, for assistance in the procurement of data and guidance throughout my years in graduate school. I would also like to thank the other members of my dissertation committee, Drs. Cameron Thraen, David Kraybill, and Scott Irwin for advice and suggestions particularly concerning the proper treatment of times series and other econometric issues. I would like to thank Dr. Luther Tweeten for the opportunity to work with him. I would Uke to thank my husband, Jim, my daughter, Grace, and my parents for their support. Also thanks to Alex. VITA July 26, 1968 ........................................................ Bom — Canton, Ohio June, 1990........................................................................B.S. Economics and P^chology The Ohio State University December, 1991 M.A. Economics The Ohio State University 1994 — 1997.......................................................................................... Research Assistant The Ohio State University Winter, 1998 .......................................................................................... Adjunct Professor Cleveland State University FIELDS OF STUDY Major Field; Agricultural, Environmental, and Development Economics VI TABLE OF CONTENTS Page Abstract................................................................................................................................................... ii Acknowledgments .............................................................................................................v V ita..........................................................................................................................................................vi List of Tables ................................................................................................................... ix Chapters: 1. Introduction................................................................................................................. 1 2. Review of Literature.................................................................................................... 7 2.1 General Observations ..................................................................................7 2.2 General Equilibrium Models .......................................................................9 2.3 Optimal Government Finance M odels....................................................... 11 2.4 Political Economy Approach.....................................................................14 2.5 Summary................................................................................................... 16 3. The Model and Hypotheses........................................................................................ 19 3.1 The Model................................................................................................ 19 3.2 D ata.......................................................................................................... 26 3.3 Econometric Issues................................................................................... 33 3.3.1 Nonstationarity..............................................................................33 3.3.2 Poolability ..................................................................................... 35 3.3.3 MulticoUinearity............................................................................35 3.3.4 Autocorrelation.............................................................................36 4. Results........................................................................................................................38 4.1 Results of the Stationarity Tests................................................................38 vii 4.1.1 Autocorrelation and Partial Autocorrélation Functions and Residual Diagnostics.................................................................... 42 4.2 Results of the Tests for Autocorrelation.....................................................44 4.3 Condition Index Results ............................................................................ 47 4.4 Poolability Test Results ............................................................................ .48 4.5 Estimation of the Fixed and Random Effects Models ................................48 4.5.1 The Hausman Test........................................................................ 50 4.6 Heteroskedasticity Consistent Estimation .................................................. 51 4.7 The Effect of Other Revenue on the Reserve Ratio ................................... 54 4.8 Instrumental Variable Estimation ...............................................................56 4.9 Summary................................................................................................... 57 5. Conclusions................................................ 60 Appendix-Autocorrelation and Partial Autocorrelation Functions.................................65 References...................................................................................................................... 186 V lll LIST OF TABLES Table Page 4.1 Results of the Augmented Dickey-Fuller and Leyboume-McCabe tests for Nonstationari^.......................................................................................