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Chapter 1 describes the international monetary landscape between 1848 and 1873. The prominent role of bullion is emphasized. It also reviews existing theories of the operation of a bimetallic system. The main point is that a bimetallic system rests on bimetallic arbitrage: agents will buy the depreciating metal and sell the appreciating one, herby stabilizing their relative value. This suggest that it is key to study the actual operation of bimetallic arbitrage.

This chapter will critically examine today’s common ways to build equilibrium models. These specifically include Dynamic-Stochastic General Equilibrium models, game theoretical models and empirical GE models. Each of these types of equilibrium model try to address the issues of how a model’s decision makers get the information needed to guarantee the attainment of a state of equilibrium. The chapter addresses the alleged limits of general equilibrium models (particularly the issues of dynamics, time and expectations), the current attempts to overcome the limits of general equilibrium models, and three empirical alternatives to Walrasian general equilibrium models. These alternatives include the Computable General Equilibrium models and the Applied General Equilibrium models. The third model involves building econometric models only after evaluating the statistical properties of the data before using them in the model.

This chapter reviews the theory related to business cycles. After outlining early approaches (including the multiplier-accelerator interaction and Goodwin cycles), it proceeds to discuss the modern debates between New Classical/Real Business Cycle (RBC) theorists and New Keynesians. This discussion is structured at various levels: more intuitive and discursive, then more analytical with the development of a formal RBC model and of a Dynamic Stochastic General Equilibrium model that synthesizes the two approaches. The chapter continues with a review of Vector Autoregressions. Finally, a narrative of a number of episodes is offered: the Great Depression, post-World War II cycles, Japan, effects of oil on business cycles, and the Great Recession (2007–9) and the subsequent slow recovery. The overarching philosophy is that a suite of models, old and new, and approaches, modelling, econometric, and narrative, are useful in offering complementary perspectives.

This chapter discusses the three lines of research used in assessing basic models of fluctuations in competitive markets, namely research with the use of Dynamic Stochastic General Equilibrium models, a typical Sunspot model, and a combination of Keynesian theory, the Samuelson destabilizing accelerator, and the Philips curve. It explains that the Dynamic Stochastic General Equilibrium models provide simpler solutions, as they answer simple first-order conditions of asset pricing, and address labor fluctuations. This chapter also includes sample problems regarding alternative shocks in the government and households, incomplete capital depreciation, a Real Business Cycle model with generations, and with autocorrelated shocks.

This chapter discusses how trade can affect poverty through a large number of channels, based on growth, efficiency and distribution. The redistributive channels also affect inequality. Case studies of China and India show that the country with the greater rise in inequality, namely China, has grown faster and seen bigger poverty reductions. Cross-country regressions also show the possibility of a poverty reducing impact of trade reforms. And, there exists considerable evidence for specifically the growth channel. Most of the intra-country studies, both direct, reduced-form ones, as well as those based on empirical general-equilibrium analysis, also provide strong support for the poverty-reducing effects of trade. Moving to inequality, many aspects, such as wage inequality, overall income inequality and labor shares, have been studied. The chapter shows that the evidence on the impact of trade on inequality has been quite mixed.

This chapter defines the use of the Dynamic Stochastic General Equilibrium (DSGE) models with perfect or imperfect competitions. It states that the solution to fluctuations brought by demand shocks is to introduce different models for nominal price and wage rigidities to the system. It indicates that several formalizations of rigidities have responded well to nominal shocks. This chapter also includes sample problems regarding the Taylor model, inflation persistence, Calvo and Calvo-Fischer: Comparative Dynamics, and DSGE model with sticky wages.

This chapter analyzes revenue and welfare effects of implementing a Financial Activities Tax (FAT) both from a theoretical and a quantitative perspective. The theoretical analysis allows deriving expressions for revenue effects and deadweight loss in a general equilibrium setting. Using data for Germany, the quantification suggests that introducing a modest FAT with a rate of 4% results in a revenue gain of about EUR 1.8 bn. If this revenue gain would be used to reduce distorting labor taxes, the results point at a total welfare gain of about EUR 1.5 bn. Comparing these results with Buettner and Erbe (2013), this chapter shows that the introduction of a FAT of 4% would generate similar revenue and slightly larger welfare gains as a repeal of the financial sector Value Added Tax (VAT) exemption.