We estimate a seven-variable-VAR for the U.S. economy on postwar data using long-run restrictions, taking changes in long-run interest rates and inflation expectations into account. We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period. We find that a simple off-the-shelf theoretical model of oil prices and monetary policy, where oil prices are flexible and other prices are sticky, in fact predicts a strong relationship if inflation and oil prices were driven by monetary policy. The observed magnitude of this relationship is still a bit of a puzzle, but this finding does call into question the identification techniques commonly used to identify oil shocks
Oil shocks, interest rates, inflation
Macroeconomic Stability or Cycles? The Role of the Wage-price Spiral
Kolsrud, Dag (Statistics Norway)
Nymoen, Ragnar (Dept. of Economics, University of Oslo)
We derive aggregate supply (AS) relationships for an intermediate-run macro model. The wage-price spiral provides the conceptual framework for a synthesis of different contesting theoretical and empirical perspectives on the AS curve: the Phillips curve model (PCM) and the wage-price equilibrium correction model (WPECM). The generalized AS curve is grafted into a small macro model. We analyze stability conditions, steady states, and dynamic solutions, using a combination of algebra and simulations. The specification of the AS curve, as a PCM or a WPECM, is shown to be important for all aspects of the model’s solution, but within each model also the detailed parameterization is of qualitative importance. For example, endogenous cyclical fluctuations are typical for both nominal and real variables, e.g. inflation and unemployment.
Low inflation on goods markets provides no reliable precondition for asset-market stability; it might even promote the emergence of bubbles because interest rates and risk premia appear to be low. A further factor driving asset demand is easy availability of credit, which in turn roots in the banking system operating in a regime of endogenous central-bank money. A comparison of Bundesbank and ECB policies suggests that credit growth can be controlled more efficiently if rising interest rates are accompanied by some liquidity squeeze that supports the spillover of a monetary restriction to capital markets. The announcement effect of a central bank Charter including the goal of financial-market stability helps to deter private agents from excessive asset trading.
open-market policy; asset-price bubble; euro money market; ECB strategy
In order to analyze current state of events in the world economy, parallel analysis with the country that has gone through boom cycle in real estate and financial asset prices (as US did during the last decade) and sudden consequential bust in mid 70s and late 80s (USA 2007), namely Japan, is performed. The definition and role of money in the economy in its various forms from narrow to the most broad credit aggregates and interrelations between central bank policy and growth of credit is discussed.
The speed of inflation adjustment to aggregate technology shocks is substantially larger than to monetary policy shocks. Prices adjust very quickly to technology shocks, while they only respond sluggishly to monetary policy shocks. This evidence is hard to reconcile with existing models of stickiness in prices. I show that the difference in the speed of price adjustment to the two types of shocks arises naturally in a model where price setting firms optimally decide what to pay attention to, subject to a constraint on information flows. In my model, firms pay more attention to technology shocks than to monetary policy shocks when the former affects profits more than the latter. Furthermore, strategic complementarities in price setting generate complementarities in the optimal allocation of attention. Therefore, each firm has an incentive to acquire more information on the variables that the other firms are, on average, mo re informed about. These complementarities induce a powerful amplification mechanism of the difference in the speed with which prices respond to technology shocks and to monetary policy shocks.
Analysis of World Values Survey 2000 data for the Philippines finds that lower income Filipinos are more likely than the upper income ones to support inflation targeting. The same can be said of older, healthier, and employed Filipinos but not of the educated and financially satisfied ones. Given the profile of people who preferred inflation targeting, the shift from monetary targeting to inflation targeting is deemed a pro-poor policy shift. Further analyses find that, in 2000, at least 53.1% of Filipino households preferred inflation targeting; in other words, the preference of Filipino society in 2000 was in line with the preference of the Bangko Sentral ng Pilipinas for inflation targeting.
Inflation targeting; central bank policy; Philippines; Filipino preference
Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules
The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies.This papers describes this trans formation from reduced-form behavioural equations estimated separately, through to contemporary micro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods.
How should monetary policy be optimally designed in an environment with high degrees of financial globalization? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed: a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization
global imbalances, collateral constraints, monetary regimes
The Vanishing Procyclicality of Labor Productivity
We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity has vanished, (ii) the relative volatility of employment has risen, and (iii) the relative (and absolute) volatility of the real wage has risen. We propose an explanation for all three changes that is based on a common source: a decline in labor market frictions. We develop a simple model with labor market frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the reduction in frictions may also have contributed to the observed decline in output volatility
We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.
A substituição de trabalhadores como instrumento para redução de gastos com salários: evidências para a indústria paulista
Labor churning is an important component of labor turnover in Brazil, which includes job reallocationbetween firms. The labor churning evolution in the nineties, at least for the industry sector inSao Paulo, folows a very similar path for di erent groups of firms (divided by size or by subsectors),suggesting that changes in the macroeconomic environment a ect labor churning in a very similar wayfor different firms. This paper proposes a model to explain the path of formal labor churning in Brazil.The model admits that employers, when facing exogenous shocks that rise real wage, may substituteemployees to reduce wage costs, particularly in low inflation periods, when real wages are more rigid.An econometric analysis is conducted using disaggregated data by firms for the industry sector in theMetropolitan Region of Sao Paulo. The results confirm the models main hipotesis. The results alsosuggest that, after the monetary est abilization, controlling for inflation and with valid instruments,labor churning is relatively higher
Output Dynamics, Technology, and Public Investment
Duarte Bom, P.R.
Ligthart, J.E. (Tilburg University, Center for Economic Research)
The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm’s production function under various technological scenarios. We show that if factors of production are gross complements and public capital is Solow neutral, which is the empirically plausible case, the long-run output multiplier falls short of its Hicks-neutral value. The way in which public capital augments factor productivity crucially affects the dynamics of private capital and net foreign assets, but yields qualitatively similar output dynamics. In contrast to conventional results obtained from hysteretic models, we find non-monotonic output dynamics of a public investment impulse in the non-hysteretic model. Schmitt-Grohe and Uribe’s (2003) findi ng of identical impulse responses across the two model types is thus not robust to the inclusion of spillovers of public capital.
<p>This paper explores the distributional effects of contractionary monetary policy by race and gender in the U.S. from 1979-2008 using state-level panel data. We hypothesize that women and Blacks, as groups with less power and lower status in the social hierarchy, fare worse in the competition over jobs, resulting in a disproportionate rise in female and Black unemployment rates relative to White males. We also investigate the possibility that Blacks bear a greater burden of joblessness than females as Black population density rises. Results indicate the costs of fighting inflation are unevenly distributed amongst workers, weighing more heavily on Black females and Black males, followed by White females, and lastly, White males.<br /><br /></p>
In a recent paper, we studied economic growth and inflation at different levels of government and external debt. The public discussion of our empirical strategy and results has been somewhat muddled. Here, we attempt to clarify matters, particularly with respect sample coverage (our evidence encompasses forty-four countries over two centuries–not just the United States), debt-growth causality (our book emphasizes the bi-directional nature of the relationship), as well as nonlinearities in the debt-growth connection and thresholds evident in the data (absolutely central points that seem to have been lost in some commentary.) In addition to clarifying the earlier results, this paper enriches our original analysis by providing further discussion of the high debt (over 90 percent of GDP) episodes and their incidence. Some of the implications of our analysis, including for the United States, are taken up in the final section.
In what follows various econometric technique is applied to determine the source of consumption growth with historical retrospective to equity and real estate markets as well comparative analysis of US consumer and Chinese consumer is presented.
Consumer credit; Wealth; Consumption
Impact du pacte de convergence, de stabilité et de croissance sur la convergence réelle dans l’UEMOA
The nominal convergence knows regular monitoring and a growing interest in the WAEMU countries. However, few studies have examined the real convergence of the WAEMU countries and in particular the contribution of the convergence, stability and growth pact (PCSC) to the dynamics of the real convergence. This paper aims to analyze the effect of this pact on the dynamics of real convergence. After examining the concept of sigma-convergence and convergence in distribution, we use the beta-convergence approach with panel data to control for differences in the technologies state of countries. After bias correction of endogeneity problem by using the system GMM method, the results suggest that the hypothesis of conditional convergence can not be rejected and that the pact adopted by WAEMU countries triple the real convergence speed of approximation of real per capita GDP of member countries of the WAEMU during the period 1997-20 08. Thus the adoption of the PCSC has improved the standard of life for WEAMU member countries.
Pacte de convergence; de stabilité et de croissance; Convergence nominale ; Convergence réelle ; Différences de technologie ; Bêta-convergence ; Panel dynamique ; GMM.
Standard economic models are based on an axiom set that epitomizes the fundamental behavioral assumptions. The present treatise moves these assumptions from the foreground to the background. The suggested change of perspective is guided by the question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with four non-behavioral axioms. Subsequently their logical and factual implications are explored and the building blocks of the general axiomatic model are determined. The switch of the unifying principle resolves the profit conundrum – ‘one of the most convoluted and muddled areas in economy theory’. Hence structural axiomatization has ramifications on larger parts of standard economics. By virtue of the axiom set evolution supersedes equilibrium as central organizing idea.
Framework of Concepts; Structure-centric; Axiom Set; Propensity Function; General Axiomatic Model; Stochastic Processes;Evolutionary Economics; Evolving Money Economy; e·Economics
Measuring the Environmental Impacts of Changing Trade Patterns on the Poor
Kalirajan, Kaliappa (Asian Development Bank Institute)
Anbumozhi, Venkatachalam (Asian Development Bank Institute)
Singh, Kanhaiya (Asian Development Bank Institute)
<p>It is an empirical fact that it is very difficult to balance economic growth, poverty reduction, and environment protection, particularly for developing and transitional economies. While the economic environment of a country is influenced by conditions within the country, it is also influenced by external shocks such as the recent global financial crisis depending on how integrated the country is with the rest of the world. Thus, it poses a continuing challenge for policy makers in developing and transitional countries to readjust the economic environment in a way that leads to better and more effective targeting of the chronic issue of poverty reduction without causing damage to the natural environment. It is in this context that this paper attempts to measure the environmental impact of changing trade patterns on the poor. <p>The recent financial crisis has discouraged United States (US) private consumpti on, which in turn has significantly reduced exports from Asia. However, Asia’s private consumption is at a very low level even when compared with the current reduced US private consumption. Therefore, it is possible for Asian countries to focus more on improving regional trade and domestic consumption to compensate for the revenue losses that resulted from the reduction in global demand. This paper argues that energy-efficient production methods and service-led growth, particularly trade in environmental goods and services, provide good opportunities for Asian countries to enjoy “inclusive growth” without damaging the natural environment.
asia economic growth; asia trade and environment; asia poverty reduction
Coordinated Tax-Tariff Reforms, Informality, and Welfare Distribution
Meijden, G.C. van der (Tilburg University, Center for Economic Research)
The paper studies the revenue, efficiency, and distributional implications of a simple strategy of offsetting tariff reductions with increases in destination-based consumption taxes so as to leave consumer prices unchanged. We employ a dynamic micro-founded macroeconomic model of a small open developing economy, which features an informal sector that cannot be taxed, a formal agricultural sector, and an import-substitution sector. The reform strategy increases government revenue, imports, exports, and the informal sector. In contrast to Emran and Stiglitz (2005), who ignore the dynamic effects of taxes and tariffs on factor markets, we find an efficiency gain, which is unevenly distributed. Existing generations benefit more than future generations, who (depending on pre-existing tax and tariff rates and the informal sector size) even may become worse off.