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on Open MacroEconomics |
| By: | Dees, Stephane (European Central Bank); Pesaran, Hashem (University of Cambridge); Smith, L. Vanessa (University of Cambridge); Smith, Ron P. (Birkbeck College, University of London) |
| Abstract: | New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC. |
| Keywords: | New Keynesian Phillips Curve, identification, Global VAR (GVAR), trend-cycle decomposition |
| JEL: | C32 E17 F37 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3298&r=opm |
| By: | Marzinotto Benedicta |
| Abstract: | Using theoretical models about the interaction between monetary policy-making and wage bargaining institutions, some researchers had been predicting an acceleration in wage growth under EMU (Iversen and Soskice 1998; Iversen et al 2000; Cukierman and Lippi 2001). However, the empirical evidence shows that, after the formation of the monetary union, wage growth has remained under control or even decelerated. Of the numerous explanations advanced to account for this trend, the most promising seems the one proposed by Posen and Gould (2006), who argue that behind the generalised shift towards wage restraint is enhanced monetary credibility in EMU. Whilst building on a similar argument, this paper adds to it in important respects. First, I show that the effects of a monetary union depend on labour market institutions. Second, and most originally, I argue that a strategic interaction between the ECB and non-atomistic labour unions is possible only in the case of large countries, whose price behaviour can potentially affect EU-13 inflation. This leads to the main finding behind this paper, namely that the relationship between wage growth and economy size is hump-shaped, with wage restraint more present in large and small countries, and less so in countries of intermediate size. Differently from a large country like Germany, small economies are free riders with respect to the monetary regime, but they care nonetheless for cost competitiveness, even if to different degrees. On the other hand, intermediate countries are trapped “inbetween” because neither do they believe capable of affecting euro-zone inflation, nor do they look at cost competitiveness as key to their economic survival. |
| Keywords: | Wage restraint, collective wage bargaining, EMU, openness, international trade |
| JEL: | J31 J51 E50 F15 F41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0035&r=opm |
| By: | Christos S. Savva; Kyriakos C. Neanidis; Denise R. Osborn |
| Abstract: | We examine business cycle synchronizations between the euro area and the recently acceded EU and currently negotiating countries. Strong evidence is uncovered of time-variation in the degree of comovement between the cyclical components of monthly industrial production indicators for each of these countries with a euro area aggregate, which is then modeled through a bivariate VAR-GARCH specification with a smoothly time-varying correlation that allows for structural change. Where required to account for the observed time-variation in correlations, a double smooth transition conditional correlation model is used to capture a second structural change event. After allowing for dynamics, we find that all new EU members and negotiating countries have at least doubled their business cycle synchronization with the euro area, or changed from negative to positive correlations, since the early 1990s. Furthermore, some have exhibited U-curved or hump-shaped business cycle correlation patterns. The results point to great variety in timing and speed of the correlation shifts across the country sample. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:91&r=opm |
| By: | Mirko Abbritti; Andreas Mueller |
| Abstract: | How do labor market institutions affect the volatility and persistence of inflation and unemployment in a monetary union? What are the implications for monetary policy? This paper sets up a DSGE currency union model with unemployment, hiring frictions and real wage rigidities. The model provides a rigorous but tractable framework for the analysis of the functioning of a currency union characterized by asymmetric labor market institutions. Positively, we find that inflation and unemployment differentials depend strongly on the underlying labor market structure: the hiring friction lowers the persistence and increases the volatility of the inflation differential whereas real wage rigidities imply more persistence and variability in output and unemployment differentials. Normatively, we find that macroeconomic stabilization is easier when labor market frictions are high and real wage rigidities are low. This has important implications for optimal monetary policy: The optimal inflation target should give a higher weight to regions with more sclerotic labor markets and more flexible real wages. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp37&r=opm |
| By: | Michael J. Artis; Mathias Hoffmann |
| Abstract: | In spite of two decades of financial globalization, consumption-based indicators do not seem to signal more international risk sharing. We argue that consumption risk sharing among industrialised countries has actually increased - in particular since the 1990s - but that standard consumption-based measures of risk sharing - such as the volatility of consumption conditional on output or international consumption correlations - have been unable to detect this increase. The reason is that consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialised countries since the 1980s. As a first important driver of this decline we identify a more gradual response of output to permanent idiosyncratic shocks. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Secondly, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated. |
| Keywords: | Consumption Risk Sharing, International Business Cycles, Great Moderation, Financial Integration and Capital Flows, Home Bias |
| JEL: | C23 E21 F36 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:346&r=opm |
| By: | Koray Alper |
| Abstract: | Using different combinations of culture, development and openness to international trade, we test the variability in the incidences of corruption at different stages of development or in other words the non-linearities in the relationship between corruption and development. We employ formal threshold model developed by Hansen (2000), and unlike the existing literature, we find that: (1) non-linear models that search for the break points in the relationship between corruption and development are statistically preferable than linear regressions; (2) the effect of development at any stage is much lower than that has been suggested by studies using linear regressions approach; (3) both culture and openness do not affect corruption directly; rather they have an effect on the location of break points in the relationship between corruption and development. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:93&r=opm |
| By: | Bonpasse, Morrison |
| Abstract: | As globalization continues, businesses are increasingly importing and exporting from countries with different currencies. To conduct that business, they must pay fees for exchanging one currency for another and they must determine the exchange rate for a particular time. If the transaction is to be conducted over time, they may purchase currency instruments to hedge against currency fluctuation. The costs of these tasks to such firms are significant. As an increasing number of international businesses understand that these expensive tasks are unnecessary for trade conducted within a monetary union, these businesses are likely to lead the effort to implement a Single Global Currency, to be managed by a Global Central Bank within a Global Monetary Union. In short, a "3-G" world. It's common cents. Much further research is needed to identify the benefits of a Single Global Currency and the steps and schedule necessary for implementation. |
| Keywords: | Single Global Currency; monetary union; dollar; euro; European Monetary Union; Global Central Bank; Global Monetary Union; international monetary system; Bretton Woods; foreign exchange; currency; currency crisis; transaction costs; trade; commerce |
| JEL: | F4 F5 E5 E6 |
| Date: | 2008–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7036&r=opm |
| By: | Alessandra Bonfiglioli |
| Abstract: | Understanding the mechanism through which financial globalization affects economic performance is crucial for evaluating the costs and benefits of opening financial markets. This paper is a first attempt at disentangling the effects of financial integration on the two main determinants of economic performance: productivity (TFP) and investments. I provide empirical evidence from a sample of 70 countries observed between 1975 and 1999. The results for both de jure and de facto indicators suggest that financial integration has a positive direct effect on productivity, while it does not directly affect capital accumulation. I control for indirect effects of financial globalization through financial development and banking and currency crises. While the evidence on financial depth as an indirect channel is weak, the results are more robust for financial crises: they depress both investments and TFP, and are favored by financial integration, though only to a minor extent. The overall effect of financial liberalization is positive for productivity and negligible for investments. |
| Keywords: | Capital account liberalization, financial development, financial crises, growth, productivity, investments. |
| JEL: | G15 F43 O40 C23 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:350&r=opm |
| By: | Michael J. Artis; Mathias Hoffmann |
| Abstract: | This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other's output (Shiller securities). Our framework allows us to distinguish between two channels of risk sharing: ex ante diversification that leads to income smoothing through capital income flows and ex-post consumption smoothing through savings and dissavings. The model successfully replicates the patterns of income and consumption smoothing observed in both U.S. state-level and international data. The increase in international consumption risk sharing is closely associated with the decline in international portfolio home bias. While capital income flows remain relatively limited as a channel of risk sharing at business cycle frequencies, we find that better international portfolio diversification has led to a considerable increase in capital income flows at medium and long horizons. |
| Keywords: | Consumption Risk Sharing, International and regional business cycles, Capital flows, Home Bias, Non-stationary panel data |
| JEL: | C23 E21 F36 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:316&r=opm |