The phillips curve and US macroeconomic performance during the 1990s

This paper identifies two competing accounts of recent US macroeconomic performance, both of which are capable of explaining the concurrence of low unemployment and low inflation experienced by the US after 1995. Econometric evidence provides partial support for both views, establishing that while there has been no change in the position of the long run Phillips curve in the US during the 1990s, this long run Phillips curve is likely not vertical. These results suggest that recent US macroeconomic performance is not sustainable and that US policy makers ultimately face a choice between higher unemployment or higher inflation in the long run.     

On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy

Contrary to the predictions of the theory underlying international finance, inflows of capital triggered by financial liberalisation have neither equalised real interest rates nor increased income growth in many emerging economies. We explain this puzzle by developing a model that combines the balance‐of‐payments constraint approach to economic growth with a less stringent version of the real interest rate parity hypothesis. The model’s foundations are based on robust empirical findings or well‐established macroeconomic models. We show that a perverse combination of income elasticities of demand for imports and exports generates slow income growth and high real interest rates. As domestic income grows and imports rise faster than exports, the real exchange rate is expected to depreciate in order to clear the balance of payments (or the foreign exchange rate market). An incipient capital outflow arises and interest rates increase. Faster adjustment in capital rather than in the goods market therefore generates a higher real interest rate differential between the domestic small open‐economy and the rest of the world. The long run analysis shows that a constant degree of risk aversion implies a positive equilibrium real interest rate differential that affects economic growth. A permanent increase in default risk driven by persistent current account imbalances thus impacts on long run growth. The model’s results are illustrated with evidence from the three major Latin America economies: Argentina, Brazil and Mexico.     

Unemployment insurance and the business cycle*

An equilibrium model is developed to study the interaction of the business cycle, unemployment insurance (UI), and the labor market for young men in Canada. The model combines optimal job offer, layoff, and recall decisions within a numerically solved and restricted Bayesian–Nash equilibrium. We consider the long‐run implications of changes made to unemployment insurance in Canada during the 1990s. The changes lead to equilibrium increases in average rates of unemployment, layoffs, and recalls. Eliminating UI lowers the equilibrium unemployment rate and average observed earnings. UI policy affects the timing of cycles of endogenous outcomes relative to the productivity cycle.     

IMMIGRATION UNEMPLOYMENT RELATIONSHIP: THE EVIDENCE FROM CANADA*

This paper examines the relationship between unemployment and immigration in Canada. The bi‐directional causality test finds no evidence of a significant effect of Canadian immigration on unemployment. Cointegration tests indicate that there is no observed increase in aggregate unemployment due to immigration in the long run. The results from the causality test based on the vector error correction model confirm that, in the short run, past unemployment does cause (less) immigration but not vice versa. There is also a long‐run positive relationship among per‐capita GDP, immigration rate and real wages. The results indicate that, in the short‐run, more immigration is possibly associated with attractive Canadian immigration policies, and in the long‐run, as the labour market adjusts, Canadian‐born workers are likely to benefit from increased migration.     

US macroeconomic conditions and asymmetric adjustment in Presidential approval

While voters may punish governments for worsening economic conditions, they may not reward them symmetrically for improving conditions. We examine whether US macroeconomic conditions affect Presidential approval asymmetrically using quarterly data from 1961_I to 2009_II. The results suggest that the relationship between Presidential approval and economic aggregates is nonlinear. Long‐run causality runs from the economic variables to Presidential support. The speed of adjustment towards long‐run equilibrium relationship also differs when conditions worsen from when they improve. Finally, we explore the impact of other factors, such as war and Presidential scandal on Presidential approval.     

The cause of Danish unemployment: Demand or supply shocks?

We study the Danish unemployment experience 1905–92 using a common trends model with cointegration constraints. To justify the identifying assumptions about the cointegration vectors and the common trends we present a simple macroeconomic model of the labor market. The model determines the long run behavior of labor productivity, employment, unemployment, real product and real consumer wages. The empirical results give support for three cointegration relations and two common trends. Based on the economic model the trends are interpreted as representing labor productivity (technology) and labor supply. With unemployment being nonstationary, the common trends analysis indicates that labor supply shocks is the primary source for explaining the behavior of unemployment. First Version Received: August 1999/Final Version Received: June 2000     

Social Status,Labour Market Frictions and Endogenous Growth

This paper develops an endogenous growth model that incorporates wealth‐enhanced preferences for social status and labour market frictions to investigate the role of social status in determining unemployment and long‐run growth. We show that the increase in the desire for social status reduces the unemployment rate, but its effect on long‐run growth is unclear. We then calibrate our model to the US economy and find that an increase in the desire for social status lowers the unemployment rate and enhances the economic growth rate in the long run.     

NOMINAL WAGE INDEXATION,QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations , I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.     

Do downturns cause desperation? The effect of economic conditions on suicide rates in Canada

There is conflicting evidence concerning the impact of macroeconomic conditions on suicide rates. To help resolve this pertinent question, we present evidence using Canadian data. We estimate feasible generalized least squares models of annual gender-specific suicide rates in the working age population (aged 25–64) using data from each of the 10 Canadian provinces over the period 1982 to 2007. We allow for heteroscedasticity across provinces and first-order autocorrelation common to all provinces. We posit that suicide rates in this population are a function of macroeconomic conditions (current and lagged unemployment rates and real per capita GDP) and other determinants that might be correlated with macro conditions, such as physician supply. We find that different factors affect suicide rates across genders and that some of the results are sensitive to the specification of the model we use and the regressors included. Generally, economic conditions affect men more than women; suicide rates are counter-cyclical and a higher supply of psychiatrists in a province is correlated with lower suicide rates.     

Endogenous distribution and equilibrium growth: a note

Does distributive conflict diminish during the course of economic development? This article outlines a model in which distribution, the tax rate and growth evolve endogenously over time. When voting occurs over a tax on capital, we show that the growth rate is maximized at the political equilibrium in the long run. When voting occurs over a general income tax, we show that the growth rate is maximized at the political equilibrium in both the short and long run. These results suggest that the transitional dynamics of growth models with redistributive politics lead to growth‐maximizing outcomes, as distributive conflict diminishes in the course of development. This implies that the democratic process leads to greater consensus over policy choices, with a perfect convergence of interest across individuals with respect to the tax rate.     

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.     

Downward nominal wage rigidity in Canada: Evidence against a “greasing effect”

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long‐run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re‐examine these issues in a model that accounts for precautionary motives in wage‐setting behaviour. We confirm that DNWR generates a long‐run negative relationship between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with the inflation target, offsetting the beneficial effects a higher inflation target has on closing the unemployment gap. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns back to pre‐crisis levels during recessions is relatively unaffected by variations in the inflation target.     

The Dynamics of Technological Unemployment*

This article compares the short‐ and long‐run effects of technological progress on employment. It presents a simple model of frictional unemployment capturing the negative creative destruction effects of technological change on employment. In the long run, faster technological change accelerates job obsolescence, which reduces the equilibrium level of employment. But it is also shown to have short‐run positive and potentially important effects on employment. This tends to partially reconcile the ‘‘Schumpeterian'’ view of the effects of technological change on labor markets with facts such as the response of most OECD unemployment rates to the 1970s productivity slowdown.     

Growth in fragile states in Africa: Conflict and post‐conflict capital accumulation

This article analyses the pattern of capital accumulation in Africa and its interaction with political fragility. Political fragility, defined as armed conflict or civil war, retards or reverses gains with respect to capital accumulation, slowing long‐term economic growth. Many countries experience negative rates of capital accumulation, particularly during periods of acute political instability. In post‐war periods, countries generally continue to experience capital destruction, lending support to the “war ruin hypothesis.” This has implications for long‐term economic growth in view of the strong association between capital accumulation and economic performance. The main policy implication of the analysis is that African countries and their international partners should pay more attention to capital accumulation, including capital reconstruction after periods of political instability, to lay the foundations for sustainable economic growth.     

News shocks and labour market dynamics in matching models

We enrich a baseline real business cycle (RBC) model with search and matching frictions on the labour market and real frictions that are helpful in accounting for the response of macroeconomic aggregates to shocks. The analysis allows shocks to have an unanticipated and a news (i.e., anticipated) component. The Bayesian estimation of the model reveals that the model that includes news shocks on macroeconomic aggregates produces a remarkable fit of the data. News shocks in stationary and non‐stationary TFP, investment‐specific productivity and preference shocks significantly affect labour market variables and explain a sizeable fraction of macroeconomic fluctuations at medium‐ and long‐run horizons. Historically, news shocks have played a relevant role for output, but they have had a limited influence on unemployment.     

Neo‐Fisherism and inflation control

According to conventional central banking wisdom, an inflation‐targeting central bank should increase (decrease) its nominal interest rate target when inflation is above (below) its target. According to neo‐Fisherites, conventional central bankers have the sign wrong. Essentially all mainstream macroeconomic models tell us that increases in nominal interest rates increase inflation—in the short run and in the long run. This paper reviews neo‐Fisherian theory and evidence and addresses issues relating to inflation control in low real interest rate environments.     

A POSITIVE THEORY OF GEOGRAPHIC MOBILITY AND SOCIAL INSURANCE*

This article presents a tractable dynamic general equilibrium model explaining cross‐country data on geographical mobility, unemployment, and labor market institutions. Rational forward‐looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self‐reinforcing mechanism can yield two steady‐states: one “European” and one “American.” The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI.     

A policy model to analyze macroprudential regulations and monetary policy

We construct a small‐open‐economy, new Keynesian dynamic stochastic general‐equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long‐term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan‐to‐value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.     

Macroeconomic Stability or Cycles? The Role of the Wage‐Price Spiral

We formulate a small and stylised dynamic macroeconomic model, and study how different specifications of the supply side affect the model's dynamic properties. The wage‐price equilibrium‐correction model (ECM) and the Phillips curve model (PCM) that both can be used to represent the supply side of a New Keynesian macro model, are synthesised in a generalised model of the wage‐price spiral. We show that the choice of ECM or PCM has implications for the long‐run stability of the macro model, without need of a NAIRU. We also find that the range of theoretically admissible dynamics is wide. For example, both the ECM and PCM may display endogenous cyclical fluctuations in inflation and unemployment, showing that even simple structures can give rise to complex dynamics. In practice that may entail that forecasting the effects of shocks and policy changes is difficult even in the best of circumstances.     

Shifts in Portfolio Preferences of International Investors: An Application to Sovereign Wealth Funds

We develop a dynamic general equilibrium model to analyze the macroeconomic effects of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterized by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. To illustrate the mechanics of the model, we calibrate it to analyze a transfer of reserves from central banks to sovereign wealth funds (SWFs). We look separately at two diversification paths: a shift away from dollar assets (path 1), and a shift away from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run.