Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation

The paper examines a long–run (neoclassical) framework in which differences in productivity growth across sectors and countries lead to inflation differentials. In a currency union, these inflation differentials imply cross–country differentials in real interest rates. The authors estimate the likely size of these differentials for European Union countries, discuss the potential costs of persistent inflation differentials, and comment on the conflicts they may cause within Economic and Monetary Union (EMU). The analytical framework is a variant of the Balassa–Samuelson "productivity hypotheisis," which relates sectoral productivity trends to trends in the relative price of home goods.     

Interest rate rules and price determinacy: The role of transactions services of bonds

Interest rate rules have been associated with price indeterminacy when they do not respond aggressively enough to inflation. Price indeterminacy is typically associated with indeterminacy of real bond balances, suggesting that the missing element is a meaningful role for government bonds. We assume that government bonds provide arbitrarily small transactions services and show that this can dramatically change the local and global determinacy conditions. In particular, the specification of fiscal policy affects the aggressiveness with which monetary policy must respond to inflation to deliver local determinacy—a range of passive monetary policies, even an interest rate peg, may yield determinacy.     

Did the Unconventional Monetary Policy of the U.S. Hurt Emerging Markets?

Open Economies Review - Policymakers in emerging markets complained that the unconventional US monetary policy response to the Great Recession hurt their economies. US policymakers responded that...     

Addressing International Empirical Puzzles: the Liquidity of Bonds

Models that assume bonds denominated in different currencies are perfect substitutes can not explain certain empirical puzzles: the exchange rate volatility puzzle is that these models can not explain the observed volatility in real and nominal exchange rates; the Backus-Smith puzzle is that these models can not explain the observed low correlation between real exchange rates and the ratio of home to foreign consumption; the Backus-Kehoe-Kydland puzzle is that these models can not explain the observed low correlation between home and foreign consumption; and finally, the uncovered interest parity puzzle is that these models can not explain the observed deviations from that parity. These long standing puzzles make the models harder to defend. In this paper, we present a symmetric two country portfolio balance model in which home and foreign bonds are imperfect substitutes for money in each country’s transactions technology; this of course makes home and foreign bonds imperfect substitutes for each other. Our calibrated model is capable of addressing the Backus-Smith puzzle and the Backus-Kehoe-Kydland puzzle. It does not fully resolve the exchange rate volatility puzzle, but it makes some headway. And finally it generates deviations from uncovered interest parity, though by some estimates these deviations are not large enough to be consistent with the data.     

Euler equations and money market interest rates: A challenge for monetary policy models

Standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption Euler equation. We use U.S. data to calculate the interest rates implied by Euler equations derived from a number of specifications of household preferences. Correlations between these Euler equation rates and the Federal Funds rate are generally negative. Regression results and impulse response functions imply that the spreads between the Euler equation rates and the Federal Funds rate are systematically linked to the stance of monetary policy. Our findings pose a fundamental challenge for models that equate the two.     

New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials

What determines the cyclical behavior of aggregate inflation and regional inflation differentials? The answer has strong implications for monetary policy and in Europe for the Stability and Growth Pact. In the United States, inflation rates move pro-cyclically, and across the Euro Area, inflation differentials are positively correlated with growth differentials. This suggests that demand shocks are the primary determinants of the cyclical behavior of aggregate inflation and regional inflation differentials. In this paper, we discuss New Keynesian explanations of these correlations, and we argue that demand shocks are either missing or inadequately modeled in the in typical New Keynesian model.     

Industrialization and Developing Countries' Indebtedness: A Theoretical and Empirical analysis

The following paper is a theoretical and empirical study of the determinants of international indebtedness of developing countries. I will argue that indebtedness is a divelopment determined phenomenon and an intrinsic tendency of capitalist development during the stage of the internationalization of productive capital. Different levels of indebtedness by developing countries can be explained by their stage of development and their position in the international division of labor. Developing country indebtedness universally increases during the phase of import substutution industrialization (corresponding to the early phase in the internationalization of production). Indebtedness continues to grow in countries exteriencing export-led industrialization, while the rate of grewth declines in countries at a higher stage of this phase.     

The Stability and Growth Pact: A Delicate Balance or an Albatross?

The EU's Stability and Growth Pact tries to strike a delicate balance: it imposes the constraints on national fiscal policy that were deemed necessary to protect the new European Central Bank from outside pressures; at the same time, it allows flexibility for a counter-cyclical policy. First, we review official institutions' studies of the flexibility embedded in the Pact and find a rather strong consensus: the Pact seems likely to constrain counter-cyclical fiscal efforts in the years ahead, or at least until EU governments bring their structural deficits into balance. Then, we review conventional academic arguments that suggest a new central bank might need to be protected from external pressures, and we ask if the constraints that were actually written into the Pact are likely to be helpful in this regard. We conclude that the Pact is closer to an albatross than a delicately balanced package of necessary fiscal constraints.     

Clean development mechanism implementation: External and organizational factors drives expected business benefits

This study aims to deal with the challenge of rationalizing and testing the interrelationships assumptions of external and organizational factors in the case of clean development mechanism implementation. Prior studies are lacking to introduce the expected business benefits as a mediator between external factors and clean development mechanism implementation. The moderating effect of environmental resources was rationalized and evaluated. The data were collected from 130 ISO 14001 certified manufacturing firms and analyzed using the partial least squares technique. The results revealed that expected business benefits mediate the impacts of all considered external factors and cause an insignificant direct association between market pressure and mechanism implementation. Organizational resources moderate positively the impact of competitor pressure on mechanism implementation. The findings extend the literature by illustrating the dependency of external factors and organizational factors and challenging the results of the studies, which have been driven by independence assumption. The findings are enabling policy-makers and managers to effectively modify the strategies for enhancing the extent of mechanism implementation.