CREDIBILITY, MACROECONOMIC FUNDAMENTALS AND MARKOV REGIME SWITCHES IN THE EMS

The main objective of this paper is to use the Markov regime‐switching modelling framework to describe and analyse the credibility of a number of countries participating in the European Monetary System during 1980–1998. Our credibility indicator, based on Hughes Hallet et al.'s (1997) methodology, is subject to discrete regime shifts and is made dependent on macroeconomic fundamentals. We carry out extensive testing to assess the specification of the Markov regime‐switching model and the potential existence of permanent breaks. A contribution of our paper is the specification of a multivariate Markov switching model that allows us to examine whether macroeconomic variables have asymmetric effects on credibility. Another contribution is the specification of a regime‐switching model with time‐varying transition probabilities, which enables us to determine whether changes in macroeconomic variables can trigger switches between the low and high credibility regimes. We find strong evidence of regime switching behaviour in all countries. Both the level of credibility and the transition probabilities display an asymmetric response to changes in macroeconomic variables, with the stance of fiscal policy exerting the most systematic influence in all countries.     

Employment,labor supply and real wages in market disequilibrium

The purpose of this paper is to provide estimates of a disequilibrium labor market model which has been fitted to the US private non-farm sector and to the manufacturing sector. After examining the rationale of the ‘minimum’-type disequilibrium model, we reject it in favor of a formulation suggested by Chow. The latter provides not only a wage adjustment mechanism, but also a quantity adjustment mechanism and treats wages and quantities symmetrically. The empirical findings for both sectors support the disequilibrium formulation employed and reject the equilibrium hypothesis for the labor market.     

The effects of monetary policy changes on market interest rates in Greece: An event study approach

The operational procedures of the Bank of Greece underwent major changes during the 1990s. These shifts in operational strategy made interest rates the main tool of monetary policy for the first time in Greece. This paper examines the effects of changes in the bank's operational interest rates on market interest rates at eight maturities and for different operational regimes. A major feature of our study is the application of the event study methodology used in finance, which has not been employed in any previous study on this subject. We find that changes in official interest rates had a significant influence on short-term and intermediate-term rates and that this relationship was affected by the changes in the bank's operational procedure.     

Another look at the linear q model: an empirical analysis of aggregate business capital spending with maintenance expenditures

Abstract .  The paper revisits the empirical investment literature, which has established that aggregate business fixed investment is not found to be related linearly to marginal or average Tobin's q . The theoretical background is extended here by developing a supply-side model where the depreciation rate of private capital is determined endogenously. The firm can either invest in 'new' capital, which adds directly to the existing capital stock at the presence of convex adjustment costs, or extend the durability of installed capital through maintenance expenditure, which affects its depreciation rate. The model shows that Tobin's q is then a positively related sufficient statistic for both components of aggregate capital expenditures. This central implication is tested empirically using aggregate time-series survey data from Canada on 'new' investment and maintenance expenditures covering the period 1956–93. The estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model.     

Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation

This article looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian Survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation.     

Public Investment Rules and Endogenous Growth with Empirical Evidence From Canada

This paper examines theoretically and empirically the effects of public investmentrules on output growth in an economy with private and public capital. It is shownthat the decisions on public capital formation are closely associated with the growthrate of output and generate endogenous growth. A permanent change in the policyrule implies a new long-run growth rate of output, but the economy will onlygradually approach the new steady-state due to adjustment costs in private capitalaccumulation. The model predictions are tested using data from Canada for theperiod 1955-1999. The data support the endogenous growth hypothesis and thetwo central assumptions of the model: (i) the growth rate of output follows closelythe rate of infrastructure formation and (ii) private capital formation also followsthe rate of infrastructure formation but adjusts with a delay.     

Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations

The aim of this paper is to investigate the integration process in the European Union retail banking sector during the period 2003–2011, by analysing deposit and lending rates to non-financial corporations. An important contribution of the paper is the application of the recently developed Phillips and Sul (2007a) panel convergence methodology which has not hitherto been employed in this area. This method analyses the degree as well as the speed of convergence, identifies the presence of club formation, and measures the behaviour of each country's transition path relative to the panel average. In addition, this is the first empirical paper that analyses the impact of the 2008 global financial crisis on the European retail banking integration process. The empirical results point to the presence of convergence in all deposit and lending rates to non-financial corporations up to 2007. In contrast, the null of convergence is rejected in all deposit and credit markets after the onset of the 2008 financial crisis. Although we still find slow convergence in a few sub-clusters of countries, the transition paths become very divergent, with the credit market being far more heterogeneous than the savings market.     

The ERM Effect,Conflict and Inflation in the European Union

This paper investigates price inflation expectations and wage determination in the ERM member countries with the aim of assessing the importance of the ERM effect and distributional conflict. We have found strong evidence of an ERM effect in the inflationary process of participating countries, but this effect manifests itself primarily through structural changes in labour markets rather than through importing Bundesbank's reputation. This evidence questions the tendency to model the ERM as a credibility-reputation game. Inflation expectations for all ERM countries are strongly influenced by movements in unit labour costs and demand, and secondarily by world commodity and oil prices. The empirical results provide strong support for the conflict approach to wage inflation.     

A disequilibrium model of investment,working capital and borrowing for the UK company sector

This paper develops a dynamic optimization model which allows a simultaneous determination of optimal fixed investment, employment, working capital investment and financial policies. Subsequently, the system of inter-related dynamic demand equations derived from the model, combined with price expectations formation behavior, is applied to UK quoted manufacturing companies classified into industry groups at a 2-digit level SIC Orders 1968). The methodology adopted is along the lines of the ‘new’ microeconomics. The model allows relative factor prices and financial risk effects to be estimated directly and its overall performance is satisfactory. The best equations are obtained when expectations are generated with the Integrating Moving Average Process (0, 1, 1).