A MANDATE OF PRICE STABILITY FOR THE FEDERAL RESERVE SYSTEM

In recent years, the rules-versus-discretion debate over monetary policy has taken on new life. In the 1960s, this debate focused on the relative merits of nonactivist policies versus activist stabilization policies. When rational expectations arguments emerged in the 1970s, the debate broadened into three categories: activist policies characterized by rules, activist policies characterized by discretion, and nonactivist policies characterized by rules. This paper presents arguments for a particular example of the latter of these policies…specifically, a monetary policy which accords preeminence to achieving price-level stability. Central to these arguments is a comparison of this hypothetical policy with the actual monetary policy pursued by the Federal Reserve System, which is a type of activist policy characterized by discretion. The comparison suggests that actual monetary policy is more constrained than is generally realized. A rule mandating that the Federal Reserve accord preeminence to achieving price-level stability, then, should not be regarded as a policy which would significantly increase constraints on monetary policy. Instead, such a rule should be regarded as replacing implicit, poorly understood constraints with explicit constraints.     

EMPLOYMENT PROTECTION AND THE NON‐LINEAR RELATIONSHIP BETWEEN THE WAGE‐PRODUCTIVITY GAP AND UNEMPLOYMENT

This paper studies the relationship between the wage‐productivity gap and the unemployment rate in OECD countries between 1985 and 2007. In particular, we investigate whether differences in the employment protection across countries affect the link between these two variables. We show that the elasticity of unemployment with respect to the wage‐productivity gap is non‐linear and that it switches from a positive to a negative value with stricter employment legislation. From a theoretical point of view, we argue that this result is related to a set of labor market reforms introduced in many OECD countries, which affected the relative strictness of institutions.     

MACROECONOMIC VOLATILITY AND COUNTERFACTUAL INFLATION‐TARGETING IN HONG KONG

The present paper evaluates macroeconomic adjustment in Hong Kong with an estimated dynamic stochastic general equilibrium (DSGE) model under a fixed exchange rate regime. We find that exports and world inflation shocks are the dominant sources of GDP volatility, with the risk premium taking on importance during the Asian crisis after 1997. A counterfactual simulation, assuming a flexible exchange rate regime with inflation targeting, shows that inflation would have decreased slightly, but interest‐rate volatility would have increased significantly. The welfare gains from switching out of the currency board system appear to be marginal.     

POLITICS AND THE FEDERAL RESERVE

Evidence presented here supports a two-part hypothesis that (1) the Federal Reserve is a powerful political entity, not independent of politics, and (2) it preserves its political power by carrying out the monetary policy desired by the President of the United States. This evidence includes the historical record from the Truman to Reagan administrations, politicization of Federal Reserve research, and political lobbying by the Federal Reserve. Formerly secret minutes of the regional Federal Reserve Banks' boards of directors meetings provide source material. The conclusion suggests a more efficient method of translating political signals and a rule for more predictable monetary policy.     

ECONOMIC MODELING AND THE FALSE TRADEOFF BETWEEN ENVIRONMENTAL PROTECTION AND ECONOMIC GROWTH

One important element of the current policy debate on what measures should be taken to reduce greenhouse gas emissions is the controversy over the costs of reducing those emissions. "Top-down" macroeconomic and general equilibrium models give much higher estimates of the costs than "bottom-up" models based on microeconomic and engineering data. This paper investigates the causes of the divergence between the two modeling approaches. The conventional top-down models incorporate strong implicit assumptions about maximization, technical progress, and organizational efficiency that predetermine their results. However, these assumptions are questionable on both theoretical and empirical grounds. Economic assessment of policy alternatives would benefit. from analyses that take account of the actual characteristics of business firms and other organizations that emit greenhouse gases in the course of their activities.     

JOB FLOWS AND UNEMPLOYMENT IN AN EQUILIBRIUM UNEMPLOYMENT MODEL WITH FIRM‐SPECIFIC SKILL TRAINING*

We introduce productivity enhancing firm‐specific skill training into the labour search model in which the firm‐specific skill training intensity and the job destruction rate are endogenously determined. It is shown that the higher the intensity of such training, the lower the rates of unemployment, job creation and job destruction. The paper's model provides a theoretical framework to understand the often mentioned peculiarity of the Japanese labour market; prevalently low rates of unemployment, job creation and job destruction in Japan are due to its training system which promotes workers to acquire firm‐specific skills.     

COMPARING FEDERAL AND PRIVATE‐SECTOR WAGES WITHOUT LOGS

I use Current Population Survey data from 2005 through 2010 to compare the wages of federal employees and workers in the private sector who have similar observable characteristics. The distribution of wages differed drastically between the federal and private sectors. In particular, I find that federal employees with no more than a high school diploma earned 21% more, on average, than their private‐sector counterparts, whereas those with a professional degree or doctorate earned 23% less. Overall, the average of federal wages was about 2% higher than the average wage of similar private‐sector workers. Other researchers have found larger differences because they used log‐linearized models, which result in comparisons of geometric means. I show that arithmetic means are more relevant in the context of the relationship between a government's compensation policy and its budget. The discrepancy between differences in arithmetic and geometric means occurs because the wages of federal employees were much less dispersed than those of employees with similar characteristics in the private sector. (JEL J31, J38, J45)     

THE IMPACT OF TFP GROWTH ON STEADY‐STATE UNEMPLOYMENT*

Theoretical predictions of the impact of total factor productivity (TFP) growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects. In econometric estimates with a panel of industrial countries we find a large negative impact of TFP growth on unemployment, which implies that embodied technology and creative destruction play no role in the steady‐state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained.     

ASSET‐BASED UNEMPLOYMENT INSURANCE*

This article studies a model of consumption, savings, and job search in which a borrowing constraint limits self‐insurance. The government administers the unemployment insurance program that may condition on an individual’s asset position, but not on her efforts of finding a job. To compensate for the impediments to self‐insurance, benefit payments should optimally be set higher at lower wealth levels and peak for borrowing‐constrained individuals with zero liquid funds. A quantitative exercise reveals that the U.S. unemployment insurance program is surprisingly close to optimal for the asset poor, but far too generous for wealthier individuals.     

UNEMPLOYMENT PERSISTENCE AND THE SUSTAINABILITY OF EXCHANGE RATE PEGS

It is commonly thought that an open economy can accommodate output shocks through either exchange rate or real sector adjustments. We formalize this notion by incorporating unemployment persistence into a two‐sided escape clause model of currency crises. We show that unemployment persistence makes a currency peg more fragile and undermines the credibility of the monetary authority in a dynamic setting. The fragility is captured by a devaluation premium in expectations that increases the average inflation rate when the currency peg is more vulnerable to ‘busts’ than ‘booms’. This interaction between macroeconomic and microeconomic rigidities suggests that a policy reform can only be consistent if it renders either exchange rates or the economy more flexible.