Together or Apart? Monetary Policy Divergences in the G4

Open Economies Review - We evaluate monetary policy divergence in the G4. A Taylor rule is extended that admits a global element and also allows for unconventional monetary policy to be reflected...     

Which Method Should the Central Bank Choose to Estimate the Model Economy? A Korean Monetary Policy Example

Abstract

To understand how the macro economy evolves, the central bank has two options in choosing how to estimate the economic model against actual data: one is to estimate each sector of the model piece-by-piece, and the other is to estimate the whole model altogether. This paper demonstrates the advantage for the central bank of estimating the whole model in terms of the estimation accuracy and the robustness of the resulting policy recommendations. For that aim, we construct a macro model for the monetary policy analysis of the Korean economy and estimate the model via the system approach and single-equation approach. We evaluate the data fits of the two estimation results and show that the fit of the system approach is far better than the other and comparable to other methods such as vector autoregressions. It is also shown that, if the two estimated models are equally likely, conducting the policy tailored for the model estimated by the system approach delivers better stabilization results for the Korean economy.     

The quantity–quality trade-off related to investment in healthy human capital: New evidence from the implementation of the “selective two-child policy” in China

Using data from China Family Panel Studies (CFPS), and employing the “selective two-child policy” as a quasi-natural experiment, this study provides empirical evidence of Becker’s quantity-quality tradeoff theory. We find that the selective two-child policy reduced households’ investment in health insurance for their first-child. The proportion of participated families and the amount invested in health insurance declined significantly among families in which one spouse was an only child. The reduction in investment in health insurance was more substantial when the first-child was a girl and when the first-child was younger. One likely mechanism was the wage penalty for motherhood. The relaxed birth policy led to a significant reduction in women’s income. As a result, households’ financial resources became more limited, and their budgets became tighter, leading to reductions in investments in the health of first-child.     

Monetary Policy in Austria–Hungary, 1876–1913: An Econometric Analysis of the Determinants of the Central Bank’s Discount Rate and the Liquidity Ratio

This paper presents a model to explain the official discount rate of the Central Bank of Austria–Hungary from 1876 to 1913. The discount rate is assumed to depend on the liquidity ratio of the Bank, defined as the ratio of its stock of metals to banknotes issued, and on changes in foreign discount rates. The paper also presents an equation explaining the liquidity ratio. We use “not equally spaced chronologically ordered data” referring to the 50 discount rate changes enacted. The regressions confirm that the liquidity ratio was the main determinant of the discount rate and that Germany (and not Great Britain) played a significant role in determining the Austro–Hungarian discount rate and the liquidity ratios, supporting the view that the classical gold standard was a decentralized multipolar system rather than a system fully dominated by London as suggested by Keynes. The regressions also suggest that, although Austria–Hungary had an inconvertible paper currency (1879–1892) and fluctuating exchange rates (1876–1895) and formally joined the gold standard only in 1902, it “shadowed” the behaviour of gold standard Central Banks with such consistency that the stability of the estimated regressions was relatively unaffected by the frequent institutional changes.

Cohesion Policy in the eu: Going Beyond Fiscal Transfers?

Should cohesion policy in the EU be reformed? This question becomes pressing in light of the coming enlargement of the EU. Indeed, without reform enlargement will involve an increase in the budget for cohesion policies, as well as a reallocation of funds across regions. Furthermore, it is an appropriate occasion to rethink the various rules and criteria associated with cohesion policies. Recently, the European Commission published its Second Report on Economic and Social Cohesion (henceforth SRESC, (2001)). The report praises the effectiveness of current cohesion policies and suggests a mere continuation of current practices in the future. This paper challenges this conclusion and discusses some options for reform. The paper starts with a brief introduction to the current cohesion policy and the changes that will occur in light of EU enlargement. Subsequently, we address two questions. Is there a need for cohesion policy reform? And if so, how should it be reformed?     

Foreign ownership and investment: do firms locate investments close to the headquarter?

Using an international panel data set of the European pulp and paper industry, we address the issue of a possible home-bias effect for real investments in plants with foreign and domestic locations. We find that there is no effect after controlling for firm effects and plant and firm size. These findings are rubust to a number of different econometric specifications, including a difference-in-difference approach. Our findings appear to be relevant for the debate on the effect of foreign takeovers. As far as we are aware, home-bias effects in real investments within multinational firms have not been studied previously.     

One Money and Sixteen Needs: Has the ECB’s Monetary Policy Become More Balanced Towards the Needs of the Member States?

In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union. We show that the ECB, if in existence in the 1990s, would have had an impossible task. This is because inflation and business cycles still strongly differed in that time, although convergence substantially increased in the run up to the monetary union. In this respect, the decade under EMU drastically differs from the preceding one. This being said, the evidence for a further improvement in the course of the first decade of the new millennium is mixed. This is because although inflation has further converged, business cycles have shown a tendency for increased divergence. If, however, we are willing to put weights on inflation and output gap divergence (as implied by the Taylor rule), we conclude that also in the course of the period under EMU in general the ECB’s monetary policy has become more in line with the needs of the individual members. Looking at individual countries, we show that during the first decade of its existence the ECB’s interest rate was most fitted to the needs of France and Italy, and least to the needs of Ireland and Greece (both too low) and Germany (too high). To a lesser extent there were also mismatches for Spain and Portugal (both too low). In the more recent period since 2005, the mismatch between the desired domestic interest rate and the desired ECB rate has come down for most countries (most noticeable Germany). For Belgium (for which a higher interest rate was more appropriate), on the other hand, the mismatch increased. These overall positive findings, however, offer no guarantee that the task of the ECB will become easier in the future.     

Reassessing the Effectiveness of Industrial Policy in Indonesia: Can the Neoliberals be Wrong?

—The neoliberal interpretation of the Indonesian state suggests that industrial policy was incoherent, subject to rent-seeking, and irrelevant to Indonesia's post-1966 development success. A more nuanced micro-historical analysis of the state's interventions demonstrates that this oversimplification misses political elite objectives to overcome the “ekonomi kolonial” by using the power of the state and selective intervention to create a strong, integrated, diversified, and outward-oriented industrial economy (“ekonomi nasional”). Empirical analysis presented here suggests that Indonesia has largely achieved this objective. It also suggests that industrial policy has been more important than the neoliberal argument permits.     

China's outward foreign direct investment in the Belt and Road Initiative: What are the motives for Chinese firms to invest?

Because of the potentially large and important effects of the extremely ambitious Belt and Road Initiative (BRI) launched by China in late 2013, considerable attention has been given to the motives for, and repercussions of, the BRI-driven infrastructural projects. Yet, the non-infrastructural outward foreign direct investment (FDI) from China to BRI countries, which varies quite substantially across different sectors and different countries, has not yet received much attention. In contrast to some recent studies showing that the massive initiative has increased China's total FDI outflows to fellow BRI countries, in this paper, based on our sector-level difference-in-differences models, we find that effect to be statistically insignificant. Yet, at the same time, we provide empirical evidence on the sectoral pattern of China's outward FDI before and after 2014 indicating that China's FDI outflows to BRI countries have significantly increased in sectors characterized by overcapacity and contributing to pollution in China, thereby demonstrating that China's BRI-driven outward FDI has been very selective in terms of sectors. We confirm these findings with a variety of robustness checks and show that it is BRI countries with relatively low institutional quality that have been more likely to receive these types of FDI from China. We thus speculate that Chinese firms have been motivated to place FDI investments in BRI countries for the sake of alleviating China's own overcapacity and pollution problems. Our findings lead us to suggest that, although these sectoral patterns are consistent with the different stages of economic development in which China and its fellow BRI-identified countries find themselves, Chinese investors and host country governments should be more concerned with the potential for unwanted side-effects of the FDI investments so that the mutually beneficial effects of the BRI can be sustained into the indefinite future among all countries involved.     

What Does Behavioral Economics Mean for Policy? Challenges to Savings and Health Policies in the Netherlands

Key findings in behavioral economics are that people’s behavior (revealed preferences) is often not in line with their intentions (normative preferences), that they are sensitive to the way choices are presented to them, and that their cognitive abilities are limited. This is manifest in particular in areas of intertemporal choice, like personal finance and health-related behavior. Policy makers can develop policies that help citizens to make choices that are more in line with their normative preferences. In this paper we summarize the behavioral evidence, discuss the motivations for interventions, and show how recent behavioral insights can help to improve upon existing policies. These new policies could be described as libertarian paternalism, and include setting defaults thoughtfully and using unorthodox commitment mechanisms.     

Policy-makers’ perceptions of the tourism–climate change nexus: Policy needs and constraints in Botswana

Tourism is a key sector for most southern African economies endowed with unique natural capital, and the industry is increasingly being used for socio-economic development and diversification of national economies in the region. However, it has become clearly evident that the natural capital upon which the sector depends is highly vulnerable to climate change. This has created urgent governmental needs to take action through policy formulation and implementation. The paper uses in-depth interviews to determine Botswana policy-makers’ perceptions of climate change and tourism with the aim of determining policy needs and constraints. The results reveal that the policy-makers do see climate change as a concern requiring urgent establishment of relevant policy. However, they foresee inadequate information as well as uncertainties surrounding the impacts of climate change on the natural capital. This may hamper the formulation and effective implementation of such a policy.     

Financial crisis and saving–investment dynamics in the presence of cross-sectional dependence: The case of East Asia

Using the common correlated effects mean group (CCEMG) technique to a set of balanced panel error correction model, we examine the effects of the Asian financial crisis of 1997, and the global financial crisis of 2008 on the behavior of saving and investment in East Asian countries. Our results show that saving and investment rates are highly dependent across countries of East Asia. This finding underlines the importance of taking into account cross-sectional dependence when analyzing saving–investment relationship. The results also indicate that the adverse financial shock of 1997 has negatively affected the short run correlation between saving and investment, but has not influenced their long run relationship. Our finding, hence, verifies the prediction of new open economy macroeconomic theories regarding the divergence of short run saving–investment from its long run trend for East Asia. Moreover, we find that the global financial crisis of 2008 has not affected the saving–investment dynamics in this region. It means that the consequences of the Asian and global financial crises for saving–investment dynamics are not the same in East Asia. One might attribute these differences to the origins of these two shocks, i.e., internal versus external to the region. These findings may have some policy implications for those countries that rely heavily on foreign investment and are subject to various internal and external financial shocks.     

New perspectives on the contribution of sanitary investments to mortality decline in English cities, 1845–1909

Health improved in English cities in the last third of the nineteenth century, in tandem with substantial increases in public spending on water supplies and sanitation. However, previous efforts to measure the contribution of public expenditures to mortality improvements have been hampered by difficulties in quantifying public health investments and the lack of mortality data for specifically urban populations. We improve upon the existing evidence base by (1) creating measures of the stock of urban district sanitary capital, by type, on the basis of capital expenditure flows, rather than loan stocks; (2) using mortality and capital stock data that relate to the same administrative units (urban districts), and (3) studying the period 1880–1909 as well as the earlier period from 1845. The stock of sewerage capital was robustly related to improvements in all-cause mortality after 1880. The size of this effect varied with the extent of public investment in water supplies, suggesting complementarity between the two assets. For the period 1845–84, investments in water were associated with declines in infant and child mortality but the effect was much smaller and less precisely estimated in later decades. Our results suggest that improvements in water and sewerage targeted different transmission pathways for faecal–oral diseases.     

Was there a Fall in the Return to Educational Investment in Norway, 1885–1955?

Abstract

The main results from this study are that private educational investment has proved a profitable investment throughout the whole period, but that there was a long-term decline in profitability, most of all in investment in the Upper Secondary Schools compared to primary education, where, in the 1950s, the profitability was zero or even negative. An important finding also is that this was not due to the sharpening emphasis on the progressive personal taxation. Of three possible explanations, the most plausible seems to be that there might have been an excess supply of college and academy candidates over the whole century.     

Women's Economic Status in Rural China: Household Contributions to Male–Female Disparities in the Wage–Labor Market

Rapid industrial growth in China coupled with economic reforms in the rural areas has created a growing demand for rural women's labor, though often at substantially lower wages than those earned by men employed in the same sector. An analysis of data collected in rural Guangdong province suggests that households may contribute to the observed male–female market wage differential through their influence in the formation of individuals' reservation wages. Under these circumstances, external employment opportunities, while no doubt serving to increase the household's overall level of income, may, on their own, be a less effective mechanism for raising the economic status of women. On the contrary, market wage signals may serve to reinforce, rather than to ameliorate, sex-based differences that arise within the household.     

Urban Land Policies in Ghana: A Case of the Emperor’s New Clothes?

The paper examines evidence on the reasons for inefficient land management in Ghana. It argues that the perceived custodians of land have consistently acted in their individual interest while successfully using a discourse of ‘communal’ to secure the backing of the colonial and post colonial state. Overall, the state has substantially promoted the interest of private capital. In turn, the ‘public good’ outcomes the current land policies ostensibly seek to achieve have only been modestly achieved. Instead, land policies have had perverse implications for weaker groups such as women and impacted cities negatively.