Alternative passive monetary policies in an inflationary economy

This paper considers three alternative specifications of passive monetary policies in a simple dynamic macroeconomic model of an inflationary economy in which both the dynamics of wealth accumulation and the evolution of inflationary expectations play central roles. These policies include one in which the real stock of money is held fixed; one in which the rate of nominal monetary growth is held constant; and a third in which the real stock of government bonds is held fixed. We compare the dynamic behavior of the system as well as its steady state properties under these alternative policies. Two expectations hypotheses—the adaptive and perfect myopic foresight—are considered and their implications related at some length.     

Money and prices in an increasingly open economy: The case of Taiwan

The paper examines the price movement in an increasingly open economy like Taiwan. A theoretical model of the open-economy quantity theory is set forth which relates domestic inflation rate to inflation of world price, monetary expansion, and fluctuation of real income. The empirical evidence suggests that the relative importance of monetary changes in determining domestic price changes declines over time as the degree of openness of the economy rises over time.     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

The corporate income tax in an open economy

The paper begins with a brief review of the distortion literature, stressing its relation to the general equilibrium consequences of the corporate income tax. The consequences for international trade of the distortions associated with the tax are then examined, and among other things it is found that trade could reduce welfare. Finally, the implications of trade for the incidence question are examined, and it is shown that whether labor or capital bears the burden of the tax depends entirely on whether the tax is imposed in the labor-intensive or the capital-intensive industry.     

Wage norms in an open economy

Zusammenfassung Das Zusammentreffen einer Beschleunigung des Preisauftriebs und einer Erhöhung der Arbeitslosigkeit in den OECD-Ländern in den sechziger und siebziger Jahren überzeugte viele Wirtschaftswissenschafter und Wirtschaftspolitiker, daß es einer Einkommenspolitik bedürfe, um die diskretionäre Marktmacht von Unternehmen und Gewerkschaften einzuschränken. Zwei wichtige Varianten der Einkommenspolitik sind die produktivitätsorientierte Lohnpolitik, die das Wachstum der Geldlöhne vom Wachstum der gesamtwirtschaftlichen Produktivität und der gesamtwirtschaftlichen Preissteigerung abhängig macht, und das Skandinavische Modell, in welchem die Erhaltung der internationalen Wettbewerbsfähigkeit dadurch garantiert wird, daß das Wachstum der Geldlöhne gleich der Summe des Produktivitätswachstums im exponierten Sektor und der Preissteigerung der handelbaren Güter (in heimischer Währung) ist. Dieser Aufsatz zeigt, daß beide Arten der Einkommenspolitik äquivalent sind. Er untersucht auch die Rolle der Wechselkurse in diesen Modellen und verwendet das Ergebnis, daß in einer umfassenden Einkommenspolitik Lohnzurückhaltung durch eine Preispolitik in der Form einer Wechselkurspolitik ergänzt werden muß, um historische Ereignisse in einigen Ländern zu interpretieren.     

Price controls in an open economy

Wage and price controls have been increasingly called for as Western economies have experienced periods of stagflation. Part of their attractiveness has been due to the belief that they are an appropriate instrument to deal with a country's unsatisfactory balance-of-payments position. This paper evaluates the appropriateness of an incomes policy in an open economy. An optimally structured incomes policy, derived for a simple inflation model, is examined under alternative exchange rate regimes. The model, in the tradition of models by Gordon, Hicks, and Okun, is characterized by two output markets-one a flexible price market and one characterized by markup pricing-and by a single labor (input) market. This model is then used as the constraint set in a dynamic optimization problem. Both analytical and simulation results are presented. The results suggest that a direct price control program is not appropriate in an open economy.     

Dynamic collusion in an open economy

This paper provides an example of how opening a country to trade may decrease competition in an industry. This result, counter to conventional theory, occurs when one considers multi-period games.     

Kaldorian dynamics in an open economy

In this paper, we formulate a Kaldorian business-cycle model in a small open economy. We consider the possibility of capital mobility, and both the system of fixed exchange rates and that of flexible exchange rates are studied. We investigate how changes of the parameter which represents the degree of capital mobility affect the dynamic characteristics of the model. Some numerical simulations are performed based on the analytical model.     

The demand for money in an open economy: the United Kingdom

Most previous studies have estimated the demand for money without paying too much attention to developments in the foreign exchange markets. In light of the fact that any development abroad and in the foreign exchange markets could have implications for domestic stabilization, we make an attempt to incorporate such developments into the demand for money in the United Kingdom. More precisely, after incorporating a measure of real effective exchange rate of the British Pound into a dynamic money demand function, we estimated it for the UK using quarterly data over 1973–87 period. By relying upon the Akaike' Final Prediction Error criteria to select the optimum number of lags, it is shown that in addition to income and interest rate, the real effective exchange rate exerts significant effect on the UK demand for money in the short run as well as long run.     

Benefits and unemployment in an open economy: an equilibrium analysis

This paper examines the relation between uemployment compensation and unemployment in The Netherlands. This relation is studied by menas of a small macroeconomic model for an open economy that assumes equilibrium in the labour market and on the current account. The model yields an elasticity of unemployment to benefits of 1.0, which is high compared to microeconomic research and the outcomes of disequilibrium models for The Netherlands. According to the model, a rise in the ‘wedge’ (i.e. the difference betweenn real labour cost and real net wages) leads to an increase in unemployment, whilst shifting this wedge from the employers to the employees induces a fall in unemployment.     

The determinants of international reserves in the small open economy: The case of Honduras

The strong monetary approach to the balance of payments suggests that for a small open economy with a fixed exchange rate, international-reserve losses are due to money-supply growth in excess of growth in money demand, where money demand is assumed to be a stable function of exogenously given income and world prices. This paper tests the applicability of the strong monetary approach to Honduras during the period 1960–1983. Although the strong monetary approach provides a statistical explanation of reserve movements during this period, insights into the underlying causes of reserve changes can be obtained through recognition of the importance of the income terms of trade in determining both real income and domestic-credit growth in the small open economy.     

The inflation tax in an open economy with imperfect competition

This paper studies the national welfare maximizing inflation tax in an open economy with imperfect competition. It shows that the presence of a monopolistic distortion dampens the incentive to engage in strategic use of the inflation tax. If this dampening effect is strong enough, monetary policy becomes completely inward-looking, restoring the Friedman rule as an equilibrium strategy regardless of the actions of the foreign government. This aspect of the policy interaction—driven entirely by the presence of imperfect competition—is important because it determines the underlying structure of the policy game and is therefore crucial for determining whether or not there exist welfare gains from international monetary cooperation.     

Accelerated depreciation and the efficacy of temporary fiscal policy: Implications for an inflationary economy

The effect on investment of temporary tax rate changes depends on the age profile of depreciation deductions. If the depreciation allowance schedule is accelerated, then temporary cuts in the corporate tax rate could reduce investment. Inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment. Two currently proposed reforms are shown to exacerbate this effect. Under each of these proposals, temporary tax cuts are likely to have opposite effects on investment in short-lived and long-lived capital, thereby complicating the conduct of countercyclical fiscal policy.     

Relative labor demand in an open economy

This paper contributes to the discussion concerning the nature of the well-documented worsening of wage and employment inequality in western economies during the past three decades. It critically discusses the use of the traditional Heckscher and Ohlin approach to analyze the distributional effects of international competition. The paper also discusses an innovative theoretical scenario in order to effectively explain the empirical observations. The model overcomes the problem of a dichotomized labor market, which is an unfavorable result of the traditional approach. Furthermore, the factor-biased character of the technological change becomes endogenous as the strength of foreign competition and the induced incentives for technical innovations are taken into consideration. This paper was presented at the 55th International Atlantic Economic Conference, Vienna, Austria, March 12–16, 2003.     

Towards an information economy : The case of Singapore

Recent empirical studies have documented the emergence of information-based economies in developed countries within Europe, the U.S.A., Japan, and Australia. Casual observations suggest that the newly industrializing country of Singapore is proceeding towards a similar trend. The primary purpose of this paper is to account for the share of Singapore's national product which originates from informational activities. In particular, we define and estimate the size of Singapore's information sector within an input-output framework. Our results indicated that a sizable portion of Singapore's economy is information-based. In view of the significant penetration of informational activities in economic production, advances in communication technology and concomitant improvements in information-handling capabilities are bound to affect factor productivities and incomes with consequences for a country's pattern of employment and production structure. It is anticipated that an economics of communication becomes necessary for an awareness of communication technology as a choice variable in economic planning. We conclude our discussion with an assessment of the admissability of an information sector concept in economic analysis and the usefulness of empirical studies based on such a concept.     

The election cycle in an economy-wide macrodynamic model: The Italian case

This article analyzes from a systemic viewpoint the effects of political elections on the Italian economy in the period 1960–1981. This is performed by a modification of an existing model of the Italian economy specified and estimated (FIML) as a set of differential equations. Results concerning estimation, control solutions, stability and sensitivity are compared with those obtained with the original model. Results do not reject the hypothesis of a preelection manipulation of the economy. Other results point out the presence of medium term instability and deterioration in the balance of payments.     

Testing for short-run money neutrality in a small open economy: The case of Canada

This paper adopts an econometric methodology which is based on standard nested-hypotheses testing in order to test the policy ineffectiveness proposition in the context of the Canadian economy. It thus avoids some problems associated with the non-nested hypotheses framework used by Barro and numerous other writers. The substantial openness of the Canadian economy is taken into account through the use of a Mundell-Flemming aggregate demand side. The supply response of the economy is carefully modelled, in the same context, and the familiar Sargent-Wallace aggregate supply function is derived as a special case of a more general Keynesian function — by assuming instantaneous adjustment of prices to costs. Empirical tests based on a data sample spanning the period of Canada's recent experience with flexible exchange rates are unfavorable to the policy ineffectiveness proposition.     

The effects of monetary policy in a small open economy: the case of Portugal

In this article, I analyse the macroeconomic effects of monetary policy on the Portuguese economy. I show that a positive interest rate shock leads to: (i) a contraction of real GDP and a substantial increase of the unemployment rate; (ii) a quick fall in the commodity price and a gradual decrease of the price level and (iii) a downward correction of the stock price index. It also produces a ‘short-lived liquidity effect’ and helps explain the negative comovement between bonds and stocks. In addition, I find evidence suggesting the existence of a money demand function characterized by small output and interest rate elasticities. By its turn, the central bank’s policy rule follows closely the dynamics of the money markets. Finally, both the real GDP and the price level in Portugal would have been higher during almost the entire sample period if there were no monetary policy surprises.