Real exchange rate and productivity in a specific-factor model with skilled and unskilled labour

The present study develops a two-sector specific factor model in which capital is mobile between sectors. We assume that the traded (non-traded) sector uses skilled (unskilled) labour for production. The theoretical model reveals that the real exchange rate (RER) response to a productivity shock depends on the countries’ relative abundance of skilled labour: a rise in traded productivity leads to a higher RER appreciation in a country whose relative skilled labour rate is high. Using panel data, structural break tests confirm that the skilled versus unskilled labour ratio may be a significant splitting variable. In the long run, the relationship between productivity and RER may be positive or negative, as suggested by the theoretical model, depending on the country’s relative abundance of skilled labour.     

Pollution and life expectancy: How environmental policy can promote growth

This article investigates the influence of environmental policy (EP) on growth in an AK-type growth model, when finite lifetime is introduced and the link between pollution and life expectancy (through the detrimental impact of pollution on health) is taken into account.Using an overlapping generations model à la Blanchard [Blanchard, O. (1985). Debt, deficits and finite horizon. Journal of Political Economy, 93:223-247], we demonstrate that finite lifetime introduces a “generational turnover effect” which modifies the influence of the EP on growth. Thus, when lifetime is finite and independent from pollution, we show that the “generational turnover effect” limits the detrimental impact of the EP on growth, if agents smooth their consumption over time. When pollution negatively influences life expectancy through health, we demonstrate that the “generational turnover effect” is magnified and that the EP and growth have an inverted U-shaped relationship in the steady-state. In this case, we show that the environmental policy is more likely to promote growth (i.e. it stimulates growth for a wider range of environmental taxes) when the impact of pollution on health is important and/or public expenditures in health are low. Finally, using numerical simulations, we find that for the value of parameters that we have chosen, the EP will be more likely to promote growth when agents smooth consumption over time.     

Saving,fertility and public policy in an overlapping generations small open economy

Motivated by the recent increase of public debt experienced by many developed countries, we develop an OLG model to provide the fiscal policies needed for any public debt level to be sustainable in steady state and the consequences that such policies produce on saving and fertility in a small open economy. Our main finding is that a reduction of public debt (an event currently publicly debated) needs tax adjustments that eventually will be detrimental for both fertility and saving under a low-interest-rate regime (possibly similar to the current world regime), with opposite transitional effects on fertility and saving. On the contrary, the needed fiscal adjustments will eventually increase saving and fertility under a high-interest-rate regime, with opposite transitional effects on fertility and saving. Besides providing clear-cut policy implications, our analysis offers possible testable implications concerning the pattern of fertility, taxes and public debt observed in many developed economies.     

Communication and exchange rate policy

Monetary authorities in the G3 economies have shifted in recent years towards communication as their primary policy tool to influence exchange rates. The paper assesses the effectiveness of communication, or oral interventions, by the G3 monetary authorities. It provides two key findings. First, G3 communication policies have constituted an effective policy tool in influencing exchange rates in the desired direction. And second, communication has been effective independently from the stance and direction of monetary policy and the occurrence of actual interventions. By contrast, the effectiveness of communication is strongly related to the degree of uncertainty and the positioning of participants in FX markets. Taken together, the results provide support for micro-based approaches to exchange rate modeling and are consistent with the argument that interventions affect exchange rates primarily through a coordination channel rather than a signaling channel.     

Multi-scale causality between saving and growth: evidence from China

In this article, we use a wavelet-based Granger causality approach to examine the multi-scale causality between saving and growth for China. We show that significant causality runs from saving to growth for most timescales, whereas multi-scale causality from growth to saving is not statistically significant. Our subsample results suggest that economic systems have remarkable effects on the multi-scale causality. Overall, our study provides a novel perspective to deeply explore the relationships between macroeconomic variables.     

General equilibrium with trade balance and real interest rate parity

This paper demonstrates, in the context of a two-sector OLG neoclassical growth model, conditions under which international trade in consumption goods alone may be sufficient for the equalization of real returns to physical capital across countries; that is, under which commodity arbitrage is sufficient for real interest rate parity (RIRP). This role for repeated commodity arbitrage is established via a dynamic extension of the factor price equalization (FPE) theorem which is valid at all dates comprising the equilibrium path as well as its steady state. The results are at odds with the conventional view regarding RIRP which arises from open one-sector growth models, in which case steady state trade balance and RIRP are irreconcilable, and are also a contradiction to frequent assertions of lon-run specialization in two-sector frameworks. An equilibrium path for an integrated world economy yields an endogenous, time-variant cone of diversification which implies sufficient conditions for the dynamic paths of a cross-section of economies to exhibit FPE, and hence RIRP with trade balance, at all points in time. These conditions require that the savings rates and initial capital-labor ratios of individual countries do not deviate too significantly from world averages, and that both sectors absorb capital easily. The first of these requirements is sufficient to establish steady state FPE and RIRP in the general specification. The first two requirements are sufficient for the entire equilibrium path to be characterized by FPE and RIRP in a log-linear example. Received: September 22, 1998; revised version: February 10, 2000     

Education and saving:: The long-term effects of high school financial curriculum mandates

Over the last 40 years, a majority of states have adopted consumer education policies, and a sizable minority have mandated that high school students receive instruction on topics related to household financial decision-making. In this paper, we attempt to determine whether these mandates have had any effect on subsequent decisions. We exploit the variation in requirements both across states and over time to identify the effects of interest. The evidence indicates that mandates have raised both exposure to financial curricula and subsequent asset accumulation once exposed students reached adulthood. The estimated effects are gradual, probably due to implementation lags.     

The relationship between saving and finance: theory and evidence from E.U. countries

This paper investigates the relationship between saving and investment in an effort to shed light on the issue of mobility of capital and whether or not this is prevented by the presence of any barriers. The data of our analysis are annual and come from 14 E.U. countries during the 1960–1994 period. The econometric analysis shows that for the E.U. countries, saving and the provision of credit are two cointegrated variables, which means that for each E.U. country (Belgium was the only exception) the amount of money saved is closely related to the amount of money that is ultimately invested. This result lends support to the view that in E.U. countries the degree of capital mobility plays a minor role in investment, which is primarily influenced by the conditions affecting the domestic provision of savings. In addition, the econometric analysis shows that the causal linkage is in most countries from savings to investment.     

Seigniorage and Japanese fiscal sustainability: Simulation analysis using an overlapping generations model

This study examines two tax policies for achieving fiscal sustainability in Japan: (i) an increase in consumption tax and (ii) consumption tax hike combined with inflation. To evaluate these policies from both fiscal and welfare perspectives, I develop a multi-period overlapping generations model with money. The results reveal that, compared to the first policy, the second policy can substantially delay the timing of and curb the increase in consumption tax through seigniorage revenue. This suggests seigniorage could be a useful tool for the Japanese government in resolving its fiscal problems. In addition, in an aging Japan, the second policy can enhance future generations’ utility. Because inflation reduces money holdings and utility of the elderly, policies that cause inflation in the present but reduce it in the future improve the utility of future generations. From a social welfare viewpoint, such policies are desirable in a government that has foresight.     

The Japanese Economy: Stagnation,Recovery, and Challenges

The Japanese economy is showing signs of a moderate recovery after more than two decades of stagnation. This stagnation was characterized by low inflation or outright deflation, subdued long-term interest rates, elevated government debt and chronic fiscal deficits, and the decline in its share of global exports. Monetary policy has been highly accommodative, marked by low and negative policy rates and the expansion of the central bank’s balance sheet. The country has been mired in a liquidity trap. Despite the recent recovery, observed inflation is still below the Bank of Japan’s target of 2.0%. Wage growth is muted even though the unemployment rate is low. Meanwhile, the working-age population continues to shrink, and the general population is rapidly aging. Japan’s export sector faces stiff competition. Openness to immigration is quite limited. This article analyzes Japan’s economic challenges in light of the moderate recovery after the protracted stagnation, ongoing demographic changes, the reforms of Abenomics, and globalization.     

Cross‐Country Differences in Unemployment: Fiscal Policy,Unions, and Household Preferences in General Equilibrium

We develop a five‐period overlapping generations model with individuals who differ by ability and with an imperfect labour market (union wage setting) for individuals of lower ability. The model explains human capital formation, hours worked, and unemployment within one coherent framework. Its predictions match the differences in the unemployment rate across 12 OECD countries remarkably well. A Shapley decomposition of these differences reveals an almost equal role for fiscal policy variables and union preferences. As to fiscal policy, differences in unemployment benefits play a much more important role than tax differences. Differences in households’ taste for leisure are unimportant.     

Capital inflows, fiscal discretion, and exchange rate policy

Many writers have argued for the benefits of a credible fixed exchange rate (a hard peg) as a commitment device in an open economy. But historically, fixed exchange rates have often been associated with large current account deficits and episodes of ‘over-borrowing’. This paper develops a model of capital inflows that are linked to the exchange rate regime because of endogenous fiscal policy. The key message of the paper is that a hard peg is undesirable in the absence of commitment in fiscal policy. In face of a credible fixed exchange rate, the fiscal authority subsidizes capital inflows. The economy will engage in inefficiently high international borrowing, and in welfare terms may end up worse off than under capital market autarky. To eliminate the incentive to subsidize borrowing, the monetary authority must follow a flexible exchange rate rule in which capital inflows lead to exchange rate appreciation. If fiscal policy must be financed by money creation rather than direct taxation, then a fixed exchange rate rule may cause both over-borrowing and a subsequent exchange rate crisis.     

Agricultural productivity,the real effective exchange rate,and structural change: Some evidence from Africa

Agriculture is thought to play a number of roles in the early development process. All of these roles involve fostering non‐agricultural development, in particular manufacturing. It is argued in this paper that agriculture plays a role that has hitherto been ignored. Specifically, if agricultural labor productivity increases faster than manufacturing labor productivity, the real effective exchange rate will depreciate. This depreciation of real effective exchange rate occurs because in very poor countries agriculture makes up the dominant share of both GDP and employment. The depreciation also makes it easier for a country to expand the production of tradables relative to nontradables, with manufacturing being the main tradable. This proposition, which as agricultural labor productivity increases relative to manufacturing labor productivity the real effective exchange rate depreciates, is tested using data drawn from 10 sub‐Saharan African countries.     

The interdependence between the saving rate and technology across regimes: evidence from South Africa

Empirical Economics - This paper hypothesises that the saving rate and technological progress are interdependently determined by a common exogenous source, so that an exogenous shock to the saving...     

Productivity,real exchange rate,and aggregate demand: An empirical exercise applied to Brazil from 1960 to 2011

This research analyzes, from a post Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity, and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: (a) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; (b) understanding the relationship between the real exchange rate and the productivity and growth regimes; (c) proposing a theoretical model that relates the real exchange rate, productivity, and the growth regime; and (d) an empirical test of the interaction between the real exchange rate, productivity, and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity, and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.     

R&D,public innovation policy,and productivity: The case of danish manufacturing

The purpose of this paper is to investigate the relationship between private R&D, public innovation support transferred to the private sector, and productivity in Danish manufacturing. Two main conclusions are established. First, public innovation support has a positive and significant effect on private R&D expenditures with an estimated elasticity of 0.062. Second, the indirect effect on productivity from public innovation support is reflected in a positive point estimate which is found to be robust to different specifications of R&D capital.     

Reserve accumulation and exchange rate policy in China: The authoritarian elite's aim of political survival

Since the Asian financial crisis of 1997–1998, China has significantly increased its foreign exchange reserves. We argue that the resulting abnormal levels of currency reserves accumulated by Chinese authorities are not intended to maximize the citizenry's economic welfare, as in a mercantilist or a precautionary account, but rather to forestall the elite's own political demise. This goal has been pursued mainly by generating large current account surpluses through manipulation of the renminbi exchange rate. The Chinese elite has sought to promote the acceptance of this policy by influencing the costs of collective action taken by winners and losers.     

Fiscal expansion, monetary policy, interest rate risk premia, and wage reactions

We examine the macroeconomic implications of fiscal policy in a small open economy, with emphasis on the interactions between fiscal, monetary and labour market policies. The paper uses the NBNZ-DEMONZ macroeconometric model. Novel features of the model are that it includes an endogenous interest rate risk premium (IRRP), and forward-looking monetary and fiscal policy reaction functions which capture the essence of New Zealand's Reserve Bank and Fiscal Responsibility Acts. The most important empirical result is that the postulated IRRP, proxying financial market mechanisms, can contribute at least as much as the monetary policy reaction function to maintaining price stability. Also of significance are that an income tax cuts package shows more damped real GDP and underlying inflation paths than does an expenditure increases equivalent; and that the inflationary and real sector impacts of a personal income tax cut package depend heavily on how the cut is `shared' between firms and workers. The nature and interdependence of monetary and fiscal policies and labour market conditions are therefore crucial to the macroeconomic outcomes.     

Exchange rate policy during transition to the European Monetary Union: The option of euroization

Countries of central eastern Europe which are candidates for accession to the European Union face fundamental challenges in the conduct of macroeconomic policies. These countries are characterized by growth rates faster than those of EU countries, along with large current account deficits and an equilibrium appreciation of the real exchange rate. In such a context, an early adoption of the euro may be beneficial to central eastern European countries, while the ERM‐II system and the Maastricht criterion on inflation may give rise to serious drawbacks for candidate countries. JEL classification: F15, F41     

The future of mobile shopping: The interaction between lead users and technological trajectories in the Japanese market

This paper uses the concepts of lead users and technological trajectories and the current status of mobile shopping in Japan to forecast the future of mobile shopping. In interviews with more than 100 Japanese and foreign firms between 2000 and 2005, the author investigated the impact of a number of technological trajectories on mobile shopping applications that are suggested to be promising ones based on the behavior of lead users. Push-based Internet mail and other key services that are not yet available in Western markets were the initial drivers of the market for mobile shopping in Japan between 2001 and 2003. Currently, the fastest growing market for mobile shopping in Japan involves the integration of mobile sites with other media such as magazines and radio and television programs where these other media compensate for the small screens of mobile phones. This paper forecasts the impact of improvements along a number of technological trajectories on the integration of mobile sites with other media.