Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

STRUCTURAL CHANGE AND AGGREGATE EMPLOYMENT FLUCTUATIONS IN CHINA

In developed countries, aggregate employment is strongly procyclical and almost as volatile as output. In China, the correlation of aggregate employment and output is close to zero, and the volatility of aggregate employment is very low. We argue that the key to understanding aggregate employment fluctuations in China is labor reallocation between the agricultural and nonagricultural sectors, and that the income effect plays an important role in determining the labor reallocation dynamics in both the long run and short run.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

SUBSIDIES AS OPTIMAL FISCAL STIMULI

Theoretical macroeconomic models typically take fiscal policy to mean tax‐and‐spend by a ‘benevolent government’ that exploits potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd‐out private consumption and typically reduce welfare. On account of their widespread use to stimulate economic activity, we consider the use of ‘tax‐and‐subsidize’ instead of ‘tax‐and‐spend’ policies. Within a static general equilibrium macro‐model with imperfectly competitive goods markets, we examine the effects of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximize welfare, rendering no intervention suboptimal. We also show that, within a two‐country setting, a Nash non‐cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between governments in setting these rates is more expansionary and leads to an improvement upon the non‐cooperative solution.     

Long‐run Lunacy,Short‐run Sanity: a Simple Model of Trade with Labor Market Turnover*

It is often argued that international trade is all about long‐run relationships. In this paper, we argue that this view is flawed when factor markets are characterized by turnover. Toward that end, we provide a simple dynamic model of trade with labor market turnover and show that the relationship between the economy's short‐run and long‐run behavior is more complex than in traditional trade models. For example, in the short run, the economy may produce outside of its long‐run frontier. We show that focusing on long‐run relationships can lead one to draw faulty policy conclusions, while focusing on its short‐run behavior restores sanity. The implication is that in the presence of factor market turnover, international trade issues can only be understood by studying the entire dynamic path of the economy. Long‐run relationships should be ignored.     

HOW LARGE WILL BE THE EFFECT OF CHINA'S FISCAL STIMULUS PACKAGE ON OUTPUT AND EMPLOYMENT?

This paper estimates the effect of China's fiscal stimulus package on output and employment. The input–output analysis shows that the package has a multiplier of approximately 0.84 in the short run, generating 18–20 million new jobs in non‐farming sectors in the first year. A dynamic structural model shows that the multiplier is around 1.1 in the medium run as fiscal spending leads to higher household consumption and corporate investment over time. The size of the fiscal multiplier also depends on the cyclical conditions of the economy, the policy environment and the distribution of funds across sectors.     

Shocking the eurozone

In this paper, the monetary transmission mechanism within the European Monetary Union is investigated. The impulse response functions and forecast error variance decompositions of a structural vector error correction model (SVECM) are compared with those of a New Keynesian theoretical model. The identifying restrictions of the SVECM are directly derived from the theoretical model. Two permanent shocks are identified, one having only nominal, and one having only real effects. The three transitory shocks comprise a short-term interest-rate shock, an aggregate demand shock and a money demand shock. The main conclusions are that permanently reducing the inflation objective depresses output in the first year, but has no real effects in the long run. Regarding output variability, the results indicate that aggregate demand shocks are most important during the first year, after which aggregate supply shocks dominate.     

总需求和总供给冲击对我国失业和产出动态关系的影响分析

在我国的失业产出关系中,短期内,总供给冲击是产出波动的主要来源,总需求冲击则是失业波动的主要来源,总需求冲击和总供给冲击共同破坏了产出失业之间反向变化关系,但是总需求冲击的破坏作用更多一些。在长期,总需求冲击对产出没有影响,总供给冲击对产出有显著的正的影响,总需求冲击在长期对失业没有影响,但总供给冲击在长期会对失业产生不利影响,即正的供给冲击的累积影响所带来的产出增加在长期使我国的失业率上升。     

The Displacement Effect of Labour‐Market Programs: MONASH Analysis*

A key question concerning labour‐market programs is the extent to which they generate jobs for their target group at the expense of others. This effect is measured by displacement percentages. We describe a version of the MONASH model designed to quantify the effects of labour‐market programs. Our simulation results suggest that: (i) labour‐market programs can generate significant long‐run increases in employment; (ii) displacement percentages depend on how a labour‐market program affects the income trade‐off faced by target and non‐target groups between work and non‐work; and (iii) displacement percentages are larger in the short run than in the long run.     

TESTING CATCHING‐UP BETWEEN THE DEVELOPING COUNTRIES: “GROWTH RESISTANCE” AND SOMETIMES “GROWTH TRAGEDY”

This paper provides empirical evidence that there is no convergence between the GDP per‐capita of the developing countries since 1950. Relying upon recent econometric methodologies (non‐stationary long‐memory models, wavelet models and time‐varying factor representation models), we show that the transition paths to long‐run growth (the catch‐up dynamics) are very persistent over time and non‐stationary, thereby yielding a variety of potential steady states (conditional convergence). Our findings do not support the idea according to which the developing countries share a common factor (such as technology) that eliminates per‐capita output divergence in the very long run. Instead, we conclude that growth is an idiosyncratic phenomenon that yields different forms of transitional economic performance: growth tragedy (some countries with an initial low level of per‐capita income diverge from the richest ones), growth resistance (with many countries experiencing a low speed of growth convergence), and rapid convergence.     

THE J‐CURVE AT THE INDUSTRY LEVEL: EVIDENCE FROM TRADE BETWEEN THE US AND AUSTRALIA*

Previous studies that tested the J‐curve phenomenon for Australia used trade data either between Australia and the rest of the world or between Australia and its trading partners on a bilateral basis. They were unable to find support for the J‐curve in the short run nor any significant relation between the trade balance and the exchange rate in the long run. In this paper we disaggregate the data between Australia and its second largest trading partner, the US, and consider the trade between 108 industries. Using annual data over the 1962–2003 period and bounds testing approach to cointegration and error‐correction modelling, we are able to discover short‐run effects of currency depreciation on the trade balance in 64 industries. The long‐run and positive effects were only evidenced in 35 cases, supporting the J‐curve.     

Aid,institutions and economic growth in sub‐Saharan Africa: Heterogeneous donors and heterogeneous responses

This study contributes to the aid‐effectiveness debate using panel data from 43 sub‐Saharan African countries over the period 1980–2013. Its novelty lies in assessing the intermediary role of institutions and the importance of recipient and donor heterogeneity. The long‐run growth effect of (aggregate) aid from “traditional” donors is robustly non‐positive, and the indirect effect is negative. Disaggregation reveals donor heterogeneity. Chinese aid outperforms aggregate aid from traditional donors with respect to growth; however, it has a negative institutional effect. Recipient heterogeneity is largely a short‐run phenomenon, with only a few countries showing some deviations from shared long‐run parameter sets. Comparing donor behavior suggests that the future of aid would benefit more from focusing on quality – particularly, specialization and donor alignment.     

Monetary shocks,exchange rates and trade balances: Evidence from inflation targeting countries

This paper investigates the relationship among monetary policy shocks, exchange rates and trade balances in five Inflation Targeting Countries (ITCs). The investigation is based on Structural Vector Error Correction Models (SVECMs) with long run and short run restrictions. The findings reveal that a contractionary monetary policy shock leads to a decrease in price level, a decrease in output, an appreciation in exchange rate, and an improvement in trade balance in the very short run. Our findings contradict the findings of price, output, exchange rate and trade puzzles that have been found in many empirical studies. Furthermore they are consistent with the theoretical expectations regarding the effect of a contractionary policy. The only long run restriction that we imposed on our models is that money does not affect real macroeconomic variables in the long run, which is consistent with both Keynesian and monetarist approaches.     

How justified is abandoning money in the conduct of monetary policy in Australia on the grounds of instability in the money‐demand function?

The role of money in the design and conduct of monetary policy has reemerged as an important issue in both advanced and developing economies, especially since the 2007 global financial crisis. A growing body of recent literature suggests that the causal relationship between money supply growth and inflation remains intact across countries and over time and that this relation is not conditional on the stability of the money‐demand function or whether money is endogenous or exogenous. Moreover, critical for a rule‐based monetary policy is the presence of a long‐run stable money‐demand function, rather than a short‐run money‐demand model that may exhibit instability for many reasons, including problems with estimating a money‐demand model with high‐frequency data. Provided that a stable money‐demand function exists, it could be useful to establish long‐run equilibrium relations among money, output, prices, and exchange rates, as the classical monetary theory suggests. Within this analytical framework, this paper addresses the question of whether money has any role in the conduct of monetary policy in Australia. The conventional wisdom is that the money‐demand function in Australia has been unstable since the mid‐1980s due to financial deregulation and reforms; this led to a change in the strategy of monetary policy for price stability in the form of inflation targeting that ignores money insofar as inflation and its control are concerned. This paper reports empirical findings for Australia, obtained from a longer quarterly data series over the period 1960Q1–2015Q1, which suggest that instability in the narrow‐money‐demand function in Australia was primarily due to the exclusion of variables which have become important in the deregulated environment since the 1980s. These findings are confirmed by an expanded form of the narrow‐money‐demand function that was found stable over the past two decades, although it experienced multiple structural breaks over the study period. The paper draws the conclusion that abandoning the monetary aggregate as an instrument of monetary policy in Australia, under a rule‐based monetary policy such as inflation targeting, cannot be justified by instability in the money‐demand function or even by lack of a causal link between money supply growth and inflation.     

Aggregate Fluctuations and International Migration

In this paper, we study the role of short‐run factors such as business cycles or changes in employment rates in explaining international migration flows. First, we derive a model of optimal migration choice predicting that short‐run economic fluctuations trigger migration flows on top of the impact exerted by long‐run factors. Second, we empirically test the magnitude of the effect of these short‐run factors on migration flows. Our results indicate that both aggregate fluctuations and employment rates affect migration flows. Third, we provide evidence that the Schengen Agreement and the euro significantly increased the international mobility of workers between the member countries.uuuü     

The Trickle‐down Effect of the Mining Boom in Australia: Fact or Myth?

This paper examines the relationship between the output levels in the mining sector and various non‐mining sectors in an attempt to understand the role of the mining sector in Australia. The unobserved components time series model is used to estimate the effects of the output gap and the growth regime in the mining sector on the output level of each of several non‐mining sectors. Overall, the estimates obtained do not suggest an overwhelmingly positive effect running from the mining sector to other production and services sectors, implying that the trickle‐down effect of the mining boom may be a myth.     

HYSTERESIS AND THE NAIRU IN THE EURO AREA

This paper analyses the Nairu in the Euro Area and the influence that hysteresis had on its development. Using the Kalman‐filter technique we find that the Nairu has varied considerably since the early 1970s. The Kalman‐filter technique is applied here using explicit exogenous variables. In order to test for hysteresis, the dependence of the Nairu on actual unemployment and long‐term unemployment is estimated and found to be significant for the Euro Area and Germany, respectively. The existence of hysteresis effects implies the possibility of a long‐run non‐superneutrality of monetary policy.     

On Persistent Demand Shortages: A Behavioural Approach

We incorporate two sets of behavioural assumptions, fairness concerns and insatiable desire for money, into a dynamic optimization model to illuminate how they can generate persistent aggregate demand shortages. We obtain the conditions for persistent unemployment and temporary unemployment. Policy implications differ significantly between the two cases. A monetary expansion raises private consumption under temporary unemployment but not under persistent unemployment. A fiscal expansion may or may not increase short‐run private consumption but crowds out long‐run consumption under temporary unemployment. Under persistent unemployment, however, a fiscal expansion always increases private consumption. The “paradoxes of toil and flexibility” also appear.     

ECONOMIC UNCERTAINTY,MONETARY UNCERTAINTY AND THE DEMAND FOR MONEY IN AUSTRALIA

The demand for money and its stability in Australia has received a great deal of attention in the past and has resulted in its own literature. Depending upon estimation method and period of analysis, previous research has provided mixed findings. By including a measure of economic uncertainty and a measure of monetary uncertainty (both GARCH‐based) in the long‐run money demand for M3, and by using the bounds testing approach under which variables could be stationary or non‐stationary, we provide strong evidence that the M3 money demand in Australia is stable. Both uncertainty measures do have short‐run as well as long‐run effects on the demand for M3 in Australia, factors that previous research did not consider.     

A dynamic macroeconomic model with monopolistic behavior in the labor market

Is the monopolistic behavior of a wage setting labor union compatible, in the long and in the short run, with price stability and full employment? What is the effect, if any, of economic policies? The answers are strongly affected by the prevailing technology and by the union's objective function. With limited short run production possibilities, a short run trade-off may exist between full employment and maximum expected real wage revenues. In the long run, however, when expectations are fully adjusted, this trade-off disappears. Therefore, a labor union consistently pursuing maximum short run expected real wage revenues may not maximize long run effective real wage revenues. Price stability is granted in the long run, provided inflation is not induced by public policy. The only instrument a pure consuming government has to fight long unemployment is to reduce its share of aggregate demand.