A two-sector Kaleckian model of growth and distribution with endogenous productivity dynamics

This study extends a two-sector Kaleckian model of output growth and income distribution by incorporating endogenous labour productivity growth. The model is composed of investment goods and consumption goods production sectors. The impact of a change in wage and profit shares on capacity utilisation and output growth rates at the sectoral and aggregate levels are identified. The study reveals short-run cyclical capacity utilisation rates and productivity growth dynamics. Even if the short-run steady state is stable, the capital accumulation rate in the consumption goods sector must decrease more than that in the investment sector for long-run stability. When simultaneous rises in profit shares in both the sectors affect long-run aggregate economic growth differently at a steady state, the distributional interests between the same class in different sectors may hamper the long-run economic growth. A policy message is that the effect of income distribution on industrial output growth is not always beneficial. These phenomena are specific to two-sector models and cannot be observed when using conventional aggregate growth models.     

Liquidity traps, learning and stagnation

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

Inflation Targeting versus Nominal Income Targeting

In this paper we analyze two different target regimes, flexible inflation targeting and nominal income targeting, under discretion in a simple dynamic macro model. The key results of our paper are: First, for both targeting regimes optimal monetary policy response leads to a shock-dependent feedback rule. Second, a demand shock is completely offset by both monetary strategies. Third, in case of a supply shock there is a significant difference between the two different targeting regimes. Under inflation targeting the policy makers face a trade-off between inflation and output stabilization. This trade-off depends on the weight Φ the policy makers attach to output stabilization relative to inflation stabilization in the loss function. In contrast, under nominal income targeting policy makers face a constant trade-off between inflation and real output growth: an increase in inflation leads to a fall in real output growth by an equal amount. Furthermore, in Appendix A we analyze a (linear) commitment solution for inflation targeting and compare it with the discretionary case. Under commitment, inflation is smaller and the output gap is larger than under discretion. In Appendix B, we investigate inflation targeting in a two-period time-lag version of the model. The qualitative results on the trade-off between inflation and output growth remain the same as in the basic model without time lag. Received May 3, 2000; revised version received December 3, 2001 Published online: February 17, 2003     

Bond risk premiums and optimal monetary policy

The bond yield dynamics implied by a welfare-maximizing monetary policy and its credibility are explored in general equilibrium. Credibility is captured by a regime change from discretion to commitment. The policy determines the optimal output and inflation responses to a source of inflation risk. Bond yields contain compensations for this risk that depend on the policy. Credibility improvements reduce the exposure to inflation risk and bond risk premiums decline. A model calibration implies lower yield spreads, less volatile yields, and reduced deviations from the expectations hypothesis under commitment. The model suggests an explanation for changes in yield dynamics in the U.S. across different policy regimes.     

Data uncertainty and the role of money as an information variable for monetary policy

In this study, we perform a quantitative assessment of the role of money as an indicator variable for monetary policy in the euro area. We document the magnitude of revisions to euro area-wide data on output, prices, and money, and find that monetary aggregates have a potentially significant role in providing information about current real output. We then proceed to analyze the information content of money in a forward-looking model in which monetary policy is optimally determined subject to incomplete information about the true state of the economy. We show that monetary aggregates may have substantial information content in an environment with high variability of output measurement errors, low variability of money demand shocks, and a strong contemporaneous linkage between money demand and real output. As a practical matter, however, we conclude that money has fairly limited information content as an indicator of contemporaneous aggregate demand in the euro area.     

Welfare improving distributionally neutral tax reforms

In a new model with incomplete markets, I quantitatively determine tax reforms that are welfare improving, distributionally neutral, and leave the budget balance unchanged in the long run. I consider a new reform. I eliminate capital income taxation and replace it with progressive consumption taxation, consisting of taxing necessities and luxuries at different rates. I compare steady states under various tax regimes. I find that progressive rather than uniform consumption taxation generates higher welfare gains in the long run and during the transition to the steady state. While this type of reform achieves redistribution neutrality only in the long run, it generates welfare gains for the whole population during the transition.     

Optimal monetary policy in a small open economy with inflation and output persistence

We study optimal monetary policy for a small open economy in a model where both inflation and output show persistence. We incorporate habit formation into intertemporal consumption decision and modify the Calvo price setting to include indexation to past inflation. The message conveyed from this study can be viewed as twofold. First, full stabilization of domestic prices or the output gap is not optimal policy. This is because stabilization of the output gap leads to serial correlation in domestic inflation, whereas under full stabilization of domestic prices the output gap displays some serial correlation. It is, however, shown that at the zero inflation steady state, stabilizing domestic prices is equivalent to stabilizing the output gap. Second, in the presence of foreign income shock inflation and the output gap are more stable under flexible CPI inflation targeting than under other alternative policy regimes considered.     

Policy trade-off in the long run: A new Keynesian model with technological change and money growth

In this study, we introduce a constant rate of technological change and money growth into the standard new Keynesian model, in which both prices and nominal wages are supposed to be sticky. Using such a model, we examine whether a policy trade-off exists between curbing inflation and stabilizing the welfare-relevant output gap in the steady state. If we take only price stickiness into consideration, a policy trade-off does not occur. However, if both nominal wage stickiness and price stickiness are taken into consideration, a policy trade-off occurs.     

Only income diverges: A neoclassical anomaly

The neoclassical growth model (NGM) is only consistent with the absolute divergence in output levels we observe if some determinants of steady state income are also diverging. In this paper we show that accumulation rates of physical and human capital are actually significantly converging, as are openness to trade and several variables measuring institutional quality. Output divergence in the face of input, policy and institutional convergence is a deep anomaly for the NGM.     

Foreign output shock in small open economies: A welfare evaluation of monetary policy regimes

We examine the impact of negative foreign output shocks, which entail negative demand side effects by lowering exports and positive supply side effects by lowering oil prices, on the welfare of non-oil producing, small open economies under five exchange rate and monetary policy regimes. We use a dynamic stochastic general equilibrium model with parameter values calibrated for Hong Kong, Israel, Singapore, South Korea and Taiwan. We find that welfare levels among the five policy regimes depend on the economy's share of oil imports in world oil consumption. Hong Kong, Singapore and Israel, which have smaller shares, maximize welfare under the Taylor rule, which targets both CPI inflation and real output. South Korea, with higher shares, and Taiwan, with more rigid prices, maximize welfare under real output targeting. CPI inflation targeting, nominal output growth targeting and fixed exchange rate regimes generate lower welfare. However, optimal monetary policy, which generates the highest welfare, gives greater weight on real output than CPI inflation.     

A Model of Structural Change and Openness: Applications to the Argentine economy

This paper describes a dynamic, multisectoral model of a less developed economy in which investment and income distribution policies influence structural change and the pattern of trade. That is, the model considers a Keynesian 'socialised investment' function and distributional policies that, by their effect on demand, could be also described as Keynesian. The model is used to analyse the effects of different policy regimes in the Argentine economy. In an environment characterised by enduring stagnation, investment policies aimed at increasing the degree of economic autonomy and self-sufficiency do not succeed in significantly changing output and trade patterns, and in reducing the degree of openness of the economy. From a long term perspective, however, stagnation is not necessarily a permanent condition. A new environment of higher growth could evolve from the consolidation of a new technological paradigm and the emergence of new socioeconomic norms and mechanisms. In an environment of lower uncertainty and higher efficacy of the investment, model simulation shows that investment policy is quite successful in augmenting the degree of autonomy and self-sufficiency of the economy. Also, income redistribution has a positive impact on income and welfare growth.     

A monetary theory with non-degenerate distributions

We construct and analyze a tractable search model of money with a non-degenerate distribution of money holdings. Analytical tractability comes from modeling decentralized exchange as directed search, which makes the monetary steady state block recursive. By adapting lattice-theoretic techniques, we characterize individuals? policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists and provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate. Moreover, we analyze the properties of this distribution.     

Temporary bubbles

This article studies the dynamics of an overlapping generations model with capital, money and cash-in-advance constraints. The economy can exhibit two different regimes. In the first one, the cash-in-advance constraint is binding and money is a dominated asset. In the second one, the constraint is strictly satisfied and money has the same return as capital. When the second regime holds on a finite number of periods, we say that the economy experiences a temporary bubble. We prove that temporary bubbles can exist in an economy, which would experience under-accumulation without money. We also show that cyclical bubbles may occur.     

On wage- and profit-led demand regimes: learning from the evidence

Abstract

This paper contributes to the empirical research around the “wage-led” or “profit-led” demand regimes. It first reviews how Kalecki, and then Steindl, approached the relationship between economic growth and income distribution. Then, empirical analysis carried out under the probabilistic approach to econometric modeling shows statistical evidence, estimated through cointegration analysis, that in the long run, in three very open economies—Mexico, France, and Korea—the wage share is positively associated with demand and output. It finally discusses the macroeconomic dilemma that almost all countries have to face, i.e., a positive effect of a high-wage policy on demand and employment may diverge from a negative effect on output compatible with external equilibrium.     

A Spatial Econometric Analysis of Cultural Dimensions,Technology Knowledge and Economic Growth

Using data from 65 countries over the period 1980–2003, this paper investigates the role that cultural dimensions play in the process of technological change, innovation and adoption and consequently on the steady state level of output per worker and its growth, using spatial econometrics techniques to account for spatial dependence between countries. Initial findings indicate that differences across cultural dimensions act as a leveling effect but not as long run growth determinants. In addition, when controlling for physical and human capital accumulation, culture plays a much smaller role in explaining differences in income per capita than initially thought, with little effect on output per worker growth along the transitional dynamics path. Spatial econometric considerations are relevant in explaining differences across rates of growth of per worker output, but not in terms of steady‐state levels of income.     

The role of fiscal policy in the St. Louis model: Nonparametric estimates for a small open economy

This paper reevaluates the efficacy of monetary and fiscal policies and bidirectional causality between income and each of the policy instruments used in the St. Louis model for aggregate demand using nonparametric (or infinite parametric) spectral methods. We proceed by estimating the strength of the correlations (or partial coherences) between income and each of the policy instruments over various frequencies. Then we obtain the corresponding band regression and Hannan's efficient estimates of both the lead and lag coefficients in the St. Louis model. The analysis is carried out with seasonally adjusted quarterly data and is divided into the flexible, fixed, and managed flexible exchange rate regimes. We find that while estimates from parametric regressions yield the standard conclusions for the St. Louis model, results from the nonparametric analysis are quite different. Specifically, the results of our analysis reveal that (i) both monetary and fiscal instruments are strongly correlated with income over cycles of 10 quarters or longer for the most recent period of the managed flexible exchange rate regime, and (ii) bidirectional causality exists between income and the fiscal policy instrument. These results suggest that both monetary and fiscal policy have a long-lasting effect on aggregate demand and that bidirectional causality exists between income and policy instruments. An explanation for the existence of bidirectional causality might be that the Canadian government generally pursued a purposeful discretionary fiscal policy during the post-World War II period. Furthermore, it appears that discretionary policy action may have been anticipated by rational, farsighted, and forward-looking economic agents. Finally, our results for the flexible exchange rate and fixed rate regimes are in agreement with the Mundell-Fleming view of the role of monetary fiscal policy in an open economy.     

Demand and supply effects of bargaining power shocks

In times of crisis, social partners may consider a temporary decline in wages as a necessity to maintain employment. This paper studies the opposing demand and supply effects following declining bargaining power of workers in a New-Keynesian model with search and matching in the labour market. Lower labour income reduces aggregate demand in the presence of credit-constrained consumers. The main result is that falling bargaining power contracts output notably when monetary policy is constrained by the zero lower bound or when agents' expectations about the persistence of the shock adjust slowly.     

Public Expenditure,Environment, and Economic Growth

This paper attempts to develop a model of endogenous growth with special consideration to the role of productive public expenditure in the presence of congestion effect of private capital and environmental pollution. We analyze the properties of the optimal fiscal policy in the steady‐state equilibrium when the level of production of the final good is the source of emission. Government allocates its income tax revenue between pollution abatement expenditure and productive public expenditure. In the steady‐state equilibrium, optimum ratio of productive public expenditure to national income is less than the competitive output share of the public input; and this ratio varies inversely with the magnitude of the emission‐output coefficient. The steady‐state equilibrium appears to be a saddle point; and the market economy growth rate is not necessarily less than the socially efficient growth rate in the steady‐state equilibrium.