Wealth effects, treasury bill financing, perpetuity financing, and stability

This note re-examines the stabilities of government financing by (a) treasury bills, and (b) perpetuities. In contrast to Currie and Gazioglou, it is shown that the wealth effect on expenditures plays the same role in the financing by treasury bills and by perpetuities.     

Productivity Growth of the Nontradable Sectors in China

Little is known about the total factor productivity of the nontradable sectors in China. In this paper we estimate productivity growth of the nontradable sectors by studying the relative price movements of the nontradable sectors vis‐à‐vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the nontradable sectors have risen significantly faster than those of the tradable sectors since China's accession to the WTO, and as a result China's internal real exchange rate has appreciated faster than the renminbi real effective exchange rate. We also find that the nontradable sectors have seen much lower productivity growth than the tradable sectors. We argue that it is important to raise China's productivity growth in the nontradable sectors through policy actions to achieve growth rebalancing and containing inflationary pressures in the medium run.     

Testing Commitment Models of Monetary Policy in China

In the past decade Chinese inflation was not high on average, but it was quite volatile. Back in the 1980s and 1990s, high inflation was a very real problem. What explains the inflationary dynamics in China? In particular, does monetary policy account for the substantial run-ups of inflation, followed by the equally substantial dis-inflation? In the absence of commitment technologies, the monetary authorities may create surprise inflation to achieve higher growth, while private agents would anticipate that and adjust their decisions accordingly, leading to accelerated inflation without a real impact. Do these types of simple time-inconsistency models of monetary policy explain the dynamic pattern of inflation in China? I show that the long-run and short-run restrictions imposed by discretionary policy, when the time-inconsistent policymaker has a desire to push output above potential, are largely rejected by the data. The estimates of the inflation bias under discretion when the policymaker is asymmetrically averse to recessions are not statistically significant either. The analysis contributes to the understanding of Chinese monetary policy and its inflationary implications and also points to the need of further investigation of inflationary behavior during the economic transition.     

A portfolio model of capital flows to emerging markets

Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy.     

Inflationary expectations and monetary policy: evidence from Bangladesh

This article first estimates inflationary expectations using a Blanchard–Quah VAR model by decomposing the nominal interest rate into expected inflation and the ex ante real interest rate. Then I utilize this expected inflation along with other macroeconomic variables as inputs to the monetary policy function in a recursive VAR model to identify exogenous policy shocks. To calculate inflationary expectations, I assume that ex ante real interest rate shocks do not have a long-run effect on the nominal interest rate. This article finds that the public expects lower inflation for the future during periods of high inflation. Estimated results from the recursive VAR suggest that a contractionary policy shock increases the real interest rate, appreciates domestic currency, and lowers inflationary expectations and industrial output. However, I find a lagged policy response from Bangladesh Bank to higher inflationary expectations.     

Adjustment Costs,Inventories and Output

This paper analyzes the optimal adjustment strategy of an inventory‐holding firm facing price‐ and quantity‐adjustment costs in an inflationary environment. The model nests both the original menu‐cost model that allows production to be costlessly adjusted, and the later model that includes price‐ and quantity‐adjustment costs, but rules out inventory holdings. It is shown that the firm's optimal adjustment strategy may involve stockouts. At low inflation rates, output is inversely related to the inflation rate, and the length of time demand is satisfied increases with the demand elasticity but decreases with the storage cost and the real interest rate.     

Life beyond the Washington Consensus: An Introduction to Pro-poor Macroeconomic Policies

Abstract

This paper develops a rationale for the recession-induced inflation hypothesis. Within a conflicting claims framework we present a model in which both price leaders and organized workers set their nominal prices on the basis of a desired profit rate and a real wage target respectively. We argue that an absolute cost advantage in concentrated industries (for instance in fixed costs) may provide oligopolistic leaders sufficient margin to raise prices and restore a desired level of profitability during a recession. The resultizng unstable income distribution will set off an inflationary spiral if the firm's advantage in selling its output imparts an upward bias to the flexibility of input prices (specifically wages). Taking into consideration different scenarios for workers' bargaining power we present a simple simulation experiment to analyze the inflation and real wage paths of the economy after a negative output shock. When we endogenize output, we show that for a high degree of the bargaining power, output is likely to converge to a higher steady-state value.     

The Real Effects of Transnational Activity upon Investment and Labour Demand within Japan's Machinery Industries

This paper attempts to estimate the real effects of transnational activity upon both investment and labour demand, within each of the five industries that comprise Japan's domestic machinery sector. The study uses a standard model of investment and labour demand, which is augmented to include foreign wages. It is argued that this approach is the most suitable for capturing the real effects of transnational activity, since foreign wages indicate the attractiveness of alternative sites for investment, production and employment. A simultaneous equations estimator is employed and, for each industry, there is evidence that both the behaviour of investment and labour demand are sensitive to foreign wage conditions. The results indicate the extent to which transnational activity has had a real effect upon Japan's domestic machinery sector.     

The Lags of Monetary Policy

The length of the transmission lags from monetary pblicy to output has been the subject of much research over the years, but there are serious problems in isolating the lags with any precision. This paper uses a simple model of Australian output to estimate the length of the lags, and then examines how attempts to grapple with the estimation problems might change the results.
We estimate that output growth falls by about one-third of one per cent in both the first and second years after a one percentage point rise in the short-term real interest rate, and by about one-sixth of one per cent in the third year. This implies an average lag of about five or six quarters in monetary policy's impact on output growth. Each of these estimates is, however, subject to considerable uncertainty. We discuss the implications for policy of these relatively long and uncertain lags. Finally, we find no evidence that the average lag from monetary policy to output growth has become any shorter in the 1990s.     

Estimating labour and output gap: evidence from the Athens Olympic Region in Greece

The present article estimates potential labour and labour gap as well as potential output and output gap using a Cobb–Douglas production function and a Hodrick–Prescott filter. We investigate the Athens Region in Greece by sector of economic activity, with the aid of the non-accelerating wage inflation rate of unemployment concept. The results support the idea that the Athens region seems to be working, mostly, over the regional economy's capabilities, a fact which leads to inflationary pressure.     

Disinflation and the December 1994 Devaluation in Mexico

This paper discusses the determinants of the Mexican peso devaluation of December 1994. An examination of basic economic data reveals the shortcomings of existing explanations based on either inconsistent macroeconomic policies or self-fulfilling prophecies. We argue in contrast that the devaluation was related to the exhaustion of the disinflationary programme launched in the late 1980s, and that the timing of policy change was critically influenced by a conflict between the inherited disinflationary stance and the economic goals of the administration taking office in December 1994. The analysis suggests that a prolonged period of real currency appreciation before the devaluation was made possible not only by the strong inflationary aversion of the authorities but by a series of positive shocks that reduced the appreciation's negative effects.     

Estimating British workers' demand for safety

This paper estimates workers' demand function for job safety using the British General Household Survey data. The estimation employs Rosen's two-stage procedure. The main difference between our study and those done in the past is that we estimate hedonic price equations with data sets from two labour markets. Our approach overcomes the usual identification problems associated with the application of Rosen's method. The estimation shows that there is a significant wage compensation for job risk in the UK. The willingness-to-pay for a 1/100 000 decrease of annual job fatal accident rate from our estimated workers' demand function is about £6 in 1973 prices. The estimation of a demand function for safety also enables the derivation of workers' willingness-to-pay for non-marginal change of job risk, and this can be used for cost-benefit analysis on projects involving such non-marginal changes.     

Estimating the import demand function for China

This paper estimates the import demand elasticity for China using three fully efficient cointegrating regressions and the autoregressive distributed lag (ARDL) method. This paper is the first to accommodate the perception of global risk in an investigation of the information transmission mechanism between the relationship import demand and its determinants in China. The empirical results show that real imports are cointegrated with domestic economic activity, real effective exchange rate, and the perception of global risk. Domestic income is found to have a significantly positive effect on imports. Contrary to theory, the real effective exchange rate carries negative coefficients, which suggests that a decrease in external competitiveness (appreciation) will decrease the level of imports in the case of China. One of the reasons for this may be the tied anti-dumping duty on some import items. Since the perception of global risk adversely affects China's aggregated imports, policy-makers should consider the degree to which the perception of global risk affects the implementation of trade policies.     

Flexible Adjustment in the Age of Financialisation: The Case of Norway

Norway's “Government Pension Fund” – Global (GPF-G) is large (around $400b), portfolio oriented and transparent. It tries to be ethical and has been mooted as a role model for other SWFs. The way the GPF-G is set up undergirds the US vision of a financialised world economy and it even indirectly supports US warfare in Iraq by buying treasury bills. It is also a leader in ethical investments – more than 20 private funds piggyback any divestment decision the GPF-G makes. Understanding the international implications of the GPF-G does not, however, amount to an explanation of why this vehicle was created. This article puts forward the argument that if we want to understand why and how these diverse behaviours cohere into a larger strategic whole, the fund must be interpreted as the continuation and technocratisation of a long established corporatist tradition of foreign economic policy that Peter Katzenstein more than 25 years ago labelled a strategy of flexible adjustment and domestic compensation.     

Real and nominal effects of monetary policy shocks

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989) . Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.     

Endogenous Government Expenditure: A Test of Wagner's Hypothesis For Hong Kong

In the last two decades a revival of interest in wagner's thesis of an endogenous public sector has led to a series of empirical tests of its validity. In its barest essentials, this paper attempts to find efficient estimates of income elasticities of demand for real total government expenditure as well as for its disaggregated functional groups as a means of verifying Wagner's expectation for the Hong Kong economy. Our empirical estimates indicate that Hong Kong's public finance setting is a synchronization of a worldwide tendency for public sector expansion according to the Wagnerian expectation. These findings lead us to raise a number of policy questions concerning the financial sustainability of Hong Kong's budget system over time. [320]     

A macroeconometric analysis of the effects of taxation on financing and real investment in equipment in Canada

This paper analyses the impact of taxation on corporate financing and corporate investment in machinery and equipment in Canada. A coherent macroeconometric model of the firm's real and financial decision process is theoretically developed and empirically tested on Canadian data. Estimates of the impact of taxation in general and of the 1987 Canadian government's White Paper in particular, are analysed. The estimates suggest that income taxation has a negative but relatively small impact on equipment investment in Canada, and that models that ignore the link between the real and financial decisions overestimate the impact of taxation on real investment. With respect to tax reform, the White Paper reduces the incentive to save and invest in equity capital, and is expected to decrease real capital investment in the long run.     

An Investigation into the Major Causes 01 Australia's Recent Inflation and Some Policy Implications*

This paper investigates the major causes of Australia's recent inflation with special emphasis on the 1970s and early 1980s A general model of inflation is formulated based upon a vector auto-regression The main empirical finding is that increases in wages and import prices and more recently in money have been significant causal factors of Australia's inflationary experience. Government current expenditure is found to contribute passively to cost-push inflation     

Profits in the UK economy: some Kaleckian models ∗

Official statistics on profits in the UK economy during the 1980s show a substantial increase in the share of profits in GDP after 1981. However, these figures are based on companies' own returns which have been distorted by changes in accounting practices and taxation, privatization and the arbitrary allocation of profits by multinational companies. Kalecki's theory of profits provides a way of systematically determining gross profits in national income. However, the use of this method is complicated by the absence of data on the distribution of savings and consumption between wages and profits, and Kalecki's own estimates of the equation appear to be flawed in their statistical methodology.

A number of ways of overcoming the distributional problem are explored in this paper, using data from the sectoral capital accounts of the UK during the 1980s. The methodology suggested by Asimakopulos to estimate Canadian profits turns out to be the weakest on theoretical and statistical grounds. All estimates are highly correlated with the officially reported profit series. However, in real terms (defined in Keynes' wage units as a proportion of implied wage income), they all show a profits cycle in which real profits in the second half of the 1980s are lower than they were at the end of the 1970s. The conclusion that there was no upward trend in the profits cycle suggests that the UK government's supply-side policies, designed to make the economy more profitable, did not achieve this purpose during the 1980s.

This article is an investigation of what happened to profits in the UK using Kaleckian models of how profits are determined to supplement the rather unreliable data that is provided by the government's Central Statistical Office. In the course of the investigation, a number of different models derived from Kalecki's fundalmental profits equations are presented. Two of them turn out to have a high correlation with the official published data, but contrary to that information suggest that there has been no upward trend in profits.     

The Balance of Payments Constraint and the Post 1973 Slowdown of Economic Growth in the G7 Economies

This paper presents estimates of export and import demand functions for the G7 economies over the period 1956 to 1995 and over two sub-periods 1956-73 and 1974-95. These estimates are used to construct predictions of the equilibrium growth rates for these economies by use of the 'Thirlwall's Law' relationship. The estimates are consistent with observed cross country growth patterns over the whole sample and the post 1973 period but are less convincing in the pre 1973 sub-period. It is argued that the slowdown in economic growth after 1973 can be partly explained by the growing internationalisation of the world economy coupled with a slowdown in the overall growth of world trade.