The Credibility of the PRC Commitment to a Market Economy in Hong Kong: Hypotheses and Evidence

How credible is China's commitment to a market economy in Hong Kong after 1997? Events signaling changes in commitment and the movement of time closer to 1997 should reduce the relative prices of immobile assets if commitment is not fully credible. Several factors may offset these effects: anticipatory adaption, growing dependence on China-related trade, and Chinese investment in Hong Kong. Analysis of data on incorporation and investment decisions, the relative sensitivity of the stock prices of firms with different asset mobility to political events, and the market for office space most strongly support hypotheses about credibility, adaption, and demand augmentation.     

Price setting behaviour in Latvia: Econometric evidence from CPI micro data

This paper discovers the driving forces behind Latvian firms' decisions to adjust prices by using various panel logit models, which explain the probability of observing price change by a broad set of exogenous variables. The results show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviours. On the one hand, frequency of price changes depends on inflation, demand conditions, and the size of last price changes. On the other hand, we observe some elements of time-dependent price setting like price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour in cases of price increases and decreases. The fact that frequency of price changes in Latvia depends on inflation as well as demand and supply conditions allows for faster price adjustment process in the event of high distortions in the economy.     

PRICE SETTING PRACTICES IN GREECE: EVIDENCE FROM A SMALL‐SCALE FIRM‐LEVEL SURVEY

The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal a low percentage of firms changing prices with frequency higher than annual and staggering of price changes during the year. As to firms’ reactions to unexpected shocks, prices appear to adjust sluggishly to cost shocks with asymmetries in price adjustment across positive and negative shocks. Adjustments to increases in costs appear speedier than those to reductions in demand. The data confirm a result found for other countries: the existence of cross‐sectional variations in price setting strategies and in the extent to which prices are adjusted in reaction to unexpected shocks. The results suggest a positive association between, on the one hand, product market competition and, on the other hand, state‐dependent pricing, frequent price changes and the likelihood of a price adjustment following an adverse demand shock.     

The cyclical behaviour of prices in the U.K.: Some structural time series evidence

The cyclical behaviour of prices in the U.K. is investigated using a sample of annual observations covering the period 1886–1993. A structural time series model relating consumer prices to output is estimated over four sub-periods. The results indicate that prices were procyclical in the inter-war period, countercyclical in the post-1973 period and acyclical otherwise. The proposition that the cyclical behaviour of prices is determined by the dominance of supply or demand shocks alone is disputed on the basis of empirical evidence and theoretical reasoning. It is concluded that the cyclical behaviour of prices cannot be explained just by analysing time series on output and prices and that due attention should be paid to the institutional and policy changes occurring during the period under study. It is demonstrated that the empirical results are consistent with the events experienced by the U.K. economy in the most recent period. First version received: November 1998/final version accepted: October 1999     

Technology,Growth and Employment

The relationship between technology, productivity and employment is a complex one. Increased productivity can lead not just to increased market share, but through falling relative prices can help expand markets, and through product innovation can develop new markets. On the other hand, if demand and hence output does not expand in line with productivity, then an inverse relation between productivity and employment will result. The European Union seeks to improve living standards in Europe by boosting productivity, competitiveness and employment together. How, though, is this to be achieved? This paper looks at the effects on productivity of different forms of investment--in physical capital, in Research & Development, and in human capital. The paper also distinguishes between the high-tech and low-tech sectors. There does appear to be scope for boosting both productivity and employment, particularly in the high tech sectors. But to do so will require increased investment across all three categories--in machinery, in innovation and in people.     

Cyclical fiscal rules for oil-exporting countries

Budget-balance tax-gap rules are preferred to other fiscal policy rules to stabilize the macroeconomic volatility and welfare in oil-exporting countries. The output-inflation trade-off is of particular concern for oil exporters relative to non-oil commodity exporters due to the pass through of oil prices into headline inflation which warrants fiscal reaction to crude oil revenue. This result is robust to several instruments satisfying the rule but with reduced efficiency for those instruments that impact potential output such as government investment and capital taxes. These rules are desirable for fixed exchange rate regimes but are unable to achieve the same degree of stability as when coordinated with inflation-targeting monetary policy. Even under optimal inflation-targeting regimes, the adoption of budget-balance tax-gap rules can produce reductions in macroeconomic volatility and welfare gains.     

Vanishing income redistributions: Keynesian clues about model surprises in the short run

A compact, one-sector version of recent large-scale income distribution models is presented. Different specifications of endogenous and exogenous variables in the model (or assumptions about how it is closed) change its qualitative behavior directly. A ‘Keynesian’ closure in which investment is exogenous and nominal changes in prime cost are passed along into price increases demonstrates relative insensitivity of the functional income distribution to factor prices. An alternative ‘neoclassical’ closure in which investment is endogenous (determined by savings) and output prices are fixed is much more responsive. The large-scale models are closed on Keynesian lines, and also have relatively insensitive functional distributions. If these models adequately describe real economies, causes besides general equilibrium price response must be invoked to explain distributional change.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Examining crop price effects on production decision and resource allocation: an ex-ante approach

This article examines the output price effects on the US crop production, employing an ex-ante approach to the differential systems of input demand and output supply. The estimation results of the differential input demand show that the expansion of crop production leads to an increase in acreage (i.e. extensive margin) and a proportional rise in input usage improving yield per acre (i.e. intensive margin). The substitutable relationship between fertilizer and land supports that crop producers have an option to choose either intensive or extensive margin in response to changes in their relative prices. In addition, the estimation results of the differential output supply highlight that the composition of crop supply can be altered by changes in ex-ante crop prices. The estimation results suggest that crop producers substitute corn supply for the supply of cotton, wheat and soybeans or vice versa. Based on the estimated elasticities, the decompositions of profit-maximizing input demand are conducted, which reveals that a change in ex-ante crop prices is associated closely with resource reallocation.     

The determinants of production-related carbon emissions in West Germany, 1985–1990: assessing the role of technology and trade

This paper examines the determinants of the substantial decline of West German production-related carbon intensity in the face of falling energy prices. A computable general equilibrium model is used to determine the simulated effects of observed changes of world energy prices and domestic energy policy on the sectoral patterns of carbon emissions, energy consumption, output, value-added and other indicators of structural change. The structural changes not accounted for by energy prices and energy policy are attributed to changing patterns of productivity growth in Germany and the rest of the world (ROW) and changing patterns of ROW demand. Weights on these driving forces are selected by least squares. One key finding is that the contribution of ROW productivity and demand patterns to emission-relevant structural change unaccounted for by energy prices and energy policy is just under 30%. The remainder is split almost equally among patterns of domestic autonomous energy efficiency improvement and domestic labor efficiency patterns.     

Trade flows,relative prices,and effective exchange rates: a VAR on Ethiopian data

The dynamic response of trade flows to price and effective exchange rate changes is examined via VAR using quarerly data from Ethiopia for the period 1973(i)–1985(iv). The results show one-way Granger-causality running from prices and exchange rates to imports and exports without significant feedback. Imports and exports exhibit similar response patterns to unexpected changes in relative prices and exchange rates. The responses of imports and exports are larger and the adjustment takes longer when relative prices rather than exchange rates caused a change in international prices. In the long-run, changes in prices account for a larger percentage of the forecast error variances in imports and exports than exchange rate changes. It is shown that devaluation may have an initial adverse effect on the trade balance.     

Factor analysis of demand growth for information technology input in Japan

The purpose of this article is to decompose demand changes for factor input and explore the factor that information technology (IT) capital stock has largely increased in Japan. The Allen partial elasticities of substitution are calculated and the variations in factor input demand are broken down into two effects—price effect and output effect, using industry-level data. From an estimation of the total cost function, the following conclusions are presented. While IT capital stock and ordinary capital stock are complementary, IT serves as a substitute for labor. The factors influencing the high growth rate in IT capital stock are the decrease in the prices of IT and ordinary capital services, and the increase in the labor price, in addition to the output effect. On the other hand, labor demand declines due to both the downward rigidity of wages and the decrease in prices of two kinds of capital services.     

Prices Versus Quantities: Technology Choice,Uncertainty and Welfare

Technological improvements have proven essential in mitigating environmental problems such as climate change, depletion of the ozone layer and acid rain. While it is well-known that price- and quantity-based regulatory instruments provide different investment levels, the effects on the choice between different technologies have received scant attention. This paper expands on the prices versus quantities literature by investigating firms’ technology choice in the face of demand and supply side uncertainty. I show that the regulator can not design tradable emissions permits and an emissions tax such that the two regimes are equivalent, even in terms of expected values. Moreover, a tax encourages the most flexible abatement technology if and only if stochastic costs and the equilibrium permit price have sufficiently strong positive covariance, compared with the variance in consumer demand for the good produced. Finally, the firms’ technology choices are socially optimal under tradable emissions permits, but not under an emissions tax.     

A dynamic model of OPEC trade and production

A dynamic simulation model is presented of the world energy market, covering the period 1974–1995. It is used to assess and rank six possible price or output policies that OPEC may adopt with respect to oil exports, given a range of assumptions relating to such important variables as the rate of growth of domestic absorption of oil revenues within OPEC, the rate of capacity expansion for oil production, the responsiveness of investment in alternative sources of energy to changes in oil prices, and the rate of growth of world demand for energy. Furthermore, an illustrative analysis is given of possible conflict situations within OPEC, and their impact on the choice of price or output policy is discussed. The main conclusion drawn is that the supply response of alternative energy sources to OPEC oil will be the key to predicting whether oil prices will go up or down.     

An investment-function-based measure of capacity utilisation.: Potential output and utilised capacity in the Bank of Italy's quarterly model

Measures of potential output and the output gap are increasingly being developed and used to concisely quantify and monitor the risk of price accelerations stemming from rises in aggregate demand that are not met by a corresponding increase in supply. They often play a prominent role in the price determination mechanisms of macroeconometric models. In this paper we build a measure of potential private-sector value added for the Italian economy that is consistent with the capital accumulation process in the Banca d'Italia's Quarterly Model — and more generally with the rest of the supply-side block of that model. More specifically, we exploit the fact that the investment function can be thought of as a relationship transforming desired gross additions to capacity output into capital accumulation by means of a conversion factor (the optimal capital/output ratio). Thus, if one removes the component of investment decisions that stems from changes in the relative price of the production factors, (i.e. in the optimal capital/output ratio), then a measure of the desired gross addition to capacity may be constructed. The results draw a cyclical picture of the degree of capacity utilisation for the period 1970–1997 that is roughly in line with those produced by the Wharton and Hodrick–Prescott filter approaches, as well as with the pictures resulting from the ISAE, IMF, European Commission and OECD measures of the output gap. Our investment-function-based measure appears to be a promising indicator of the pressure exerted on prices by demand accelerations. Its empirical properties are, on the whole, acceptable and plausible.     

Labor market integration policies and the convergence of regions: the role of skills and technology diffusion

We study the role of different labor market integration policies on economic performance and convergence of two distinct regions in an agent-based model. Production is characterized by a complementarity between the quality of the capital stock and the specific skills of workers using the capital stock. Hence, productivity changes in a region are influenced both by the investment of local firms in high quality capital goods and by the evolution of the specific skill distribution of workers employed in the region. We show that various labor market integration policies yield, via differing regional worker flows, to distinct regional distributions of specific skills. Through this mechanism, relative regional prices are affected, determining the shares that the regions can capture from overall consumption good demand. There occurs a trade-off between aggregate output and convergence of regions with closed labor markets resulting in relatively high convergence but low output, and more integrated labor markets yielding higher output but lower convergence. Furthermore, results differ substantially in several respects as distinct labor market opening policies are applied.     

Dutch disease and the oil boom and bust

This paper examines the impact of the oil price boom in the 1970s and the subsequent bust on non‐oil economic activity in oil‐dependent countries. During the boom, manufacturing exports and output increased significantly relative to non‐oil countries. These measures decreased gradually during the bust and subsequent period of low prices, displaying a positive relationship with oil prices. However, exports of agricultural products sharply decreased during the boom. Imports of all types of goods displayed strong pro‐cyclicality with respect to oil prices. The results suggest that increased local demand and investment spillovers from the windfall resulted in increased manufacturing activity.     

Determinants of international trade flows: The Case of Developing Countries

The question of magnitude and the time path of the trade flows to changes in the exchange rates and to changes in the price level is of emitent practical importance. To assess the above proposition, a distributed lag structure is imposed on the relative prices and on the effective exchange rate as the determinants of trade flows. Then, import and export demand functions are estimated for a sample of developing countries, using the Almon procedure. The empirical findings appeared to sustain Orcutt's early conjecture that trade flows adjust differently to different price stimuli. More precisely, it was found that imports and exports reactions were quicker and the total response time was shorter when an exchange rate, rather than relative prices, caused a change in international prices.     

European Integration and Production in the French Economy

Effects of greater European integration on the French economy are explored with an aggregate cost function. Input direct price elasticities are inelastic, but greatest (absolute value) for capital and lowest for imports. Cross-price elasticities suggest inputs are substitutes and are higher for domestic inputs than domestic input and imports pairs. As trade restrictions fall, effects on domestic input demand may increase as substitution elasticities rise. Inverse output supply price elasticities indicate domestic input prices are relatively important factors affecting consumption goods prices and import prices more important for investment goods. Thus, import price decreases may stimulate investment and growth. (JEL F14 , O10 , O12 )