Optimal Monetary Policy with Price and Wage Rigidities

In this paper, I search for an optimal configuration of parameters for variants of the Taylor rule by using an accurate second‐order welfare‐based method within a fully microfounded dynamic stochastic model, with price and wage rigidities, without capital accumulation. A version of the model with distortionary taxation is also explicitly tested. The model is solved up to second‐order solution. Optimal rules are obtained by maximizing a conditional welfare measure, differently from what has been done in the current literature. Optimal monetary policy functions turn out to be characterized by inflation targeting parameter lower than in empirical studies. In general, the optimal values for monetary policy parameters depend on the degree of nominal rigidities and on the role of fiscal policy. When nominal rigidities are higher, optimal monetary policy becomes more aggressive to inflation. With a tighter fiscal policy, optimal monetary policy turns out to be less aggressive to inflation. Impulse‐response functions based on second‐order model solution show a non‐affine pattern when the economy is hit by shocks of different magnitude .     

Export orientation and domestic merger policy: theory and some empirical evidence

Abstract.  Recent 'open‐economy industrial organization' literature finds export orientation enhances the weight of post‐merger international competitive gains, favouring lenient domestic merger policy. However, mergers seldom generate the 'significant synergies' supportive of international competitive gains. Since a joint‐economies‐of‐production effect suggests domestic mergers tend to generate international competitive losses (not gains), export orientation favours strict (not lenient) domestic merger policy. We show how non‐synergistic domestic mergers in the presence of international sales might reduce national welfare and incur stringent merger reviews. A panel data set of U.S. merger policy by manufacturing sector, 1990–2001, empirically supports export orientation, leading to strict merger policy. JEL classification: L40, F10     

An Empirical Analysis of Cost Efficiency in Non‐profit and Public Nursing Homes

Abstract *** :  This paper examines the issue of cost‐efficiency in Switzerland's nursing homes, an issue of concern to policy makers because of the rapid growth of elderly care expenditure and the aging of the population. The fact that nursing homes in Switzerland exist in different institutional forms, private for‐profit, government and non‐profit status, raises the issue of their relative cost efficiency. A panel data of 17 public and 19 nonprofit nursing homes operating over the 9‐year period from 1993 to 2001, in one of the 26 Swiss cantons, Ticino, is studied. Ticino's nursing homes are heavily regulated and monitored by the canton's authorities. However, given that in public firms there are more bureaucratic constraints and agency problems, one can expect a relatively low level of cost‐efficiency. In this paper the effect of institutional form on efficiency is studied using a translog stochastic cost‐frontier model. Several specifications are used to study the robustness of the results. The results suggest that the institutional form influences the efficiency of the studied nursing homes in that non‐profit foundations are likely to be more cost‐efficient than the nursing homes operated by government administration. The results also suggest that a great majority of the nursing homes in the sample do not fully benefit from scale economies. This implies that efficiency gains can be obtained with larger capacities or joint operations .     

The Impact of the Rating Agencies' Through‐the‐cycle Methodology on Rating Dynamics

Surveys on the use of agency credit ratings reveal that some investors believe that credit‐rating agencies are relatively slow in adjusting their ratings. A well‐accepted explanation for this perception on rating timeliness is the through‐the‐cycle methodology that agencies use. Through‐the‐cycle ratings are intended to measure default risk over long investment horizons and to respond only to changes in the permanent component of credit quality. A second aspect of the through‐the‐cycle methodology is the prudent migration policy. In a benchmark study with a financial ratio‐based credit‐scoring models – an agency‐rating prediction model and default‐prediction models with various time horizons – we confirm the exclusive focus of agencies on the permanent component of credit quality and we model and quantify the agencies' prudent migration policy. A rating migration is triggered only when the rating predicted by the agency‐rating prediction model differs by at least a threshold level of 1.8 notch steps from the actual agency rating. If triggered, ratings are only partly adjusted by 70 per cent at the downside and 60 per cent at the upside. From a 1‐year point‐in‐time perspective, weighting temporary fluctuations in credit quality, the through‐the‐cycle methodology lowers the rating‐migration probability by a factor of 3.5. Both aspects of the through‐the‐cycle methodology contribute equally to this factor. The partial adjustment of ratings lowers the rating‐reversal probabilities on short term and introduces rating drift, the known serial correlation in agency‐rating migrations.     

Church‐based Credit Cooperatives in Germany

Abstract The traditional business focus of credit co‐operatives is locally oriented and business success is explained by the efficient way to induce monitoring of borrowers. Church‐based credit co‐operatives in Germany are not that locally oriented but were extraordinary successful over the last decades. First, this analysis describes the special characteristics of church‐based institutions compared to other credit co‐operatives. This part is based on a historical backward glance, an analysis of annual reports and a survey on their business policy. Second, we discuss the special characteristics of church‐based credit co‐operatives to explain the business success in a broader context and to understand the perspectives of credit co‐operative banking beyond the local orientation.     

Regulating Public Transit Networks: How do Urban‐Intercity Diversification and Speed‐up Measures Affect Firms’ Cost Performance?

Abstract Empirical studies on the cost structure of Public Transit Networks are mainly based on specialized firms providing urban or intercity services. In this study we estimate a translogarithmic variable cost function to assess the behaviour of returns to scale and the impact of network characteristics. The analysis is based on a sample of 45 Italian municipal companies observed from 1996 to 1998 and including both specialized and mixed transit operators. Results confirm previous evidence on the existence of natural monopoly in the industry and support a regulation introducing competitive tenders to access to the market. In addition, we provide insights about the advantages associated with urban‐intercity diversification and with the improvement of network commercial speed. Cost benefits can then be achieved by promoting mergers between neighbouring firms, so as to create new companies operating on integrated local networks and supplying in combination urban and intercity public transport. Implications of such a strategy for the design of tender mechanisms are also underlined, together with the need for a regulatory policy which takes more care of speed‐up measures.     

Regulation under Financial Constraints

Abstract This article studies a simple procurement problem (Laffont and Tirole,1993) where the regulator faces a cash‐in‐advance constraint. The introduction of such a constraint not only reduces the amount of public good provided but also limits the instruments available to the regulator. The wealth constraint could change the optimal regulatory contract from a two‐part tariff, where the quantities produced depend on the firm's cost, to a less efficient fixed fee where the firm produces the same quantity whatever its cost .     

Money, capital, and real liquidity effects with habit formation

Abstract.  The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short‐ and long‐term real interest rates. The adjustment of the capital stock is non‐monotonic. Employment and the short‐ and long‐term real interest rates may also adjust non‐monotonically. JEL classification: E22, E52, E58     

The performance and robustness of simple monetary policy rules in models of the Canadian economy

Abstract.  In this paper, we evaluate seven simple monetary policy rules in a wide range of models of the Canadian economy. Our results indicate that none of the seven simple policy rules we examined is robust to model uncertainty, in that no single rule performs well in all models. In fact, our results show that the performance of some of the simple rules, particularly rules with interest rate smoothing and rules with a high coefficient on the inflation gap, can substantially deviate from that of the optimal rule and can even be unstable in some models. Furthermore, we find that "open‐economy" rules do not perform well in many models. We find that adding an exchange rate term to a simple policy rule often increases the value of the policy‐maker's loss function. Although it is not robust, we find that a simple nominal Taylor‐type rule that has a coefficient of 2 on the inflation gap and 0.5 on the output gap outperforms the other simple rules in a certain class of models. However, even in those models, the loss‐function value of this simple rule can be substantially higher than that of the optimal or base‐case rule. JEL classification: E52, E58     

Are migrants more skilled than non‐migrants? Repeat,return, and same‐employer migrants

Abstract.  I examine the determinants of inter‐state migration of adults within western Germany, using the German Socio‐Economic Panel from 1984–2000. Migrants who do not change employers represent one‐fifth of all migrants and have higher education and pre‐move wages than non‐migrants. Skilled workers thus have a low‐cost migration avenue that has not been considered in the previous literature. Other migrants are heterogeneous and not unambiguously more skilled than non‐migrants. I confirm that long‐distance migrants are more skilled than short‐distance migrants, as predicted by theory, and I show that return migrants are a mix of successes and failures. Most repeat migration is return migration. JEL classification: J6     

Incomplete Information, Trading Costs and Cross‐autocorrelations in Stock Returns

This paper provides an economic rationale for the cross‐autocorrelation patterns in stock returns in the context of a microstructure model in which investors have incomplete information. The paper shows that in a market in which investors are informed about only a sub‐set of stocks, the emergence of lead‐lag, cross‐autocorrelations is a function of the cost of trading in other stocks based on information about the sub‐set of stocks. If cross‐trading costs are high, informed investors will trade only in the sub‐set of stocks they are informed about; if cross‐trading costs are moderate, informed investors will randomize between trading and not trading in other stocks; and if cross‐trading costs are low, they will trade in all stocks. When informed investors trade only in a sub‐set of stocks, prices of stocks with more informed trading will adjust to common factor information faster than the prices of stocks with less informed trading giving rise to asymmetric lead‐lag cross‐autocorrelations. When informed investors trade in all stocks, asymmetric lead‐lag cross‐autocorrelations will disappear as a result of their cross‐market arbitrage trading. These results provide a number of testable implications for lead‐lag cross‐autocorrelation patterns. The data is consistent with the empirical predictions .
(J.E.L.G12, G14).     

Market Power and Emissions Trading: Theory and Laboratory Results

Policymakers are concerned with market power being exploited by dominant firms in emission permit markets. Two types of market power may emerge: simple and exclusionary manipulation. Simple manipulation should result in reduced pollution‐control cost relative to command‐and‐control regulation. Exclusionary manipulation may result in increased cost. The paper reports results of an economic experiment to determine whether (i) such opportunities are successfully exploited when a dominant firm has the opportunity to do so, and (ii) the resulting outcomes are serious enough to merit consideration by regulators. Market power outcomes emerge and market efficiency is far below predicted levels.     

Network externalities, discrete demand shifts, and submarginal‐cost pricing

Abstract.  The introduction of a new product often causes a massive (discrete) demand shift to the new product. This study demonstrates that if a large‐scale demand shift to a new product is accompanied by network externalities, it may result in 'submarginal‐cost pricing,' by which the seller sets its price below the marginal cost. This finding casts new light on dumping and safeguard issues in the real world. JEL classification: D42     

Health investment, saving, and public policy

Abstract.  This paper develops an overlapping‐generations model in which agents invest in health to prolong life in both working and retirement periods. It explores how unfunded social security with or without health subsidies affects life expectancy, economic growth, and welfare. In particular, by extending life at a possible cost of capital accumulation, health subsidies and a pay‐as‐you‐go pension can improve welfare, especially in the short run. JEL classification: I12, J14, J18, O11     

Parallelism in the Lab and the Field: Testing Robustness of the Minimum‐Contributing‐Set Mechanism

Efforts to "test" public‐goods provision mechanisms in field settings encounter a fundamental obstacle: investigators cannot determine whether the aggregate valuation of the public good exceeds the cost. Experimental laboratory settings can fix the provision of the public good to be efficient. This allows investigation of the performance of the mechanism under potential field settings. This paper reports the results of a set of laboratory experiments designed to test the robustness of the minimum‐contributing‐set (MCS) mechanism to field conditions. The reported results support further use and investigation of the MCS mechanism for the provision of step‐level public goods.     

Product differentiation, cost‐reducing mergers, and consumer welfare

Abstract.  Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41     

Monetary policy in a cash‐in‐advance economy: employment, capital accumulation, and the term structure of interest rates

Abstract.  In this paper we study the effects of monetary policies on employment, capital accumulation, consumption, and the term structure of interest rates in a cash‐in‐advance economy, where money is required for consumption expenditures. Monetary policy involves targeting the inflation rate. The detailed dynamics of the model are fully worked out. As no numerical analysis is involved, we are able to identify very clearly the different channels through which monetary policy will impinge on the important macroeconomic variables. The model is also used to discuss the 'Great Canadian Slump.' JEL Classification: E52 and E43     

Tariff‐jumping FDI and domestic firms' profits

Abstract.  Studies of trade policy welfare effects often ignore the potential for tariff‐jumping foreign direct investment (FDI) to mitigate positive gains to domestic producers. Using event study methodology we find that affirmative U.S. antidumping decisions are associated with average abnormal gains of over 3% to a firm in the petitioning industry in the absence of tariff‐jumping FDI, but much smaller and statistically insignificant abnormal gains if there is tariff‐jumping FDI. We also find evidence that tariff jumping in the form of new plants or plant expansion has significantly larger negative effects on U.S. domestic firms' profits than other types of tariff‐jumping FDI. JEL Classification: F13, F23, L11     

An analysis of the MFN clause under asymmetries of cost and market structure

Abstract.  We conduct a welfare comparison of MFN and tariff discrimination in an oligopoly model of trade between two exporting countries and one importing country. While MFN dominates tariff discrimination from a world welfare perspective when exporting countries are asymmetric with respect to either cost or market structure, such need not be the case when both types of asymmetries co‐exist. In particular, when high‐cost exporters are merged and the cost disadvantage of the merged unit relative to competing firms is of intermediate magnitude, tariff discrimination can be welfare preferred to MFN (even when the average tariff is actually lower under MFN). JEL classification: F13, F12