The principle of political-economic assignment

This paper formulates a macroeconomic model of disposable income, unemployment, inflation, and the balance of payments; a theory of qualitative choice to explain government popularity in terms of these variables; and a satisficing formulation of political-economic policy. This approach to economic policy relies on the promotion of ideology and satisficing popularity and gives rise to an interdependent system of political-economic reaction functions for the tax rate and state spending. Using a theorem for the stability of “patched-up” systems, the principle of political-economic assignment is derived.     

Trade,capital accumulation and structural unemployment: an empirical study of the Singapore economy

This paper studies the factors responsible for the secular decline of Singapore's unemployment rate over the period 1966-2000 in an environment of low and stable inflation rates. We introduce wage bargaining and unions into a specific-factors, two-sector economy with an export sector and a non-tradable sector to obtain an endogenous natural unemployment rate. Increases in the relative export price and capital stock in the export sector are predicted to reduce structural unemployment. These hypotheses could not be rejected based on structural estimations and co-integration regressions. Empirically, capital accumulation in the export sector explains most of the decline in Singapore's unemployment rate.     

A tale of two traditions: Pierre Force's Self-interest before Adam Smith

Abstract

The paper compares different strands of New Keynesian Economics with regard to Keynes' original work. Two issues are analysed in detail. First, the explanations provided by Keynes and New Keynesians of nominal and real wage behaviour. Second, the different theories concerning the ability of flexible nominal wages in assuring full employment. It is argued that, although involuntary unemployment is a central problem both in Keynes' and New Keynesians' views, referring to the role of nominal and real wages in explaining unemployment, New Keynesians theories present important features that differ, sometimes substantially, from the concepts developed by Keynes in his General Theory.     

Endogenous expectation formation methods: Evidence from consumers' inflation expectations

This paper analyzes qualitative survey data on consumers' inflation expectations with the multinomial probit model. The results provide evidence that consumers' expectations depend on monetary and fiscal policy data, unemployment rates and pas inflation rates and that consumers' forecast differently during periods of low and high inflation rates. The analysis indicates that the government policy data, especially money growth rates, had a larger impact on the expectations during periods of high inflation. The paper provides support for the hypothesis that expectation formation methods depend on economic conditions.     

Structural change in the United States' social preference function, 1953–88

Many studies have used Gallup Poll data to estimate the relationship between presidential popularity, and inflaion and unemployment. Typically these estimates are made over the terms of several presidents. The only time-varying effect included in these studies is an intercept dummy. No account is taken of the possibility that there may be changes in the positions or slope of the indifference curves between inflation nd unemployment. Within this paper, we estimate the US public's social preference function between inflation and unemployment as a quadratic within a sets of equations framework. A series of F-tests leads us to believe that there is structural change in the economic variables as well as in the intercepts over time. Thus, estimating each administration individually or in the sets of equations format is superior to constraining slope coefficients to be equal across administrations by simply estimating the function over the entire time period. We hypothesize that the public has become somewhat more accustomed to high rates of inflation; this hypothesis is consistent with the observed changes in the social preference function.     

The New Consensus on Monetary Policy and its Post-Keynesian Critique

Abstract

This paper seeks to look at the underlying framework of the New Consensus models, providing a Post-Keynesian critique. In the light of this critique, the model is reformulated, with its basic structure intact, but with alternative post-Keynesian specifications of the Phillips curve being considered. It is shown that such modifications, either allow a long run trade-off between the rate of inflation and the level of output, the rate of capacity utilization and, therefore, unemployment, or, in our preferred specification, changes in output and capacity have no implications for inflation over a large range of capacity utilization.     

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.     

HOW HAS THE CRISIS OF 2008–09 AFFECTED SUBJECTIVE WELL‐BEING? EVIDENCE FROM 25 OECD COUNTRIES

This paper uses life satisfaction data of almost 140,000 individuals in 25 OECD countries to study how changes in the rates of GDP growth, unemployment, and inflation during the macroeconomic crisis of 2008–09 have affected subjective well‐being. The relative contributions of the three macroeconomic variables to individuals’ life satisfaction are used to assess how each country performed on balance during the crisis. This approach follows a recent trend of using subjective well‐being data for monitoring economic performance and for policy appraisal. We find that in the countries most strongly affected by the crisis, the effects on an average citizen's well‐being may be of a similar magnitude as the effects of the most serious personal life events. The main driver of these effects is the drop in GDP, whose impact is aggravated by the increase of unemployment. Though the inflation rate went down in several of the countries, the effect was too weak to significantly reduce the negative effect of the changes in GDP and unemployment. The results show that GDP fluctuations are important drivers of subjective well‐being.     

The joint dynamics of inflation, unemployment and interest rate in the United States since 1980

In this paper, by using a combination of long-run and short-run restrictions, we identify a small structural VECM which includes inflation, unemployment and the federal funds rate and study the dynamic interactions at different frequencies among these variables. Our results show that: (a) in accordance with the traditional view of economic fluctuations, aggregate demand shocks and monetary policy shocks push inflation and unemployment in opposite directions in the short run; (b) the permanent supply shock explains the long-run movement of inflation and unemployment. These conclusions are at odds with the prediction of “natural-rate” models but are consistent with the idea of a propagation mechanism which links productivity shocks to inflation and unemployment at medium and low frequencies. Thus, with respect to some recent studies (e.g. Beyer and Farmer, ECB Working Paper 121, 2002, and Ireland, J Monet Econ 44:279–291, 1999), we offer a different interpretation of the low-frequency comovements between inflation and unemployment characterizing the US economy in the last decades.

Productive and Unproductive Capital: A mapping of the New Zealand system of national accounts to classical economic categories, 1972‐95

New Zealand has gained considerable international attention for the neo-liberal economic reform programme it enacted from the mid-1980s; this programme has served as a model for similar reform elsewhere. Within the neoclassical framework of the reformers, the programme has produced many improvements to the economy. Such fundamental indicators as lower inflation, lower budget deficits and higher economic growth are cited as evidence of the improved economic conditions. Yet unemployment remains high, real interest rates are among the highest in the world, nominal interest rates and business confidence fluctuate considerably, and the balance of payments is deteriorating. Using a classical framework, this paper examines the neo-liberal reform of the New Zealand economy to see if there are alternative explanations for the persistence of these problems. The methodology developed by Shaikh & Tonak (1994) is used to map official national accounts data to classical economic categories for the 1972 to 1995 period. This approach is compared with earlier attempts at estimating classical economic categories for New Zealand. This classical view of the economic reforms is compared with the conventional view. The paper's main results are that there was a large increase in unproductive economic activity associated with the economic reforms in New Zealand; that the improvement in economic fundamentals emphasised by the reformers reflects this growth of unproductive activity; and that the persistence of other economic indicators is related to the ongoing weakness of productive activity.     

Tax Incidence in a Model with Efficiency Wages and Unemployment

Abstract

The purpose of the present paper is to examine the effects of taxation on income distribution in a model with efficiency wages and involuntary unemployment. Central to our efficiency-wage model is the hypothesis that firms set wages above market-clearing levels, whenever the productivity of labor depends on the real wage paid by the firm, and unemployment. Within a two sector general equilibrium model we study the incidence of factor and commodity taxes on income distribution, and unemployment. Our findings differ substantially from those derived by the traditional neoclassical analysis, originally developed by Harberger, and as it has been extended by several authors.     

THE SIZE DISTRIBUTION OF INCOME DURING INFLATION

This paper analyzes the effects of inflation on the size distribution of income, making use of a microsimulation model. It goes beyond earlier analyses not only in the use of microdata but also in the types of inflation modeled. Two different income concepts are used, one the money income concept of the U.S. Census Bureau and the second, called Accrued Comprehensive Income, based on the concept of income as consumption plus the change in net worth. The results of the simulation inflations are presented graphically, as the ratio of real income with inflation to real income without, by income class. The analysis concludes that the income concept chosen is crucially important. While low income households suffer modest losses and middle income households are largely unaffected, whatever income concept is used, the effects on upper income households are extremely sensitive. With a simple money income concept, the well-to-do appear to benefit from inflation but a broader concept reverses this effect. A policy to negate the distributional effect of inflation would benefit primarily the upper income households. Similarly, macroeconomic policies designed to reduce inflation at the price of slower growth and greater unemployment would not aid lower income groups to a significant degree.     

Do FOMC forecasts add value to staff forecasts?

This paper compares the economic forecasts of members of the Board of Governors and presidents of the Federal Reserve Banks, and then investigates the value of each group's forecasts in supplementing the forecasts of the Board of Governors' staff. We find that the presidents tend to forecast higher inflation and real GDP growth, and lower unemployment than the members of the Board of Governors. We also find that the presidents' real GDP and unemployment rate forecasts add value to the real economy forecasts of the staff, while the governors' inflation forecasts add value to the staff's inflation forecasts.     

New Zealand's Economic Reforms: An assessment

New Zealand's economic policy between 1984 and 1996 is often hailed as an example of comprehensive supply-side reform that successfully improved the performance of a weak economy. In contrast, this paper presents statistical evidence to show that: (1) New Zealand sacrificed a large volume of real per capita gross domestic product after 1987; (2) its average unemployment rate increased substantially after 1988; (3) labour productivity growth declined after 1992; and (4) the per capita real income of low-income households in 1996 was more than 3% lower in absolute terms than it had been in 1984. The paper concludes that the economic reform programme did not achieve the objectives expected at its launch.     

Nonlinear Phillips curve,NAIRU and monetary policy rules

The US Phillips curve is modeled with a logistic smooth transition autoregression specification that allows various nonlinear shapes. Using this, the paper derives model-consistent estimates of the NAIRU. The NAIRU is defined as the level of unemployment rate that would correspond to a forecast of no inflation changes over the policy horizon. This paper also investigates the implications of nonlinearities in the Phillips curve for deriving optimal monetary policy rules. The optimal policy rule for interest rates and implied sacrifice ratios are found to be nonlinear as well.      

Openness and the Effectiveness of Monetary Policy: A Cross-country Analysis

Abstract

This paper evaluates the relationship between a country's openness to trade and the effectiveness of monetary policy in changing output growth and inflation in 29 different countries. Using quarterly data from the 1957–2003 period, empirical estimates based on individual country specifications show that the direction, significance and nature of the relationship between openness and the effectiveness of monetary policy on output growth as well as inflation vary considerably across countries.     

Price expectations, capital accumulation and employment: Lindahl's macroeconomics from the 1920s to the 1950s

Erik Lindahl's approach to macroeconomics focused on the non-neutralityof monetary policy (in the short and the long run) and on thedenial of the existence of natural rates of interest and unemployment.From the 1920s until his death in 1960, Lindahl advocated theuse of norms for monetary policy to fight inflation and deflationprecisely because he would not rely on the market system's returnto natural rates. Making use of hitherto unexplored material,this paper analyses the development of Lindahl's thinking aboutprice level changes, investment and employment from the 1920sto the 1950s.     

Exchange Rate Movements and Unemployment in the EU Accession Countries—A Panel Analysis

According to the traditional “optimum currency area” approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate. This paper takes a different approach, and highlights the fact that high exchange rate volatility may as well signal high costs for labor markets. The impact of exchange rate volatility on labor markets in the CEECs is put to the test, finding that volatility vis‐à‐vis the euro significantly increases unemployment. Hence, the elimination of exchange rate volatility could be considered as a substitute for a removal of employment protection legislation. However, labor market reform could be argued to be an equally worthy strategy, backed up by central bank independence and the adoption of an anti‐inflation monetary policy rule.     

An Estimate of the Range of Equilibrium Rates of Unemployment for Australia

This paper estimates the range of equilibrium rates of unemployment for Australia. The estimation technique nests a unique equilibrium rate of unemployment as a special case. It is found for the period 1965–97 that a range of equilibria of at least 6.6 percentage points of unemployment exists in Australia. The lower limit of this range, which is the minimum rate of unemployment consistent with non-increasing inflation, was 2–3 per cent in the 1960s, jumped in the early 1970s and was about 5.6 per cent during the 1990s.