Financial repression and debt liquidation in the USA and the euro area

Rising debt levels have caused a revival of financial repression in the euro area and the USA. The Federal Reserve directly represses US bond yields and assists in financing the state budget, resulting in an overall liquidation effect from falling bond yields of about three per cent of total government revenues and one per cent of GDP in 2011. In the euro area, the ongoing actions to contain the European debt crisis have also repressed interest rates, easing debt-servicing costs in all European countries and reducing the interest rate payments for the German government by about one to two per cent of total government revenues. This article argues that a slight rise in infl ation could even liquidate German debt.     

Determinants of advertising expenditures: aggregate and cross-media evidence

Advertising expenditures account for 1 per cent of developed country GDP, having grown at an average real rate of 5 per cent p.a. over the 1980s. Trends in New Zealand have been similar to trends overseas. Hence analysis of the determinants of advertising in New Zealand should assist understanding of the determinants of advertising expenditures in other developed countries. We discuss changes in NZ's advertising industry and use a multi-equation co-integration framework to model the determinants of NZ advertising expenditure, both in total and across different media. We find that expenditure on advertising in all media is strongly pro-cyclical, that the allocation of expenditures depends on circulation patterns, and that press and magazines are complementary media and are substitutes for TV advertising.     

Deutsche Leistungsbilanzüberschüsse in der Kritik

Germany runs large current account surpluses. Recently the surplus has been higher than seven per cent of GDP. This has provoked many different criticisms. First, some argue that the euro is the main problem. Second, German wages and prices have been criticised for being too low. Third, according to some critics, German domestic demand should be higher. Fourth, current account surpluses have been assumed to be unsustainable. The article discusses all those arguments and analyses their validity.     

The International Effects of China’s Growth,Trade and Education Booms

China’s international trade flows have increased by 500 per cent since 1992, far outstripping GDP growth. Likewise tertiary education enrolments have increased by 300 per cent. We simulate these changes using a multi‐sector growth model of the Chinese and USA economies. A decade of trade biased growth in China is found to raise USA GDP by approximately 3–4.5 percentage points and has a large impact on the demand for tertiary education in China. Despite these positive effects of growth, the results suggest that the expansion of China’s education sector per se has practically no long‐run impact on the USA economy.     

Lässt sich der deutsche Leistungsbilanzüberschuss mit vertretbarem Aufwand reduzieren?

Can an expansive fiscal policy help to reduce Germany’s current account surplus while simultaneously creating positive spillover effects for the eurozone? If yes, what amount of measures would be required in order to bring the current account surplus below the 6% of GDP threshold specified in the EU Commission’s macroeconomic imbalance procedure? An analysis based on a global macroeconometric model shows that fiscal policy measures could reduce Germany’s surplus. The positive spillovers for the eurozone would be relatively small, however, while a huge amount of fiscal stimuli would be required to reach the 6% threshold. In addition, there would be a lasting increase in Germany’s public debt.     

Is Infrastructure Spending an Effective Fiscal Policy?

The impact of expansionary fiscal policy intended to increase economic growth by using infrastructure‐focused stimulus packages is analyzed by considering the debt to GDP ratio dynamics model. It is shown that for the data characterizing the current state of the US economy the government investment in infrastructure cannot decrease the debt to GDP ratio. The paper contributes to the ongoing fiscal policy debate whether government investment in infrastructure is an effective approach to boost the economy.     

Why India Lags Behind China and How It Can Bridge the Gap

Though India has been growing at six per cent annually since the late 1980s, it trails behind China, which has been growing at ten per cent per annum since 1981. The single most important factor explaining this difference is the relatively poor performance of Indian industry. Whereas the share of industry in China's GDP rose from 42 per cent in 1991 to 51 per cent in 2001, it remained virtually stagnant in India. By contrast, services grew rapidly in India, expanding from 42 per cent in 1991 to 48 per cent in 2001. With the information technology sector less than two per cent of the GDP, services growth was largely in the informal sector. Approximately 77 per cent of India's workers live in rural areas. To bring a large chunk of this workforce into the modern sector, India must achieve a much higher growth in the traditional, unskilled‐labour‐intensive industry. Growth in the information technology sector gives India an extra lever but cannot be the main engine of transformation. Therefore, the right approach is to walk on two legs: traditional labour‐intensive industry and the modern IT industry. Both legs need strengthening through further reforms. The paper suggests four specific reforms, three for industry and one for IT, necessary to achieve the transformation to a modern economy.     

Money,saving and growth in an international economy with perfect capital mobility

The effects of differential national saving rates on current accounts, foreign indebtedness and the welfare of the countries involved are examined within the framework of a two-country, three-asset and one-good model of growth with international capital mobility. It is argued that the persistent current account imbalance and its implied national indebtedness are a natural consequence of differential national saving rates in the world of integrated capital markets, that any direct interference hampering an orderly flow of capital makes both countries worse off, that changes in the exchange rate mainly reflect the differential growth rates of two currencies and have little effect on the current account, and that persistent current account deficits do not necessarily imply an ever-increasing debt burden. While an increase in the saving rate of the high-saving country benefits the low-saving country, an increase in the saving rate of the low-saving country harms the high-saving country both in the short run and the long run.     

The US Current Account Deficit: Stocktaking and Remedies

In 2004, the US current account deficit widened to US $668.1 billion and 5.7 per cent of gross domestic product (GDP). These numbers, unprecedented both in absolute and relative terms, have led many observers to doubt the stability of the status quo. To avoid a major crisis resulting from a disorderly adjustment, questions must be answered concerning appropriate policy initiatives to ensure a more benign correction of external imbalances.      

Productivity Versus Employment: Quantifying the Economic Effects of an EU–Japan Free Trade Agreement

The European Union and Japan recently entered into negotiations over a bilateral free trade agreement intended to stimulate growth and create wealth. Since customs duties are already low, the success of the liberalisation process hinges on the elimination of non‐tariff barriers. The purpose of this paper is to shed light on two possible liberalisation scenarios: a less ambitious liberalisation and a comprehensive liberalisation. In contrast to classic studies, our paper builds on the modern trade literature, accounting for the dominance of intra‐industry trade in both economies and the existence of heterogeneous firms. Furthermore, we model a search‐and‐matching labour market, allowing us to quantify employment effects of trade liberalisation. We find that a comprehensive liberalisation increases Japanese GDP by 0.86 per cent, whereas the EU experiences only an additional 0.21 per cent of real GDP growth. Most of the growth in real GDP is due to firms' efficiency gains, whereas unemployment is reduced by only a small amount. Other world regions experience small reductions of GDP due to trade diversion effects.     

The Compatibility of EU Biofuel Policies with Global Sustainability and the WTO

The EU’s Renewable Energy Directive (2009/28) requires that by 2020, biofuels should account for at least 10 per cent of transport fuel consumption. EU legislation sets out sustainability criteria for biofuels to qualify for this target and procedures for verifying that they are met. Using the AGLINK‐COSIMO model, we investigate the impacts of the biofuel target on global trade flows and land use, both under the current biofuel tariff regime and assuming zero EU tariffs for biofuels. The EU’s 2020 transport fuel target increases the global area of agricultural crops by 0.9 per cent. With zero tariffs, the extra global land requirement is 21 per cent smaller, but a larger share of it falls outside the EU. This outcome sharpens the issue of how the EU’s unilateral sustainability criteria can be implemented given current international trade rules.     

The Macroeconomic Effects of the Canada–US Free Trade Agreement on Canada: A Counterfactual Analysis

We evaluate the macroeconomic effects of the Canada–US Free Trade Agreement (FTA) on Canada's economy using a counterfactual analysis. We exploit the dependence of GDP growth (labour productivity and unemployment, respectively) among different economic entities and construct the counterfactuals using data from countries other than Canada. We find that in the adjustment period from 1989:Q1 to 1992:Q1, Canada's economy bore the short‐run adjustment costs of the FTA with a decline of the annual real GDP by 2.56 per cent and a decline of the labour productivity by 0.62 per cent. After the adjustment period, the FTA had a positive and permanent effect of 1.86 per cent on Canada's annual real GDP growth and raised the labour productivity from 1992 to 1994 by 2.39 per cent on average. Moreover, the FTA increased Canada's annual unemployment rate by 1.81 per cent in the period 1989–94.     

Uncovering Unobserved Economy: A General Equilibrium Characterization

This paper builds a three‐sector DSGE (Dynamic Stochastic General Equilibrium) model, considering explicitly the interactions among regular, underground and criminal sectors. We generated quarterly data for unobserved variables for Italian economy over the sample 1974:01–2011:02, through Monte Carlo simulations, and we found that underground economy is about 20 per cent of GDP, whereas criminal economy is 11 per cent. The dynamic behavior of the model shows that (1) regular production has a greater relative volatility with respect to unobserved production, (2) an efficient law enforcement activity is able to weaken unobserved activities and (3) unobserved sectors' variables exhibit a negative correlation with the corresponding ones of regular economy.     

The Prospects for Future Economic Growth in the Euro Area

With a long-term projection of TFP growth of 0.2 per cent, a gradual decline in the work-age population and a static average workweek, we project a "baseline" average real GDP growth rate in the euro area of just 0.6 per cent over the next decade — even if the unemployment rate and investment share of GDP return to their pre-crisis levels by 2020.     

Science and Technology Take-off in China?: Sources of Rising R&D Intensity

China's ratio of research and development (R&D) spending to its gross domestic product (GDP) more than doubled from 0.6 per cent in 1996 to 1.4 per cent in 2005. This study documents the pattern of science and technology (S & T) take-off, characterized by an abrupt increase in the R&D to GDP ratio. This abrupt increase, observed in many of the now Organization for Economic Cooperation and Development (OECD) countries, typically drives R&D intensity from below 1 per cent to the range of 2–3 per cent. The question addressed in this work is whether China has begun a similar S & T take-off. The study reviews several conditions identified in the endogenous growth literature that drives R&D intensification and notes their emergence in China during the past decade. It also speculates why China's R&D intensification appears to be starting at such a low level of income per capita.     

对我国发展中国家地位的思考与建议

本文分析了高收入国家与发达国家在概念上的差异,指出不能将世界银行认定高收入国家的标准,作为区分发达国家与发展中国家的标准。本文提出用发达国家末尾集团的人均GDP作为发达国家的"门槛线",并结合日本、韩国、新加坡等国的发展经验,以及国内各省人均GDP发展现状,做出了相应预测:我国人均GDP至少还需要十年才能够达到发达国家"门槛线"。据此,本文认为我国作为全球制造大国、贸易大国,既要认真考虑发展的外溢效应,承担相应大国责任;也要认清发展任务的艰巨性,以便更好地维护我国发展中国家的地位。     

Heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries

This paper considers how competitiveness impacts macroeconomic performance in 11 euro area countries. VAR models are estimated for the individual countries using quarterly data from 1995Q4 to 2013Q4. Besides unit labour costs as a competitiveness measure, the models include GDP, the current account balance and domestic credit. The empirical analyses show that changes in unit labour costs help explain GDP dynamics in the short and medium term in most countries, whereas they have little explanatory power for the current account balance or domestic credit for most countries. Overall, the effects of the unit labour costs vary substantially across the countries in the euro area. The heterogeneity suggests that policy measures aiming to improve economic growth, correct current account imbalances and ensure financial stability need to take country‐specific features into account.     

The real dollar-yen exchange rate,asymmetries in trade flows and the current account in a perfect-foresight model for developing East Asia

This paper explores permanent, unanticipated shocks in the yen-dollar exchange rate in a perfect-foresight, infinite-horizon, representative-agent model for an open, semismall economy that produces a single good, imports intermediate inputs and investment goods from Japan and competes with Japan in external markets. Therefore, the model captures some of the features of the developing countries of East Asia. External debt is constrained by a country-risk premium that depends on the level of external debt. The capital stock is maintained and incremented by an endogenous mixture of Japanese and home goods. An appreciation of the dollar against the yen is neutral for external indebtedness and the trade account in the long run, but raises the capital stock, consumption and hence welfare in the long run; the home currency depreciates against the dollar but appreciates against the yen. Whether a cycle of current account surpluses followed by current account deficits or vice versa is generated depends on the initial response of the shadow value of external debt.     

How Income and Crowding Effects Influence the World Market for French Wines

Wine prices rose rapidly between 2001 and 2011 but have now stagnated. The growth phase could be explained by the increased demand from emerging markets, while the subsequent stagnation may result from the crowding effect caused by the entry of numerous new varieties onto the wine market. The generalised model of ideal variety proposed by Hummels and Lugovskyy combines these two elements, and focusing on French exporters, we find partial support for this explanation at the world level. A 1 per cent increase in GDP per capita (income effect) generated an increase in price of 1.13 per cent between 2001 and 2011. In contrast, a 1 per cent increase in market size (competition effect) reduced prices by 1.10 per cent over the same period. This paper goes further into the analysis of these effects by considering wine exports according to the mode of transport used and indirectly evaluates economies of scale when wine is exported by land, sea or air (via a gravity equation). Economies of scale are observed for transport by plane and ship but not for road. A 10 per cent increase in the value of wine exported by road (plane) leads to a rise (reduction) in transport costs of 0.5 per cent (19 per cent).     

EU Financial Market Access After Brexit

Brexit means Brexit, or out means out — and that includes the UK’s exit from the single financial market. With financial services accounting for about eight per cent of the country’s GDP, it is understandable why the UK attaches immense importance to retaining access to the EU’s single market. But putting a mutually acceptable regime in place will take years of negotiations, and the final agreement will clearly allow much less access than UK-licensed firms enjoy today.