How strong is the case for a populist central banker? A note

Conventional wisdom holds that a conservative central banker reduces equilibrium inflation with no cost in terms of real activity. More recently, this proposition has been turned around in models with inflation averse wage setters who are Stackelberg leaders vis-à-vis the central bank: In this case a populist central banker with no interest in inflation was shown to lead to the first-best equilibrium. This note demonstrates that the Stackelberg assumption is crucial for this result and that the Nash solution of the same model does not generally support the case for a populist central banker.     

Optimal monetary policy in a Phillips-curve world

In this paper, we study optimal monetary policy in a model that integrates the modern theory of unemployment with a liquidity model of monetary transmission. Two policy environments are considered: period-by-period optimization (time consistency) and full commitment (Ramsey allocation). When the economy is subject to productivity shocks, the optimal policy is pro-cyclical. We also characterize the long-term properties of monetary policy and show that with commitment the optimal inflation rate is inversely related to the bargaining power of workers. Both results find empirical support in the data.     

Competition and the capital-labor conflict

This paper analyzes the distributional effects of changes in the intensity of product market competition. The focus is on the interaction between imperfect competition in product markets and bargaining in the labor market. The main result is that, while a uniform intensification of product market competition increases employment, it may cause real wages to fall, in the short run as well as in the long run. This is especially likely if labor market regulations are favorable to workers. Therefore, product market and labor market regulations tend to reinforce each other politically, and compensatory fiscal transfers may be needed in order to enact employment-enhancing deregulation policies.     

Monetary regimes and the co-ordination of wage setting

A recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters, as wage setters abstain from raising wages to avoid a monetary contraction. However, in this literature the wage setters are assumed not to co-ordinate their wage setting. The present paper argues that precisely because a strict monetary regime may discipline the unco-ordinated wage setting, thus lowering unemployment in the unco-ordinated outcome, it also reduces wage setters’ incentives to co-ordinate. It is shown that an accommodating monetary regime may reduce equilibrium unemployment, via the strengthening of the wage setters’ incentives to co-ordinate.     

Optimal delegation implications of central bank transparency

The interrelationship between monetary regime design and central bank transparency is examined. We find optimal delegation requires the central bank be either: ‘representative’, not choosing to publicly reveal its private information; or ‘ultraconservative’, deciding to be fully transparent.     

Are Good Industrial Relations Good for the Economy?

Abstract. Recent US microeconomic analysis indicates that good industrial relations might improve firm performance. Of late, it has also been claimed that the benefits of industrial relations quality – proxied inversely by a strikes variable – could also extend to the macroeconomy. Using cross-country data, we find that, independent of other labor market institutions, a lower strike volume is associated with lower unemployment. Although there is a separate line of causation running from unemployment to strikes, our analysis suggests that this is not dominant. That said, support for the notion that macro performance owes something to good industrial relations is, however, weakened once we formally control for strike endogeneity.     

Adjustment within the euro. The difficult case of Portugal

In the second half of the 1990s, the prospect of entry in the euro led to an output boom and large current account deficits in Portugal. Since then, the boom has turned into a slump. Current account deficits are still large, and so are budget deficits. This paper reviews the facts, the likely adjustment in the absence of major policy changes, and examines policy options.     

Revisiting the Relationship between Ethnic Diversity and Preferences for Redistribution: Comment

In this paper, we revisit the question raised in Dahlberg et al. ( 2012 , Journal of Political Economy 120, 41–76) concerning a causal relationship between ethnic diversity and preferences for redistribution. We find that their results are based on (i) an unreliable and potentially invalid measure of preferences for redistribution, (ii) an endogenously selected sample, and (iii) a mismeasurement of the refugee placement program. Correcting for any of these three problems reveals that there is no evidence of any relationship between ethnic diversity and preferences for redistribution. We also discuss what is currently known about the refugee placement program, and to what extent it can be used for estimating causal effects more generally.     

Revisiting the Coyne Affair: a singular event that changed the course of Canadian monetary history

Abstract The Coyne Affair occurred during the 1959–61 period and led to the resignation of the governor. Eventually major reforms of the Bank of Canada Act were enacted. Archival and empirical evidence is used to assess the performance of monetary policy throughout the 1950s. In doing so, a real‐time data set is constructed for both Canada and the US that permits the estimation of a reaction function. I find that while the case against James Coyne is ‘not proven,’ there was a brief period when monetary policy was excessively tight, and this may well have worsened an already weak economic environment.     

Block recursive equilibria for stochastic models of search on the job

We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.     

Implementing the Mortensen rule in a frictional labor market

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.     

Rogoff revisited: The conservative central banker proposition under active fiscal policies

The paper re-examines Rogoff's [Rogoff, K., 1985. The Optimal Degree of Commitment to an Intermediate Monetary Target. Quarterly Journal of Economics 100, 1169–1189.] influential monetary policy result. It shows that responses of a conservative central banker and the resulting macroeconomic outcomes may be substantially different if interactions with (ambitious) fiscal policy are taken into account.     

Evaluating the performance of the search and matching model

Does the search and matching model fit aggregate U.S. labor market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some significant failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data “fit” the model, i.e. what are the data which are relevant to be explained by the model?The analysis shows that the model fits certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, the negative co-variation of unemployment and vacancies, and the behavior of the worker job finding rate. A key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate. The latter is a major component of the rate discounting the future value of the job-worker match.The paper offers a workable, empirically grounded version of the model for the analysis of aggregate U.S. labor market dynamics.     

Efficiency in a search and matching model with training costs

This paper studies the efficiency of the search and matching model with training costs. I incorporate productivity enhancing firm-specific skill training into the search and matching model of Pissarides (2000). I demonstrate that while the decentralized economy can be efficient if training costs are not sunk at the time of wage determination, the decentralized economy is not efficient due to a hold-up problem if training costs are sunk.     

Micro and macro elasticities in a life cycle model with taxes

We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.     

The Interaction between the Central Bank and a Single Monopoly Union Revisited: Does Greater Monetary Policy Uncertainty Reduce Nominal Wages?

Previous papers modelling the interaction between the central bank and a single monopoly union demonstrated that greater monetary policy uncertainty reduces the union's nominal wage. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union's objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority's transparency reduces average inflation .     

Financial conditions indexes for the United States and euro area

Financial conditions indexes are developed for the United States and euro area using a wide range of financial indicators and a dynamic factor model. The financial conditions indexes are shown to be useful for forecasting economic activity and have good revision properties. Variants of the indexes that allow for cross-economy effects reveal very strong financial linkages across the United States and euro area.     

Shirking in a monetary business cycle model

Abstract .  This paper investigates whether a limited participation model with imperfectly observed effort can reproduce the economy's responses to a monetary policy shock without appealing to high labour supply elasticities or high markups. The results demonstrate that the presence of imperfectly observed effort, in combination with the limited participation assumption, allows the model to account for the presence of involuntary unemployment, nominal wage rigidity, and the observed responses to monetary policy shocks.     

Inflation before and after central bank independence: The case of Colombia

In this paper we model the Colombian inflation rate in terms of excess demand effects from asset, goods and factor markets. In contrast to previous results for a group of industrial economies, we find that domestic factors are a far more powerful influence on inflation than are external factors. The paper pays particular attention to the potential effects of the Constitutional Reform of 1991, which created a Central Bank independent from other parts of government. We find that the creation of an independent Central Bank did change some of the parameters of the model, as the disequilibria in goods and monetary markets were found to have a smaller effect on inflation after Central Bank independence was granted.