‘Rules of the game’ during the International Gold Standard: England and Germany

The paper suggests an alternative framework to test hypotheses about central bank policy rules during the International Gold Standard. This framework is inspired by work of Mundell (1968) on optimal central bank policies, and more recent literature on the theory of economic policy, which stems from Luca's (1976) critique. Empirical tests obtained from this approach are quite different from those appearing in the empirical literature on the Gold Standard.The results of the tests indicate that the Bank of England was not optimally targeting international gold flows. Inthe case of the Rechsbank, the hyphothesis that international gold flows were optimally targeted is not rejected at the 5 per level. Thus the data suggest that the Reichsbank was following the ‘rules of the game’, whereas the Bank of England was not.     

Structural change and financing constraints

In a multi-industry growth model, firms need external funds for productivity-enhancing R&D, and face financing constraints. The cost of research differs across industries, so financing constraints hinder industry productivity growth unevenly. Equilibrium industry dynamics map into a differences-in-differences regression specification where industry growth depends on the interaction between country financial development and industry R&D intensity. The paper provides a framework for interpreting several empirical results that rely on industry growth data in terms of R&D-induced technology transfer, and identifies a new channel for finance to encourage aggregate growth: the reallocation of resources towards sectors with rapidly expanding technological frontiers.     

近代上海标金市场金银比价的实证分析及对当代的启示

近代上海标金市场是国际金融市场的重要组成部分,也是上海成为国际金融中心的标志。本文通过实证分析得出,近代上海不仅拥有门类齐全的货币市场和资本市场,重要的是拥有当时世界上最发达、最先进的金融期货市场,这对于当代上海重建国际金融中心具有一定的启发意义。     

Working Less and Bargain Hunting More: Macroimplications of Sales during Japan's Lost Decades

Standard New Keynesian models have often neglected temporary sales. In this study, we ask whether this treatment is appropriate. We use Japanese scanner data covering the last two decades and find a negative correlation between the frequency of sales and hours worked. We then construct a model that takes households' decisions regarding their allocation of time for work, leisure, and bargain hunting into account. We show that the decline in hours worked explains the rise in the frequency of sales. The real effect of monetary policy shocks weakens by around 40% due to temporary sales, but monetary policy still matters.     

How resilient is the German banking system to macroeconomic shocks?

Macroeconomic stress testing studies often rely on rather short sample periods due to the limited availability of banking data. They may fail to appropriately account for the cyclicality in the interaction between the banking system and macroeconomic developments. In this paper, we use a newly constructed data set on German banks’ income and loss statements over the past 39 years to model the interaction between the banking sector and the macroeconomy. Our VAR analysis indicates that the level of stress in the banking sector is strongly affected by monetary policy shocks. The results rationalize the active behavior of central banks observed during periods of financial market crises.     

Monetary policy, taxes, and the business cycle

This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.     

On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare

This paper employs a multi-country large-scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is “importing” the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.     

Inflation dynamics: A cross-country investigation

We document that “persistent and lagged” inflation (with respect to output) is a world-wide phenomenon in that these short-run inflation dynamics are highly synchronized across countries. In particular, the average cross-country correlation of inflation is significantly and systematically stronger than that of output, while the cross-country correlation of money growth is essentially zero. We investigate whether standard monetary models driven by monetary shocks are consistent with the empirical facts. We find that neither the new Keynesian sticky-price model nor the sticky-information model can fully explain the data. An independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with sticky information.     

Market conditions,default risk and credit spreads

This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.     

Firm dynamics, markup variations, and the business cycle

We present a model in which net business formation is endogenously procyclical. Variations in the number of operating firms lead to countercyclical variations in markups that give rise to endogenous procyclical movements in measured total factor productivity (TFP). Based on this result, the paper suggests a simple structural decomposition of variations in TFP into those originating from exogenous shocks and those originating endogenously from the interaction between firms’ entry and exit decisions and the degree of competition. The decomposition suggests that around 40% of the movements in measured TFP can be attributed to this interaction. Moreover, the paper analyzes the effects on (i) the measurement of the volatility of exogenous shocks in the U.S. economy and (ii) the magnification of shocks over the business cycle.     

Trend inflation, wage and price rigidities, and productivity growth

What are the steady-state implications of inflation in a general-equilibrium model with real per capita output growth and staggered nominal price and wage contracts? Surprisingly, a benchmark calibration implies an optimal inflation rate of -1.9 percent. The analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth. Steady-state output and welfare losses are quantitatively important even for low values of trend inflation. Further, nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results. This conclusion does not arise from price dispersion per se, but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers. Finally, accounting for productivity growth is found to be important for calculating the welfare costs of inflation. Indeed, the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no-growth case.     

Ageing and public capital accumulation

We have examined the effects of ageing on the balanced-growth-maximizing public investment policy in an overlapping generations model with growth engines of public capital accumulation. Extended life expectancy tends to increase individual savings, while the increased old-age dependency requires more resources to be allocated to consumption in the economy. Declining working population makes for a severe trade-off between private and public capital accumulation. It is shown that as ageing proceeds, not only the income tax rate must be raised to accelerate public capital formation but the expenditure share of maintenance should be increased in order to maximize the balanced-growth rate.      

Euler equations and money market interest rates: A challenge for monetary policy models

Standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption Euler equation. We use U.S. data to calculate the interest rates implied by Euler equations derived from a number of specifications of household preferences. Correlations between these Euler equation rates and the Federal Funds rate are generally negative. Regression results and impulse response functions imply that the spreads between the Euler equation rates and the Federal Funds rate are systematically linked to the stance of monetary policy. Our findings pose a fundamental challenge for models that equate the two.     

Long‐Run Inflation and the Distorting Effects of Sticky Wages and Technical Change

We show that the Calvo price‐setting model is not necessarily inconsistent with evidence of a weak relation between positive trend inflation and price dispersion. We identify the interaction between sticky wages and technical change as factors disrupting the allocative role of the wage system under positive trend inflation. In turn, this interaction generates inefficient wage dispersion, as opposed to price dispersion, which fuels inflation costs. We conclude that it is too early to dismiss the New Keynesian model as a useful vehicle to assess the costs of inflation.     

Moderate Inflation and the Deflation–Depression Link

Recent research has concluded that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative to moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is nonlinear over the entire sample range.     

A theory of growth and volatility at the aggregate and firm level

We present an endogenous growth model that explains the evolution of the first and second moments of productivity growth at the aggregate and firm level during the post-war period. Growth is driven by the development of both (i) idiosyncratic R&D innovations and (ii) general innovations that can be freely adopted by many firms. Firm-level volatility is affected primarily by the Schumpeterian dynamics associated with the development of R&D innovations. The variance of aggregate productivity growth is driven by the arrival rate of general innovations. Ceteris paribus, the share of resources spent on development of general innovations increases with the stability of the market share of the industry leader. As market shares become less persistent, the model predicts an endogenous shift in the allocation of resources from the development of general innovations to the development of R&D innovations. This results in an increase in R&D, an increase in firm-level volatility, and a decline in aggregate volatility. The effect on productivity growth is ambiguous.On the empirical side, this paper presents new cross-country evidence that R&D subsidies are not significantly associated with higher growth but are associated with lower aggregate volatility. It also documents an upward trend in the instability of market shares, a positive association between firm volatility and R&D spending, and a negative association across sectors between R&D and how correlated the sector is with the rest of the economy.     

Time Aggregation and the Relationship between Inflation and Money Growth

Using panel data for 99 countries, we confirm that the measured elasticity of prices with respect to money is higher, and closer to unity, the higher is money growth and the longer the time horizon over which the data are averaged. We propose two explanations. In one, the true model of inflation involves a lagged response to money growth. In the other, there is negative correlation between shocks to inflation and money growth. Our empirical results can be explained if high–money‐growth countries have (i) shorter lags or (ii) less negative correlation, when compared to countries with low money growth.     

Does Monetary Policy Have Asymmetric Effects on Stock Returns?

This paper investigates whether monetary policy has asymmetric effects on stock returns using Markov-switching models. Different measures of a monetary policy stance are adopted. Empirical evidence from monthly returns on the Standard & Poor's 500 price index suggests that monetary policy has larger effects on stock returns in bear markets. Furthermore, it is shown that a contractionary monetary policy leads to a higher probability of switching to the bear-market regime.     

Interaction between housing prices and household borrowing: The Finnish case

Employing time series econometrics this study shows that there has been a significant two-way interaction between housing prices and housing loan stock in Finland since the financial liberalization in the late 1980s. Before the financial deregulation the interaction was substantially weaker. Furthermore, housing appreciation has a notable positive impact on the outstanding consumption loan stock. It appears that there is no similar relationship between stock prices and credit. Understanding the two-way interaction between housing prices and credit is of importance, since the interdependence is likely to augment boom–bust cycles in the economy and increase the fragility of the financial sector.     

Hyperbolic Discounting and the Phillips Curve

Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.