Is the Hybrid New Keynesian Phillips Curve Stable? Evidence from Some Emerging Economies

This paper primarily examines whether the ‘hybrid new Keynesian Phillips curve’ (HNKPC) holds for four important emerging economics viz., Brazil, Russia, India and South Africa. This has been done after testing for the structural stability of this relationship. Econometric issues like the test of unit roots in presence of a structural break and estimation of output gap have also been done appropriately. Our findings suggest that the HNKPC is not stable for all the four countries. However, the analysis based on the two sub-periods thus formed clearly shows mixed evidence in respect of holding of this relationship.

     

Does the New Keynesian Phillips curve need countercyclical markups?

This paper examines the behavior of four types of markup measures and its implications for the new Keynesian Phillips curve (NKPC). The four types of measures are a procyclical measure, a weakly procyclical measure, an acyclical measure and a countercyclical measure. Motivated by the fact that the U.S. markup has shifted up dramatically since the early 2000s, the paper also presents both empirical dynamics and a new Keynesian model featuring nonstationary markups. After inspecting empirical dynamics of key macroeconomic variables and the performance of the model, it points out that weakly procyclical or acyclical markups are more consistent with the purely forward-looking NKPC. Moreover, a major shortcoming of standard new Keynesian models is their inability to trace the actual behavior of the markup in response to a demand shock.     

Is the Phillips Curve Valid in China?

Is the “non-existence” of the Phillips curve in China a truth or just an illusion due to the deficiency of data? Should policy analysis follow the light of New-Keynesian or New-classical economics? These questions require empirical work on the Phillips curve, which has long been limited in China due to an inaccurate unemployment rate and unreliable estimated output gap. Instead of the insignificant or self-contradicting results in previous work, this paper puts forward a significant estimation, creatively using the vacancy-jobseeker ratio instead of the unemployment rate. It is suggested that a robust Phillips curve cannot be ignored and New-Keynesian economics should be employed in policy analysis in the short run.     

What are the prerequisites for a euro area fiscal capacity?

ABSTRACT

This paper discusses a pathway towards achieving fiscal union in the euro area. It outlines three steps and their prerequisites. In the first step, Banking Union would be completed to increase the financial stability of the euro area. It would render the “no bailout” clause more credible and thereby allow to deal better with insolvent governments. In the second step, more centralised funds would be created in order to provide important public goods and in order to deal with large asymmetric shocks. The third step, which is currently unattainable, consists of a true federalisation of important government functions.     

Productivity in the euro area: any evidence of convergence?

Sizable prevailing real economic disparities among countries in a currency union potentially involve costs for those countries for which the aggregate policy stance is not appropriate. This paper contributes to the literature by testing for productivity convergence among euro area countries. While no convergence can be found on the aggregate level, selected service sectors and manufacturing sub-industries indicate evidence of convergence. In a search for factors influencing productivity, investments in research and development as well as a high skill level of employees are shown to be beneficial, whereas regulations constitute a burden.     

Is more competition conducive to the macroeconomic performance in the euro area?

One of the main goals of the European Union, laid down, inter alia, in the Lisbon Strategy and in the “Europe 2020” Strategy, is to raise employment. One important means of supporting the creation of new jobs is to increase competition. In this paper, it is shown that on average the mark-up, i.e. the deviation of prices from marginal cost in the euro area still exceeds the levels observed in the UK and in the US. After completion of the Single Market Programme in 1993, the mark-up has declined in the euro area and even more in the UK. Nevertheless, there is a strong cross-country variation between Member States, with a particularly high mark-up ratio found for Italy. Panel estimations show that total factor productivity growth, labour productivity growth and the labour market performance in the euro area could be improved by reducing the mark-up. This could be achieved by a proper institutional design. More competition could indeed improve the macroeconomic performance.     

The New Keynesian Phillips curve in Europe: does it fit or does it fail?

The canonical New Keynesian Phillips curve specifies inflation as the present-value of future real marginal costs. This paper exploits projections of future real marginal costs generated by VAR models to assess the model’s ability to match the behavior of actual inflation in the Euro area. The model fits the data well at first sight. A set of bias-corrected bootstrapped confidence bands, however, reveals that this result is consistent with both a well fitting and a failing model. These findings also hold for the hybrid version of the Phillips curve.     

Is there a “reform fatigue” in the euro area?

The absence of monetary policy within a currency union increases the need for structural reforms that make the participating economies more flexible. However, the absence of exchange rate risk with respect to the other members of the union may reduce the urgency for such reforms. A number of other considerations also suggest that theory is ambiguous about the impact of participating in a currency union on progress in structural reforms. This paper addresses this issue empirically for the euro area. The results suggest that reforms in the euro area seem to have decelerated following the introduction of the euro, but from a fast pace. The paper discusses a number of possible explanations, including “reform fatigue,” the absence of “market punishment,” and “good-times” complacency. Estimates from an empirical growth model suggest that the slowing of reforms may slow down annual output growth by up to 0.2%. However, the results are preliminary and depend on the area of reform considered. Furthermore, the reform dynamics may change with the euro area starting slowing at the end of 2007.     

Are remittances an instrument of stabilization and funding in the euro area?

In this study, we explore the specific question of the counter cyclicality of remittances in the euro area, namely, if they could be used to stabilize the business cycle and as an additional source of external financing. This research uses data for 13 euro area countries in the period 2004–2013. For whole of the sample, our two hypotheses concerning stabilization and external financing are rejected, but Lithuania and Greece are outliers. Remittances seem to have had a macroeconomic stabilizing effect on Lithuania and to have mitigated in part the liquidity problems that Greece has faced since the sovereign debt crisis.     

The ECB's New Multi-Country Model for the euro area: NMCM — Simulated with rational expectations

The model presented here is an estimated medium-scale New Multi-Country Model (NMCM) which covers the five largest euro area countries and is used for forecasting and scenario analysis at the European Central Bank. The model has a tight theoretical structure which allows for non-unitary elasticity of substitution, non-constant augmenting technical progress and heterogeneous sectors with differentiated price and income elasticities of demand across sectors. Furthermore, it has the explicit inclusion of expectations on the basis of three optimising private sector decision making units: i.e. firms, trade unions and households, where output is in the short run demand-determined and monopolistically competing firms set prices and factor demands. Labour is indivisible and monopoly-unions set wages and households make consumption/saving decisions.We assume that agents optimise under limited information where each agent knows only the parameters related to his/her optimisation problem. Therefore we estimate with GMM, which implicitly assumes limited information boundedly rational expectations. In this paper we provide some simulation results under the assumption of model-consistent rational expectations, we show that there is some heterogeneity across countries and that the reactions of the economies to shocks depend strongly on whether the shocks are pre-announced, announced and credible or unannounced and uncredible.     

Did the pattern of aggregate employment growth change in the euro area in the late 1990s?

This paper examines whether the pattern of growth in euro area employment seen in the period 1997 to 2001 differs from that recorded in the past and what could be the reasons. First, a standard employment equation is estimated for the euro area as a whole. This shows that the lagged impact of both output growth and real labour cost growth, together with a productivity trend and employment ‘inertia’, can account for most of the employment developments between 1970 and the early 1990s. Conversely, these traditional determinants can only explain part of the employment development seen in recent years (1997 to 2001). Second, the paper shows sound evidence of a structural break in the aggregate employment equation in the late 1990s. Third, the paper provides some tentative explanations for this change in aggregate employment developments, using in particular country panels of institutional variables and of active labour market policies but also cross-sectional analyses. Among the relevant factors likely to have contributed to rising aggregate employment in recent years are changes in the sectoral composition of euro area employment, the strong development of part-time jobs, lower labour tax rates and possibly less stringent employment protection legislation and greater subsidies to private employment.     

Has monetary policy really become less effective in the euro area? A note

This paper applies a time-varying VAR model with stochastic volatility to the euro area. In contrast to the literature, we find that (i) monetary policy has not become less effective and that (ii) the expansionary policy that is currently pursued would not have resulted in a less severe recession in 2009.     

European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.     

Financial market fragmentation and monetary transmission in the euro area: what do we know?

We provide a survey on the literature examining financial market fragmentation in the euro area and discuss the policy options how to reduce it. The fragmentation has increased markedly since the outbreak of the global financial crisis in 2007. It declined somewhat from late 2012 onwards, but is still above the pre-crisis level. Interest rate pass-through has become less efficient primarily because of increased mark-ups and, to a certain extent, the lower responsiveness of bank interest rates to policy rates. The effectiveness of interest rate pass-through has become more heterogeneous across euro area countries, making a common monetary policy more difficult. The unconventional monetary policy conducted by the European Central Bank has reduced financial market fragmentation notably; however, this policy was not without side effects. Enhancing financial and fiscal stability in the euro area is key for the efficient functioning of the monetary transmission mechanism.     

Forecasting inflation and tracking monetary policy in the euro area: does national information help?

The ECB target is set in terms of the year on year growth rate of the euro area Harmonized Index of Consumer Prices. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor Model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. Within our empirical framework we find that once area wide information is properly taken into account the contribution of national idiosyncratic developments is negligible.     

Economic policy uncertainty in the US: Does it matter for the Euro area?

We investigate the effects of a US economic policy uncertainty shock on some Euro area macroeconomic aggregates via Structural VARs. We model the indicators of economic policy uncertainty recently developed by  Baker et al. (2013) jointly with the aggregate price indexes and alternative indicators of the business cycle for the two above indicated economic areas. According to our SVARs, a one standard deviation shock to US economic policy uncertainty leads to a statistically significant fall in the European industrial production and prices of −0.12% and −0.06%, respectively. The contribution of the US uncertainty shock on the European aggregates is shown to be quantitatively larger than the one exerted by an Euro area-specific uncertainty shock.     

Theoretical incentive properties of contingent valuation questions: Do they matter in the field?

Green et al. (1998) [Green, D., Jacowitz, K.E., Kahneman, D., McFadden, D., 1998. Referendum contigent valuation, anchoring, and willingness to pay for public goods. Resource and Energy Economics 20 (2), 85−116] show theoretically that stated preference questions about public services can be framed in such ways that if the subjects accept the frame the payoff­maximizing behavior will be to answer truthfully. One key element of such a theoretically incentive­compatible framing is that the (hypothetical) decision rule specified in the survey instrument is understood to be a majority rule rather than the efficiency rule typically used in cost­benefit analysis. We conducted field experiments in Germany and Switzerland to test if a referendum framing as suggested by Green et al. is effective in reducing strategic misrepresentation in a contingent valuation setting. We did not find the expected effects of the framing treatments on stated willingness to pay or on individuals' (stated) beliefs about the social choice context. The results do not support hopes that a theoretically incentive compatible framing could be purposefully used to invoke the specific beliefs about the linkage between responses and policy implementation that would make stated preference questions incentive compatible.