Wage norms in an open economy

Zusammenfassung Das Zusammentreffen einer Beschleunigung des Preisauftriebs und einer Erhöhung der Arbeitslosigkeit in den OECD-Ländern in den sechziger und siebziger Jahren überzeugte viele Wirtschaftswissenschafter und Wirtschaftspolitiker, daß es einer Einkommenspolitik bedürfe, um die diskretionäre Marktmacht von Unternehmen und Gewerkschaften einzuschränken. Zwei wichtige Varianten der Einkommenspolitik sind die produktivitätsorientierte Lohnpolitik, die das Wachstum der Geldlöhne vom Wachstum der gesamtwirtschaftlichen Produktivität und der gesamtwirtschaftlichen Preissteigerung abhängig macht, und das Skandinavische Modell, in welchem die Erhaltung der internationalen Wettbewerbsfähigkeit dadurch garantiert wird, daß das Wachstum der Geldlöhne gleich der Summe des Produktivitätswachstums im exponierten Sektor und der Preissteigerung der handelbaren Güter (in heimischer Währung) ist. Dieser Aufsatz zeigt, daß beide Arten der Einkommenspolitik äquivalent sind. Er untersucht auch die Rolle der Wechselkurse in diesen Modellen und verwendet das Ergebnis, daß in einer umfassenden Einkommenspolitik Lohnzurückhaltung durch eine Preispolitik in der Form einer Wechselkurspolitik ergänzt werden muß, um historische Ereignisse in einigen Ländern zu interpretieren.     

Kaldorian dynamics in an open economy

In this paper, we formulate a Kaldorian business-cycle model in a small open economy. We consider the possibility of capital mobility, and both the system of fixed exchange rates and that of flexible exchange rates are studied. We investigate how changes of the parameter which represents the degree of capital mobility affect the dynamic characteristics of the model. Some numerical simulations are performed based on the analytical model.     

Verification of the natural unemployment rate hypothesis in the South African economy

The results obtained confirming the natural unemployment rate hypothesis, i.e., that in the long run there is no trade-off between inflation and unemployment. The results also support the weak rational expectations hypothesis, that with the increase in the information the economic agent will eliminate the money illusion, though the process towards the final elimination of the money illusion is very long, and therefore short-term Phillips curve can be sustained for quite long periods.     

Quantile hedging for equity-linked life insurance contracts in a stochastic interest rate economy

In this paper we examine equity-linked life insurance contracts in a stochastic interest rate economy via quantile hedging whose purpose is to look for the optimal probability of a successful hedge under initial budget constraint. Most of the existing studies have focused on valuing equity-linked life insurance contracts by quantile hedging or in a framework of stochastic interest rates. However, a few have taken into account simultaneously the two techniques, which make valuing equity-linked life insurance contracts more difficult. We model the term structure of interest rates by classical HJM model that imbeds stochastic interest rate economy into one containing an arbitrary number of additional risky assets. By means of the change of measure approach, we give explicit formulas for the fair values of the following four products: deterministic payoff contract, pure equity-linked life contract, equity-linked life contract with guarantee, equity-linked life contract with minimum guarantees and capped benefits. We find that the explicit formulas are mainly composed of normal distribution functions and two-dimensional normal distribution functions. We also investigate sensibility of the survival probability using data of interest rates, stock prices and life table from China.     

Inflation and nominal tax system in an open economy

This paper provides an analysis of the implications of the interaction between inflation and a tax system which is not fully indexed within the context of an open economy. The model used is characterized by perfect foresight, full employment, imperfect substitutability between domestic and foreign assets, and an endogenous stock of capital. Three distinct channels through which an increase in the inflation rate disturbs the initial equilibrium are analysed separately. The global effect is then discussed with respect to the position of the economy as debtor or creditor to the rest of the world. The financing of the public deficit is also briefly discussed.     

Progressive taxes and automatic stabilization in an open economy

In a simple model with a fixed exchange rate, more progressive taxes are likely to lead to a fall in the multiplier for autonomous expenditure. The effect on the multiplier for an autonomous wage shock may go either way, and increased progressivity may change the sign of this multiplier. The wage bargaining is modeled as a trade-off between employment and real disposable income. Depending on them weight attached to employment and the way expectations are formed, more progressivity may contribute to stabilize rather than destabilize this wage formation process. Indexation of taxes to imported inflation seems preferable to alternatives.     

Income inequality and economic growth in an open economy

Income inequality has a strong impact on fiscal policy when majority voting enables those individuals with less-than-average income to decide on tax rates. This study analyzes the impact on economic growth of income inequality in an open economy where tax revenues are partially used for international transfers. In any case, income inequality is harmful for growth. In an economic union, positive effects of international integration raise the growth rate as long as net transfers do not grow proportionally. In a political union, unionwide voting makes distributive politics depending on the union's median voter. In this case, additional output growth on aggregate level is a necessary, but not sufficient condition for a majority of voters to accept union membership.     

Benefits and unemployment in an open economy: an equilibrium analysis

This paper examines the relation between uemployment compensation and unemployment in The Netherlands. This relation is studied by menas of a small macroeconomic model for an open economy that assumes equilibrium in the labour market and on the current account. The model yields an elasticity of unemployment to benefits of 1.0, which is high compared to microeconomic research and the outcomes of disequilibrium models for The Netherlands. According to the model, a rise in the ‘wedge’ (i.e. the difference betweenn real labour cost and real net wages) leads to an increase in unemployment, whilst shifting this wedge from the employers to the employees induces a fall in unemployment.     

Price level targeting and the delegation issue in an open economy

A weight-conservative central banker setting policy with discretion and stabilizing the real exchange-rate-adjusted (REX) price level and the output gap can replicate the behavior of the rate of REX inflation and the output gap under policy from a timeless perspective.     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

Taylor rules in the open economy

Taylor rules, which link short-term interest rates to fluctuations in inflation and output, have been shown to be a good guide (both positively and normatively) to the conduct of monetary policy. As a result they have been used extensively to model policy in the context of both closed and open economy models. Their determinacy properties have also been analysed in the context of closed and, to a more limited degree, in small open economy models. In this paper, we extend the analysis of the determinacy properties of Taylor rules to the case of a benchmark two-country model. When the rules are specified in terms of output-price inflation we confirm and extend the conventional results from the closed economy literature—satisfying the Taylor principle is the key to ensuring determinacy, although the presence of backward-looking price-setting can affect the determinacy properties of the two-country model. However, the conventional results do not hold when we replace output-price inflation with consumer price inflation in the specification of the rule. In this case, Taylor rules which satisfy the Taylor principle will be indeterminate, unless there is an unusually large home bias in consumption. Similar indeterminacy problems arise when one country targets CPI inflation and the other output-price inflation. In this case we show that, even if determinacy is achieved, large spillovers may occur between countries.     

The demand for money in an open economy: the United Kingdom

Most previous studies have estimated the demand for money without paying too much attention to developments in the foreign exchange markets. In light of the fact that any development abroad and in the foreign exchange markets could have implications for domestic stabilization, we make an attempt to incorporate such developments into the demand for money in the United Kingdom. More precisely, after incorporating a measure of real effective exchange rate of the British Pound into a dynamic money demand function, we estimated it for the UK using quarterly data over 1973–87 period. By relying upon the Akaike' Final Prediction Error criteria to select the optimum number of lags, it is shown that in addition to income and interest rate, the real effective exchange rate exerts significant effect on the UK demand for money in the short run as well as long run.     

The influence of money and the rate of interest on the rate of inflation in a financially repressed economy: the case of Turkey

In this paper we discuss a recent paper by Stephen E. Haynes in which he relates electoral cycles in political support to electoral cycles in economic variables. Haynes finds that the cycle in support for Republican presidents is explained by the cycle in economic variables, whereas the cycle in support for Democratic presidents is not. In our opinion this shortcoming is due to his specification of the popularity function. Haynes estimates a popularity function which incorporates the notion that voters reward the incumbent for favourable outcomes (score hypothesis). Our popularity function combines the score hypothesis and the notion that voters cast their ballots for the party that best fits the current economic situation (issue hypothesis). We show that the electoral cycle in popularity of both Republican and Democratic presidents is explained very well by the cycle in economic variables.     

A structural model of price and exchange rate dynamics in a small open economy

Conclusions A major result following from the analysis of ourstructural model of inflation under flexible exchange rates is that there is no such thing asstructural inflation in the long run. Long-run inflation rather becomes a purely monetary phenomenon if exchange rates are flexible and if on an international level functioning capital markets are postulated. While, in the light of the assumptions made in Part III, this finding is not nearly as paradoxical as it may appear at first sight, it can hardly be overemphasized considering the ongoing theoretical discussion and the empirical research on the Scandinavian approach to inflation and recalling that the Scandinavian model is basically intended to picture equilibrium dynamics.The results concerning equilibrium price and exchange rate dynamics also apply to the equilibriumlevels of prices and the exchange rate, i. e., the equilibrium price level depends exclusively on monetary factors while the equilibrium exchange rate is determined by a purchasing power parity element and the structural productivity gap component.Turning to the results of our analysis of disequilibrium dynamics, the overall picture does not change very much. Here the qualitative pattern of adjustment of both prices and the exchange rate is again completely independent of structural variables, but is exclusively determined by four adjustment coefficients. However, the particular quantitative values assumed by prices and the exchange rate during the adjustment process do indeed reflect the impact of the productivity gap.No conclusions can be derived from our model on the amount of time it takes to return to the neighbourhood of equilibrium once the economy has been subjected to some kind of external shock. A casual examination of post-1973 developments and especially the Swiss experience suggest, however, that in the case of a disturbance as, e. g., in the form of a monetary contraction (relative to the rest of the world), the economy may take so long to return to the neighbourhood of long-run equilibrium that the negative real consequences of the overvaluation of the domestic currency during the adjustment process provide a momentous rationale for short-run stabilization interventions in the foreign exchange market.We should like to thank Peter Bernholz and an anonymous referee for helpful comments on a previous version of this paper.     

Exchange rate changes and endogenous terms of trade effects in a small open economy

This paper shows that the small-country assumption of dependent-economy models is unlikely to hold for many of the cases in which this class of models is used, for example, in the analysis of a terms of trade shock in the “commodity currency” models. When a shock affects most or all of the small countries exporting a commodity, the combined exchange rate effects will result in endogenous terms of trade changes even for those countries too small to individually affect world markets. The paper also explores the possible implications of these secondary terms of trade changes for the dependent-economy models.     

The natural rate of interest and the output gap in the euro area: a joint estimation

The notion of a natural real rate of interest, due to Wicksell (Interest and prices. Macmillan, London Translation of 1898 edition, 1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a concept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method suggested by Laubach and Williams (Rev Econ Stat 85(4):1063–1070, 2003) to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960 onwards. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s. The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of the institutions to which they are affiliated. We are grateful to Siem Jan Koopman for very helpful suggestions and comments. We also thank P. Cour-Thimann, V. Curdia, F. Drudi, S. McCaw, D. Rodriguez-Palenzuela, R. Pilegaard, H. Pill, L. Stracca, T. Laubach, J. C. Williams and the participants of an ECB workshop on natural interest rates.     

Determinants of the long-term yield in Canada: an open economy VAR approach

An assumption of many national drug control policies is the existence of a causal relationship between illegal drug use and violent crime. However, robust empirical findings supporting this relationship are scarce. Alternatively, there is extensive research, much of it in economics, which suggests that there may actually be a stronger causal relationship between drug enforcement/control/prohibition and violent crime than drug use and criminal violence. The paper presents some of the research pertaining to the relationship between illegal drugs and violent crime. In addition, a violent crime model is empirically tested using data from 24 Metropolitan Statistical Areas (MSAs) in the United States to determine the nature and strength of this relationship.     

Rationing in an open economy: Fix-price equilibrium and two-gap models

Two-gap models have been criticized severely for the lack of realism of their assumptions but are still prominent in development planning and, implicitly, in discussions of short-run policy problems. Here the model's applicability outside a command economy is considered by comparing it with a rationing model with proper micro-foundations. It is shown that the two-gap model in general violates fix-price equilibrium properties but that the fix-price model generates quite similar results.