Thoughts on a Fiscal Union in EMU

Using an estimated large‐scale New Keynesian model, we assess the consequences of introducing a fiscal union within EMU. We differentiate between three different scenarios: public revenue equalisation, tax harmonisation and a centralised fiscal authority. Our results indicate that no country would significantly benefit from introducing any form of fiscal union. Comparing long‐term, that is, steady state, effects we have winners and losers depending on the scenario. Differences in terms of business cycle statistics as well as in terms of risk sharing of asymmetric shocks are minor. This also explains why welfare differences are small across the fiscal union scenarios. A counterfactual exercise indicates that with a fiscal union regime already installed at the start of EMU, key macroeconomic variables would have reacted very similarly while debt dynamics would have changed notably.     

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.     

3M: Role model for emerging markets

This article focuses on the role of multinational companies in transferring advanced human resource management practices to post‐Communist countries. It reviews the lessons learned from the complex cultural and historical configuration of a transitional economy. The authors analyze 3M's experience in Russia and the results of interviews with the company managers. They summarize innovative solutions in hiring, training, motivating employees, and creating organizational culture, and discuss the company's position as a role model for emerging markets. © 2006 Wiley Periodicals, Inc.     

A FIRST‐ORDER BSPDE FOR SWING OPTION PRICING

We study an optimal control problem related to swing option pricing in a general non‐Markovian setting in continuous time. As a main result we uniquely characterize the value process in terms of a first‐order nonlinear backward stochastic partial differential equation and a differential inclusion. Based on this result we also determine the set of optimal controls and derive a dual minimization problem.     

Composition of wealth,conditioning information,and the cross-section of stock returns

Value stocks covary with aggregate consumption more than growth stocks during periods when financial wealth is low relative to consumption. However, the conditional value premium does not exhibit such countercyclical behavior. Consequently, a one-factor conditional consumption-based asset pricing model can be rejected without making any arbitrary assumptions on the dynamics of the price of risk or the conditional moments. Empirical evidence is somewhat more consistent with a consumption-based model augmented with an aggregate wealth growth factor, which can be motivated by either recursive preferences or relative wealth concerns.     

Countercyclical currency risk premia

We describe a novel currency investment strategy, the ‘dollar carry trade,’ which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for taking on aggregate risk by shorting the dollar in bad times, when the U.S. price of risk is high. The countercyclical variation in risk premia leads to strong return predictability: the average forward discount and U.S. industrial production growth rates forecast up to 25% of the dollar return variation at the one-year horizon. The estimated model implies that the variation in the exposure of U.S. investors to worldwide risk is the key driver of predictability.     

Firing costs, severance payments, judicial mistakes and unemployment

In the discussion about employment protection, little attention has been given to judicial mistakes. In most countries, only in the case of dismissals due to economic reasons, the employee is entitled to a severance payment. Given judicial mistakes when reviewing a dismissal, shirkers might falsely receive a severance payment while non-shirker might not. At fighting unemployment, increasing the level of severance payments can increase employment for small judicial mistakes and effectively dominate the pure firing costs which leave ambiguous effects on employment. For large judicial mistakes, the opposite can hold and severance payments can decrease employment.     

LONG DARK SHADOWS OR INNOVATIVE SPIRITS? THE EFFECTS OF (SMOOTHING) BUSINESS CYCLES ON ECONOMIC GROWTH: A SURVEY OF THE LITERATURE

Abstract It is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long‐term path of growth. Never before has this argument been advanced as frequently as in the current economic crisis. However, the economic literature – an overview of which is given here – does not provide an unambiguous answer, either theoretically or empirically, to the question of the relationship between (the smoothing of) cyclical fluctuations and long‐term growth. In this context, two main contrasting explanatory paradigms can be identified: Schumpeter’s concept of creative destruction and the learning by doing hypothesis. Even if it were possible to identify the relationship more clearly on this basis, it is important not to lose sight of the problems associated with the real‐time assessment of the current economic situation, time lags and political economic incentives even in difficult times.