What Monetary Policy after the Crisis?

The objective of this paper is to reflect on some of the implications that recent economic experience has for monetary and financial stability policies. We contend that the financial crisis and the upsurge in inflation 2007–08 have shown that the policy model based on the new consensus in macroeconomics, which largely held sway over the past decade or more, is broken. It is argued that inflation targeting cannot deliver low inflation. We argue that fine-tuning through interest rates should not be attempted, but rather a constant real interest rate target based on the output growth rate should be adopted. The key objective of monetary policy should be shifted to financial stability, the independence of central banks should be brought to an end, and their decision making should be coordinated with other macroeconomic policy initiatives.     

The Euro: Reflections on the first three years

In the first three years of its (virtual) existence, the euro has seen a general decline in its value (notably against the dollar). In this paper we look at this issue and reflect on the implications of the decline for the future of the euro.The paper begins by briefly reviewing some of the explanations that have been put forward for the weakness of the euro, which might be seen as temporary factors or factors that do not arise from the creation of the eurozone per se. These explanations include the decline in the value of the euro as being a reaction to previous rises, interest rate differentials as favouring the dollar and the decline in the euro as being the obverse of a rise in the value of the dollar reflecting the strength of the US economy. These explanations are found to be unconvincing, and the view is advanced that there are serious weaknesses within the eurozone itself and in the construction of the eurosystem, along with its operation, that could be undermining the value of the euro. The divergent euro area may be one of the more significant factors contributing to the euro decline.     

Fiscal policy under New Labour

This paper seeks to provide an evaluation of fiscal policy underNew Labour in the decade from its election in May 1997 to date.It begins with a brief review of macroeconomic performance overthat period. It outlines the main features of the approach ofthe Labour government to fiscal policy including the ‘goldenrule’ of public finance, and provides a critique of thatrule and the general approach to fiscal policy. It considershow far the policy rules have been observed in practice. Finally,it argues that the relative macroeconomic stability since 1997has not resulted from the fiscal policy pursued, but ratherthat changes in the fiscal stance have fortuitously offset variationsin private expenditure.     

Recovering the production technology from the cost function

An alternative technique for recovering the technology from the cost function is investigated. The recovery method uses an optimization problem with a finite number of constraints that, under appropriate conditions, has, the equations of Shephard's lemma among the first order conditions. Hence, a justification is provided for the technique of recovering the production function from the cost function by solving the system of equations generated by Shephard's lemma. The alternative technique also recovers the output distance function from the cost function in the multioutput case.The editor for this paper was R. Robert Russell.     

THE RELATIONSHIP BETWEEN CAPITAL STOCK, UNEMPLOYMENT AND WAGES IN NINE EMU COUNTRIES

The focus of this paper is to investigate the importance of the capital stock in the determination of wages and unemployment in a range of EMU countries and to compare the results across countries. A time‐series analysis is conducted in the case of nine euro area countries, which were selected solely on the basis of data availability and consistency: Austria, Belgium, Finland, France, Germany, Italy, Ireland, the Netherlands and Spain. The paper begins with a short review of the literature on capital stock and unemployment, before it deals with the theoretical model. This is followed by estimation and testing of the theoretical model put forward, using both time‐series and panel data. The results are supportive of the main hypothesis of the paper: capital stock is an important determinant of unemployment and wages in the countries considered for the purposes of the paper.     

International Marketing of Organic Foods: Consumers,Standards, and Harmonization

Differing technical standards can be barriers to international trade. Harmonizing standards is one means of removing barriers to trade. It is argued in this article that international harmonization may not be welfare enhancing if consumers have a strong attachment to their domestic standards. Standards for organic products differ among countries and act as a barrier to trade. International harmonization has been proposed. Consumers were surveyed in the United States, United Kingdom, and Canada to determine their likely attachment to existing domestic organic standards. The results suggest that consumers, even those with a preference for organic foods, have little understanding of their domestic standards and only weakly identify with them. As a result, harmonization could be pursued. Agribusiness firms that are interested in harmonization to expand their access to export markets should promote the development of a new international standard rather than harmonization to one of the existing domestic standards.     

Patterns and determinants of intra-industry trade in Asia

Intra-industry trade (IIT) has gained in importance across Asia as a result of the rapid growth of Asian economies and their key role in the international fragmentation of production. This paper examines the level of IIT for 22 countries in East, Southeast, South, and Central Asia in 2003. IIT is measured as a multilateral trade-weighted index and is reported for ten different categories of goods in the primary and secondary sectors. In addition, the determinants of IIT are investigated using a Tobit regression model. The results indicate that ASEAN and the high-income countries in East Asia exhibit the highest levels of IIT, followed closely by China and India. R&D spending, openness, and a higher share of manufactured exports were found to promote IIT, while geographical distance and the difference in economic size had an adverse effect, especially for manufactured goods. The ASEAN free trade area was most prominently associated with IIT across all SITC categories. Central and South Asian regional trade agreements had a positive influence on IIT in primary products.