Gold rush fever in business cycles

A flexible price model of the business cycle is proposed, in which fluctuations are driven primarily by inefficient movements in investment around a stochastic trend. A boom in the model arises when investors rush to exploit new market opportunities even though the resulting investments simply crowd out the value of previous investments. A metaphor for such profit driven fluctuations are gold rushes, as they are periods of economic boom associated with expenditures aimed at securing claims near new found veins of gold. An attractive feature of the model is its capacity to provide a simple structural interpretation to the properties of a standard consumption and output Vector Autoregression.     

The Provision of Company Benefits in the UK

Abstract:   A theoretical analysis argues that a company will provide benefits if they are worth more to the employee than income equal to the net amount it is costing the firm to provide the benefit. Because the individual is being denied choice, other things being equal he/she would prefer the income. But the firm may be able to provide a benefit‐wage package which compensates the individual because of (i) tax advantages, (ii) economies of scale in purchasing or (iii) production function advantages. The empirical work focuses on benefit provision in the UK.     

Hours Worked and Permanent Technology Shocks in Open Economies

We use Structural Vector Autoregressions to study the impact of technology improvements on hours worked in the major seven countries. While previous studies estimate the response of labor input to permanent shocks to country-level labor productivity, we consider the response of labor input to aggregate-level labor productivity. Since labor productivities do cointegrate in the G7, the estimated responses should look very similar. They do not: for each country but Germany, the responses estimated using G7 labor productivity sizeably exceed those estimated using country-level labor productivity. These results also hold in larger SVAR models.     

Tax distortions and the case for price stability

We investigate the case for price stability in the general version of the New Keynesian (NNS) model with capital and several shocks. The model includes, in addition to the standard imperfect competition and monetary frictions, a non-trivial, endogenous tax distortion. We find that the case for perfect price stability is not significantly weakened. Optimal policy tolerates a small amount of output gap and price variability by reacting less strongly to supply and fiscal shocks in comparison to a policy that aims at perfect price stabilization.     

Monetary union: A welfare based approach

This article attempts to shed light on the consequences of the transition to EMU for individual welfare following specific shocks. To this end, we develop a two country intertemporal general equilibrium model that extends the Obstfeld and Rogoff (Journal of Political Economy 103 (3) (1995) 624) specification to nominal rigidities through price adjustment costs and pricing-to-market behavior.We show that, when facing a positive asymmetric permanent shock to either technology or government expenditures occurring in one country, implementing a monetary union is beneficial to the households living in this economy. Conversely, it is detrimental to foreigners. Further, a sensitivity analysis shows that if the gains/losses to implementing monetary union are qualitatively robust when facing changes in the degree of nominal rigidities and the elasticity of substitution between foreign and domestic goods, they are quite sensitive to the degree of pricing-to-market in the economy.     

Poole in the New Keynesian model

We study the properties of alternative central bank targeting procedures within the standard New Keynesian model. We find that Poole's famous insights concerning the output stabilization properties of money and interest rate targeting obtain when intertemporal substitution is low. And that output volatility rankings do not induce similar welfare rankings. Unlike the popular presumption, money targeting always fares better for money demand shocks. For fiscal shocks, money targeting does better for low and worse for high degree of intertemporal substitution. The opposite pattern obtains for supply shocks.     

Demographics and recent productivity performance: insights from cross‐country comparisons

Abstract.  Over the last few decades, countries have experienced quite different patterns of productivity growth. In this paper, we emphasize the role of country level demographics in explaining these differences. In particular, looking over the period 1960–2002, we show that cross‐country data support the notion that, starting in the late 1970s, countries went through a period of technological transition that lasted at least until the mid‐1990s for the fastest adjusting countries and is still proceeding for the slower adjusting countries. The main claim of the paper is that the country‐level rate of labour growth was a key factor driving the speed of adjustment to the new technological paradigm, implying that much of the cross‐country difference in economic performance over recent decades can be explained by demographic differences across countries as opposed to the many other factors emphasized in the literature. JEL classification: O33, O41     

The case for inflation stability

We evaluate the case for inflation stabilization in a New Keynesian (NNS) model that includes various frictions, capital accumulation and a variety of shocks. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains. Policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible.