Political consensus, uncertain preferences, and central bank independence

Models where monetary policy is delegated to an independentcentral bank using contracts or targets usually assume thatthe preferences of the principal and the agent are known withcertainty. However, if there is no consensus in society aboutthe relative costs of inflation and output stabilisation, thedelegation solution may not produce a better outcome for themedian voter than discretion This paper examines the robustnessof the institutional solutions to the credibility problem withuncertain preferences We also examine the related issue of whetherpolitical parties have an interest in moving towards centralbank independence     

COINTEGRATION AND DYNAMIC TIME SERIES MODELS

ABSTRACT. This paper provides a survey of some of the recent developments in the field of econometric modelling with cointegrated time series. In particular, we describe the testing and estimation procedures which have become increasingly popular in the recent applied literature. In addition to the 'two-stage' procedure proposed by Engle and Granger, we consider extensions to the modelling of dynamic models with cointegrated variables, such as the estimation of models with multiple cointegration vectors, simultaneous systems, models with seasonally integrated and cointegrated variables. Furthermore, we illustrate the practical application of the techniques describes in the paper by means of a tutorial data set.     

Monetary Policy Rules, Policy Preferences, and Uncertainty: Recent Empirical Evidence

We survey recent empirical evidence on monetary policy rules, and find that the emphasis in the political economy literature on institutional design (e.g. central bank independence and inflation targeting) is exaggerated. Formal institutional reform seems neither a necessary nor a sufficient condition for the observation of shifts in monetary policy rules. However, there is no doubt that in some cases (e.g. the UK following the start of inflation targeting in 1992, and Bank of England Independence in 1997), a major shift in monetary policy conduct is detectable. We also highlight the problems in explicitly testing the predictions of the political economy literature. Semi-structural modelling approaches, such as time-varying VAR models may be more useful in understanding policy rules, and the interaction between policy shifts and changes in the transmission mechanism.     

GIBSON'S PARADOX AND POLICY REGIMES: A COMPARISON OF THE EXPERIENCE IN THE US, UK AND ITALY

This paper compares the behaviour of long-term interest rates and prices in Italy, the UK and the USA, and seeks to shed light into what has become known as the 'Gibson Paradox'. We compare the various theoretical explanations for the observed positive correlation of interest rates and prices in the USA and the UK. Using both regression and frequency domain techniques, we demonstrate that there is little evidence for the occurrence of the paradox in the case of Italy. The key conclusion of the paper is that the comparative evidence from these three countries supports a gold standard interpretation of the Paradox.     

Business cycles and productivity growth: Are temporary downturns productive or wasteful?

This paper investigates the relationship between the structure of the business cycle and total factor productivity (TFP) growth in U.S. manufacturing. Previous empirical studies on cycle-growth interactions have been conducted at the aggregate level, and have produced mixed results. In contrast, we examine the dynamic linkages between temporary employment shocks and TFP at the industry level, using the NBER Productivity Database. Given the substantial differences in factor intensities, costs and the nature of innovation and productivity-enhancing activities across industries, there are good reasons why cycle-growth interactions may be more readily captured at the sectoral level. We construct an exactly identified Vector Autoregressive model for employment and TFP growth, and find strong support for the “opportunity-cost” view of business cycle-productivity growth interaction. This result suggests that recessions can lead to TFP growth through reorganization and restructuring effects. On the other hand, we find little support for the notion that temporary booms increase TFP through “learning-by-doing” effects. The responsiveness of TFP to employment shocks also seems to be related to the degree of job reallocation within individual industries and the capital intensity of the industry in question. This is further evidence in favour of the view that employment shocks can trigger reorganization effects. Finally, we suggest possible future avenues for this research, including the adjustment of TFP measures to allow for variable factor utilization over the cycle.     

Unemployment and growth: some empirical evidence from structural time series models

This study investigates the empirical relationship between unemployment and growth in a number of OECD economies. A structural time series model is used for labour productivity growth to demonstrate that, in most economies, there seems to be a negative correlation between unemployment and labour productivity growth. The results provide little support for the theory that recessions may stimulate productivity growth. The use of a structural time series approach allows an attempt to model the underlying dynamics of productivity growth jointly with the effect of unemployment.     

The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?*

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two‐country New Keynesian DSGE model, incorporating non‐Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non‐Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country‐specific shocks does not suggest potential inter‐country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility.