Labor market institutions and inflation volatility in the euro area

Despite having had the same currency for many years, EMU countries still have quite different inflation dynamics. In this paper we explore one possible reason: country specific labor market institutions, giving rise to different inflation volatilities. When unemployment insurance schemes differ, as they do in EMU, reservation wages react differently in each country to area-wide shocks. This implies that real marginal costs and inflation also react differently. We report evidence for EMU countries supporting the existence of a cross-country link over the cycle between labor market structures on the one side and real wages and inflation on the other. We then build a DSGE model that replicates the data evidence. The inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.     

``Three Can Keep a Secret if Two are Dead' (Lavigne, 1996): Weak Ties as Infiltration Routes

Among several ways of trying to suppress terrorist conspiracies,infiltration has probably received the least attention.Impressionistic evidence suggests that conspiracies that carry outviolent attacks usually have a small number of participants, and thatlarge conspiracies either fail to materialize, fail to organize actualattacks, or are substantially less difficult to uncover. Due to theprevalence of weak social ties in larger groups there may be anintermediate group size, around 7–10 members, that is highly subjectto infiltration. Building on work by Freeman, Granovetter, and others,this study examines a few features of the social ecology ofinteraction ties. We introduce a procedure for counting,within groups of size $n$, all interacting pairs {P, Q},where P and Q are disjoint or nonoverlapping subsets(Freeman, 1992: 153) of a given group; these subsets usually contain more than one person, i.e., the interacting units do not invariably consist of individuals. This procedure generates interaction configurations having unique patterns of strong, weak, and ``weakest' ties – i.e., three levels of tie strength corresponding to core, primary, and secondary ties inFreeman's terminology – such that relatively weak ties predominatewithin larger conspiracies. We speculate about ways in which theseconfigurations may evolve through time.We then use a combinatorial analysisof group structure to develop arough calculation of the probability of infiltrating conspiracies ofsize $n$, and we show that relatively large conspiracies,having 7 or more members, tend to have interaction structures that make them highly vulnerable to infiltration. Finally, Collins' (1985: 170–172) approach to interaction-chain analysis suggests that, while in real situations it would be hard to anticipate departures from our probability model, attempts to ``turn around' conspirators with weak ties appear tohave a fairly high prospect of success.– But the child's sob in the silence– Curses deeper than the strong man in his wrath.– Elizabeth Barrett Browning, ``Cry of the children'     

Differential Equation Modeling as a Source of Theoretical Insight: Four Disparate Examples

We explore differential equations involving alcoholism, socialmobility, excess female mortality, and international arms competition.In each of these instances we show that the initial equation, orsystem of equations, has a sociological plausibility comparable tothat of the associated solutions; the solutions do indeed describetime-series trajectories that seem to represent important and uniquesocial processes. We argue that the central challenge of differentialequation modeling is to use experimentation to clarifyrelationships between, on the one hand, the equations andtheir coefficients and, on the other, the solutions and thetime-series orbits created by them. Such feedback interaction ofdifferential equations and their solutions appears to be the basis forfurther theoretical insight, and rapid assessments of theseinteractions are now possible largely because modern softwareencourages experimentation with many combinations of inputcoefficients.This paper expands on an argument made by Nielsen and Rosenfeld(1981, p. 161), who recommend that differential equations be interpreted in a way that emphasizes their solutions, i.e., the time-seriestrajectories of Yvalues, the orbits of Y, taken torepresent behavior of dependent variables through time. We concludethat the most edifying interpretations of differential equations focuson the equations themselves, the resulting trajectories, therelationships between equations and trajectories, and the theoreticalsignificance of all three.     

Ramsey monetary policy with labor market frictions

Traditional New Keynesian models prescribe that optimal monetary policy should aim at price stability. In the absence of a labor market frictions, the monetary authority faces no unemployment/inflation trade-off. The design of optimal monetary policy is analyzed here for a framework with sticky prices and matching frictions in the labor market. Optimal policy features deviations from price stability in response to both productivity and government expenditure shocks. When the Hosios [1990. On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279-298] condition is not met, search externalities make the flexible price allocation unfeasible. Optimal deviations from price stability increase with workers’ bargaining power, as firms incentives to post vacancies fall and unemployment fluctuates above the Pareto efficient one.     

Financial openness, financial frictions and optimal monetary policy

Increasing financial integration challenges the optimality of inward-looking strategies for optimal monetary policy. Those issues are analyzed in an open economy where foreign net lending, and the current account, are determined by a collateral constraint. Durables represent collateral. The current account features persistent imbalances, but can deliver a long run stationary equilibrium. The comparison between floating and managed exchange rate regimes shows that the impossible trinity is reversed: higher financial integration increases the persistence and volatility of the current account and calls for exchange rate stabilization. In this context, the Ramsey plan too prescribes stabilization of the exchange rate, alongside with domestic inflation.     

Capital regulation and monetary policy with fragile banks

Optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky. A monetary expansion and a positive productivity shock increase bank leverage and risk. Risk-based capital requirements amplify the cycle and are welfare detrimental. Within a class of simple policy rules, the best combination includes mildly anticyclical capital ratios (as in Basel III) and a response of monetary policy to asset prices or bank leverage.