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

aggregate employment and intertemporal substitution in the uk in this paper the author sets up estimates and tests an explicit model of aggregate labor supply based on the intertemporal substitution hypothesis the model is derived as the optimal decision rule of an infinitely living household maximizing an intertemporal ces utility function over consumption and leisure the evidence suggests that for aggregate employee hours the model is rejected but that for the total number of employees in employment the estimates are broadly consistent with the theory the assumed constant elasticity of substitution is estimated at around 0 2 and this estimate implies a short run real wage and real interest rate elasticity of labor supply of the same order copyright 1987 by royal economic society

the aggregate labour market an empirical investigation into market clearing for the uk a two equation model of the aggregate labor market is presented as part of a larger market clearing macroeconomic framework which is then estimated by a suitable subsystem estimator using annual data for the u k 1948 1979 taken on their own theory consistent estimates of both labor supply and labor demand are obtained the maintained hypothesis that the market clears cannot be tested againsta more general structural model within the framework presented however a test of the model against the data generation process suggests that the maintained hypothesis is untenable after 1966 which is confirmed by evidence of dynamic instability copyright 1987 by royal economic society

equilibrium exchange rates and supply side performance this paper develops a two country optimising sticky price model of real exchange rate determination in the new open macroeconomics tradition which allows several different forms of deviation from purchasing power parity ppp both along the adjustment path and in the steady state the model has a rich structure and is designed to provide a flexible tool for policy analysis unlike most other papers in the literature both of the key components of the real exchange rate the relative price of non tradables and the terms of trade are made endogenous allowing a more complete analysis of the impact of structural shocks to illustrate one possible application the model is calibrated to match key elements of the uk and euro area economies and used to examine the extent to which possible improvements in the united kingdom s relative supply side performance might account for the sharp and persistent appreciation in sterling since 1996 the results are not supportive of this hypothesis in the model improvements in productivity goods market and labour market competitiveness are all associated with a depreciation in both the spot and the equilibrium real sterling exchange rates two potential supply side sources of an equilibrium appreciation a productivity improvement biased towards traded goods balassa samuelson effect and an anticipated future productivity rise are considered however each is insufficient to account for a long run equilibrium appreciation the latter may account for an initial appreciation of the real exchange rate we conclude by considering further mechanisms that could affect our results

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

a note on the impact of options on stock return volatility abstract this paper measures the impact of option introductions on the return variance of underlying stocks past research generally finds a significant reduction in stock return variance following the listing of options through 1986 using a more extensive sample i compare changes in the return variance of optioned stocks to changes in the return variance of a control group since the average change in the control group is statistically indistinguishable from the average change in the optioned stocks i conclude that option introductions do not significantly affect stock return variance

managing an economy under emu the case of ireland ireland s experience of limited monetary independence within the ems indicated that such independence was bought at the price of significant risk premia on interest rates this experience informed its decision to join emu and membership has resulted in the expected credibility gain since the start of emu inflation in consumer prices in ireland has risen well above the eu average however this need not be a matter of concern within a monetary union instead what should concern the irish administration is a high rate of inflation in wage rates and domestic asset prices chiefly housing while monetary policy is no longer available as an instrument of domestic policy fiscal policy can still be used to effectively target these problems the lessons of the first three years of membership is that the focus of fiscal policy within ireland needs to change and that the eu institutions also need to focus more clearly on the needs of the euro area rather than on those of individual regional economies

irregular staggered contracts and monetary policy taylor s 1980 notion of staggered contracts has been widely recognized as an elegant and useful tool to modelize wage setting procedures and to generate persistence in output and employment levels in this paper we present an extension of taylor s suggestion in which staggered contracts are irregular this implies that the wage equation varies period after period recurrently and raises the issues of the non convergence and the non unicity of the corresponding reduced form then we show that a specific feedback monetary policy may resolve this difficulty and induce a unique solution when explosive solutions are a priori forbidden such a monetary policy is formed by a system of rules varying period after period recurrently

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

assessing energy price induced improvements in efficiency of capital in oecd manufacturing industries to assess how capital stocks adapt to energy price changes it is necessary to account for the impacts on different vintages of capital and to account separately for price induced and autonomous improvements in the energy efficiency of capital stock the results of econometric analysis for five manufacturing industries in 19 oecd countries between 1990 and 2005 indicate that higher energy prices resulted in smaller energy use due to both improved energy efficiency of capital stock and reduced demand for the energy input the investment response to energy prices varied considerably across manufacturing industries being more significant in energy intensive sectors the results of policy simulations indicate that a carbon tax can deliver significant reductions in energy consumption in the medium run with modest declines in energy using capital stock

real wages over the business cycle evidence from panel data one topic on which keynes did not disagree with classical economists was the cyclical behavior of real wages keynes 1936 as well as various classical writers predicted that real wages should move countercyclically quoting the general theory p 17 in general an increase in employment can only occur through the accompaniment of a decline in real wages thus i am not disputing this vital fact which the classical economists have rightly asserted as indefeasible this prediction is based on the premise of competition and a given short run capital stock increases in employment then correspond to more intensive use of capital and through diminishing product lower real wages for this reason evidence by dunlop 1938 and tarshis 1939 that real wages move procyclically was viewed as paradoxical both dunlop and tarshis based their findings on an observed positive correlation between real and money wages which given the procyclical movement of money wages implies a positive correlation between

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

the real wage employment relationship an industry analysis abstract estimates of industry differences in the strength and direction of the real wage employment relationship are used to draw implications for the magnitude of aggregation bias and the role of employment contracts

the effect of ethanol listing on corn prices evidence from spot and futures markets abstract the use of corn for ethanol has been the topic of heated discussions in the media and among policy makers as part of this debate some observers have argued that the use of corn in the production of ethanol has had adverse effects on corn prices this paper contributes to this reviving debate by examining the impact of the listing of ethanol futures in the chicago board of trade on the spot and futures prices for corn we find a significant listing effect indicating that the listing of ethanol has had a positive contribution to both price and volatility in the corn market especially in the spot and the shorter maturity futures contracts and mostly through its interaction with trading volume in the corn market we discuss the policy implications of the findings for investors and its relevance for the ongoing debate on us energy policy we conclude with some suggestions for future research

trends in european real exchange rates we study a newly created panel data set of relative prices for a large number of consumer goods among 31 european countries over a 15 year period the data set includes eurozone members both before and after the inception of the euro floating exchange rate countries of western europe and emerging market economies of eastern and southern europe we find that there is a substantial and continuing deviation from purchasing power parity ppp at all levels of aggregation both for traded and non traded goods even among eurozone members real exchange rates rer exhibit two clear properties in the sample a they are closely tied to gross domestic product gdp per capita relative to the european average at all levels of aggregation and for both cross country time series variation b they are highly positively correlated with variation in the relative price of non traded goods we then construct a simple two sector endowment economy model of real exchange rate determination which exhibits these two properties calibrated to match the data simulating the model using the historical relative gdp per capita for each country we find that for most countries there is a close fit between the actual and simulated real exchange rate in terms of policy relevance the model can offer suggestions of the degree to which real exchange rates in europe both in and out of the eurozone have been overvalued by approximately 15 in greece and portugal and 6 in italy and spain martin berka and michael b devereux

wage growth and the inflationary process a reexamination the nature of the relationship between wage growth and inflation has long been the subject of ongoing debate the expectations augmented phillips curve theory contends that the two variables are mutually causal however the original wage type phillips curve model argues it is inflation that causes wage growth rather than vice versa the price markup scheme holds an opposite view and asserts that wage growth plays an independent causal role in the inflationary process of course other theories e g the monetarist deny the presence of any reliable linkage between wages and prices researchers have also expended enormous effort attempting to investigate empirically the relationship between wage growth and inflation but with mixed results for example mehra 24 and ashenfelter and card 1 report results suggesting a bidirectional causality barth and bennett 2 and stein 37 38 find causality running from prices to wages without feedback while shannon and wallace 34 and hill and robinson 19 report results showing causality only in the reverse direction from wages to prices still gordon 11 bazdarich 4 batten 3 and mehra 27 find no causal linkage between the two variables clearly such remarkably mixed evidence is unfortunate in light of the profound implications that the precise wage price relationship may have for economic and public policy a more recent and quite interesting study is that of mehra 28 mehra employed the technique of cointegration and error correction modelling on u s quarterly data for the period 1959 1 1989 3 he concluded that inflation and wage growth are cointegrated implying that their long run movements are correlated as the expectations augmented phillips curve theory predicts however contrary to this theory and in accordance with the original wage type phillips curve view mehra argued that the inflation wage growth long run correlation is primarily the outcome of the former causing the latter mehra s model encompasses three basic variables namely prices p productivity adjusted wages w and an output gap proxy g he tested each of the three variables in logs for the presence of unit roots finding evidence of two unit roots in p and w but a single unit root in g mehra then examined cointegration of the two variables having two unit roots p w his re

revisiting inflation in the euro area allowing for long memory abstract we analyse inflation and inflation differentials in the euro area allowing for long memory and a new type of limiting theory denoted fixed bandwidth our results differ from those based on standard normal asymptotics and the short memory assumption and we also find that the inflation differentials between core and peripheral countries are strongly persistent core economies appear to have less persistent differentials and may be more integrated while peripheral countries with high inflation may find themselves under competitive pressure for a long time

the price effect of option introduction this paper examines the price effect of option introduction from 1974 to 1980 the introduction of individual options causes a permanent price increase in the underlying security beginning approximately three days before introduction the price effect appears to be associated with introduction and not announcement throughout the sample period excess returns volatility declines with option introduction systematic risk is unchanged there is a positive relation between the price increase and a measure of activity in the options market copyright 1989 by american finance association

market frictions technology adoption and economic growth this paper develops an endogenous growth model with labor market matching and technology adoption while labor market search and entry frictions lengthen technology diffusion exogenous technology arrival may creatively destruct jobs in the short run such interrelationships give rise to multiple equilibria global and local indeterminacy under which a small autonomous technological improvement may create a large growth effect we characterize the effects of exogenous technology arrival on equilibrium matching adoption effort wage and the overall dispersion of wages social inefficiency arises as a result of individuals failure to account for free rider thick matching job destruction effects in making technology adoption decision

why option prices lag stock prices a trading based explanation while many studies find that option prices lead stock prices stephan and wvhaley 1990 find that stocks lead options we find no evidence that options even deep out of the money options lead stocks after confirming stephan and whaley s results we show their results can be explained as spurious leads induced by infrequent trading of options we show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices hence we find no evidence of arbitrage opportunities associated with the stock lead in a perfect market price discrepancies should be instantly arbitraged away in particular option prices should neither lead nor lag stock prices in real markets only very short leads should occur traders with private information who are confident that their information is valid and that they will not be detected generally want highly leveraged positions to exploit their advantage thus we might expect options with their greater leverage to lead stocks if information trading is important manaster and rendleman 1982 bhattacharya 1987 and anthony 1988 find evidence that options

evaluating the performance of the search and matching model abstract does the search and matching model fit aggregate u s labor market data while the model has become an important tool of macroeconomic analysis recent literature pointed to some significant failures in accounting for the data this paper aims to answer two questions i does the model fit the data and if so on what dimensions ii does the data fit the model i e what are the data which are relevant to be explained by the model the analysis shows that the model fits certain specifications of the data on many dimensions though not on all this includes capturing the high persistence and high volatility of most of the key variables the negative co variation of unemployment and vacancies and the behavior of the worker job finding rate a key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate the latter is a major component of the rate discounting the future value of the job worker match the paper offers a workable empirically grounded version of the model for the analysis of aggregate u s labor market dynamics

trends and cycles in macroeconomic time series two structural time series models for annual observations are constructed in terms of trend cycle and irregular components the models are then estimated via the kalman filter using data on five u s macroeconomic time series the results provide some interesting insights into the dynamic structure of the series particularly with respect to cyclical behavior at the same time they illustrate the development of a model selection strategy for structural time series models

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

an examination of wage behaviour in macroeconomic models with long term contracts are long term contracts equivalent to a series of shorter term contracts except for the informational sets available this paper argues that the wage equations in many macroeconomic models with labor contracts imply a positive answer to the above question an empirical examination of canadian contract wage data rejects the above hypothesis the paper argues that real economic conditions at the time contracts are signed have a greater impact on wage settlements than do conditions that are expected to exist in the future this alternative hypothesis is generally supported by the data

european product market integration after the euro using a detailed data set of prices of consumer goods in european cities from 1990 to spring 2003 we investigate the question of whether the introduction of the euro in january 1999 increased integration of consumer markets as reflected by consumer prices in fact we find no tendency for prices to converge after january 1999 this finding holds even when we control for a number of factors that might affect price dispersion on the other hand we find that there has been a significant reduction in price dispersion throughout the decade of the 1990s suggesting that efforts to reduce economic barriers initiated early in the decade may have in fact had the effect of significantly increasing the integration of consumer markets charles engel and john h rogers

divergent inflation rates in emu inflation divergence inflation rates have diverged much more widely than expected among the member states of the emu we show that much of this is attributable to the differential impact on different member states of the weakness of the euro on international currency markets in the early months of the union the balassa samuelson productivity growth effect has not yet played an important role even in respect of the outlier ireland although it will likely be more significant over a longer run especially as the accession countries join patrick honohan and philip lane

adjustment lags versus information lags a test of alternative explanations of the phillips curve phenomenon reply it is perhaps a truism that without lags either in the adjustment of prices and wages or in the transmission of information about prices and wages there would be no business cycle but rather employment and output would follow presumably smooth paths determined by demographic factors capital accumulation and other long run processes the observation that movements in wages and prices are correlated with output and employment and the hypothesis that this phenomenon may be accounted for by adjustment lags in prices and wages are not new and certainly predate both the phillips 25 paper in 1958 and the keynesian revolution in macroeconomics for example irving fisher 5 6 presented both empirical and theoretical analyses along these lines more than a decade before publication of keynes general theory 15 in 1936 milton friedman s 8 analysis of the phillips curve phenomenon parallels fisher s thinking quite closely both emphasizing an hypothesized lag in factor prices behind final product prices attributed at least partially to the existence

an econometric analysis of fluctuations in aggregate labor supply and demand the paper contains a simple equilibrium model of the labor market the supply function allows for intertemporal substitution in response to real wage fluctuations and the demand function allows for adjustment costs on employment the supply and demand functions both solve quadratic partial adjustment problems driven by rational expectations about future real wages the market equilibrium also solves a partial adjustment problem driven by rational expectations about future preference and technology shocks two related issues are emphasized the identification of dynamic labor supply and demand functions and the theoretical interpretation of serial correlation in employment and real wages when the supply and demand shocks are assumed to be ar 1 processes which are not causally related the model delivers a simple structure for the equilibrium process for employment and real wages which is a restricted var 2 this simple structure facilitates the interpretation of summary statistics on the time series properties of observed employment and real wage series the supply and demand functions can both be locally identified using only employment and real wage data an illustrative application is presented using u s manufacturing data for the period 1948 1971

exogeneity tests of market boundaries applied to petroleum products us antitrust law makes market definition and the calculation of marketshare statistics an integral part of the determination of the anticompetitive impact of a merger because markets frequently overlap however market definition is rarely an easy task a statistical test that can be used as an aid in defining markets is proposed here time series techniques are used to test if price in one region is exogenous to the process that determines price in another the rejection of exogeneity can be an indication that the two regions are economically linked and thus may belong to a common geographic market the test is applied to petroleumproduct prices from various regions of the united states time series techniques have long been appreciated by macroeconomists the uses to which they have been put range from testing for the exogeneity of variables used in the construction of macroeconomic models sims 1972 for example to discovering empirical regularities in macroeconomic data without imposing a priori structure on the observations ashenfelter and card 1982 for example in contrast these techniques have not been so

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

does option trading have a pervasive impact on underlying stock prices the question of whether and to what extent option trading impacts underlying stock prices has been a focus of intense interest since options began exchange based trading in 1973 despite considerable effort no convincing evidence for a pervasive impact has been produced a recent strand of theoretical literature predicts that rebalancing by traders who hedge their option positions increases decreases underlying stock return volatility when these traders have net written purchased option positions this paper tests this prediction and finds a statistically and economically significant negative relationship between stock return volatility and net purchased option positions of investors who are likely to hedge hence we provide the first evidence for a substantial and pervasive influence of option trading on stock prices

impacts of derivative markets on spot market volatility and their persistence in this article we investigate the impacts of futures and options markets on the volatility of the underlying market unlike earlier studies the focus is on their persistence over time tests on the hang seng index yield several interesting results that often contrast with previous findings empirical results suggest that the quality of new information generated by derivative trading determines the impacts on the spot market volatility the futures market provides new material information reducing spot market volatility the options market on the other hand generates noisy information and distorts price which is followed by an increase in volatility and a decrease in its sensitivity to price change while the impact of futures persists that of options mostly disappears as the market matures our conjecture is that the futures market is mainly driven by informed experienced participants while the options market attracts new inexperienced investors

the impact of ceo turnover on equity volatility this study investigates the effect on stock price volatility of a significant event in the life of the firm a change in its ceo we find significant long lived increases in volatility following ceo turnover after controlling for firm characteristics and marketwide volatility these increases are larger after forced departures and outside successions following voluntary departures stock prices also respond more strongly to earnings announcements following turnovers these results are consistent with more informative signals of value driving the increased volatility helping resolve two sources of uncertainty possible changes in the firm s strategy and doubt about the successor ceo s ability

current account imbalances and systemic risk within a monetary union abstract the aim of this paper is to cast light on possible influences of current account imbalances on the escalation of systemic risk which hit the eurozone the hypothesis which was set up by examining empirical evidence points to heterogeneity across the macroeconomic conditions prevailing in different clusters of emu countries given the strengthened financial and real interconnections across the emu countries the capital flows triggered by widening distances between surplus and deficit trade balances and also between sound and deteriorating public budgets represent an important factor magnifying systemic risk and contagion the econometric estimates we conducted concern two sub periods the two decades from the launch of the ems in 1979 to 1999 and the first twelve years 1999 2010 of the monetary union the findings sound as a confirmation that the strengthened financial and real interconnections across the emu countries instead of facilitating convergence among the core and the peripheral economies have magnified and mutually reinforced imbalances the divide between surplus and deficit countries the backward emu countries running larger current account deficits and the more advanced countries accumulating larger current account surpluses have brought about increasing capital outflows from the periphery to pay for excess imports from the core conversely increasing capital flows were invested by the banks of the core countries in the periphery s public bonds

the importance of composition of fiscal policy evidence from different exchange rate regimes abstract we study the macroeconomic effects of fiscal policies in an open economy we emphasize two transmission mechanisms the cost channel by which wage government spending and labor taxes raise the real wage firms must pay and the exchange rate channel by which the nominal exchange rate shifts induced by fiscal policy have real effects if some prices and wages are sticky the latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates in a 1964 93 panel of oecd countries we find significant evidence for both channels moreover we find that the real product wage and profitability are more responsive than quantities employment and output to fiscal policy innovations

how do exchanges select stocks for option listing we investigate the factors influencing the selection of stocks for option listing exchanges tend to list options on stocks with high trading volume volatility and market capitalization but the relative effect of these factors has changed over time as markets have evolved we observe a shift from volume toward volatility after the moratorium on new listings ended in 1980 using control sample methodology designed to correct for the endogeneity of option listing we find no evidence that volatility declines with option introduction in contrast to previous studies that do not use control samples beginning with a handful of options listed on the chicago board options exchange cboe in april 1973 the exchange traded option market has since matured into a thriving industry in the united states options trade on five exchanges with contracts on stock indices exchange traded funds currencies interest rates and over 3 000 stocks total equities options volume traded on u s exchanges has risen from 5 7 million contracts in 1974 to over 722 million contracts in 2001 options clearing corporation http www optionsclearing com option markets have also thrived in western europe and other economies with well developed capital markets in this paper we study the listing choices made by option exchanges in the united states in an effort to better understand what determines the success of financial innovation and how derivative markets develop understanding this process has important implications for the continuing development of new securities markets domestically and globally in the new century innovation

convergence of euro area inflation rates abstract we study the behavior of inflation rates among the 12 initial euro countries in order to test whether and when the group convergence initially dictated by the maastricht treaty and now by the ecb occurs we also assess the impact of events such as the advent of the euro and the 2008 financial crisis due to the small size of the estimation sample we propose a new procedure that increases the power of panel unit root tests when used to study group wise convergence applying this new procedure to euro area inflation we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency after the 2008 crisis euro area inflation rates follow the ecb s price stability benchmark although greece reports relatively higher inflation

a new econometric model of union threat effects the union threat effect is the propensity of non union employers to resist union organization by raising wages this study introduces an empirical model of the non union employer s optimal wage in the presence of threat effects estimates of an equation of a firm s unionization probability provide key variables unlike previous models this specification dervies directly from a theoritical model separstes threat effects from the influence of other union non union spillovers and efficiency wages and includes many factors affecting the probability of unionization wage equation estimates reveal that the predicted threat of unionization did not significantly raise non union wages in the united states in 1980

internal or external devaluation what does the ec consumer survey tell us about macroeconomic adjustment in the euro area this paper explores the dynamics of national inflation expectations within the euro area during the recent crisis using the european commission s consumer survey we find that the strong anchoring of area wide inflation expectations which is typically found in the literature does not extend to individual member states we also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations this suggests that consumers expect their country to adjust through a process of internal devaluation in contrast we find no evidence that tensions in the sovereign bond markets increase national inflation expectations as one would be expect under an exit or breakup scenario

monetary and fiscal policies interaction in monetary unions in this paper the literature on the interaction between monetary and fiscal policies in a monetary union is surveyed by adopting the concept of symbiosis as a starting point the paper highlights the importance of uncertainty policy makers preferences and targets then the role of commitment to policy rules and coordination is addressed the analysis also focuses on the importance of the data considered for the generation of the policy mix as a final step the paper discusses the main results in the literature on public debt management in a monetary union all the reported theoretical results are then adopted to retrieve policy and institutional implications for the european monetary union

the employment real wage relationship an international study the neoclassical and keynesian theories of employment both predict an inverse relationship between employment and real wages in the short run the observed correlation between employment and real wages however has usually failed to conform to this prediction dunlop 1938 and tarshis 1939 reported a positive correlation between real and money wages which given procyclical movement of money wages was interpreted as evidence against the theoretical prediction the statistical significance of these results was however challenged by ruggles 1940 and tobin 1948 more recent studies by kuh 1966 and bodkin 1969 failed to detect a significant relationship between real wages and employment these findings stimulated a series of contributions by solow and stiglitz 1968 barro and grossman 1971 1976 and others developing alternative models not apparently refuted by the evidence barro and grossman recast macro theory under the assumption that markets did not clear modigliani 1977 argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation

stock price clustering on option expiration dates abstract this paper presents striking evidence that option trading changes the prices of underlying stocks in particular we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices on each expiration date the returns of optionable stocks are altered by an average of at least 16 5 basis points which translates into aggregate market capitalization shifts on the order of 9 billion we provide evidence that hedge rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering

does one size fit all a taylor rule based analysis of monetary policy for current and future emu members this article uses the taylor rule to examine the appropriateness of european central bank ecb interest rate policy for the initial european monetary union emu members and the 10 new emu member states some of whom are expected to join the eurozone in 2006 2007 specifically it addresses three questions 1 are there differences between the interest rate aggregated from the taylor interest rates of individual member states in the euro area and the interest rate set by the ecb 2 for which countries do the desired interest rates according to the original taylor rule and the interest rate of the euro area differ most and in which respect 3 the last question is whether the interest rate gaps change over time we find that the ecb s policy does not fit individual emu members equally well and this result is unlikely to be changed with the addition of the 10 new members which will have only a marginal effect on the ecb interest rate stance

external wealth the trade balance and the real exchange rate abstract we examine the link between the net foreign asset position the trade balance and the real exchange rate in particular we decompose the impact of a country s net foreign asset position external wealth on its long run real exchange rate into two mechanisms the relation between external wealth and the trade balance and holding fixed other determinants a negative relation between the trade balance and the real exchange rate we also provide additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate

are labour markets in the new member states sufficiently flexible for emu abstract new member states nms coming from central planning are often advised against early euro adoption because of their rigid labour markets but are labour markets so rigid in these countries we argue in this paper that this is not the case labour market institutions are no more rigid than among current emu members whilst wage bargaining institutions are actually better equipped for microeconomic wage flexibility than in the eu 15 nms also achieved substantial reallocation of jobs and workers in the transition to markets display relatively large job turnover rates and are reducing their regional mismatch the view that nms have rigid labour markets is fuelled by the low job content of growth in the region but there is evidence that the latter is related to productivity enhancing job destruction in the aftermath of prolonged labour hoarding reduced form employment equations estimated in this paper also suggest that tight fiscal policies rather than being harmful to job creation may actually improve the employment performance of the region our interpretation of this result is that loose fiscal policies weaken the confidence of investors and crowd out private employment growth through generous pay rises to civil servants

the impact of derivatives hedging on the stock market evidence from taiwan s covered warrants market abstract we examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the taiwan stock exchange twse results present significant positive abnormal returns and trading volumes before the announcement of a warrant s issuance and the effect is stronger when the hedging demand is larger moreover a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand finally we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in the money due to the liquidation of hedging portfolios

the panel purchasing power parity puzzle does long run purchasing power parity ppp hold over the post 1973 floating exchange rate period panel unit root tests provide evidence of ppp that increases with the number of observations the strengthening of the evidence however is highly cyclical when the dollar appreciates at the end of the sample the evidence of ppp strengthens and when it depreciates the evidence weakens while these patterns cannot be explained by the specifications that are normally used to model real exchange rates the strengthening but not the cyclical pattern can be explained by a specifi cation that incorporates ppp restricted structural change

inflation targeting flexible exchange rates and inflation convergence using a disaggregated level consumer price index cpi data this article compares convergence properties of regional inflation rates in a small open economy turkey between pre inflation targeting and inflation targeting periods where the latter also corresponds to a flexible exchange rate regime it is found that during the inflation targeting period turkish regional inflation rates have converged to each other in terms of cpi groups with relatively nontradable components while they have diverged from each other in terms of cpi groups with relatively tradable components since a common and sound monetary policy among the regions of a country is supposed to have a convergence effect on regional inflation rates according to the conventional wisdom the results for cpi groups with relatively tradable components require further attention and have significant policy implications especially for inflation targeting countries using flexible exchange rate regimes

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

inflation differentials in the euro area did the ecb care compared to inflation differentials among regions in the united states european monetary union emu inflation differentials are larger and more persistent based on augmented monetary policy reactions functions this article addresses the question whether the presence of pronounced inflation differentials in combination with low average inflation rates has influenced monetary policy decisions of the ecb the article finds statistical evidence that the ecb took inflation differentials into account which may reflect the fear of deflation in low inflation countries like germany

search wage bargains and cycles in this paper i describe an equilibrium model of job matchings with perfect foresight that has the following property the number of people looking for work changes temporarily when there is a temporary shock to the value of labour s marginal product it does not change when the shock is permanent by contrast real wages change temporarily by a small amount when the shock is temporary but change permanently and by a bigger amount when the shock is permanent thus the model offers an explanation for the observation that over the cycle small wage changes are associated with changes in unemployment whereas secularly wage growth does not seem to affect the rate of unemployment the two most common explanations for this observation in the literature the phelps lucas misperceptions model and the lucas rapping intertemporal substitution model are well grounded in equilibrium theory but they have not stood up well to empirical testing the misperceptions model requires more ignorance of aggregate changes than can be reasonably assumed whereas the intertemporal substitution model requires bigger wage elasticities of labour supply than those estimated in the model of this paper neither misperceptions nor changes in the supply of labour play a role in generating the unemployment cycle all agents observe the shocks when they occur and they anticipate correctly the economy s adjustment path but like the new classical explanations of the cycle the model is an equilibrium one in the sense that all private gains from trade are fully exploited at all phases of the cycle although the social gains from trade may not be fully exploited because of search externalities the cycle i derive here is not due to externalities unlike other related perfect foresight models such as diamond s 1982a the structure of the model is such that the externalities do not give rise to multiple equilibria the key element of the model which is responsible for the transmission of output shocks to unemployment is the equation for wages in markets where the allocation of jobs takes place through search both firms and workers have some monopoly power a point emphasised by mortensen 1970 though he attributed only temporary monopoly power and only to firms i use the nash bargaining solution to solve for the equilibrium wage rate and show that the firm s and worker s alternative returns threat points or

time series representations of economic variables and alternative models of the labour market accepting the hypothesis that the time series facts of the aggregate labour market may be summarized by the linear autoregressive and moving average representations of wages prices unemployment and interest rates implies that a useful theory ought to lead to predictions about these representations following this approach this paper first catalogues many of the time series facts about the aggregate labour market and then compares them against alternative models of the labour market based on the intertemporal substitution and staggered contract hypotheses