how important is fiscal policy cooperation in a currency union abstract by constructing a dynamic stochastic general equilibrium model which assumes a currency union consisting of two countries with nontradables we study the importance of fiscal policy cooperation as shown in the previous studies we find that the role of fiscal policy is important in maximizing social welfare however we have a contrary result for fiscal policy cooperation while the previous studies highlight that fiscal policy cooperation has a nontrivial effect in maximizing social welfare we show that fiscal policy cooperation has no benefits regardless of the share of nontradables self oriented fiscal policy can replicate social welfare under the cooperative setting

analyzing u s output and the great moderation by simultaneous unobserved components this paper seeks to determine the causal interaction between structural trend and cycle innovations in an unobserved components framework of aggregate output for the purpose of identification i propose allowing for shifts in volatility this strategy provides good estimation precision when applied to u s industrial production in the early 1980s predominance of cycle shocks gives way to strong negative spillovers of trend impulses consistent with real business cycle theories the coincident reduction of macroeconomic volatility was mainly caused by pronounced dampening of transitory disturbances this is in accordance with an important role of macroeconomic policy in explaining the great moderation

tracking the new economy using growth theory to detect changes in trend productivity abstract the acceleration of productivity after 1995 prompted a debate over whether the economy s underlying growth rate would remain high in this paper we draw on growth theory to identify variables other than productivity namely consumption and labor compensation to help estimate trend productivity growth we treat that trend as a common factor with two regimes high and low growth our analysis picks up striking evidence of a return in 1997 to the high growth regime nearly 25 years after a switch from high to low growth we find that both the common factor and regime switching aspects of the model are important for identifying changes in trend productivity and also show that the trend breaks are more difficult to detect with per capita as opposed to per hour based data because of persistent labor supply shifts finally we argue that our methodology is effective in detecting changes in trend in real time in the case of the 1990s the methodology would have signaled the regime switch by 1999 or within roughly six quarters of when it occurred according to the full sample

coordination and crisis in monetary unions we characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets member country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently a common monetary authority chooses inflation for the union also without commitment we first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow this externality rationalizes the imposition of debt ceilings in a monetary union we then investigate the impact of the composition of debt in a monetary union that is the fraction of high debt versus low debt members on the occurrence of self fulfilling debt crises we demonstrate that a high debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high and low debt members than one where all other members are low debt this contrasts with the conventional wisdom that all countries should prefer a union with low debt members as such a union can credibly deliver low inflation these findings shed new light on the criteria for an optimal currency area in the presence of rollover crises

when do long run identifying restrictions give reliable results many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long run effects of shocks this article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions although many aspects of these issues have been raised before this article draws out and illustrates the implications for inferences under the long run scheme furthermore it provides strategies for dealing with the problems

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

public expenditure international specialisation and agglomeration abstract it is widely recognised that public sector purchasers tend to favour domestic suppliers we study the consequences of such home biased public procurement on international specialisation using a general equilibrium model with a monopolistically competitive sector we find that a country will specialise in that sector if it has relatively large home biased procurement the pull effect furthermore home biased procurement can counter agglomeration forces in that sector and thereby attenuate the overall degree of international specialisation the spread effect our empirical analysis conducted on input output data for the european union yields supporting evidence for the pull effect and some support for the spread effect

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

optimal monetary policy in a currency area abstract this paper investigates how monetary policy should be conducted in a two region general equilibrium model with monopolistic competition and price stickiness this framework delivers a simple welfare criterion based on the utility of the consumers that can be used to evaluate monetary policy in a currency area if the two regions share the same degree of nominal rigidity the terms of trade are completely insulated from monetary policy and the optimal outcome is obtained by targeting a weighted average of the regional inflation rates these weights coincide with the economic sizes of the region if the degrees of rigidity are different the optimal plan implies a high degree of inertia in the inflation rate but an inflation targeting policy in which higher weight is given to the inflation in the region with higher degree of nominal rigidity is nearly optimal

an unobserved components model that yields business and medium run cycles we generalize the unobserved components uc model to allow the permanent component to have different dynamics than the transitory components when decomposing u s economic activity using a multivariate uc model of log output consumption and investment we find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components our approach provides an alternative explanation for the growth cycles identified by comin and gertler 2006 that is related to the cyclical movements in technology in a framework consistent with the beveridge and nelson 1981 decomposition

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

on the international dimension of fiscal policy this paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non state contingent debt the main finding of the paper is that once the open economy aspect of the policy problem is considered it is not optimal to smooth taxes following idiosyncratic shocks even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium the presence of a terms of trade externality lead to movements in the tax rate also in contrast with the closed economy the introduction of sticky prices can reduce the optimal volatility of taxes

sharing a ride on the commodities roller coaster common factors in business cycles of emerging economies fluctuations in commodity prices are an important driver of business cycles in small emerging market economies emes this paper documents how these fluctuations correlate strongly with the business cycle in emes a commodity sector is then embedded into a multi country emes business cycle model where exogenous fluctuations in commodity prices follow a common dynamic factor structure and coexist with other driving forces the estimated model assigns to commodity shocks 42 percent of the variance in income of which a considerable part is linked to the common factor a further amplification mechanism is a spillover effect from commodity prices to risk premia

optimal discretionary monetary and fiscal policies in a country size heterogeneous monetary union abstract this paper develops a new keynesian model of a monetary union where atomistic small economies coexist with a large economy it explores how the level of public debt shapes non cooperative discretionary policies it evaluates welfare losses for small and large member countries the paper demonstrates that higher public debt levels hamper business cycle stabilization for the union as a whole and in particular penalize the stabilization performance of small country members while cooperation and monetary leadership is preferable to fiscal leadership for the union as whole and for the small countries the big country prefers fiscal leadership where it explores a larger strategic power vis a vis the common monetary policy authority political support for cooperation may be hard to achieve under low debt levels cooperative stabilization outcomes are relatively similar to the non cooperative ones

the macroeconomic effects of fiscal policy we investigate the macroeconomic effects of fiscal policy using a bayesian structural vector autoregression b svar approach we identify fiscal policy shocks via a partial identification scheme but also i include the feedback from government debt ii look at the impact on the composition of output iii assess the effects on asset markets iv use quarterly data and v analyse empirical evidence from the us the uk germany and italy the results show that government spending shocks in general have a small effect on gross domestic product gdp lead to important crowding out effects have a varied impact on housing prices and generate a quick fall in stock prices government revenue shocks generate a mixed effect on housing prices and a small and positive effect on stock prices the empirical evidence also suggests that it is important to explicitly consider the government debt dynamics in the model

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

new measures of the output gap based on the forward looking new keynesian phillips curve abstract forward looking versions of the new keynesian phillips curve imply that the output gap the deviation of the actual output from its natural level due to nominal rigidities drives the dynamics of inflation relative to expected inflation we exploit this to set up a bivariate unobserved component model for extracting new estimates of the output gap in the us the gap estimates are large and persistent even after allowing for correlated trend and cycle shock we then augment our model to use the information in the unemployment rate the estimates confirm the presence of a large and persistent cyclical component

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

optimal monetary policy with international trade in intermediate inputs abstract this paper examines optimal monetary policy in a two country new keynesian model with international trade in intermediate inputs we derive the loss function of a cooperative monetary policymaker and find that the optimal monetary policy must target intermediate goods price inflation rates final goods price inflation rates final goods output gaps and relative price gaps we use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three taylor type monetary policy rules a main finding is that the degree of price stickiness at the stage of intermediate goods production is a key factor to determine which policy rule should be followed specifically when the degree of price stickiness at the stage of intermediate goods production is high the policymaker should follow intermediate goods ppi based taylor rule whereas cpi based taylor rule should be followed when the degree of price stickiness at the stage of intermediate goods production is intermediate or low

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

deficit reduction short term pain for long term gain abstract the paper evaluates the costs and benefits of fiscal consolidation using simulations based on the imfs global dynamic general equilibrium model gimf over the longer run well targeted permanent reductions in budget deficits can lead to a considerable increase in both the growth rate and the level of output the gains may be enhanced by shifting some of the tax burden from incomes to consumption in the short run credibility plays a crucial role in determining the size of initial output losses global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits

do the ecb and the fed really need to cooperate optimal monetary policy in a two country world abstract a two country model with monopolistic competition and price stickiness is employed to investigate the implications for macroeconomic stability and the welfare properties of three international policy arrangements a cooperative b non cooperative and c monetary union i characterize the conditions under which there is scope for policy cooperation and quantify the costs of non cooperation and monetary union the non cooperative equilibrium may be suboptimal because of terms of trade spillover effects while monetary union may be suboptimal because of the sluggishness of relative prices both the costs of policy competition and of a monetary union are sensitive to the values assumed for the intertemporal and international demand elasticity and the degree of openness of the economy independently of the calibration scenario adopted the ecb has little to gain by coordinating with the fed

business cycle convergence in emu a first look at the second moment we analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of gdp across countries in the european monetary union emu this analysis allows us to evaluate the patterns of cyclical comovement in emu and compare them the cyclical performance of the new members of the eu and other oecd countries we make use of sigma convergence methods to identify synchronization patterns in business cycles the eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s the new eu members have also experienced a strong pattern of convergence from 1998 to 2005 when a strong divergence trend appears an enlargement of the emu to 22 members would not significantly decrease its optimality as a currency area there is evidence for some europe specific characteristics as compared to global comovements in business cycles authors abstract

measures of per capita hours and their implications for the technology hours debate structural vector autoregressions give conflicting results on the effects of technology shocks on hours the results depend crucially on the assumed data generating process for hours per capita we show that the standard measure of hours per capita and productivity have significant low frequency movements that are the source of the conflicting results hodrick prescott hp filtered hours per capita produce results consistent with those obtained when hours are assumed to have a unit root we show that important sources of the low frequency movements in the standard measure are sectoral shifts in hours and the changing age composition of the working age population when we control for these low frequency components to determine the effect of technology shocks on hours using long run restrictions we get one consistent answer hours decline in the short run in response to a positive technology shock we further extend the analysis by examining the effects of demographic controls on the impulse responses to investment specific technology shocks our results are less conclusive

long dark shadows or innovative spirits the effects of smoothing business cycles on economic growth a survey of the literature abstract it is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long term path of growth never before has this argument been advanced as frequently as in the current economic crisis however the economic literature an overview of which is given here does not provide an unambiguous answer either theoretically or empirically to the question of the relationship between the smoothing of cyclical fluctuations and long term growth in this context two main contrasting explanatory paradigms can be identified schumpeter s concept of creative destruction and the learning by doing hypothesis even if it were possible to identify the relationship more clearly on this basis it is important not to lose sight of the problems associated with the real time assessment of the current economic situation time lags and political economic incentives even in difficult times

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

on the benefits of a monetary union does it pay to be bigger this paper revisits the question of the appropriate domain of a currency area using a new keynesian open economy model in which the world is split into two areas each framed as a continuum of small open regions we show that the adoption of a common currency like the euro can be beneficial for the members of the monetary union since the spill over effects generated by the inflationary policies of the small open economies are likely to outweigh the costs of not tailoring monetary policy to country specific shocks we also show that while the enlargement of the monetary union to another group of small open economies can bring about welfare gains for all countries involved monetary integration of two large economies such as the euro area and the u s will not these findings can help to rationalize the process of the creation and enlargement of multi country currency areas like the eurozone

fiscal policy in a currency union at the zero lower bound this paper constructs a two country core periphery new keynesian model of a currency union to address the interaction between the objectives of regionally directed fiscal policy constrained by a single currency and the aggregate use of fiscal policy in face of the zero lower bound zlb on policy interest rates we identify an optimal path of aggregate and relative fiscal policy responses to a negative region specific demand shock our results show that i in a monetary union the optimal policy response to an asymmetric reduction in demand concentrated in the periphery always entails a relative shift of fiscal expenditure toward the worse affected regions ii though no aggregate fiscal response is required outside the zlb and iii optimal union wide fiscal policy is expansionary at the zlb therefore optimal policy always entails an expansion in the periphery at the zlb but the optimal fiscal response in the core regions can be either expansionary or contractionary depending on the parameters of the model however iv fiscal expansion in the core is warranted if the periphery cannot implement an expansion due to constraints on public spending

a real options perspective on the future of the euro abstract a break up of the eurozone is no longer regarded as implausible this will be a costly and irreversible decision in conditions of continuing uncertainty therefore it is amenable to analysis in the real options framework we do so by solving as an n dimensional optimal stopping problem with country specific shocks and convergence of member economies we compare a complete break up with individual country departures in calibrated solutions for a symmetric case we find a non negligible but small option value furthermore we find a new theoretical result on the non monotonicity of abandonment threshold with respect to volatility

detrending stylized facts and the business cycle the stylized facts of macroeconomic time series can be presented by fitting structural time series models within this framework we analyse the consequences of the widely used detrending technique popularised by hodrick and prescott 1980 it is shown that mechanical detrending based on the hodrick prescott filter can lead investigators to report spurious cyclical behaviour and this point is illustrated with empirical examples structural time series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components finally the structural framework provides a basis for exposing the limitations of arima methodology and models based on a deterministic trend with a single break

inflation stabilization and welfare the case of a distorted steady state this paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price setting rotemberg and woodford 1997 and woodford 2002 have shown that under certain conditions a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function in which each period s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values zero however those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolistically competitive price setters so that the steady state under a zero inflation policy involves an efficient level of output here we show how to dispense with this unappealing assumption so that a valid linear quadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary extent allowing for tax distortions as well as market power and when as a consequence it is necessary to take account of the effects of stabilization policy on the average level of output we again obtain a welfare theoretic loss function that involves both inflation and an appropriately defined output gap though the degree of distortion of the steady state affects both the weights on the two stabilization objectives and the definition of the welfare relevant output gap in the light of these results we reconsider the conditions under which complete price stability is optimal and find that they are more restrictive in the case of a distorted steady state we also consider the conditions under which pure randomization of monetary policy can be welfare improving and find that this is possible in the case of a sufficiently distorted steady state though the parameter values required are probably not empirically realistic

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

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

broken trend stationarity of hours worked the estimated impact of a technology shock on hours worked using structural vector autoregressions svars depends to a great extent on whether or not hours worked is considered to be integrated of first order it is shown in this article that the widely analysed time series of hours worked per capita in the us business sector evolves around a broken linear trend when this fact is taken into account the unit root null is rejected by recently proposed tests therefore it can be stated that empirical specifications with hours in first differences are not recommended it seems more appropriate to control for the presence of this shift in the deterministic component we also draw this conclusion from a bivariate model for both productivity growth and hours worked our results suggest that technology improvements have a negative but nonsignificant effect on hours only in the very short run this impact later becomes positive and statistically significant after five periods

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

inflation targeting fiscal rules and the policy mix cross effects and interactions we examine how inflation targeting it and fiscal rules fr affect inflation and fiscal performance in a large panel of countries during 1990 2009 in line with theory both fr and it appear to shape monetary and fiscal outcomes significant cross effects seem to exist as it strengthens fiscal performance whereas the combination of fr and it tends to be associated with more disciplined macroeconomic policies than if only one of these institutions operates our findings suggest that it and fr affect the coordination of the policy mix and point to potential benefits of reforming macroeconomic frameworks in a holistic fashion

winners and losers from the uro abstract using the synthetic control method this paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro our estimates suggest that while the income per capita of belgium france germany and italy would have been higher without the euro that of ireland would have been considerably lower in contrast the netherlands would have been as well off without the euro we show that these estimates are not contingent on our choice of baseline control groups growth predictors and pre treatment period in addition we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain our estimates we find that early euro adopters with a business cycle more synchronized to that of the union and more open to intra union trade or migration lost less or gained more from the euro a key role in increasing post euro income losses of union members has been played by the integration of capital markets

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

the exchange rate in a dynamic optimizing business cycle model with nominal rigidities a quantitative investigation this paper studies a quantitative dynamic optimizing business cycle model of a small open economy with staggered price and wage setting the model exhibits exchange rate overshooting in response to money supply shocks the predicted variability of the nominal and especially of the real exchange rate is noticeably higher than in standard real business cycle models with flexible prices and wages a positive domestic money supply shock is predicted to lower the domestic interest rate raise gdp and trigger a depreciation of both the nominal and real exchange rate increases in domestic productivity and in the world interest rate are also predicted to induce a nominal and real exchange rate depreciation 2001 elsevier science b v all rights reserved

optimal fiscal transfers in a monetary union abstract we derive the optimal fiscal transfer scheme for countries in a monetary union to offset the welfare losses resulting from asymmetric shocks and nominal rigidities optimal transfers involve a tradeoff between reducing national output gaps and the provision of consumption insurance across countries where the weight of the former increases relative to the latter as consumption home bias rises the welfare gains from optimal transfers increase in wage rigidity and trade elasticities and are particularly large when risk sharing through financial markets breaks down for the average euro area economy the welfare gains from optimal transfers range from 0 50 of permanent consumption under complete markets and low wage rigidity to 6 09 of permanent consumption under financial autarky and high wage rigidity

strategic monetary and fiscal policy interactions an empirical investigation this paper identifies leadership regimes in monetary fiscal policy interactions in three countries the uk the us and sweden we specify a small scale structural general equilibrium model of an open economy and estimate it using bayesian methods we assume that the authorities can act strategically in a non cooperative policy game and compare different leadership regimes we find that the model of fiscal leadership gives the best fit for the uk and sweden while in the us the nash or non strategic regime dominates we assess the extent to which policy maker preferences reflect microfounded social preferences

ramsey policies in a small open economy with sticky prices and capital this paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices we allow for trade in consumption goods under perfect international risk sharing we consider balanced budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate first as long as a symmetric equilibrium is considered the steady state in an open economy is isomorphic to that of a closed economy second whereas sticky prices allocations are almost indistinguishable from flexible prices allocations the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes fluctuations in terms of trade implied by complete international financial markets affect i consumption through changes in the consumption price index cpi ii hours through changes in the cpi based real wage and iii capital accumulation through the relative price of capital goods these wedges affect the volatility and persistence of optimal tax rates and resulting allocations are quite different as compared to a closed economy

trend breaks long run restrictions and contractionary technology improvements abstract structural vector autoregressions with long run restrictions are extraordinarily sensitive to low frequency correlations recent literature finds that the estimated effects of technology shocks are sensitive to how one treats hours per capita however after allowing for statistically and economically significant trend breaks in productivity results are much less sensitive hours fall when technology improves the issue is that the common high low high pattern of productivity growth and hours i e the low frequency correlation inevitably leads to a positive estimated response the trend breaks control for this correlation this example suggests a practical need for care in using long run restrictions

exchange rate economics is always and everywhere controversial abstractthis article reviews the major developments in the recent literature on exchange rate economics it is argued that the link between the exchange rate and economic fundamentals is breaking new ground evidence indicates that alternative analytical frameworks such as the new open economy macroeconomics and exchange rate arrangements such as the euro have their theoretical and analytical elegance but are proving empirically very difficult to implement the role of methodological advances and alternative fundamental instruments such as world commodity prices is also highlighted

large scale bond purchases in a currency union with segmentation in the market for government debt abstract the literature on large scale purchases of government debt emphasises the importance of bond market segmentation along the maturity dimension for their transmission this study investigates how another form of segmentation that we observe the segmentation of government bond markets across countries can be exploited by the central bank of a currency union in which fiscal coordination is not attainable it is shown first that under general conditions government bond purchases which lower bond yields have first order effects on demand and hence inflation through a fiscal channel even in the absence of heterogeneity in investment opportunities the total effect on aggregate demand can be broken down into an income from debt issuance effect and a primary surplus effect as a result the central bank is able to use government bond purchases to control the terms of trade and achieve asymmetric degrees of stimulus across the members of the currency union without a transfer of resources if there is cross country segmentation in bond markets and home bias in government spending the paper characterises the welfare optimising mix of conventional interest rate policy and bond purchases in this scenario and gives an upper bound on the welfare benefits from using the additional tool

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

on the relevance of exchange rate regimes for stabilization policy this paper assesses the relevance of the exchange rate regime for stabilization policy using both fiscal and monetary policy we conclude that the exchange rate regime is irrelevant this is the case independently of the severity of price rigidities independently of asymmetries across countries in shocks and transmission mechanisms the only relevant conditions are on the mobility of labor and financial assets the results can be summarized with the claim that every currency area is an optimal currency area however with labor mobility or tradable state contingent assets additional policy instruments would be required to establish the irrelevance result

optimal monetary and macroprudential policy in a currency union abstract the financial crisis proved strikingly that financial frictions play a crucial role for system risk and policymakers have overlooked financial stability the obvious candidate for addressing financial stability is macroprudential policy in this paper we study the optimal ramsey monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks the monetary and macroprudential instruments are modeled as independent tools with a union wide macroprudential tool full stabilization on the aggregate level is possible but welfare losses due to fluctuations in relative variables prevail with country specific macroprudential tools full stabilization of shocks is always possible but as a rule not optimal evaluating the performance of different policy regimes shows that the additional welfare gains from having country specific macroprudential tools are small and vanish as the ability of the central bank to commit decreases

monetary and fiscal policy interactions in a micro founded model of a monetary union abstract this paper analyzes in detail the mechanisms behind fiscal stabilization policy and the role of policy commitment in a micro founded new keynesian model of a two country monetary union which is hit by supply shocks we also explore the determinants of the gains from fiscal stabilization while monetary policy with identical union members is concerned with stabilizing the union wide economy fiscal policy aims at stabilizing inflation differences and the terms of trade besides exploring optimal policies we also consider monetary and fiscal rules we study these rules both under coordination and non coordination by the fiscal authorities

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

the european sovereign debt crisis the origin and propagation of the european sovereign debt crisis can be attributed to the flawed original design of the euro in particular there was an incomplete understanding of the fragility of a monetary union under crisis conditions especially in the absence of banking union and other european level buffer mechanisms moreover the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis after diagnosing the situation we consider reforms that might improve the resilience of the euro area to future fiscal shocks

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

should i stay or should i go an agent based setup for a trading and monetary union abstract the recent history of the european union eu suggests the importance of studying the conditions under which two or more countries can benefit from becoming part of a union of course this depends both on the economic characteristics of the involved countries and on the scope of the union i e the level of integration of markets regulations and institutional bodies this study tackles the topic from the angle of agent based computational economics by designing an open economy model inspired from the eu where countries can be part of a trade and monetary union we find that for similar countries it is always beneficial to be a member of a union although a lack of mobility frictions can cause a divergence between the two countries weakening the overall union performance even if countries have different productivity the performance of the union is in general better than the performance of the isolated countries the exception is when productivity gap and labor mobility are both high in this case a strong migration within the union can create economic distortions exacerbating the gap between the member states stronger fiscal integration helps reducing inequality between countries increasing the sustainability of the monetary union

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

how much to share welfare effects of fiscal transfers recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a scal transfer system that could alleviate the negative impact of asymmetric shocks across countries using a simple labor production economy model we rst derive an analytically tractable solution for optimal degree of scal transfers in this economy scal transfers can improve welfare by moving the competitive equilibrium with scal transfers closer to the social planner s solution we then extend the model to a dsge setting with capital formation

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

asymmetric labor market institutions in the emu and the volatility of inflation and unemployment differentials how does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks to answer this question this paper sets up a dynamic currency union model with monopolistic competition and sticky prices hiring frictions and real wage rigidities in our analysis we focus on the differentials in inflation and unemployment between countries as they directly reflect how the currency union responds to shocks we highlight the following three results first we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials second we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials finally we show that it is important to take into account the interaction between different types of labor market rigidities overall our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks

are supply shocks important for real exchange rates a fresh view from the frequency domain abstract this paper re examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency domain perspective in contrast to the existing literature our empirical findings point towards an important role played by supply productivity shocks in driving us real effective exchange rate fluctuations at low frequencies while real demand shocks matter mostly at high and medium frequencies in addition we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

is canada an optimal currency area an inflation targeting perspective we propose a method based on the currency union model of gali and monacelli 2008 to determine whether a region within an existing currency area belongs in the currency union the method involves assessing the predictability of regional inflation rates at medium term horizons we apply the method to the canadian provinces and find that for all but alberta there is little evidence of costs in terms of inflation arising from national monetary policy for alberta the evidence suggests that they are not as well served by the inflation targeting framework and that a more flexible policy environment might improve inflation outcomes

do sticky energy prices impact the time paths of rebound effects associated with energy efficiency actions abstract there is broad consensus in the policy and academic communities regarding the importance of energy efficiency actions in reducing energy requirements and subsequent greenhouse gas emissions however there is also a requirement to understand the extent to which the technically possible energy savings from exogenously introduced efficiency improvements might be eroded by knock on economic effects which will further change energy use these effects strongly influence the way this rebound phenomenon evolves over time while economy wide drivers of rebound effects are well understood there has been some controversy over the relative sizes of the short and long run rebound effects associated with energy efficiency improvements theoretical analysis predicted that rebound effects would always be greater in the long run than in the short run however numerical general equilibrium simulations have contradicted this result a principal driver of the simulation results is the fully flexible response of energy supply prices to shifting demand however in practice there are a number of reasons for arguing that energy prices are likely to be sticky in this paper we systematically explore the effects of energy price stickiness on the evolution of rebound effects we find that price stickiness is an important determinant of the time path of rebound effects and of their relative size in the short and long runs moreover there is considerable variation in the scale of rebound effects through time especially where short run rebound is lower than its long run counterpart however the most significant overall finding is that rebound reflects the system wide interaction between energy producing and energy using sectors

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

hours per capita and productivity evidence from correlated unobserved components models recent studies debate the effect of a permanent productivity shock on hours per capita within a structural var context this paper examines the issue using a correlated unobserved components uc framework the estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours this result is robust for non stationary or levels stationary specifications of hours model comparisons indicate that the data do not favor imposing var type restrictions on the uc models copyright 2008 john wiley sons ltd

simple fiscal policy rules for small open economies abstract this paper analyzes the scope for rules based countercyclical fiscal policy in small open economies where a subset of households is liquidity constrained relative to balanced budget rules structural surplus rules significantly improve welfare but they minimize fiscal instrument volatility rather than business cycle volatility more aggressively countercyclical tax revenue gap rules strong automatic stabilizers increase welfare gains by around 50 with only modest increases in fiscal instrument volatility if liquidity constrained households labor income is independent of raw materials prices the government should save excess raw materials revenue on their behalf the best fiscal instruments are transfers consumption and labor taxes

the behavioral economics of currency unions economic integration and monetary policy we analyze different behavioral models of expectation formation in a multi country new keynesian currency union model our analyses yield the following robust results first economic integration is of crucial importance for the stability of the economic dynamics in a currency union second when the economic dynamics are unstable more activist monetary policy does not lead to stable economic dynamics these findings have natural counterparts in the rational expectations version of the model there economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate more activist monetary policy does not lead to a determinate equilibrium in an application to euro area data we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance

estimating the effects of coordinated fiscal actions in the euro area abstract we estimate spillover effects of a fiscal shock in one member country in the euro area on outputs of the rest of the members using a global vector autoregression gvar model we compare the effects of a domestic fiscal shock with those of a similar size area wide shock expressed as a weighted average of the fiscal shocks across all member countries according to our estimates the impact of an area wide fiscal shock on output of a member country tends to be positive and larger than that of a domestic shock since the cost of participating in the area wide shock is lower than the cost of a similar size domestic shock our finding indicates the importance of coordinated fiscal actions in the euro area

fiscal federalism and monetary unions a quantitative assessment abstract in this paper i provide a quantitative analysis of three different forms of fiscal federalism in monetary unions fully decentralized regional fiscal authorities as the benchmark fiscal equalization with nominal tax revenue sharing and a common central fiscal authority i assess the capability of the different arrangements to stabilize regional consumption output and employment over the business cycle i also study the implications for interregional income consumption risk sharing and welfare from this analysis the following results emerge first a central fiscal authority stabilizes consumption fluctuations and increases the scope of interregional income and consumption risk sharing second fiscal equalization destabilizes consumption fluctuations and also reduces the scope of interregional income and consumption risk smoothing third a central fiscal authority leads to welfare gains whereas fiscal equalization leads to welfare losses