fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

does right or left matter cabinets credibility and fiscal adjustments abstract this paper tests the widely held assumption that left wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments in a panel of large fiscal adjustments in oecd countries during the last 40 years we find evidence that left wing and right wing cabinets are partisan the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies in other words the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments the effect is significant for cuts in public spending public consumption wage or nonwage increases in total revenues direct taxes on businesses and other taxes we test for the role of several other determinants of persistence confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence the estimates of the impact of ideology and other variables on gdp and its components show that it is the size of the spending cut rather than cabinet ideology that is most important

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

assessing china s exchange rate regime the imf articles of agreement forbid a country from manipulating its currency for unfair advantage the us treasury has been legally required since 1988 to report to congress biannually regarding whether individual trading partners are guilty of manipulation one part of this paper tests econometrically two competing sets of hypothesized determinants of the treasury decisions 1 legitimate economic variables consistent with the imf definition of manipulation the partners overall current account gdp its reserve changes and the real overvaluation of its currency and 2 variables suggestive of domestic american political expediency the bilateral trade balance us unemployment and an election year dummy the econometric results suggest that the treasury verdicts are driven heavily by the us bilateral deficit though other variables also turn out to be quite important in 2005 china announced a switch to a new exchange rate regime the exchange rate would be set with reference to a basket of other currencies with numerical weights unannounced allowing a movement of up to 0 3 within any given day although this step was originally accepted at face value in public policy circles scepticism is in order the second econometric part of the paper evaluates what exchange rate regime china has actually been following we use the technique introduced by frankel and wei 1994 1 one regresses changes in the value of the local currency in this case the rmb against changes in the values of the dollar euro yen and other currencies that may be in the basket we find that within 2005 the de facto regime remained a peg to a basket that put virtually all weight on the dollar subsequently there has been a modest but steady increase in flexibility with some weight shifted to a few non dollar currencies but not those one might expect in any case the weight on the dollar was still fairly heavy in 2006 the paper tests whether the decline in the implicit weight on the dollar is related to the pressure from us officials it also considers whether the increase in flexibility that we have seen small though it is has been gradually accelerating at a rate that would suggest the likelihood of some genuine flexibility in the not so distant future jeffrey a frankel and shang jin wei 1 ref 18

nonlinear purchasing power parity under the gold standard 1 introductionrecent theoretical analysis of purchasing power deviations see e g dumas 1992 sercu uppal and van hull 1995 and o connell and wei 1997 demonstrates how transactions costs or the sunk costs of international arbitrage induce nonlinear adjustment of the real exchange rate to purchasing power parity ppp globally mean reverting this nonlinear process has the important property of exhibiting near unit root behavior for small deviations from ppp since small deviations from ppp are left uncorrected if they are not large enough to cover the transactions costs or the sunk costs of international arbitrage a parametric nonlinear model suggested by the theoretical literature that captures the nonlinear adjustment process in aggregate data is the exponential smooth transition autoregression model estar of ozaki 1985 a smooth rather than discrete adjustment mechanism is motivated by the theoretical analysis of dumas 1992 also as postulated by terasvirta 1994 and demonstrated theoretically by berka 2002 in aggregate data regime changes may be smooth rather than discrete given that heterogeneous agents do not act simultaneously even if they make dichotomous decisions 1 recent empirical work e g michael nobay and peel 1997 taylor peel and sarno 2001 peel and venetis 2002 has reported empirical results that suggest that the estar model provides a parsimonious fit into a variety of data sets particular for monthly data for the interwar and postwar floating period as well as for annual data spanning 200 years as reported in lothian and taylor 1996 in addition nonlinear impulse response functions derived from the estar models show that although the speed of adjustment for small shocks around equilibrium will be highly persistent larger shocks mean revert much faster than the glacial rates previously reported for linear models rogoff 1996 in this respect the estar models provide some solution to the ppp puzzle outlined in rogoff 1996 2the estar model can also provide an explanation of why ppp deviations analyzed from a linear perspective appear to be described by either a nonstationary integrated i 1 process or alternatively described by fractional processes see e g diebold husted and rush 1991 taylor peel and sarno 2001 and pippenger and goering 1993 show that the dickey fuller tests have low power against data simulated from an estar model michael nobay and peel 1997 and byers and peel 2003 show that data that is generated from an estar process can appear to exhibit the fractional property that this would be the case was an early conjecture by acosta and granger 1995 given that the estar model has a theoretical rationale whereas the fractional process is a relatively nonintuitive one the fractional property might reasonably be interpreted as a misleading linear property of ppp deviations granger and terasvirta 1999 whereas the empirical work employing estar models provides some explanation of the glacially slow adjustment speeds obtained in linear models there is one aspect of the empirical work that is worthy of further attention a second way of explaining the rogoff puzzle raised by rogoff himself 3 is to relax the assumption that the equilibrium real exchange rate is a constant see e g canzoneri cumby and diba 1996 and chinn and johnston 1996 theoretical models such as that of balassa 1964 and samuelson 1964 imply a nonconstant equilibrium in the real exchange rate if real productivity growth rates differ between countries 4 nonlinear models that incorporate proxies for these effects are found to parsimoniously fit post bretton woods data for the main real exchange rates see venetis paya and peel 2002 and paya venetis and peel 2003 naturally models that ignore this effect may generate misleading speeds of ppp adjustment to shocks in this regard the empirical results of hegwood and papell 2002 for the gold standard period are particularly interesting

withering government spending multipliers the empirical literature has documented a weakening of the consumption and output responses to an increase in government spending during the last thirty years we show that a new keynesian model in which real government spending is observed with measurement errors can account for the reduction in the size of government spending multipliers the model implies consistent with empirical evidence presented by ilzeki et al 2009 that the evolution of monetary policy and greater globalization increasing international trade and decreasing capital controls are key factors in this development

the economics of worldwide stagflation the last fifteen years have witnessed dramatic changes in economics not only in the manner in which the economics profession views economics but also in the manner in which the general public views economics and economists by the late 1960 s there had emerged more or less a consensus macroeconomic framework that is an agreed upon structure to be used to study economic problems at the aggregate level robert solow stated as quoted in leijonhufvud 1968

the exchange rate and fiscal consolidation episodes in emerging market economies abstract an analysis of fiscal consolidations in emerging market economies during 1970 2004 suggests that exchange rate depreciation raises the probability of a fiscal consolidation being successful including when controlling for debt growth the composition of the consolidation and degree of democracy

monetary policy in open economies abstract the recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates we argue that this result may owe much to the combination of two commonly made assumptions that nominal goods prices are rigid and that the monetary authorities have a lot of information about the economy when the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules such as a standard interest rate rule policies that stabilize the money supply or the nominal exchange rate may perform better

the process followed by ppp data on the properties of linearity tests recent research has reported the lack of correct size in stationarity test for ppp deviations within a linear framework however theoretically well motivated nonlinear models such as the estar appear to parsimoniously fit the ppp data and provide an explanation for the ppp puzzle employing monte carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses we also fit the estar model to data from high inflation economies our results provide further support for estar specification

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

foreign direct investment theories entry barriers and reverse investments in u s manufacturing industries this paper investigates empirically whether industrial organization oriented fdi theories explain the recent phenomenon of reverse foreign direct investment in the u s based on the distribution of fdi in two digit sic manufacturing industries we find that capital and advertising intensities act as entry barriers to foreign investments in the u s we also observe that foreign multinationals are attracted by the u s market size and that they invest heavily in industries with intensive r d combined with marketing efforts

exchange rate regimes and asset prices abstract we study the implications of alternative exchange rate regimes for asset prices in a portfolio balance model motivated by the recent us china experience we establish that asset price responses to various shocks differ across a flexible regime and a unilateral peg but the differences for most shocks tend to be rather small moreover while both monetary and public debt expansions have inflationary effects on equity prices the latter s impact is stronger under a flexible exchange rate regime these two findings suggest that a flexible usd rimni rate would not have limited the recent asset price inflation in the us

international evidence on tradables and nontradables inflation abstract using 1970 1985 sectoral data for the oecd we find that inflation in nontradable goods exceeds inflation in tradables we identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of the differential inflation in addition disinflation attempts and the exchange rate regime appear to have exerted significant influence on the relative inflation rate

tales of fiscal adjustment fiscal adjustments why they can be expansionary this paper examines the evidence on fiscal adjustments in oecd countries from the early 1960s to today the results shed light on the recently observed phenomenon of fiscal tightening that produces non keynesian expansionary effects one interpretation is that a serious fiscal tightening increases demand wealth rises when future tax burdens decline and when interest rates decline credibility is restored and inflation or default risks abate both consumption and investment rise for this effect to produce an expansion the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up another interpretation emphasizes the supply side typically a fiscal consolidation based on tax increases is short lived to be long lasting it must include cuts in public employment transfers and government wages to be politically possible such a policy must be supported by trade unions these measures result in more efficient labour markets and boost the supply side based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment this article provides cautious support to the supply side view without denying a more limited role for the demand side channel alberto alesina and silvia ardagna

separating the wheat from the chaff a disaggregate analysis of the effects of public spending in the us in this paper we undertake a systematic disaggregate analysis of the effects of government spending on economic activity in the us the level of disaggregation we consider is the highest available and is unprecedented in the empirical literature more specifically public consumption and public investment are decomposed into various subcategories which are measured at the levels of the federal defence and non defence and state and local governments for each subcategory we estimate a structural vector autoregression that identifies public spending shocks through the conditional heteroskedasticity of the structural disturbances thus relaxing the identifying restrictions commonly used in the literature our analysis reveals significant heterogeneity in the effects of public spending shocks on output both across subcategories and government levels shocks to spending on durables and structures are found to have the largest and most persistent effect on aggregate output with a peak multiplier that exceeds 1 our results also suggest that there is little association between the size of a given category of public expenditures and the magnitude of its effect on output resume separer le bon grain de l ivraie une analyse desagregee des effets des depenses publiques aux etats unis dans ce texte on entreprend une analyse desagregee des effets des depenses gouvernementales sur l activite economique aux etats unis le niveau de desagregation considere est le plus grand possible et est sans precedent dans la litterature empirique plus specifiquement la consommation et l investissement publics sont decomposes en diverses sous categories qui sont mesurees pour le gouvernement federal defense et non defense ainsi que pour les gouvernements des etats et locaux pour chaque sous categorie on estime un vecteur autoregressif structurel qui identifie les chocs de depenses publiques a travers l heteroscedastictite conditionnelle des perturbations structurelles pour ainsi rel cher les restrictions d identification communement utilisees dans la litterature l analyse revele une heterogeneite significative dans les effets des chocs de depenses publiques sur la production agregee selon les sous categories et les niveaux de gouvernement les chocs dans les depenses sur les biens durables et les structures tendent a avoir les effets les plus grands et les plus persistants sur la production agregee avec un effet multiplicateur qui excede 1 les resultats suggerent qu il y a peu de rapport entre la taille d une categorie donnee dans les depenses publiques et l ampleur de l effet sur la production agregee

a comparison of the plant location strategies of foreign and domestic manufacturers in the u s several studies have investigated that locational strategies of multinationals across national borders but there have been very few investigations of the locational strategies of multinational and international firms within the borders of a given nation the influx of foreign manufactures into the u s in the seventies and eighties provided a unique opportunity to study their locational strategies within the u s which because of its spatial diversity and size permits identifiable patterns to emerge in the locational strategies of manufacturers

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

short run independence of monetary policy under pegged exchange rates and effects of money on exchange rates and interest rates this paper examines the effects of money supply changes on exchange rates interest rates and production in an optimizing two country model in which some sectors of the economy have predetermined nominal prices in the short run and other sectors have flexible prices money supply shocks have liquidity effects both within and across countries and induce a cross country real interest differential the model predicts that liquidity effects are highly nonlinear and are not likely to be captured well empirically by linear models particularly those involving only a single country a striking implication of the model is that countries have a significant degree of short run independence of monetary policy even under pegged exchange rates copyright 1997 by ohio state university press

purchasing power parity in less developed and transition economies a review paper abstract the concept of purchasing power parity ppp has been the subject of numerous studies many of which have been unable to prove conclusively this core principle of international finance although industrialized countries have received most of the attention studies that focus on less developed and transition economies have also attained mixed results this study surveys trends in this branch of the literature highlighting the econometric advances that have sought to solve this puzzle while pointing out that more needs to be done to address the reasons that might cause ppp not to hold

the new open economy macroeconomics of government debt in this paper we introduce an overlapping generations structure of the blanchard type in a new open economy macroeconomics model this allows us to study a wider range ofscal shocks compared to the traditional mundell fleming and to the baseline redux models one important policy implication of our model is that the tax cut imple mented in the us in 2001 might have contributed to the appreciation of the dollar vis a vis the euro in contrast the imposition ofscal constraint such as the golden rule proposed by the uk government can have opposite exchange rate e ects

the welfare state and competitiveness in all industrial countries fiscal policy is increasingly about redistribution in this paper the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation they show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries depending on the degree of centralization of the wage setting process in the labor market the authors find considerable empirical support for the model in a sample of fourteen oecd countries copyright 1997 by american economic association

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

the impact of journals and authors on international business research a citational analysis of jibs articles in this paper we use citational analysis to examine the influence of individuals and disciplines on international business research we collected citational data over the ten year period 1984 to 1993 from every issue of the journal of international business studies we found that management economics marketing and finance disciplines have had significant influence on international business research and identified researchers such as dunning porter vernon casson rugman and hofstede as having made significant contributions to international business research

fdi theories and the performance of foreign multinationals operating in the u s based on firm specific financial data performance of foreign multinationals operating in the u s is evaluated to determine if they enjoy advantages over u s firms results of this study indicate that foreign firms operating in the u s are less profitable than randomly selected u s firms that they spend more in research and development but less in advertising and that they have higher debt levels combined with higher liquidity in addition the findings also demonstrate that the determinants of excess market value as measured by tobin s q differ between foreign owned firms and american owned firms and that the performance of foreign multinationals differ by country of origin this suggests that foreign owned firms may have different reasons for investing in the u s and that foreign multinationals present investment opportunities to the u s investors distinct from american firms

component sourcing strategies of multinationals an empirical study of european and japanese multinationals this is a study of component sourcing decisions of european and japanese manufacturers for supplying their manufacturing operations in their home countries for export to the u s as well as their operations in the united states specifically employing data from seventy one multinational manufacturers of european and japanese origin operating in the u s the study investigated the determinants of international sourcing decisions the authors found support for the hypothesis that international sourcing could be explained using international plant location theory the significance of this finding is that it offers a new theoretical framework to spur much needed research on the topic of international sourcing

mean reversion of real exchange rates in high inflation countries we test for mean reversion in real exchange rates using data from five countries four of which have experienced episodes of high inflation using monthly data for argentina brazil chile colombia and israel we find that a stochastic unit root model is typically appropriate brazil is the exception kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes this suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion

motives of non american firms investing in the united states non american firms have recently begun investing larger sums of money in the u s such increased activity has created a great deal of interest and concern the growth in foreign direct investment and findings of a mailed questionnaire will be reviewed in this article factor analysis was utilized to help isolate the salient motives for these investment activities although the size of the u s market and the attractiveness of a new market or the desire to preserve the existing u s market were the most frequently cited reasons for new investment in the u s factor analysis reveals that these reasons merely reinforce the primary motive namely the desire to benefit from a higher level of u s technology and innovation

government spending and the real exchange rate i study the effect of government spending on the real exchange rate in an open economy version of the sidrauski model with a time varying rate of time preference that introduces complementarity between consumption at different points in time i show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods if the increase falls instead on nontraded goods both the stylized results of a real appreciation and a current account deficit and the perverse result of an appreciation and a surplus can occur

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

the macroeconomic effects of monetary and fiscal policy in a small open economy does the exchange rate regime matter abstract this paper develops a small open economy model in the spirit of obstfeld and rogoff 1995 the introduction of endogenous traded sector output unlocks current account and real exchange rate effects within this framework where specific consideration is given to the case with fixed but adjustable parities exchange rate devaluation generates similar qualitative effects as a money supply expansion under floating rates output and external effects of government spending shocks are broadly consistent with the adjusted basic non micro founded mundell and fleming mf framework but differ in significant ways from the baseline mf model contrary to the textbook mf model a government expenditure shock depreciates the nominal exchange rate and generates real effects under the fixed rate system

home country political risk and foreign direct investment in the united states this study investigates the proposition that home country political risk factors influence outward foreign direct investment investment data from the u s department of commerce is used to model investment activity in the united states from various industrialized source countries foreign direct investment is regressed on home country domestic and international economic and political risk measures for the western industrial countries results indicate that investment activity from the ics in the u s is dependent on home country economic and political conditions

nonlinear mean reversion to purchasing power parity exponential smooth transition autoregressive models and stochastic unit root processes nonlinear exponential smooth transition autoregressive estar models are recently very popular in modelling the deviation from purchasing power parity this article shows that there is a close relation between the estar models estimated in taylor et al 2001 and stochastic unit root stur processes of granger and swanson 1997 and mccabe and tremayne 1995 also for a post bretton woods sample period the real exchange rates from four major countries are tested if they are better described as i 1 estar or stur processes

the effect of national culture on the choice of entry mode characteristics of national cultures have frequently been claimed to influence the selection of entry modes this article investigates this claim by developing a theoretical argument for why culture should influence the choice of entry two hypotheses are derived which relate culture to entry mode choice one focusing on the cultural distance between countries the other on attitudes towards uncertainty avoidance using a multinomial logit model and controlling for other effects the hypotheses are tested by analysing data on 228 entries into the united states market by acquisition wholly owned greenfield and joint venture empirical support for the effect of national culture on entry choice is found

towards solving the ppp puzzle evidence from 113 countries several different approaches have been followed by researchers to test the validity of purchasing power parity ppp since the introduction of the unit root tests researchers have applied a battery of these tests to determine whether the real exchange rates are stationary if the answer is in the affirmative ppp is validated while application of the standard augmented dickey fuller test has not provided much support for ppp a test that incorporates nonlinearity in the rates has under both tests however the null of nonstationary is tested against the alternative of stationarity in this article when we switch the null with the alternative and apply kwiatkowski et al 1992 test we provide relatively more support for the theory getting closer and closer towards solving the ppp puzzle

size distortions of tests of the null hypothesis of stationarity evidence and implications for the ppp debate abstract tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance we show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions if the model under the null hypothesis is highly persistent this fact calls into question the use of these tests in empirical work we illustrate the practical importance of this point for tests of long run purchasing power parity ppp under the recent float we show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long run ppp while the size distortions may be overcome by the use of finite sample critical values the resulting tests tend to have low power under economically plausible assumptions about the half life of deviations from ppp thus the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion only in the rare case that stationarity is rejected do size corrected tests shed light on the question of long run ppp

the mystery of the chinese exchange rate regime basket or no basket economists have taken for granted the claim made by the chinese government that the policy shift introduced in july 2005 constituted a change in the exchange rate regime from a fixed peg to a basket peg we demonstrate that neither the stylized facts nor the empirical evidence support the proposition of a basket peg and suggest several reasons as to why china has not adopted this regime the results could prove useful for identifying the chinese exchange rate regime in the aftermath of the perceived policy shift following the august 2015 devaluation

foreign direct investment in the united states the state of knowledge in research this article categorizes and summarizes the major writings published during the 1970s concerning foreign direct investment in the united states it is based on the authors analysis of more than 100 works published in the english language in addition to analyzing what has been published the article also suggests directions for future research

exchange rate systems and macroeconomic stability abstract we examine macroeconomic stability and the properties of the international transmission of business cycles under three exchange rate systems a flexible a unilateral peg ems and a single currency emu the subjects of study are germany and france in france macroeconomic volatility under emu is comparable to that under a flexible exchange rate system but considerably lower than that under ems in germany output volatility is significantly higher under ems relative to the flexible regime and increases even further under emu inflation though becomes more stable emu also induces a strong negative international transmission of country specific supply shocks and amplifies their role this fact may complicate ecb policymaking

import sourcing dynamics an integrative perspective the character of import sourcing for manufacturing has changed beyond the reach of current explanatory schemes this study knits several evolving trends in the area of import sourcing into a theoretical framework in order to facilitate research in this under researched topic and expose to practitioners the increasing strategic value of import sourcing

the origin of the us china trade war the ongoing trade war or at least dispute between the us and china has its roots in the early 2000s when american politicians and economists started complaining about the us trade deficit with ch

fiscal policy profits and investment this paper evaluates the effects of fiscal policy on investment using a panel of oecd countries we find a sizeable negative effect of public spending and in particular of its wage component on profits and on business investment this result is consistent with different theoretical models in which government employment creates wage pressure for the private sector various types of taxes also have negative effects on profits but interestingly the effects of government spending on investment are larger than those of taxes our results can explain the so called non keynesian i e expansionary effects of fiscal adjustments jel e22 e62

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

trigger points and budget cuts explaining the effects of fiscal austerity we propose and solve an optimizing model which explains counterintuitive effects of fiscal policy in terms of expectations if government spending follows an upward trending stochastic process which the public believes may fall sharply when it reaches specific trigger points then optimizing consumption behavior and simple budget constraint arithmetic imply a nonlinear relationship between private consumption and government spending this theoretical relation is consistent with the experience of several countries jel e62 e21 textbook aggregate demand models suggest simple relationships between the government budget and economic activity a cut in the government deficit for example depressing consumption and output though such models heavily influence the design of stabilization policies their micro foundations are unclear and their sharp predictions are not always consistent with reality in many countries large cuts in government spending carried out as part of stabilization programs have led to expansions rather than contractions in economic activity the absence of simple relationships be

the need for international policy coordination what s old what s new what s yet to come the first generation of policy coordination models was introduced some 25 years ago it provided a rationale for policy coordination but the gains from coordination were generally thought to be small now a new generation of policy coordination models is emerging incorporating monopolistic competition and nominal inertia here we examine macroeconomic interdependence and the scope for policy coordination in a tractable second generation model with two countries and multiple sectors initial calibration of the model suggests that second generation models may have more scope for policy coordination than did the first d 2004 elsevier b v all rights reserved

the price of policy risk empirical insights from choice experiments with european photovoltaic project developers managing the transition to a renewable energy future is an important policy priority in many countries solar photovoltaic pv technology is expected to make an important contribution but due to relatively higher cost its growth to date has been largely driven by public policy notably feed in tariffs feed in tariffs have been implemented in various countries however with widely differing outcomes in terms of installed pv capacity previous research indicates that the level of policy risk may be an important driver for differences in renewable energy policy effectiveness more specifically we suggest that investors who take a decision between pv investment opportunities in different countries carefully weigh feed in tariff induced returns against a set of policy risks and choose the country with the most favorable risk return profile we empirically test this model based on a stated preference survey among european pv project developers consisting of 1575 choice decisions by 63 investors the findings of our study demonstrate that risk matters in pv policy design and that a price tag can be attached to specific policy risks such as the duration of administrative processes or uncertainty induced by an approaching capacity cap governments can build on our empirical results to design policies that will be effective in attracting private pv investment while at the same time maintaining efficiency by providing an adequate compensation for policy risk

trade spill overs of fiscal policy in the european union a panel analysis we explore the international spillovers from fiscal policy shocks via trade in europe a fiscal expansion stimulates domestic activity which leads to more foreign exports and hence higher foreign output to quantify this we combine a panel var model in government spending net taxes and gdp with a panel trade model on average a public spending increase equal to 1 of gdp implies 2 3 more foreign exports over the first two years the corresponding figure for an equal size net tax reduction is 0 6 both estimates are statistically significant as far as the effect on foreign activity is concerned a 1 of gdp spending increase net tax reduction in germany on average raises gdp of trading partners by 0 23 0 06 over the first two years these figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions contractions in response to european wide cyclical downturns upswings

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

market frictions and real exchange rates abstract one explanation for the failure of purchasing power parity ppp is that market frictions impede trade allowing departures from ppp to grow quite large without precipitating goods arbitrage if this explanation is correct then other things equal large deviations from ppp should be less persistent than small differences this paper examines this prediction over the modern floating rate era the outcome is surprising between most countries large deviations from ppp appear to be at least as persistent as small deviations and perhaps even more so the exceptions are for some intra ec real exchange rates the implication is that market frictions alone do not explain the chimerical nature of ppp

profitability and growth the link between profitability and growth is explored by means of an alternative explanation suggested by standard neoclassical theory of the firm the growth model developed clarifies the relationships between the real wage rate the rate of profit taxation and savings behavior and the rate of growth

understanding the dynamic effects of government spending on foreign trade abstract using vector autoregressions on u s time series the present paper documents the effects of fiscal policy on foreign trade an increase in government spending significantly depreciates the nominal exchange rate appreciates the terms of trade and increases net exports exposed to the same spending shock a new keynesian general equilibrium model is shown to match qualitatively the response of relative prices the response of net exports in contrast depends on the intra and intertemporal elasticities of substitution and the degree of home bias in private spending an accommodating monetary policy dampens but does not alter the response of net exports

the effects of government purchases shocks review and estimates for the eu in this article we review the theoretical consequences of government purchases shocks for both closed and open economies followed by a discussion of the empirical literature next we provide our own estimates for the eu countries we find that an increase in government purchases raises output consumption and investment and reduces the trade balance however the stimulating effect is weaker and the trade balance reduction is larger for the more open eu economies consistent with larger leakage effects further we show that government purchases shocks in large eu economies have non negligible consequences for economic activity in the main trading partners

searching for nonlinearities in real exchange rates a recent innovation in modeling exchange rates has been the use of nonlinear techniques such as threshold autoregressive models and its smooth transition variants this paper investigates the smooth transition autoregressive star modeling strategy in an application to real exchange rates the key findings are as follows first using the methodology advocated by terasvirta 1994 we find evidence of nonlinear dynamics for several of the spot dollar real exchange rates using monthly data on five of the g7 countries however once estimated we find that the star specification is appropriate for only one of the three exchange rate series indicated to be an estar process moreover using simulations we show that the underlying methodology used to detect nonlinearities in the data exhibit substantial size biases which we attribute to influential observations we also investigate an alternative nonlinear specification and find that we can model the dollar sterling and the dollar lira real exchange rates better as an open loop tar process instead of a setar process

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

quantile unit root test and ppp evidence from 23 oecd countries abstractapplication of six different univariate unit root tests to real effective exchange rates of 23 oecd countries supports their stationarity or purchasing power parity theory ppp only in five countries a result consistent with previous research that is known as ppp puzzle however descriptive statistics of each effective rate reveals a clear sign of non normal distribution to account for this we use quantile unit root test which allows impact of different shocks to be realized at different quantiles when we applied this new test to the same rates number of countries in which ppp is supported increased to 16 apparently incorporating effects of shocks improves testing efficiency and provides more support for the ppp and reduces the severity of the puzzle

wage rigidity and monetary union we compare monetary union to flexible exchange rates in an asymmetric threecountry model with active monetary policy unlike the traditional oca literature we find that countries with a high degree of nominal wage rigidity benefit from monetary union specially when they join other similarly rigid countries countries with relatively more flexible wages tend to be worse off in unions with countries that have more rigid wages we examine france germany and the uk and find that the welfare implications of alternative monetary arrangements depend more on the degree of wage asymmetry than on other types of asymmetries in shocks monetary policy etc and that higher degree of wage flexibility in the uk relative to france and germany would make its participation in emu costly

a general equilibrium model of international portfolio choice we investigate in a two country general equilibrium model whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities we develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries in this model investors less risk averse than an investor with log utility bias their portfolios towards domestic assets investors more risk averse than log however prefer foreign assets thus this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption we investigate in a two country general equilbrium model whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor s optimal portfolio we constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country this cost gives rise to endogenous deviations from the law of one price lop thus the home and foreign investors do not hold identical portfolios we show that an investor s optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility investors with relative risk aversion greater than one exhibit a preference for the foreign asset this is because the exchange rate derived endogenously is negatively correlated with the return on the foreign asset and therefore the translated return on the foreign stock is less risky than that on the domestic stock thus the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption there exists a considerable body of literature documenting the gains from international diversification grubel 1968 was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically this proposition relies on the correlation between stock indices across countries being significantly less

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

competitiveness through disinflation an assessment of the french macroeconomic strategy france olivier jean blanchard and pierre alain muet over most of the last decade france has followed increasingly rigorous policies the hard franc approach has meant that external competitiveness is no longer sought through devaluation instead the new policy is to achieve a lower inflation rate than abroad in principle the competitiveness through disinflation approach should work and eventually bring down the unemployment rate which has remained broadly unchanged at a high level for many years while maintaining external balance this article investigates whether the policy is working inflation is lower than in germany profits have steadily increased and trade balance has been reestablished but unemployment is higher than in 1983 the policy has been more successful at bringing down inflation than at returning the economy to lower unemployment the adjustment process has been protracted credibility effects have not been fulfilled but nor however have fears that the drastic change of policy might prove unusually disruptive it simply turns out that the policy is working very slowly it would take an improbable 30 accumulated competitiveness gain to bring unemployment down by 3 which does not seem acceptable to france s trading partners

an optimum currency area odyssey abstract the theory of optimum currency areas was conceived and developed in three highly influential papers written by mundell 1961 mckinnon 1963 and kenen 1969 those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally tailored monetary policy and the adjustment of an exchange rate of a national currency we trace the development of optimum currency area theory which after a flurry of research into the subject in the 1960s was relegated to intellectual purgatory for about 20 years we then discuss factors that led to a renewed interest into the subject beginning in the early 1990s milton friedman plays a pivotal role in our narrative friedman s work on monetary integration in the early 1950s presaged subsequent optimum currency area contributions mundell s classic formulation of an optimal currency area was aimed in part at refuting friedman s strong case for floating exchange rates and friedman s work on the role of monetary policy had the effect of helping to revive interest in optimum currency area analysis the paper concludes with a discussion of recent analytical work using new keynesian models which has the promise of fulfilling the unfinished agenda set out by the original contributors to the optimum currency area literature that is providing a consistent framework in which a country s characteristics can be used to determine its optimal exchange rate regime

foreign labor costs and domestic employment what are the spillovers abstract this paper studies the international spillover effects of country specific labor cost changes in the presence of labor market frictions a two country model with search frictions predicts that a cut in foreign labor costs leads to an increase in domestic employment driven by a positive terms of trade effect on job creation i find empirical evidence in support of this positive spillover effect the terms of trade channel and the dependence on the degree of labor market rigidity this is done by a panel regression that estimates the effect of exogenous variation in foreign unit labor costs instrumented by changes in foreign statutory social security contribution rates on domestic employment and output

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association