stabilization policy a reconsideration i introduction in 1936 keynes s general theory explained how fiscal and monetary policy could be used to end depressions since that time no developed country has ever seen a downturn on the scale of the 1930s the general theory was not just a how to book on the avoidance of depressions it was an argument for stabilization policy itself the years since the general theory have seen a revolt against keynesian economics in a revisionist mode milton friedman argued that countercyclical policy cannot affect the average level of unemployment and output robert lucas and thomas sargent 1979 went further contending that it is not only impossible to increase average output it is also impossible to stabilize it more recently lucas 1987 2003 has argued that policies to stabilize output even if effective would yield negligible welfare gains thus stabilization policy should not be a macroeconomic priority lucas s conclusion notwithstanding stabilization policy has long been an explicit or implicit objective of monetary policy in most industrial countries even including those countries with inflation targets the volatility of output has in fact declined in most major industrial countries since the mid 1980s and monetary policy arguably deserves at least partial credit see bernanke 2004 mirroring practice monetary policy research commonly takes it as given that along with price stability stabilization policy the minimization of squared deviations of output around potential is an appropriate policy objective see for example clarida et al 1999 in this article we explore the economic rationale for stabilization as a policy goal concluding that it does in fact deserve high policy priority we survey a large body of literature that critiques the validity of key assumptions in lucas s argument we also offer suggestive evidence that stabilization policy can significantly reduce average levels of unemployment by providing stimulus to demand in circumstances where unemployment is high but underutilization of labor and capital does little to lower inflation a monetary policy that vigorously fights high unemployment should however also be complemented by a policy that equally vigorously fights inflation when it rises above a modest target level the federal reserve act thus wisely enunciated price stability and maximum employment as twin goals for monetary policy ii the case against stabilization policy macroeconomic analysis typically assumes that social welfare depends negatively on both inflation above a modest target level here assumed zero and unemployment above some minimum socially efficient level for example a standard social welfare function is the discounted sum of period losses l sub t of the form see among others barro and gordon 1983 pp 592 93 1 l sub t a u sub t 1 k u sup 2 b pi sup 2 sub t where u sub t and pi sub t are the unemployment and inflation rates in period t and u sup is the natural rate of unemployment the coefficient k is positive reflecting the desirability of unemployment below the natural rate because real economies deviate in many respects from perfect competition the natural rate of unemployment is likely to exceed the socially optimal unemployment rate for example with monopolistic competition goods are underproduced because they are priced above marginal cost so potential output is inefficiently low and equilibrium unemployment is too high standard macroeconomic analysis additionally assumes that inflation is determined by an expectations augmented accelerationist phillips curve of the form 2 pi sub t pi sup e sub t f u sub t u sup epsilon sub t where pi sup e sub t is the expected inflation rate at time t with expectations formed at t 1 and epsilon sub t captures supply shocks to the phillips curve at t

the phillips curve macroeconomic policy and the welfare of canadians a review of the two competing paradigms explaining inflation and unemployment fluctuations singles out the keynesian phillips curve as the clear empirical winner over its classic competitors reestimation of the canadian phillips curve for 1957 90 identifies a sharp structural shift toward a high degree of unemployment hysteresis after 1972 the recent attempt of macropolicy to flatten the aggregate demand curve and limit supply side shock accommodation which aims at lower and more stable inflation is then shown to make unemployment higher and more unstable on average to an extent that is an increasing function of the degree of hysteresis understanding and reducing hysteresis and developing a consensus based incomes policy that has a chance of alleviating the dismal trade off should therefore to top research and policy priorities

the effects of scarcity on cheating and in group favoritism abstract we study the impact of scarcity on cheating and in group favoritism using a two period lab in the field experiment with low income coffee farmers in a small isolated village in guatemala during the coffee harvesting months farmers in this village experience a significant income boost from selling their coffee beans however during the non harvesting months they experience a substantial decline in income inducing a pronounced state of scarcity while other factors remain similar using this distinctive variance in income we first conduct our experiment before the coffee harvest scarcity period we then repeat the experiment with the same group of subjects during the harvest season abundance period first using the fischbacher and follmi heusi 2013 die roll paradigm we find that subjects cheat at high levels in both periods when they are the beneficiaries of the cheating scarcity does not impact this cheating behavior secondly using subjects natural village identity we find significant in group favoritism for cheating in the abundance period which disappears during the scarcity period finally using a dictator game we show that this finding holds even when the cost of favoring an in group member is monetary rather than moral

the changing relationship between aggregate price and output the british experience over the past two and a half decades great britain has exhibited the most noticeable increase in inflation variability among the ten major noncommunist industrialized countries in addition there has been an apparent worsening in the output inflation tradeoff this paper attempts to identify and empirically assess possible causes of the deterioration in the british output inflation tradeoff in the context of a new classical type model supply side shocks can cause an increase in the inflation rate and a decrease in real output and it is estimatedthat such shocks interacted with inflation variability to reduce real output roughly 3 3 percent between the period 1957 1968 and the period 1969 1980 also contributing to the deterioration in the output inflation tradeoff it is estimated that the decline in the natural rate of real output due to inflation variability as hypothesized by milton friedman amounted to about 2 3 to 2 5 percent between these two subperiods this abstract was borrowed from another version of this item

on the neutrality of fiscal policy abstract the paper explores the relationships between fiscal policy and real economic activity and prices for the six largest industrialized economies fiscal policy variables are shown to be consistent and rational functions of the behaviour of the economy it is also confirmed that fiscal policy seems to have a consistent impact on subsequent real economic activity and prices when multivariate time series analysis is used to breakdown overall fiscal policy into anticipated and unanticipated components the anticipated components are shown generally to have just as much forecasting ability for subsequently realized economic variables as the unanticipated components this does not appear to be consistent with the implications of pure rational expectations models

an examination of aggregate price uncertainty in four countries and someimplications for real output this stu dy constructs measures of aggregate price uncertainty for four countries canada west germany great britain and the united states and examines the relationship across countries and through time between the inflation rate inflation variability and measures of price uncertainty the results suggest that the higher and more variable inflation of the 1970s increased uncertainty about the aggregate price level in canada great britain and the united states but not west ge rmany and there was a significant negative output effect of aggregate price uncertainty for canada and the united kingdom but not for the united states or west germany copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

real and nominal wage rigidities and the rate of inflation evidence from west german micro data the paper examines real and nominal wage rigidities we estimate a switching regime model in which the observed distribution of individual wage changes computed from west german register data for 1976 1997 is generated by simultaneous processes of real nominal or no wage rigidity and measurement error the fraction of workers facing wage increases that are due to nominal but mostly real wage rigidity is substantial the extent of real rigidity rises with inflation whereas the opposite holds for nominal rigidity overall the incidence of wage rigidity which accelerates unemployment growth is most likely minimized in an environment with moderate inflation

the taylor principle fights back part ii abstract the existing literature holds that the taylor principle often leads to indeterminacy in new keynesian models that allow for capital accumulation and limited asset market participation this conclusion is special however to the case of continuous full employment when the assumption of perfect wage flexibility is relaxed very slightly so that the labor market clears quickly but not instantaneously determinacy is the norm the threat of indeterminacy is limited to a tiny irrelevant corner of the parameter space where the elasticity of labor supply is unusually high and real wage adjustment is unbelievably fast everywhere else the taylor principle guarantees a unique rational expectations equilibrium the dramatic difference in results reflects the sensitivity of the monetary transmission mechanism to the speed of adjustment in the labor market

wage rigidity in canadian collective bargaining agreements the authors search information on the provisions of 10 947 wage contracts signed in the canadian unionized sector between 1976 and 1999 for evidence of downward nominal wage rigidity the disinclination of wages to fall in nominal dollars below their established level over the sample period real wage reductions were common but nominal wage reductions were rare the probability of downward nominal wage rigidity increased substantially during low inflation periods during such periods apparently there was no reduction in the incidence of real wage cuts but the magnitude of those cuts was modest suggesting a lesser ability of wages to adjust to labor market conditions than at other times

unemployment and productivity in the long run the role of macroeconomic volatility abstract this paper presents a new empirical regularity between the volatility of productivity growth and long run unemployment for a given level of long run productivity growth a theoretical framework based on asymmetric real wage rigidities is shown to have the potential to rationalize this finding the model tends to fit u s long run unemployment better than a specification based on long run productivity growth only especially during the great moderation and the great recession

pecuniary externalities in economies with downward wage rigidity abstract a pecuniary externality in economies with downward nominal wage rigidity leads firms to hire too many workers in expansions which leads to too much unemployment in recessions when firms hire more workers firms fail to internalize that competition for workers between firms pushes up the aggregate wage which imposes a negative externality over other firms the externality can be resolved by a macroprudential tax on labor in expansions in the calibrated model the tax reduces the welfare cost of downward nominal wage rigidity by up to 90 as it makes the economy significantly less exposed to unemployment crises

escalators and elevators a phillips curve for keynesians the negatively sloped long run phillips curve remains an issue of contention this paper presents a theoretical model of the phillips curve in which nominal demand growth reduces unemployment caused by stochastic shifts of demand between sectors the model can be understood through the following metaphor keynesian economies are escalator economies in which markets adjust back to equilibrium slowly so that nominal demand growth presents a means of speeding up the escalator process contrastingly new classical economies as set forth by e g lucas 1973 are elevator economies in which adjustment is instantaneous consequently there is no role for nominal demand growth in the adjustment process and to the extent that policy sponsored nominal demand growth is uncertain it may actually disrupt the economy by sending the elevator to the wrong floor

interest rates and the fisher effect in india an empirical study abstract this study throws light on the importance of adjustment lags variability of inflation changes in real income etc in the empirical estimation of fisher hypothesis variability of inflation has a significant negative impact on both short and long term interest rates in a developing economy like india the philips curve effect has not been operative in a developing country

the incidence of nominal and real wage rigidities in great britain 1978 98 this paper analyzes the extent of rigidities in wage setting in great britain over the 1980s and 1990s our estimation strategy which generalizes the work of altonji and devereux 2000 models the notional wage growth distribution the distribution of nominal wage growth that would occur in the absence of rigidities in pay while allowing for the presence of measurement error in the data the model then allows for the possibility that the nominal wage growth of a fraction of the workforce may be subject to a nominal or real downward rigidity our model suggests that real rigidities in wage setting are more prevalent than nominal rigidities although the incidence of these real wage rigidities has fallen gradually over time if firms cannot cut real wages in response to negative demand shocks they may resort to laying off workers our results support this microfoundation of the wage unemployment phillips curve workers who are more likely to be protected from wage cuts are also more likely to lose their jobs

low inflation targeting and long run unemployment the model of akerlof dickens and perry 2000 adp predicts that low inflation may cause unemployment to persist at high levels when applied to u s data their results strongly rejected the conventional nairu model we apply the adp model to swedish data the fact that our swedish data also reject the nairu model has a number of interesting implications for the swedish economy and potentially for other european countries as well the results indicate that raising the swedish inflation target from 2 to 4 percent would bring longrun unemployment down by several percentage points the possibility of adp type long run phillips curves also across the euro countries may raise some concern about the emu project while detailed studies on other countries are needed there is nothing to suggest that these non vertical phillips curves would not differ considerably across the euro countries any single inflation level targeted by the ecb would then generate excess unemployment in individual member states

loss aversion and the asymmetric transmission of monetary policy there is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity while price responses display no sizeable asymmetry to rationalize these facts we develop a dynamic general equilibrium model where households utility depends on consumption deviations from a reference level below which loss aversion is displayed state dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation contractions face the central bank with higher responsiveness of output to interest rate changes as well as a flatter aggregate supply schedule

explaining the fame of friedman s presidential address it is noted that although in fact it lacks the revolutionary content commonly ascribed to it friedman s presidential address to the american economic association is very highly regarded as an original and formative contribution it is argued that close attention to the literature shows that it was not initially seen as original and only after an interval of five years did the idea of its revolutionary status retrospectively but suddenly become widely accepted the explanation of this change of view is considered four explanations are suggested one involving terminological confusion one involving a change in theoretical priorities and two involving debates of the 1970s which although they did not in fact do so appeared to build on friedman s presentation and by this appearance gave it an undeserved stature

wage rigidity inflation and institutions we study the possible existence of downward nominal wage rigidity dnwr at wage growth rates different from zero in aggregate data even if dnwr prevails at zero for individual workers compositional effects might lead to falling aggregate wages while changes in relative wages combined with dnwr might lead to positive aggregate wage growth we explore industry data for 19 oecd countries over the 1971 2006 period we find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s at 1 percent in the 1990s and at 0 5 percent in the 2000s furthermore we find that dnwr is stronger in country years with strict employment protection legislation high union density centralized wage setting and high inflation

downward nominal wage rigidity evidence from canada 1901 1950 this paper tests for the presence of downward nominal wage rigidity in canadian wage data for 26 occupations in 38 cities from the first half of the 20th century the sample is of particular interest as it contains periods with average inflation rates that are close to zero as well as two sharp deflations results from a variety of different tests indicate that wage change distributions are consistent with the presence of downward nominal wage rigidity however for two subsamples containing sharp declines in output and prices estimates of the extent of downward nominal wage rigidity are much lower this suggests that downwards adjustments did occur during times of severe depression and deflation

nominal wage rigidity and the rate of inflation using the accurate and extensive data available in the uk new earnings survey this paper investigates the extent to which nominal wages are downwardly rigid and whether such rigidity interferes with necessary real wage adjustments when inflation is low despite the substantial numbers of individuals whose nominal wages fall from one year to the next we find that if long run inflation is one percent higher the number of individuals with negative real pay growth increases by around 1 4 percent this is controlling for the median and dispersion of the real wage change distribution

how prevalent is downward rigidity in nominal wages international evidence from payroll records and pay slips in chapter 2 of the general theory of employment interest and money 1936 john maynard keynes put forward an assumption of downward rigidity in nominal wages as the cornerstone of his analysis of what happens in the labor market over the business cycle according to his analysis if the real value of the existing nominal wage exceeds the market clearing level downward nominal rigidity prevents arbitrage towards that level instead employment is determined by the short side of the market the labor demand side and the excess supply of labor at that wage manifests as high unemployment keynes s brief theoretical account of why workers refuse to accept a nominal wage reduction even when unemployment is the consequence involved workers concern about their wages relative to their reference group keynes did not directly address why workers would be so preoccupied with their relative wage that they would prefer job loss even during a recession to accepting a wage cut keynes s empirical basis for his assumption was that whether logical or illogical experience shows that this is how labour in fact behaves he did not provide any quantitative evidence to support this observation

can the electricity market be characterised by asymmetric behaviour in this paper we test for asymmetric behaviour of industrial and residential electricity demand for the g7 countries using the entropy based test for symmetry suggested by racine j and maasoumi e 2007 a versatile and robust metric entropy test of time reversibility and other hypotheses journal of econometrics 138 2 547 567 racine j and maasoumi e 2008 a robust entropy based test of asymmetry for discrete and continuous processes econometric reviews 28 246 261 the triples test of randles r flinger m policello g and wolfe d 1980 an asymptotically distribution free test for symmetry versus asymmetry journal of the american statistical association 75 168 172 and the bai j and ng s 2001 a consistent test for conditional symmetry in time series models journal of econometrics 103 225 258 test for conditional symmetry using data that spans over three decades we find overwhelming evidence of conditional symmetry of residential and industrial electricity consumption this finding implies that the use of econometric tests based on linear data generating processes is credible

the simple economics of extortion evidence from trucking in aceh this paper tests whether the behavior of corrupt officials is consistent with standard industrial organization theory we designed a study in which surveyors accompanied indonesian truck drivers on 304 trips during which they observed over 6 000 illegal payments to police soldiers and weigh station attendants using plausibly exogenous changes in the number of checkpoints we show that market structure affects the level of illegal payments we further show that corrupt officials use complex pricing schemes including third degree price discrimination and a menu of two part tariffs our findings illustrate the importance of considering the market structure for bribes when designing anticorruption policy

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

on the optimal inflation rate abstract in our incomplete markets economy households choose portfolios consisting of risky uninsurable capital and money money is a bubble it has positive value even though it yields no payoff the market outcome is constrained pareto inefficient due to a pecuniary externality each individual agent takes the real interest rate as given while in the aggregate it is driven by the economic growth rate which in turn depends on individual portfolio decisions higher inflation due to higher money growth lowers the real interest rate on money and tilts the portfolio choice towards physical capital investment modest inflation boosts growth rate and welfare

a contribution to the theory of depletable resource scarcity and its measures a contribution to the theory of depletable resource scarcity and its measures i introduction the question of devising suitable measures of the scarcity of natural resources has received considerable attention in the past quarter century beginning with the classic study of barnett and morse 1963 this literature includes a long series of articles of which the collection edited by smith 1979 is an excellent example and which for the moment culminates with the illuminating paper by hall and hall 1984 the present paper expands upon hall and hall s review of the received literature following this a stylized model of exhaustible resource production builds upon some of the classical insights the model suggests that it may be worthwhile to de emphasize the use of unit cost and of rent as measures of scarcity at least in a ricardian context where firms are physically constrained to mine varying qualities of ore simultaneously it also de emphasizes the importance of the question of ultimate exhaustibility of the resource rather it emphasizes the role of capital which is sometimes neglected in extraction models and thereby the role of the exhaustibility of the deposit in influencing the choices of an extracting firm ii classical and classic treatments malthus and ricardo as elaborated by barnett and morse differed in their treatment of agricultural land malthus 1798 assumed a fixed quantity of land 1 so that food production could be expanded to feed a growing society at the extensive margin until the land constraint was reached thereafter more food could be obtained only at higher costs by exploiting the intensive margin ricardo 1817 was at once more pessimistic and more optimistic the quality of land was non homogeneous the best land would be farmed first so that diminishing returns would result from any expansion costs at the extensive and intensive margins would rise and would continue rising as population increased 2 while ricardo did emphasize the role of the intensive margin he did not discuss an ultimate limit even though he was obviously aware of one ricardo lived on an island and had corresponded with malthus instead he advocated removal of trade barriers as a means of avoiding the need to move further into the extensive as well as intensive margin hall and hall 1984 365 6 discern four types of scarcity in the non renewable resource literature namely malthusian and ricardian flow and stock scarcities their discussion is summarized in table i the important questions are 1 whether a limit on total quantity produced is envisaged 2 whether the resource is of uniform quality or whether there are depletion effects which cause quality to decrease through time and 3 whether marginal extraction costs rise at any time as a result of constraints inherent in the characteristics of the resource the distinguishing feature of malthusian scarcities turns on the existence of an ultimate limit to total production which in turn reflects malthus s emphasis on the ultimate fixity of the quantity of cultivable land the distinguishing feature of the ricardian scarcities is that there is no ultimate limit to land rather than diminishing returns at the extensive margin 3 with these definitions malthusian flow scarcity is the most general concept there are three columns in table i with binary entries in each column thus a total of 2 sup 3 8 types of scarcity can be imagined using this classification scheme table ii extends table i to include all eight possibilities and then categories the entries most of the categories have interpretations and are treated in the literature even more importantly it is clearer than in table i that attaching the labels malthusian or ricardian is sometimes suggestive but that trying to stretch the malthusian and ricardian notions developed for self renewing agricultural land to mining can lead to inaccuracies and possibly to confusion

wage inflation in the united kingdom in britain there is little agreement on what determines the growth of wages or indeed on whether a stable wage equation exists in this paper i try to clarify matters in two ways first i aim to represent the data generation process as faithfully and accurately as possible while using with a few modifications the criteria for model selection advanced in davidson et al 1978 second i use five different measures of the pressure of demand rather than just picking on one particular measure 2 it may be helpful at this stage to summarize very crudely the argument and results in section ii having first set out the framework for the rest of the analysis which relates to the period 1961 i 1980 iv i modify the standard real wage model by proxying the desired level of real wages by a moving average of the past level of real wages it is found that the coefficient on the prevailing real wage is equal but of opposite sign to that on the desired wage thus in the long run inflation is independent of the level of real wages the pressure of demand and incomes policy dummies are both found to be significant one would have expected that in the long run the rate of growth of earnings at given price inflation and pressure of demand would respond to differences in the rate of growth of productivity but over the sample period there was no evidence of this once we allowed for incomes policy which implies considerable rigidity in the target rate of growth of wages the analysis so far includes no specifically expectational variables in section iii i use some survey data on wage expectations which have the advantage of being based on quantitative responses one rationale for having wage expectations in a wage equation might be that in a world of staggered contracts where workers care about relative wages they will take into account what they expect to happen to the wages of other workers when settling now a two equation model for wages and wage expectations is presented in the subsequent section and in most respects the results confirm our conclusions from the previous sections however the preferred specification obtained here which encompasses much of the earlier work and probably constitutes progress is one that we have some doubts about and will it is hoped form the basis for future research in this area

opening a can of worms the pitfalls of time series regression analyses of income inequality this paper argues that time series regression analysis is of only very limited use for understanding the determinants of income inequality the argument is based on a combination of results from the time series econometrics literature and several characteristics of inequality itself principally nonstationarity of the data in most inequality regression models and the weak theoretical foundations underlying the models a sample of postwar us data is used to illustrate the problems involved

the reincarnation of keynesian economics this paper discusses the reemergence of keynesian economics during the past decade it highlights the substantial differences between new keynesian economics and the convictions of early keynesians in particular it points out that new keynesians have adopted many views that were once considered monetarist or classical it concludes that the term keynesian may have outlived its usefulness this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

resource characteristics extraction costs and optimal exploitation of mineral resources this paper modifies the traditional theories ofnon renewable resource exploitation where reserve sizeis assumed to be the major determinant of extractioncosts in a competitive model of resourceexploitation characteristics of aggregate reservesare considered as a determinant of extraction cost then dynamic solutions for the price and exploratoryefforts are developed various price paths arefeasible under different assumptions with regard tothe changes in the reserve characteristics over time past empirical research shows that there is noconsistent price path for all materials in fact itis the quality of newly discovered reserves as well astheir size that has affected material prices todemonstrate the complexity of a firm s decision torecover mineral from new deposits potentials forsubstantial high quality marine mineral resources areevaluated as a substitute for land based resources however several factors including the decreasingtrend in marine mining r d expenditures and thepotential impact of large scale marine mining on priceof minerals indicate that mining of mostnon hydrocarbon marine minerals will not take place inthe near future

earnings unemployment and the allocation of time over time since an individual s labour market history can be described by a markov chain in state space it is possible to calculate the steady states it is natural to interpret the steady state proportion in unemployment for a group of identical workers as the natural rate of unemployment for this group i e it is the expected proportion that would be employed if the environment were to remain constant it is shown how the natural rate of unemployment is different for different groups the model is estimated using data from a large u s income maintenance experiment the predictions of the model with some exceptions bear up well to confrontation by data the empirical findings also accord well with existing evidence on cross section studies of labour supply we find that labour force participation rates implied by the estimated models are positively related to earnings for all age sex and race groups as expected we demonstrate that the elasticities of the unemployment rates for all groups with respect to expected wage rates are negative and large in absolute value in the case of adults while the role of the wage in allocation of time is not novel the existing neoclassical labour literature uses static labour supply models to interpret participation rate studies

management versus ownership ii two fields in economics have developed without much interaction in the past the theory of the firm and mathematical economics the former has accumulated a wealth of thoughts observations on the firm activities without analytical scrutiny the latter has raised the standard of analytical rigor only within simple frameworks which do not fit the nature of the firm activities in the preceding paper ichiishi 1982 a mathematical model of a capitalistic economy was constructed and a rigorous analysis was given to the model this paper presents the economic interpretations implications of the formal study in ichiishi 1982 and shows how the gap between the two fields is bridged it is also intended to serve as a survey article

the history of the phillips curve consensus and bifurcation while the early history of the phillips curve up to 1975 is well known less well understood is the post 1975 fork in the road the left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non shocked sector its econometric implementation interacts shocks with backward looking inertia the right fork approach emphasizes forward looking expectations that can jump in response to anticipated policy changes the left fork approach is better suited to explaining the postwar us inflation process while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments the history of the phillips curve pc has evolved in two phases before and after 1975 with a widespread consensus about the pre 1975 evolution which is well understood bifurcation begins in 1975 when the pc literature split down two forks of the road with little communication or interaction between the two forks the major contribution of this paper and hence the source of bifurcation in its subtitle is to examine contrast and test the contributions of the two post 1975 forks the pre 1975 history is straightforward and is covered in section i the initial discovery of the negative inflation unemployment relation by phillips popularized by samuelson and solow was followed by a brief period in which policy makers assumed that they could exploit the trade off to reduce unemployment at a small cost of additional inflation then the natural rate revolution of friedman phelps and lucas overturned the policy exploitable trade off in favour of long run monetary neutrality those who had implemented the econometric version of the trade off pc in the 1960s reeled in disbelief when sargent demonstrated the logical failure of their test of neutrality and finally were condemned to the wreckage of keynesian economics by lucas and sargent following the twist of the inflation unemployment correlation from negative in the 1960s to positive in the 1970s the architects of neutrality and the opponents of the keynesian trade off emerged triumphant with two major caveats that their own models based on information barriers were unconvincing and that their core result that business cycles were driven by monetary or price surprises floundered without supporting evidence after 1975 the evolution of the pc literature split in two directions each of which has largely failed to recognize the other s contributions section ii reviews the left fork of the road the revival of the pc trade off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests in theoretical contributions and in intermediate macro textbooks this approach which i have called mainstream is resolutely keynesian because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation an important difference between the mainstream approach and other post 1975 developments is that the role of past inflation is not limited to the formation of expectations but also includes a pure persistence effect due to fixed duration wage and price contracts and lags between

monitoring motivation and management the determinants of opportunistic behavior in a field experiment economic models of incentives in employment relationships are based on a specific theory of motivation employees are rational cheaters who anticipate the consequences of their actions and shirk when the marginal benefits exceed costs we investigate the rational cheater model by observing how experimentally induced variation in monitoring of telephone call center employees influences opportunism a significant fraction of employees behave as the rational cheater model predicts a substantial proportion of employees however do not respond to manipulations in the monitoring rate this heterogeneity is related to variation in employee assessments of their general treatment by the employer jel d2 j2 l2 l8 m12

unions wages and the common interest three models have dominated recent research on the relationship between labor unions wage behavior and national economic performance a simple linear model a parabolic model and a political model this article argues that an unemployment mediated linear model is theoretically preferable in a context of low unemployment encompassing labor movements can be expected to restrain wage demands whereas localized unions have much less incentive to do so in a context of high unemployment localized unions should exhibit wage moderation and the pressure on encompassing unions to restrain wage demands is further accentuated these four models are assessed as predictors of wage changes inflation and misery index levels for 15 industrialized nations over the periods 1960 1973 1974 1979 and 1980 1990 the linear models outperform the parabolic and political models in each of the latter two time periods for the mid to late 1970s the simple linear model performs best but for the 1980s the unemployment medi

how rigid are nominal wages evidence and implications for germany many recent attempts to find evidence on downward nominal wage rigidity in micro data have suffered from problems such as composition bias and the effects of measurement error in this paper a model of proportional downward nominal wage rigidity is developed which avoids these problems by taking into account the determinants of wage changes and the measurement process that leads to observable earnings changes we find a high degree of downward nominal wage rigidity in german micro data its real implications for individual expected wage growth the aggregate wage level and equilibrium unemployment have marked effects for rates of inflation lower than 3 percent

banks net interest margin in the 2000s a macro accounting international perspective this paper re examines the determinants of net interest margin nim in the banking industries of 15 developed and emerging economies it presents three main contributions with respect to previous studies first we analyze the determinants of nim in the years leading to the 2008 financial crisis second we account for the role of different accounting standards across countries third we use multi way cluster estimation methodologies which control for cross sectional and time series dependence in macroeconomic and banking variables we find that the introduction of international financial reporting standards ifrss contributed to lower nim variations unexplained by standard accounting variables interest rate volatility is found to be positively and strongly related to nim dynamics whereas inflation risk is often found to be a relevant driver of nim cross country differences

on inflation and real price variability this paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation for constant elasticity demand and cost of production it is shown that a higher demand a lower cost of production or a lower cost of price adjustment leads to less intertemporal variability of real prices if the marginal cost of production does not increase too fast then the average real price is less than the real price that would prevail in the absence of inflation additionally a higher demand a lower cost of production or a lower cost of price adjustment leads to a higher level of real prices

the relationship between inflation and inflation uncertainty in the uk 1885 1998 abstract using a long series of uk inflation data i have provided strong evidence in favour of the hypothesis that inflationary periods are associated with high inflation uncertainty this result supports the friedman ball hypothesis and has important implications for the inflation output relationship provided that more inflation uncertainty leads to lower output

downward wage rigidity in italy micro based measures and implications using the 1985 99 whip data we find a sizable amount of downward wage rigidity in italy with a prevalence of real over nominal rigidity the results hold when real rigidity is identified either with reference to collective bargaining dispositions or to price inflation consistently with the labour market reforms of the early 1990s downward rigidities have become less important over time with the reduction in real rigidities more than offsetting the rise in nominal rigidities we also find that downward wage rigidities are positively related to labour reallocation and local unemployment rates hinting at the macroeconomic relevance of our estimates

public inflation aversion and the political economy of macroeconomic policymaking do the macroeconomic priorities of citizens differ across countries if so what accounts for this variation and what are its consequences for explanations of the choice of monetary institutions macroeconomic policy and international monetary cooperation this article uses survey data from twenty advanced economies to examine individual preferences about macroeconomic priorities the analysis establishes three key findings first the results suggest that economic context defined by inflation and unemployment performance has a substantial impact on the public s economic objectives in a way that is broadly consistent with the specification of utility loss functions in the theoretical political economy literature second the results suggest that there is significant cross country variation in inflation aversion controlling for economic context third some of this variation is accounted for by national level factors affecting the aggregate costs of inflation and unemployment these results have significant implications for optimal monetary policymaking the explanation of variation in economic outcomes and for accounts of the choice of institutional frameworks for policymaking i thank the bank of england the center for basic research in the social sciences and the institution for social and policy studies for research support and jim alt andrew bailey bill bernhard lawrence broz john freeman jeff frieden jim granato shigeo hirano david lake jeff lax simon price rose razaghian ron rogowski david stasavage gabriel sterne mike tomz jim vreeland the editor and two anonymous reviewers for helpful comments all views expressed are those of the author and do not represent those of the bank of england

the optimal inflation rate in new keynesian models should central banks raise their inflation targets in light of the zero lower bound we study the effects of positive steady state inflation in new keynesian models subject to the zero bound on interest rates we derive the utility based welfare loss function taking into account the effects of positive steady state inflation and solve for the optimal level of inflation in the model for plausible calibrations with costly but infrequent episodes at the zero lower bound the optimal inflation rate is low typically less than two percent even after considering a variety of extensions including optimal stabilization policy price indexation endogenous and statedependent price stickiness capital formation model uncertainty and downward nominal wage rigidities on the normative side price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability these results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes

post unification wage growth in east germany following monetary union with west germany in 1990 the real wage of east german workers rose 83 i use the german socio economic panel data to investigate the determinants of wage growth and assess whether they are consistent with efficient restructuring although job changing rates were initially high the share of wage growth that accrued to movers was little higher than in the west suggesting that the incentives to move were too low for 1990 to 1991 the biggest gainers were low wage workers generally and women and the less educated specifically for 1991 to 1996 the biggest gainers were women and the better educated

wage bargaining and nominal rigidities abstract delays in wage negotiations do not necessarily mean work stoppage production can continue under the terms of the old contract while the parties are bargaining holdout this holdout option is included in a strategic bargaining game in addition to strike and lock out threats integrating the bargaining model in a standard macroeconomic framework it turns out that holdout threats will prevail under certain circumstances in this case wages will be rigid in nominal terms so that an increase in aggregate nominal demand increases aggregate output

does price affect the demand for information about new health technologies evidence from a field experiment in nigeria we study how prices influence the demand for information about a new preventative health technology we conducted a field experiment in nigeria where women were offered the opportunity to get screened for cervical cancer at baseline 2 3 of women had no knowledge of cervical cancer screening field staff made house calls to give women information about the test and also distributed vouchers that randomly varied the price of screening at the point of service we find an inverse u shaped relationship between prices and the demand for information going from zero to a small positive price increased the demand for information about the test but increasing the price further by 100 resulted in a net decrease in the demand for information we argue that these results have interesting implications for the debate about the pricing of new health technologies in developing countries

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

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

how strong is the macroeconomic case for downward real wage rigidity we explore the existence of downward real wage rigidity drwr at the industry level based on data from 19 oecd countries for the period 1973 1999 the results show that drwr compresses the distributions of industry wage changes overall as well as for specific geographical regions and time periods but there are not many real wage cuts that are prevented more important however drwr attenuates larger real wage cuts thus leading to higher real wages there is stronger evidence for downward nominal wage rigidity than for drwr real wage cuts are less prevalent in countries with strict employment protection legislation and high union density

aftershocks of monetary unification hysteresis with a financial twist abstract in the 1990s it was widely agreed that neither europe nor the united states satisfied the conditions for constituting an optimum currency area although the u s came closer bayoumi and eichengreen 1993 moderating this concern about europe was the fact that it was possible to distinguish a regional core and periphery using updated data we confirm that the united states remains closer to an optimum currency area more intriguingly the euro area shows striking changes in correlations and responses we interpret these as reflecting hysteresis with a financial twist in which the financial system causes aggregate supply and demand shocks to reinforce each other an implication is that the euro area needs vigorous coordinated regulation of its banking and financial systems by a single supervisor that monetary union without banking union will not work

bottlenecks and the phillips curve a disaggregated keynesian model of inflation output and unemployment benchmark macroeconomic models of output and inflation combine the demand side of the economy with aggregate supply equations based upon some version of the phillips curve in contrast to classical and new classical models such as lucas i972 and sargent 1979 chs i xii and xvi in which prices jump instantaneously to market clearing levels the gradual price adjustment approach represented by tobin 1972 laidler and parkin i975 section 4 barro and grossman 1976 ch 5 sargent 1979 ch ii and ch v i okun i98i and perry i983 take wages and or prices to be predetermined at an instant in time while their rates of change depend on the level of aggregate output in the prototype complete macroeconomic model incorporating this approach output is determined by aggregate demand equations while the augmented phillips curve specifies that prices move in a direction which will tend to return output to its equilibrium value this short run keynesian long run monetarist character is typical of many structural macroeconometric models it is the standard textbook account found for example in dornbusch and fischer i98i and is implicit in much current research there are fundamental questions of consistency in the type of model just described the central difficulty is that with wages and prices predetermined the non market clearing analysis ofbarro and grossman i 976 ch 2 and malinvaud i977 is applicable but in this world the aggregate demand equations are decisive only in the keynesian regime in the other regimes which must arise at high levels of aggregate demand the effective supplies of output or labour or both must be modelled indeed at the aggregate level it is difficult to provide a coherent account of how it is possible to have output above its equilibrium value since this would require labour and output in excess of their notional supplies violating barro and grossman s min condition that quantities be determined by the short side of the market an appealing line for addressing this last difficulty is to disaggregate markets an approach taken by hansen i970 tobin i972 and barro and grossman i976 ch 5 however because each market can be in either excess supply or demand a formal fixed price general equilibrium model appears to be intractable due to the resulting multiplicity of regimes and is not attempted by these authors in this paper these problems are overcome in a disaggregated model in which

wage policies of a russian firm and the financial crisis of 1998 evidence from personnel data 1997 to 2002 the authors use a rich personnel data set from a russian firm for the years 1997 to 2002 to analyze how the firm adjusts wages and employment during this period in which local labor market conditions changed in the aftermath of the financial crisis in 1998 they relate the development of turnover and wages for various employment categories to alternative models of wage and employment determination the authors argue that the firm s behavior is consistent with the predictions of efficiency wage models of the shirking and turnover type

united kingdom manpower policy against a background of national economic decline the welsh example chakravarty s p jones d r and mackay r r 1983 united kingdom manpower policy against a background of national economic decline the welsh example reg studies 17 91 104 economic policy has been strongly influenced by a theory which emphasises that only one rate of unemployment is consistent with price stability claims that unemployment is either temporary or voluntary and stresses that lasting reductions in unemployment depend on selective policies designed to encourage adjustments within the labour market this paper outlines experience in wales the evidence is not consistent with the view of unemployment provided by the underlying theory moreover there are considerable problems in applying policies which are designed to reduce the obstacles and frictions to labour market adjustment when unemployment is severe and widespread

colonial legacies and economic growth much of the work on colonialism has been theoretical or anecdotal in this paper i close the gap between the literature on development and new growth theory by testing the effect of colonization on subsequent growth and development in a sample of 63 ex colonial states from 1961 1990 i find that colonies that were held for longer periods of time than other countries tend to perform better on average after independence finally i show that the level of education at the time of independence can help to explain much of the development gap between the former british and french colonies in africa

estimating social effects in matching markets externalities in spousal search this paper investigates the hypothesis that individuals are less willing to marry when there are more potential partners to search amongst and thus when others are also less prone to marry to do this it develops a reduced form method a variation on manski s 1993 model that allows identification of such spillovers in two sided matching markets estimates from this method are internally consistent unbiased robust to different definitions of the marriage market and large enough to warrant attention additional evidence suggests that the effect works via the proposed search mechanism

doing wrong to do right social preferences and dishonest behavior abstract can pro social preferences lead to dishonest or unethical behavior lab evidence suggests that it can in this paper we document some of the first field evidence of this phenomenon in this study individuals were hired as field staff and tasked with distributing subsidized price vouchers following a clearly specified protocol we find substantial deviation from the protocol i e cheating we study the mis allocation of the vouchers to gain some insight into motivations for dishonesty in our main result we find that the field staff were significantly more likely to allocate the higher value vouchers those representing a greater subsidy to the poorest beneficiaries while we are not able to definitively establish the motivations for this observed pro social behavior we argue that this result is consistent with a model of social preferences and less consistent with a pure self interest motive

optimal monetary policy and downward nominal wage rigidity in frictional labor markets empirical evidence suggests that nominal wages in the u s are downwardly rigid this paper studies the optimal long run inflation rate in a labor search and matching framework under the presence of downward nominal wage rigidity dnwr in this environment optimal monetary policy targets a positive inflation rate the annual long run inflation rate for the u s is around 2 percent positive inflation greases the wheels of the labor market by facilitating real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following recessionary shocks these findings are related to standard ramsey theory of wedge smoothing by following a positive inflation policy under sticky prices the monetary authority manages to reduce the volatility and the size of the intertemporal distortion significantly the intertemporal wedge is completely smoothed when prices are fully flexible since the optimal long run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets the nature of the labor market in which dnwr is studied can be relevant for policy recommendations

money illusion under test abstract we propose a test for the presence of money illusion based on subjective survey information on individual satisfaction with income using data from the german socio economic panel for the period 1993 2003 we cannot reject the null hypothesis of no money illusion

the cleansing effect of recessions the authors investigate industry response to cyclical variations in demand production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed although outdated units are the most likely to turn unprofitable and be scrapped in a recession they can be insulated from the fall in demand by a reduction in creation the structure of adjustment costs plays a determinant role in the responsiveness of those two margins the calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series and their asymmetries over the cycle copyright 1994 by american economic association

real wage cyclicality in the eurozone before and during the great recession evidence from micro data we study the response of real wages to the business cycle in eight major eurozone countries before and during the great recession average real wages are found to be acyclical but this reflects in large part the effect of changes in the composition of the labour force related to unemployment variations over the cycle using longitudinal micro data from the echp and silc panels to control for composition effects we estimate the elasticities of real wage growth to unemployment increases between 0 6 and 1 over the period 1994 2011 composition effects have been particularly large since 2008 and they explain most of the stagnation or increase in the average wage observed in some countries from 2008 to 2011 in contrast at a constant labour force composition in terms of education and experience the figures indicate a significant decrease in average wages during the downturn particularly in countries most affected by the crisis overall there is no evidence of downward nominal wage rigidity during the great recession in most countries in our sample

pitfalls im a received idea ricardian decreasing returns at the extensive margin of a natural resource the ricardi theo of constantly decreasing returs on addition units of a self renewable resource states that best resources are used firs except for location and technical change using modem economic theory we show this result to be an unfounded prejudice our moel of the origin ricardian ild problem easily splays initial increasing retumsr thus soling a 150 year old empirical puzzle carey s paradox of switches in hstorical land use pattems the ricadi result may be empirically correct in specific cases but cannot claim general theoretica validity le embuches dune ide re ue le rendements d raissants icardens a ia marge extensive duine ressource naturelle la theonre ncardienne des rendements constamment