explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

terms of trade shocks and the balance of trade there is a harberger laursen metzler effect abstract according to the harberger laursen metzler hlm effect an exogenous increase in the terms of trade faced by a small open economy leads to an improvement in that country s trade balance in this paper structural vector autoregression techniques are used to investigate whether there is any systematic pattern in the responses of the trade balance to terms of trade shocks for a large number of small open economies two important results emerge first there is strong support in the data for the existence of an hlm effect second the response of the trade balance and real income to a terms of trade shock implied by the structural vector autoregression model are strongly consistent with those reported by mendoza 1995 from simulating a particular dynamic stochastic equilibrium model of a small open economy

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

the effects of surprise and anticipated technology changes on international relative prices and trade abstract this paper argues that it is important to distinguish surprise and anticipated components of total factor productivity tfp when we study the international transmission of tfp shocks we document that surprise and anticipated shocks to us tfp induce distinct dynamics for international relative prices the real exchange rate and the terms of trade and international trade real exports real imports and the trade balance our empirical findings can reconcile some conflicting empirical results in the literature and hence lead to a better understanding of the international transmission of tfp shocks in addition we evaluate a standard international macroeconomic model and discuss the mechanisms that may help to replicate our empirical findings

the structure of labor costs with overtime work in u s jobs the author analyzes employment contract and labor demand models of the fair labor standards act overtime pay regulation to determine their effects on employers labor costs using national compensation survey data to obtain a representative sample of u s private industry jobs he assesses each model s ability to predict either the adjustment of wage rates if overtime is warranted the employment contract model or the probability of using overtime to meet labor demands the labor demand model using quasi fixed employment costs as independent variables allows for a better accounting of labor demand he finds that lower wages go hand in hand with jobs requiring more overtime work which indicates that overtime pay regulation influences the structure of compensation

dynamics of the trade balance and the terms of trade in ldcs the s curve abstract in their analysis of the dynamic behavior of terms of trade and the trade balance backus kehoe and kydland found that the lead and lag correlation between these two variables is s shaped for a set of oecd countries furthermore they show that this s curve can be replicated by a two country dynamic general equilibrium model surprisingly the s curve also describes the dynamic relationship between terms of trade and the trade balance for a large set of ldcs this s curve can also be reproduced by a small open economy model which captures some important features of ldc economies the s curve is unexpectedly robust to variations in the key parameters of the model the model also captures the business cycle properties of the ldc data

the assessment strategic policy dilemmas for the 1990s in europe this is most obvious in the growing concern over unemployment which at about 12 per cent has now reached a level exceeding even that reached in the great depression most developed countries moreover face or at least think they face a fiscal crisis hie fact that problems of high public borrowing and rising national debt stocks are self evidently in part a result of recession slow growth and in europe persistent unemployment does not make the situation any more comfortable conventional responses of the fiscal kind whether macroeconomic or in the form of directed labour m rket measures seem to be blocked off and though the situation varies considerably between countries there are limits to the use of monetary p licy imposed by worries over inflation or by exchange rate objectives such as those which were embodied in the now disintegrating exchange rate mechanism erm even without formal ex change rate commitments or objectives increasing international integration limits the freedom of ma noeuvre for any one country

regional macroeconomic policy fiscal federalism and european integration i the issues from a theoretical viewpoint there is nothing very special about that particular set of regional group this paper is about how the role of macroeconomic ings policy changes as regions or countries coalesce into larger groupings and as integration occurs no one the obvious context that motivates this analysis is expects a very small region say an individual a the political economic debate over monetary union firm or a town to have a macroeconomic policy let in europe what are the gains and losses for a alone a separate currency however as the domain country in giving up a separate exchange rate and a of attention or analysis expands as regions are in separate monetary policy how should the roles of an accounting sense consolidated macroecomonetary and fiscal policy change but the ques nomic problems become more evident and fions apply downwards as well as upwards should macroeconomic policy has more and more of a regional authorities design and implement their role traditionally it is countries that carry out own fiscal policies should they perhaps have macroeconomic policy and have currencies but separate currencies

can government purchases explain the recent u s net export deficits abstract this paper investigates the role of u s government purchases in explaining recent u s net export behavior i develop a two country neoclassical model that emphasizes linkages from government purchases to consumption i compare the model s implications for the movements and co movements of net exports against their data counterparts a parameterization in which government purchases and private consumption are complements and in which expectations of future government purchases are revised downward can account for much of the time path and co movements of net exports i conclude that u s government purchases play some role in explaining recent u s net export behavior

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

cointegration aggregate consumption and the demand for imports a structural econometric this paper uses a two good version of hall s 1978 representative agent permanent income model to derive a structural import demand equation for nondurable consumer goods under the identification restriction that taste shocks are stationary the model is shown to imply that log imports log domestic goods and the log relative price of imports are co integrated the data decisively reject the null hypothesis that imports the relative price of imports and the consumption of home goods are not co integrated we employ the non linear least squares technique recently proposed by phillips and loretan 1990 to estimate the parameters of the import demand equation the long run price elasticity of import demand is estimated to be 0 95 the elasticity of import demand with respect to a permanent increase in real spending is estimated to be 2 20 these estimates fall within the range reported in studies by helkie and hooper 1986 cline 1989 and the many studies surveyed by goldstein and kahn 1985 the message of this paper is that at least for non durable consumer goods it is possible to interpret the traditional import demand equation as a co integrating regression and to interpret the price and expenditure elasticities estimated from such a trade equation as a co integrating vector estimates of the co integrating vector can be used to recover estimates of the utility parameters of the representative household the similarity between the ols and phillips loretan estimates of the parameters suggests that the simultaneous equation bias is not large this abstract was borrowed from another version of this item

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

the j curve a literature review due to lag structure currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter j hence the j curve phenomenon since its introduction by magee in 1973 brooking papers on economic activity 1 pp 303 25 a large number of studies have attempted to test the phenomenon using different techniques and different model specifications the results are at best ambiguous and deserve to be collected together for the future generation of researchers and graduate students this paper fills such a vacuum in the literature by reviewing the j curve related empirical papers

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

how is the worker s weekly hour related to wage over the life cycle the u s evidence abstractthe current study estimates the relationship between weekly hours and weekly wage over the life cycle of a representative sample of workers recognizing the endogeneity of these two variables the study estimates both equations in a simultaneous equations framework and demonstrates that the relationship between weekly hours and weekly wage is not uniform over the worker s life cycle these two variables are negatively related when the workers are young and have a positive relationship when they are matured adults this conclusion remains valid for both men and women our robustness check further confirms that workers respond to wage increases differently at different stages of their working career this has interesting policy implications any policy to influence the worker s hours decision through wage incentive must consider the stage of his her working career

whose preferences are revealed in hours of work it has become orthodox in economics research to interpret the association between hourly earnings and working hours as the expression of the preferences of workers this convention originated in h gregg lewis explanation for the decline in hours of work since the nineteenth century his explanation rested on an explicit resolution of the identification problem inherent in any quantity hours price wage relation for over 40 years researchers have neglected this identification problem with the result that the findings in the purported labor supply literature are of questionable value jel j22 j23 c13

fiscal flows in the united states and canada lessons for monetary union in europe regional flows of federal taxes and transfers within the united states and canada are used to analyze long term fiscal flows the redistributive element and short term responses to regional business cycles the stabilization element in the united states long run flows amount to 22 cents in the dollar while the stabilization effect is 31 cents in the dollar in canada the redistributive effect is larger 39 cents and the stabilization effect smaller 17 cents federal flows appears to depend on the institutional structure of the country concerned however in both countries the redistributive element is considerably larger than the amounts involved in the ec structural funds program as for stabilization national fiscal policies in the ec appear to have been as effective as federal governments in the united states and canada in cushioning shocks to incomes

the demand for hours of labor direct evidence from california california s longstanding requirement that most women receive time and a half pay for workhours beyond eight in one day was extended to men in 1980 analyzing current population survey data from 1973 1985 and 1991 we find that this overtime penalty substantially reduced the amount of daily overtime worked by california men relative to men in other states comparisons that use women to control for california specific shocks show even stronger effects the estimates imply a price elasticity of demand for overtime hours of at least 20 5

a selectivity model of employer size wage differentials this article investigates wage differentials for employees of different size firms utilizing an econometric methodology that allows the size of employer to be treated as endogenous in the context of discrete ordered employer size data as a result we are able to estimate i employer size wage gaps which are corrected for selectivity bias and ii the magnitude and direction of the selection bias decompositions of the resulting wage differentials are computed with comparisons of the conditional on sorting across employer size and unconditional wage gaps

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

canadian jobs and firm size do smaller firms pay less even after controlling for observable workers characteristics and for occupation and industry specific effects a substantial wage differential remains between large and small firms what underlies the remaining wage differential is unclear direct evidence on pension plan coverage and on lay off rates by firm size is inconsistent with the bad working conditions hypothesis the union avoidance hypothesis does not seem to explain an important portion o f the wage differential as suggested by efficiency wage models part of the remaining wage differential may be due to firms heterogeneity similarly perhaps large firms pay higher wages simply partly beca use they employ workers with more unobserved abilities because differen t explanations of the wage differential may lead to different policy implications determining the source of the wage firm size effect is an important question for future research

the fallacy of composition argument is it relevant for ldcs manufactures exports abstract the constraints imposed upon ldcs export growth by international demand have been the subject of a long standing controversy in this paper we present estimates of manufactures export demand functions for 23 ldcs we focus first on the constraints that the international environment imposes upon export growth for an individual ldc to this purpose the small country hypothesis of an infinitely elastic export demand is tested and the claim that supply factors play a determinant role in affecting export performances is then assessed we turn next to the constraints on global ldc growth and ask whether exports from ldcs complete mostly with northern products or are better substitutes with exports from other ldcs this allows us to assess the heuristic value of cline s 1982 remark that a generalized outward shift in the ldcs export supply schedule would be associated with an important decline in prices and would undermine the success of a widespread export led strategy we find that for a representative ldc a large share almost 80 percent of the benefits of devaluation on export revenues are made to vanish when other ldcs competitors pursue similar policies

an examination of regional interaction and super regions in britain an error correction model approach gray d 2005 an examination of regional interaction and super regions in britain an error correction model approach regional studies 39 619 632 this paper examines spill over effects among regions estimating error correction models of british rates of unemployment and conducting granger causality tests it is found that on a short run basis the west midlands is a leading territory within a closely knit group of surrounding regions the paper draws a distinction between a core and a leading region suggesting the core region the south east is a follower responding to and magnifying economic fluctuations the policy implications are that current regional delineations may not be consistent with the demands of economic coherence at the national level and so is not optimal for the delivery of decentralized spatial economic policy indeed as economic engineering in the high unemployment periphery has consequences for more prosperous areas it may be better not to allow local administrators too m

technology utilization and inflation what drives the new keynesian phillips curve we argue that the new keynesian phillips curve literature has failed to deliver a convincing measure of real marginal costs we start from a careful modeling of optimal price setting allowing for nonunitary factor substitution nonneutral technical change and time varying factor utilization rates this ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many u s time series the cost measure comprises conventional countercyclical cost elements plus procyclical and covarying utilization rates although procyclical elements seem to dominate the components of real marginal cost components are becoming less cyclical over time incorporating this richer driving variable produces more plausible price stickiness estimates than otherwise and suggests a more balanced weight of backward and forward looking inflation expectations than commonly found our results challenge existing views of inflation determinants and have important implications for modeling inflation in new keynesian models

choice among wage hours packages an empirical investigation of male labor supply this article specifies and estimates an empirical model of male labor supply based on an implicit market model of wage hours determination we discuss how moving from a standard labor supply model to an implicit market model affects model specification and choice of estimation technique we find that average hourly earnings are not independent of hours worked and that ols estimates of the wage hours relationship are biased we also show that a labor supply model that assumes wages to be independent of hours worked produces a positively biased estimate of the effect of the wage on labor supply

engel s law and cointegration a time series counterpart of engel s law is that the expenditure share on food declines as the economy grows the main purpose of this paper is to test whether houthakker s addilog utility function can simultaneously explain this time series observation and cross sectional observations concerning engel s law ogaki and park s cointegration approach is used to estimate parameters of the utility function from time series data total expenditure elasticities implied by the estimated addilog utility function are compared with estimates of the elasticities from cross sectional data

can world real interest rates explain business cycles in a small open economy abstract while the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies much of the recent quantitative research that studies this mechanism concludes that it has little effect on output investment and net exports we re examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology we begin with a small open economy business cycle model but rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles we use the model to back out the shocks that are consistent with the model s observable endogenous variables then we use variance decompositions to examine the importance of each shock we apply this methodology to canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy in particular they can explain up to one third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

longitudinal analyses of the effects of trade unions but union members are different from nonmembers in unobserved ways biasing your estimates y ou should make a selectivity bias correction simultaneously determine union status and economic outcomes develop an unobservables model use longitudinal data archetypical comment on virtually any study of the economic effects of umomsm or suitably modified on any other empirical subject

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

impact of internal migration on labor market outcomes of native males in thailand abstractwe investigate the impact of internal migration on local labor markets in thailand using an instrumental variables approach based on weather and distance we construct an exogenous measure of the net migration inflow into each region our econometric results show that instrumenting for the possible endogeneity of net inward migration is crucial to the analysis the results suggest substantial adjustments in hours worked and weekly wages in response to short term changes in labor supply for low skilled males

crowding out in open economies results from a simulation study it has recently been shown that industrialized countries in the 1970s and 1980s are characterized by a high correlation between national saving and investment this regularly is considered puzzling in the context of highly integrated international capital markets in this paper the author shows that both the failure of real interest parity and productivity changes are each sufficient to generate a high positive correlation between national saving and investment these results indicate that it is easier than previously thought to reproduce a high correlation between saving and investment in models with perfect capital mobility

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

working hours and hedonic wages in the market equilibrium in the conventional model of labor supply working hours are implicitly assumed to be divisible goods which is an obviously unrealistic assumption the purpose of this paper is to analyze working hours as indivisible goods when working hours are indivisible labors are differentiated in the market by their length and wages will be a function of working hours the main conclusions are that 1 in the market equilibrium the elasticity of the hedo nic wage curve with respect to hourly wage rates must be positive or less than a1 and 2 generally data will reveal neither demand nor su pply structures copyright 1987 by university of chicago press

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite