optimal state dependent rules credibility and inflation inertia abstract we use a state dependent model where pricing rules are optimal to examine the costs of a money based disinflation under various assumptions about the credibility of the policy change our analysis allows us to relate actual credibility and future inflation inertia to the asymmetry of the price deviation distribution an important implication of our state dependent setting is that disinflation can be attained without substantial cost even in a situation of low credibility provided that a mechanism of price alignment eliminates the asymmetry of the price deviation distribution we also develop an analytical framework for analyzing intermediate imperfect credibility cases

wage inflation unionization and monopoly power this paper uses panel data from 301 four digit manufacturing industries over the years 1959 to 1980 to examine how market structure affects the wage response to aggregate demand disturbances the authors use a new classical macroeconomic framework in which such shocks are identified with the unexpected component of money growth they find that product market power does not affect the response of wages to such shocks but that unionization does to be specific greater unionization leads to a faster wage response they also find that wages rise equiproportionately with expected money growth i e expected money is neutral copyright 1990 by blackwell publishing ltd

wage stickiness and the non neutrality of money a cross industry analysis abstract the paper provides an empirical test of sticky wage models of business fluctuations by focusing on industry level cross sectional implications that emerge this breaks the observational equivalence existing at the aggregate level between rational expectations long term contracting and imperfect information models the specific implication tested is whether output responses to nominal disturbances industry phillips curve slopes are inversely related to wage indexation elasticities the phillips curve slopes are found to vary across industries for the canadian economy but bear no relationship to indexation elasticities casting doubt on the role of nominal wage rigidity in generating the observed non neutrality of money

central bank independence disinflations and the sacrifice ratio it is widely believed that independent central banks produce costless low inflation yet a few recent studies indicate that more independent central banks are associated with higher output costs during disinflations this carries the implication that there are indeed costs associated with autonomy the author develops and extends those analyses in two important ways first he shows that central bank independence cbi affects both the output and the unemployment costs of disinflation because central banks control only monetary policy they should not exert a differential effect on the two ratios and there should be a positive relationship between independence and both the unemployment and the output costs of disinflations second by including a range of potentially significant political and institutional controls the author demonstrates both the importance of political and institutional determinants of the costs of disinflation and that cbi is a robust predictor of those costs

optimal disinflationary paths abstract this paper characterizes optimal monetary policy in the context of a general equilibrium model with optimizing agents and staggered price setting starting from a steady state with positive inflation a rapid disinflation is desirable when announcements of future monetary policy are fully credible disinflationary policy yields substantial losses in output and employment when the monetary authority lacks credibility nevertheless the benefits of disinflation still exceed the costs disinflation often fails to be welfare improving however when lost seignorage revenues must be replaced using other distortionary taxes

the equilibrium distribution of wage settlements and economic stability several authors recently have attempted to extend the fischer contract model by allowing agents to endogenize the contract pattern see e g gray 1978 and blanchard 1979 aside from the early literature on the pattern bargaining ross 1948 rees and hamilton 1963 and mcguire and rapping 1968 however the only literature that endogenizes the pattern of negotiation is fethke and policano 1982 1984 adopting a game theoretic framework in which each sector selects the contract length and the timing of its negotiation date so as to minimize the expected resource cost of contracting they investigate the determinants and aggregate implications of alternative negotiation patterns in a twosector model with relative and aggregate disturbances in this paper contract length is assumed to be fixed and indexing provisions are ignored our attention is concentrated on the determinants of the timing of bargaining and the macroeconomic consequences of the resulting year to year distributions of wage settlements these questions will be analyzed in a game theoretic framework where bargaining units choose the timing of bargaining and the authority chooses the money supply rules suppose that the distribution of wage settlements is uniform and that the monetary authority chooses optimum monetary policy such as that given by fischer 1977 then the behaviors of the price level output and the real wage are symmetric between odd and even periods and hence bargaining units are indifferent to the timing of bargaining at the same time the authority minimizes the loss function given the distribution of wage settlements consequently no player has an incentive to change his current strategy and the economy is in nash equilibrium in effect fischer 1977 examines the properties of this equilibrium without providing a game theoretic treatment of the problem we require answers to three questions 1 is uniform distribution the only equilibrium of this labor contract economy 2 if not what is the optimal pattern of negotiation from the

indexation staggering and disinflation abstract since high inflation makes very frequent price adjustments desirable costs of taking optimal price decisions may become high and indexation may emerge as an economical rule of thumb to update prices between optimal adjustments we introduce indexation in a model of staggered price setting where individual prices when not adjusted by inflation are set optimally we show that it is more difficult to disinflate in a model with indexation than in a standard fixed price staggering model the costs associated with a given path of money disinflation are higher and the time necessary to stabilize an inflationary economy while keeping output at its natural level is about three times longer as a consequence the paper explains why disinflation may be more difficult in high inflation economies

equity and efficiency in rationed labor markets the social welfare implications of income tax policy are shown to critically depend on whether or not labor markets are rationed i e on the existence of involuntary unemployment with rationed labor markets raising taxes on the employed and transfers to the unemployed might improve both equity and efficiency it improves equity by redistributing income from the employed to the unemployed it improves efficiency as it encourages people with a small utility surplus of employment to exit the labor market leaving their jobs for people with a higher utility surplus i derive conditions under which this result continues to hold when only part of the labor market is rationed when there is both frictional and rationing unemployment and when rationing endogenously follows from trade unions monopoly power

information incentives and contract timing patterns a prominent feature of wage contracting in the united states is the bunched timing pattern that is often associated with the process of pattern bargaining the model describes the bunching of wage contracts as the equilibrium outcome of decentralized decisions in an economy composed of both competitive and monopolistically competitive product markets agents time their wage adjustment to take advantage of the information associated with the timing decisions of others this information based motive leads to staggered contracting a bunching equilibrium requires the presence of heterogeneous product markets and occurs because the information transmitted by contracting agents differs across the market structures copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the implications of inflation in an estimated new keynesian model abstract this paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the u s economy it is found that 10 percentage points of inflation entail a steady state welfare cost as high as 13 of annual consumption this large cost is mainly driven by staggered price contracts and price indexation the transition from high to low inflation inflicts a welfare loss equivalent to 0 53 of annual consumption the role of nominal real frictions as well as that of parameter uncertainty is also addressed

us high technology multinationals and silicon glen haug p 1986 us high technology multinationals and silicon glen reg studies 20 103 116 future growth and investment by high technology industries have generated increasing interest in the agglomeration tendencies of high technology firms governments throughout the world are seeking to develop high technology firm concentrations similar to silicon valley in california an area that represents one of the largest high technology industry clusters outside the united states is scotland s silicon glen this article is based on interviews conducted at fourteen us owned manufacturing plants in silicon glen and sets out to 1 define the terms high technology industry and silicon glen 2 summarize research on the origins of silicon valley boston s route 128 silicon fen or the cambridge phenomenon and the m4 corridor near london and 3 present evidence on the location and investment activities of us multinational enterprises in silicon glen the results indicate that the attributes attracting high te

determinants of inflationary performance corporatist structures vs central bank autonomy studies by economists have shown that countries with autonomous central banks experience lower inflation than others banian laney and willett 1983 and bade and parkin 1987 one reason for this may be that countries with autonomous central banks are less likely to monetize their deficits burdekin and wahar 1990 studies by political scientists have used measures of the strength of corporatist structures to explain macroeconomic outcomes cameron 1984 however neither economics nor political science research has employed measures of both central bank autonomy and the strength of corporatist structures to explain comparative inflation rates the present paper tests whether measures of corporatist structures and central bank autonomy explain the comparative inflation performance of eighteen industrialized countries this issue is of great importance for students of piecemeal monetary reform in countries where the central banking structure is susceptible to reorganization the results of this paper should inform parties who are active in the reformation and reorganization of central banks in lesser developed and nascent market economics throughout the world

central governance or subsidiarity a property rights approach to federalism abstract we consider a model where one region in a federation can realize a public project after undertaking value increasing investments while negotiations on the federal level ensure that an efficient project size is implemented in equilibrium non contractibility of investments causes the overall outcome to differ across regimes if the region bears the entire implementation costs of its policies underinvestment prevails and subsidiarity centralized governance is superior when spillovers are weak strong conversely if linear cost sharing arrangements are feasible decentralized authority often admits a socially optimal outcome while centralized authority with majority or unanimity rule does not

inflation inertia and credible disinflation abstract we develop a model of optimizing forward looking staggered price setting where even fully credible disinflations display a delayed and gradual inflation response and significant output losses there is a welfare trade off between these output losses and the gains from smaller inflationary distortions for reasonable parameter values disinflation improves welfare and more so if it is phased in gradually the pricing assumption of our model yields dynamics that are similar to models of sticky information but its state space is much simpler thereby allowing for the application of standard linearization methods

stopping inflations big and small previous studies of disinflation work with models in which firms use time dependent strategies changing nominal prices at intervals of fixed length these models may be criticized for failing to allow pricing behavior to adjust after a large shift in policy regime consequently this paper develops a model that permits firms to adopt strategies that are partially state dependent changing nominal prices whenever they depart sufficiently from their target values the paper uses this model to examine how the welfare costs and benefits of disinflation vary with the initial inflation rate and the speed of disinflation copyright 1997 by ohio state university press

some evidence on factor intensity and price rigidity abstract this paper establishes a new empirical finding the degree of labor intensity and the degree of price flexibility are negatively correlated across industrial sectors in the u s economy this finding suggests that varying factor intensity can potentially generate different degrees of price stickiness across sectors and remove the need to exogenously impose the latter of course labor intensity is just one more feature in addition to others like the durability of goods produced and the degree of competition that can explain some of the heterogeneity in price durations across sectors

inflation variability and gradualist monetary policy this paper considers the optimal approach to reducing inflation when the cost of inflation is its conditional variability inflation is stochastically related to money growth with unobservable time varying autonomous and induced components a sharp reduction in money growth provides information about the responsiveness of inflation to money but also induces variability as the economy heads into unknown territory gradual policy is always optimal and the model explains why moderate inflation countries adopt a much more gradual money growth reduction than high inflation countries additionally the analysis sheds light on the more general problem of learning with two unobservable parameters

inflation target shocks and monetary policy inertia in the euro area the euro area as a whole has experienced a marked downward trend in inflation over the past decades and concomitantly a protracted period of depressed activity can permanent and gradual shifts in monetary policy be held responsible for these dynamics to answer this question we embed serially correlated changes in the inflation target into a dsge model with real and nominal frictions the formal bayesian estimation of the model suggests that gradual changes in the inflation target have played a major role in the euro area business cycle counter factual exercises show that had monetary policy implemented its new inflation objective at a faster rate the euro zone would have experienced more sustained growth than it actually did

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

unions in a frictional labor market abstract a labor market with search and matching frictions where wage setting is controlled by a monopoly union that follows a norm of wage solidarity is found vulnerable to substantial distortions associated with holdup with full commitment to future wages the union achieves efficient hiring in the long run but hikes up wages in the short run to appropriate rents from firms without commitment in a markov perfect equilibrium hiring is too low both in the short and the long run the quantitative impact is demonstrated in an extended model with partial union coverage and multiperiod union contracting

sacrifice ratio in a medium scale new keynesian model a medium scale macroeconomic model with a number of nominal and real frictions that have be shown to be important for explaining observed aggregate uctuations is capable to quantitatively account for the empirically estimated sacri ce ratio after a disin ationary monetary policy this nding however is sensitive to the degrees of price and wage indexation to past in ation and to a less extent to the price and wage calvo probabilities jel classi cation e31 e5

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

monetary policy and the timing of wage negotiations abstract in a model of long term labor contracts the simultaneous determination of the pattern of contract negotiation and the pattern of monetary policy intervention yields a nash equilibrium in which agents allow a discretionary role for policy the resulting pattern of negotiation depends on the stochastic nature of the system when all disturbances are aggregate in nature a synchronized pattern of negotiation is optimal regardless of the frequency of monetary policy intervention when both aggregate and relative disturbances affect the system a pattern of bunched negotiations can result with the authority intervening at dates away from the negotiation dates

monetary targets real exchange rates and macroeconomic stability abstract in this paper i develop a model to determine the optimal degree of flexibility in attaining monetary targets in an economy that is affected by shocks in the labor and financial markets i then simulate the model to assess the optimal degree of monetary policy flexibility in spain a country that has adopted monetary targets rigidly since 1978 i show that the model supports the policy choice of that country i also show that the monetary authorities should attribute more importance to real exchange rate movements in choosing their policies if the spanish economy becomes more open to international trade or if the labor market becomes more flexible

wage contingencies the pattern of negotiation and aggregate implications of alternative contract structures abstract a model of long term contracts is developed in which the choice of the negotiation pattern is endogenized when disturbances to the economy derive primarily from relative shocks staggered negotiation is optimal because adjustments made by negotiating agents transmit desirable employment effects into sectors that are looked into previously negotiated contracts the price level acts as the transmission mechanism indexation of wages to the price level enhances the benefits of staggered negotiation because the sector specific information revealed by the price level acts as a substitute for explicit inclusion in the contract of sector specific information the degree of persistence and the level of variation in aggregate output and employment measures which are commonly used in comparing the merits of synchronized versus staggered regimes are shown to be inappropriate criteria upon which to judge the optimality of the negotiation pattern

discretionary monetary policy and inflation persistence rational expectations models of staggered price wage contracts have failed to replicate the observed persistence in inflation and unemployment during disinflationary periods the current literature on this persistency puzzle has focused on augmenting the nominal contract model with imperfect credibility and learning in this paper i re examine the persistency puzzle by focusing on the discretionary nature of monetary policy i show that when the central bank is allowed to re optimize a quadratic loss function each period imperfect credibility and learning even in the absence of staggered contracts can generate a significant amount of inflation persistence and employment losses during a disinflationary period

union wage settlements during a disinflation this paper examines the role of union wage contracts in the persistence of inflation and the implication of these contracts for the problem of disinflation in the united states a quantitative model of overlapping con tracts explicitly oriented toward the major union sector is developed the model takes account of expectations of future wage price and employment conditions as in more aggregated models that have been used in macroeconomic research in addition the distribution of workers according to contract length as well as deferred wage increases and escalator clauses are explicitly used in the model the main aim of the model is to determine the constraints which these contracts impose on disinflation paths the model indicates that the maximum speed of disinflation is extremely slow in the early phases if a rise in unemployment is to be avoided but increases considerably before the new lower rate of inflation is reached the disinflation path is considerably slower than that observed after hyperinflation periods however the existence of a path of inflation reduction raises questions about whether the institution of union wage con tracts is really the direct cause of costly disinflations or whether their influence works indirectly by raising credibility problems about a monetary disinflation this abstract was borrowed from another version of this item

long term contracts expectations and wage inertia abstract this paper develops a macro model of contractual wage setting that is used to test the importance that increased contract length has in generating wage inertia using an errors in variables format to isolate the effect of price and productivity shocks it is shown that the sensitivity of union wages to unanticipated disturbances would increase by only a small amount in the absence of long term three year labor contracts our results suggest that formal contracts are not a major source of nominal wage rigidity and the price surprises play a relatively small role in generating business cycles

wage rigidity collective bargaining and the minimum wage evidence from french agreement data using several unique data sets on wage agreements at both industry and firm levels in france we document stylized facts on wage stickiness and the impact of wage setting institutions on wage rigidity first the average duration of wages is a little less than one year and around 10 percent of wages are modified each month by a wage agreement data patterns are consistent with predictions of a mixture of calvo and taylor models the frequency of wage change agreements is rather staggered over the year but the frequency of effective wage changes is seasonal the national minimum wage has a significant impact on the probability of a wage agreement and on the seasonality of wage changes negotiated wage increases are correlated with inflation the national minimum wage increases and the firm profitability

unionism in a competitive industry this article explores a model in which a union confronts many competitive workers firms and consumers under monopoly unionism union coverage may be incomplete then union wages and employment are insensitive to product demand variation under efficient unionism coverage can never be incomplete some union variables necessarily vary with product demand preliminary evidence on the demand independence under incomplete coverage hypothesis is presented also more structure is imposed and further hypotheses are derived and the manner in which the model can be enriched to allow for a variety of union related issues within a consistent framework is set out

disinflation shocks in the eurozone a dsge perspective we investigate the effects of disinflation policies on key macroeconomic variables using euro area data and structural vector autoregressions svars we identify disinflation shocks as the only shocks that drive nominal variables to a lower long run level we find that in the immediate aftermath of a disinflation shock the euro area enters in a persistent recession we use these dynamic responses to estimate a dsge model with imperfect information about the disinflation shock we find that both nominal and real frictions and monetary policy gradualism have played a prominent role in the recessionary effect of disinflation shocks conversely allowing for imperfect credibility does not yield a better fit except when we shut key model s frictions down

output effects of disinflation with staggered price setting 1 introduction monetary authorities who choose to reduce their country s rate of inflation that is to disinflate are usually faced with subsequent recessions a pattern of slower growth in the money supply followed by a lower inflation rate and lower output can be seen in historical statistics such as those examined by friedman and schwartz 1963 when there was thought to be a permanent phillips curve trade off between inflation and unemployment an important policy question was what combination of inflation and unemployment was most desirable as economists came to accept the idea of a short run but not a long run trade off between inflation and unemployment the stage was set to ask about how much output is lost as a result of a disinflation okun 1978 using results from several econometric models estimated that an extra 1 unemployment rate for one year would reduce inflation between one sixth and one half of 1 to reduce inflation by 1 these figures suggested that the unemployment rate needed to be higher by 2 to 6 of the labor force if one uses an okun s law of 2 5 of gross national product gnp lost for an unemployment rate higher by 1 then the output lost to reduce inflation by 1 would be between 5 and 15 of gnp the term sacrifice ratio is now widely understood to mean the ratio of the cumulated percentage loss of output at an annual rate to the reduction in the trend rate of inflation 1 for the disinflation in the early 1980s in the united states fischer 1986 figures the sacrifice ratio was about five other empirical studies such as those in ball 1994b and jordan 1997 find a range of estimates around an average sacrifice ratio of about two 2 the pattern of slower rates of growth in the money supply being followed by recessions has posed a challenge to theorists to develop plausible models that help us understand this phenomenon the existence of staggered price setting is one candidate explanation and taylor 1979 1980 deserves credit for introducing formal analyses of how overlapping wage contracts can lead to a persistence in wages and deviations in output from its natural rate during disinflations sargent 1983 in discussing conditions for a successful disinflation without much output loss characterizes the taylor model as follows in this class of models in terms of unemployment it is costly to end inflation because firms and workers are now locked into long term wage contracts that were negotiated on the basis of wage and price expectations that prevailed in the past in addition the wage contracting mechanism contributes some momentum of its own to the process so that the resulting sluggishness in inflation cannot be completely eliminated or overcome by appropriate changes in monetary and fiscal policies p 55 similarly vegh 1992 explaining why ending hyperinflations appears to involve less output loss than ending moderate inflations writes the fact that in hyperinflations backward looking contracts so prevalent in industrial and chronic inflation countries disappears is probably at the heart of the difference in output costs p 656 in a widely used textbook romer 1996 p 273 writes that the taylor model exhibits price level inertia the price level adjusts fully to a monetary shock only after a sustained departure of output from its normal level as a result it is often claimed that the taylor model accounts for inflation inertia romer then adds the provocative sentence ball 1994a demonstrates however that this claim is incorrect the link between the discrete time model presented by romer and the contention attributed to ball is not immediately evident and needs to be clarified beginning with an environment of steady growth in money and prices ball 1994a assumes that a new regime suddenly announces a fully credible continuous linear decline in the growth rate of money