transfer problem dynamics macroeconomics of the franco prussian war indemnity we study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account a two country model with debt and capital allows for realistic features of historical transfers they follow wartime increases in government spending and are financed partly by borrowing the model is applied to the largest historical transfer the franco prussian war indemnity of 1871 1873 in these three years france transferred to germany an amount equal to 22 percent of a year s gdp when the transfer is combined with measured shocks to fiscal policy and productivity over the period the model provides a very close fit to the historical sample paths of french gdp terms of trade net exports and aggregate consumption this makes a strong case for the dynamic general equilibrium approach to studying the transfer problem more generally our results provide striking evidence of the importance of international capital markets in the nineteenth century

the imf s role in structural adjustment in the 1980s conditional lending for structural adjustment in developing countries moved the imf beyond its role of macroeconomic crisis management fund supported adjustment programmes have often been flawed by a lack of distributional analysis and by poor sequencing of reforms notably premature financial liberalisation as a result they have caused avoidable hardship in addition the attempt to taper out aid as part of the reform programme leads to avoidable reductions in post stabilisation growth an important role for the fund in poststabilisation environments is to provide credible signals to private investors as macroeconomic crises spread across latin america and africa during the 1980s the imf became much more involved in low income countries whereas following its interventions in developed countries the fund had rapidly withdrawn post crisis in the low income countries its involvement became continuous this was partly because stabilisation often took longer however additionally by the 1980s it was already evident that whereas those poor countries which had adopted market based development strategies were developing those which had adopted inward oriented high regulation strategies were in decline unlike the economic crisis of 1998 the crises of the 1980s were concentrated among the inward orientated hence a reasonable diagnosis was that the crises were not merely manifestations of fiscal imbalance but that many other policies needed reform the task thus went beyond the conventional one of rectifying a crisis to reorienting a development strategy the fund joined with the world bank in an attempt to induce these reforms through sustained conditional lending hence the imf moved beyond its traditional role of short run macroeconomic crisis management fund and bank conditions were linked through cross conditionality but with the fund as the lead agency on many areas of policy this gave the fund a critical role in structural adjustment the fund s instrument for concessional lending in low income countries is its extended structural adjustment facility esaf in 1997 the board of the fund commissioned an external review of its esaf programmes in which we participated the report of the evaluation botchwey et al 1998 suggested three lines of criticism of fund adjustment programmes and these form the basis of our analysis in this paper the first is that through flawed design the programmes have sometimes had adverse consequences for the poor either directly through reducing incomes or indirectly through reductions in social service provision our criticism is of the sequence sometimes adopted by fund

international transfers the relative price of non traded goods and the current account this paper considers the role of the relative price of non traded goods and the current account in the adjustment of a small open economy to the receipt of an international transfer the paper shows that the economy s macroeconomic adjustment to the transfer depends upon the relative capital intensities of the traded and non traded sectors of the economy as well as on the duration of the transfer the paper provides a new interpretation of france s current account surplus in the 1870s that accompanied the payment of reparations to germany following the franco prussian war and of germany s trade deficit in the 1920s that accompanied reparations payments associated with the first world war

monetary union and labor market reform abstract policy makers incentives to undertake costly labor market reform depend on the international monetary system a regime of noncooperative monetary policy is compared with monetary union we find that noncooperative policy leads to more reform of factors that affect the inflation bias which regime leads to more reform of factors affecting labor market flexibility depends on the size of monetary policy spillovers and the degree of correlation of supply shocks we show that monetary union produces higher expected inflation but a lower variance of inflation welfare can be higher or lower with monetary union

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

unemployment labor market reform and monetary union monetary union such as the economic and monetary union in europe emu may affect incentives for labor market reform and thus equilibrium unemployment through several mechanisms if an inflation bias exists there is usually a stronger incentive to reduce equilibrium unemployment through national reform outside rather than inside the emu absent such a bias emu membership could lead to more reform one reason is that reform may increase wage flexibility which can substitute for monetary policy in the emu another reason could be a precautionary motive for low equilibrium unemployment to reduce the utility cost of increased macroeconomic variability in the emu

product replacement bias in inflation and its consequences for monetary policy the paper examines a new keynesian model with product entry and exit and with two types of households households consume different product baskets and therefore face different inflation rates the statistical bureau used in the model measures aggregate inflation but observes product entry with a probabilistic delay consequently measured inflation suffers from product replacement bias with respect to aggregate inflation measured inflation is less volatile but more persistent than aggregate inflation and the correlation between aggregate inflation and aggregate output is lower than the correlation between measured inflation and measured output when monetary policy responds to measured variables it stabilizes aggregate inflation insufficiently nevertheless under discretionary monetary policy responding to measured variables improves welfare

what happened to the washington consensus the phrase the washington consensus was so the story goes coined by john williamson at a conference in response to the suggestion that during the 1980s countries in latin america were being confronted with conflicting and therefore confusing advice from the international monetary fund and the world bank williamson s response was that there was in fact a strong consensus about policy across the washington based institutions around the need for macroeconomic stability microeconomic liberalisation and openness their advice was therefore not conflicting but reinforcing

revisiting the effects of imf programs on poverty and inequality investigating how lending programs of the international monetary fund imf affect poverty and inequality we explicitly address model uncertainty we control for endogenous selection into imf programs using data on 86 low and middle income countries for the 1982 2009 period and analyze program effects on various poverty and inequality measures the results rely on averaging over 90 specifications of treatment effect models and indicate adverse short run effects of imf agreements on poverty and inequality for the whole sample while for a 2000 2009 subsample the results are reversed there is evidence that significant short run effects might disappear in the long run author s abstract

intertemporal dimensions of international economic adjustment evidence from the franco prussian war indemnity few topics in international economics have generated the intense and persistent interest that surrounds analysis of the transfer problem in large part this reflects continuing fascination with the political and economic consequences of the victorious allies attempts to extract war reparations from germany after the first world war for economists interest in this episode is surely increased by the clear analytical parallel between international transfer payments and other payments obligations and in particular international debt service see e g arminio fraga 1986 more generally the economics of effecting an international transfer are immediately relevant for a broad range of questions in international economics including in particular the economics of devaluation and by extension the economics of alternative exchange rate regimes careful study of the macroeconomic consequences of episodes in which transfers were made would therefore provide important evidence on a much wider variety of issues than war reparations alone the problem is that few such episodes exist the world war i reparations are of little use here because transfers were not in any real sense made from germany to the allies rather the reverse the lending booms studied by frank w taussig jacob viner and others are of more use but are suspect because the lending was clearly associated with a goods market disturbance in the recipient countries there is thus an element of endogeneity in these transfers which makes it unclear whether observed economic fluctuations during the period of transfer are due to the transfer itself or to the goods market disturbance that induced the international flow of resources this paper studies some aspects of one of the few major economically exogenous international transfers in modern economic history the war indemnity that followed the franco prussian war of 1870 1871 this immense indemnity was demanded by and from an economy that was relatively unscathed by the war itself and the transfer was actually paid in this and other respects the franco prussian reparations seem to provide radically different economic and political lessons than those that have been drawn from the 1920 s 1 the focus here is on some intertemporal dimensions of international transfers these were somewhat neglected by the static theoretical discussions that eventually sorted out theoretical aspects of the keynes ohlin debate though contemporary analysis never lost sight of their importance see e g james w angell 1930

a true test do imf programs hurt the poor this article analyses the effect of imf programs on poverty with data from 82 countries during 1985 2000 two indicators of poverty infant mortality rates and the human development index hdi are utilized and the effects of the imf s concessionary and nonconcessionary programs are investigated as well as economic and institutional factors the results show that the imf s programs have no significant direct impact on poverty growth and good institutions however both have significant impacts lowering infant mortality and increasing the hdi the fund s concessionary programs increase the impact of growth on lowering infant mortality while the nonconcessionary programs lower the impact of growth on the hdi where a great proportion of the people are suffered to languish in helpless misery that country must be ill policed and wretchedly governed a decent provision for the poor is the true test of civilization samuel johnson 1791 once a country was in crisis imf funds and programs not onl

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

exchange rate policy and wage formation in an economy with many trade unions abstract exchange rate policy may confront governments with an important credibility problem while there is usually a long run gain from abstaining from devaluations there may also be a short run benefit from a devaluation this short run benefit may cause expectations of future devaluations resulting in wage and price rises that make the expectations self fulfilling this issue is analysed within a model with many trade unions if the government pursues a non devaluation policy the trade unions gain from voluntary wage restraint however if the non devaluation policy isn t credible the cooperation on wage restraint may break down

exchange rate policy wage formation and credibility abstract since the collapse of the bretton woods system some european countries have pursued discretionary exchange rate policies in order to maintain or enhance the international competitiveness of the traded goods sector these countries which typically feature centralized wage setting have also tended to experience high nominal wage increases the overall outcome may be described as a devaluation wage spiral this paper applies two models of repeated games to analyze the strategic interaction between an exchange rate setting policy maker and a wage setting trade union it is shown how a devaluation wage spiral may result from a conflict of interest over the real wage it is also shown how reputational forces may provide a way out of the devaluation wage spiral

performance based conditionality a european perspective abstract the critique of conditionality has led to the recent emphasis on ownership by the recipient government to promote ownership it has been suggested that traditional ex ante conditionality based on promises of policy changes be replaced by ex post conditionality in which aid is based on performance in terms of ultimate objectives in this spirit the european commission has reformed its adjustment aid this article reviews early experience with the eu initiative in four countries benin burkina faso madagascar and uganda we find a shift toward intermediate indicators which are too distant from the final impact of the policies

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

emu and labour market reform needs incentives and realisations despite improving labour market conditions in recent years a number of emu countries still suffer from high and persistent unemployment it could therefore be expected that labour market reform would be given a prominent position on the political agenda the new constraints associated with the common monetary policy only increase the pressure for reform relying on the introduction of the single currency as a trigger for labour market reform may be a risky strategy emu generates a complex set of re optimising strategies of the players on the labour market which makes it difficult to get a clear idea what impact it will have on labour market reform evaluation of recent reform measures does not make one confident either the empirical analysis confirms to some extent the idea that countries with higher unemployment rates have carried out more labour market reform this finding holds however only for countries that do not belong to emu emu countries have on average carried out no more reform than countries outside emu and any link between the initial unemployment level and the labour market reform indicators seems to lack it may become apparent that more reform is needed once the macroeconomic environment becomes more unfavourable

uncertainty and monetary policy in a wage bargaining model in a wage bargaining model increased uncertainty concerning monetary and real aggregates is shown to give rise to a higher equilibrium unemployment rate moreover the equilibrium unemployment rate is found to depend on the choice of monetary policy regime as this choice affects the uncertainty wage setters face when setting the nominal wage rate it is also shown that the equilibrium inflation rate may depend on uncertainty in such a way that increased uncertainty gives rise to a higher equilibrium unemployment rate as well as a higher equilibrium inflation rate or what has been called stagflation

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

the imf and the mobilisation of foreign aid abstract particularly in the context of the millennium development goals there has been much discussion of the association between the international monetary fund and bilateral aid flows what role should the fund be playing in helping to achieve the mdgs some observers have suggested that the fund should seek to reduce its role in poor countries and should be minimising its own lending they see aid donors taking on a larger role and present the imf and aid donors as substitutes others envisage a much bigger lending role for the fund this may hint at complementarities although this discussion raises important policy issues there are very few studies that examine the relationship empirically this paper attempts to help fill this gap it explores the extent to which the imf has had a catalytic effect on official development assistance and the potential channels through which catalysis might work it finds strong evidence of a positive association and suggests that this may have more to do with condit

capital market imperfections and the theory of optimum currency areas this paper studies how within and cross country capital market imperfections affect the welfare effects of forming a currency union the analysis considers a bank only world where intermediaries compete in cournot fashion and monitoring and state verification are costly the first part determines the credit market equilibrium and the optimal number of banks prior to joining the union the second part discusses the benefits from joining a currency union a competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country through an argument akin to the brander krugman reciprocal dumping model of bilateral trade however in our framework whether joining a union raises welfare of the home country is ambiguous it depends on the relative strength of investment creation and intermediation diversion effects

hyperbolic discounting and the phillips curve using a standard dynamic general equilibrium model we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long run effects on real variables

would you like to shrink the welfare state a survey of european citizens welfare state reform a survey of what europeans want the fundamental problems facing european welfare states high unemployment and unsustainable public pensions plans in particular have been in the political debate for years so why have we seen so little reform to find out we surveyed the opinions of citizens in france germany italy and spain on their welfare states and on various reform options this is what we found first most workers underestimate the costs of public pensions though they are aware of their unsustainability second the status quo is a majoritarian outcome a majority of citizens opposes cuts to social security and welfare spending but also opposes further increases since population ageing without reform implies an automatic expansion our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states third many would welcome changes in the allocation of benefits a large number of workers in italy and germany would be willing to opt out of public pensions and replace them with private pensions though the details of how this scheme is formulated matter for its popularity and many italians and spaniards would welcome an extension of the coverage of unemployment insurance fourth conflicts over the welfare state are mainly shaped by the economic situation of the respondent while political ideology plays a limited role disagreements are found along three dimensions young versus old rich versus poor and outsider versus insider in terms of labour market status from a practical point of view this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters tito boeri axel borsch supan and guido tabellini

monetary institutions monopolistic competition unionized labor markets and economic performance recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy but not both this leads to two opposing views about the effects of central bank conservativeness we evaluate the relative merits of those conflicting views by developing a unified framework we find that i the effect of conservativeness on employment depends on unions relative aversion to unemployment versus inflation and ii for plausible values of this relative aversion and more than one union social welfare is maximized under a highly conservative central bank we also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation

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

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

reforming the international financial system for effective aid delivery the role of the multilateral aid agencies in the delivery of aid is as old as the debate on the role of aid in economic development aid is effective in a good policy environment however effective aid delivery is equally important this is why the need to reform the institutions involved in the process of delivering aid is crucial among others the paper concluded that there is a need for redefining the roles and the establishment of a well articulated network among the various institutions involved in the aid process more importantly given the different actors and motives at play in the transfer of resources to recipient countries the role of a supranational institution to coordinate and give direction is indispensable

multiple wage bargaining systems in the single european currency area little attention in the emu literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining analytically and empirically coordinated wage bargaining systems respond with real wage restraint to non accommodating monetary policy since wage determination is dominated by collective bargaining in all the emu member states and wage coordination within the member states has grown since 1980 this is a topic of potential importance in particular the replacement of the bundesbank directly targeting german inflation by an ecb targeting european inflation has removed a major institutional support of wage restraint in germany the consequences of this for emu are worked out under two scenarios that inflation expectations will be generated by ecb monetary policy and that they will reflect german inflation outcomes possible institutional developments are discussed including government union bargains the bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in germany again its replacement by the ecb targeting if at all european rather than german fiscal policy loosens fiscal constraints for underlying structural reasons therefore it is possible that germany and other emu countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations

stabilisation policy targets and unemployment in imperfectly competitive economies this paper argues that the rate of equilibrium unemployment depends on the objectives of the central bank in a model where the central bank uses monetary policy to stabilise the economy we show that unemployment and inflation will be lower with an inflation target than with targets for output money or nominal gdp the intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target we show that this leads to a lower mark up of price over marginal cost and makes wages more sensitive to unemployment

does the lucas critique apply during hyperinflation empirical evidence from four hyperinflationary episodes farmer review of economic studies 58 321 32 1991 suggests that in a model in which there are multiple rational expectations equilibria agents may find it useful to coordinate their expectations in a unique rational expectations equilibrium which is supported by a self fulfilling forecast rule having the property of being immune to the lucas critique in this paper farmer s hypothesis is tested using data from hyperinflationary episodes it is believed that those episodes are suitable for testing this hypothesis because an agent who lives in a hyperinflationary environment usually faces frequent changes in policy regime the agent may thus choose a selffulfilling forecast rule which is immune to the lucas critique as a way of hedging against unanticipated policy regime switches the empirical results show mixed evidence on farmer s hypothesis during the hyperinflationary episodes studied

union cooperation and nontraded goods in general equilibrium a general equilibrium model of a small open economy with traded and nontraded goods and sector specific trade unions is set up wage formation is either noncooperative or cooperative egalitarian union wage policy is shown to be the equilibrium under cooperation important asymmetries are encountered and an alternative model of cooperative behavior called bargaining cooperation is proposed bargaining cooperation is shown to have qualitatively different implications than simple cooperation the welfare and employment effects of bargaining cooperation compared to simple cooperation are ambiguous

labour markets and monetary union a strategic analysis this paper shows that the effects of a monetary union depend on several labour market features in particular the switch from national monetary policies to a common monetary policy usually affects both inflation and unemployment even when all structural parameters of the economy and of unions and policymakers preferences remain the same the benchmark case of a monetary union between identical countries suggests that the switch to a monetary union is likely to make labour unions more aggressive increasing unemployment qualifications to this result are provided under alternative institutional scenarios like cross country asymmetries pre union erm membership and wage leadership

the aggregate implications of regional business cycles during the last recession and its aftermath aggregate price growth and aggregate nominal wage growth remained robust despite the high rate of unemployment we document that u s states with weaker labor markets experienced lower price growth lower nominal wage growth and lower real wage growth during the great recession given that reliable measures of local prices do not exist we create our own state price indices using scanner data from the nielsen retail scanner database the main innovation of the paper is the development of an econometric procedure that combines cross region data with aggregate time series data to infer the underlying shocks driving both aggregate and regional business cycles applying our procedure to the great recession we find that a combination of both demand and supply shocks are necessary to account for the joint dynamics of aggregate prices wages and employment during the 2007 2012 period in contrast we find that only demand shocks are needed to explain the cross region variation the results suggest that only using cross region variation to explain aggregate fluctuations is insufficient when shocks do not have a substantive regional component

the macroeconomics of social pacts in this paper we analyze macroeconomic interactions between trade unions the central bank and the fiscal policymaker we explicitly model unions concern for public expenditure paving the way for an analysis of the potential gains from cooperation between the fiscal policymaker and the unions i e the so called corporatist or social pacts that have characterized economic policies in a number of european countries in the last few decades we also highlight the profoundly different incentives generated by institutional arrangements such as the maastricht criteria and the stability and growth pact the former has unambiguously induced more efficient outcomes the latter is likely to backfire

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

optimal monetary policy in the euro area in the presence of heterogeneity abstract this paper examines the optimal design of monetary policy in the european monetary union in the presence of structural asymmetries across union member countries it derives analytically an optimal interest rate rule under commitment and studies the dependence of its coefficients on the parameters of the structural model of each economy the central bank s preferences for inflation and output stabilization as shown in its loss function and the relative size of each country based on a two country forward looking general equilibrium model which is estimated for two euro area countries germany and france we show that there are gains to be achieved by the ecb taking into account the heterogeneity of economic structures this finding appears to be robust under alternative weights given by the central bank to the stabilization of the target variables although the implementation of the proposed rule involves difficulties relating to data and estimation constraints as well as risks of accommodating structural divergences it is important that the ecb takes into consideration national characteristics in formulating its monetary policy especially in view of more countries joining the european monetary union in the future however as monetary and financial integration advances the welfare benefits of monetary policy responding to individual countries variables may become less significant

adjustment growth and income distribution in indonesia during the decade of the 1970s and until 1982 the growth performance of the indonesian economy was very good with gdp growing at 7 2 percent per annum oil exports provided the major engine of growth for the entire economy during that period in addition within agriculture growth was fueled by the boom in paddy production which converted indonesia from the largest rice importing country in the world to virtual self sufficiency by the mid 1980s paddy production increased at an annual rate of 7 1 percent between 1978 80 and 1983 4 the two oil price booms of 1973 and more particularly 1979 fueled a major expansion of the economy which lasted until the crisis the predominant role of the oil sector is clearly revealed by recalling that earnings from crude oil and petroleum products accounted for two thirds of all export earnings one fourth of total gnp and 70 percent of government domestic revenues in 1982 oil prices peaked in 1982 and revenues from this sector started to contract reducing drastically the basis and prospects for economic growth

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

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

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

relative prices in monetary union and floating we analyse a small open economy with a tradable and a sheltered sector if the unions that operate in each sector coordinate their wage demands sectorwise the choice of monetary regime floating cum inflation target vs emu may affect the relative wages and prices of the economy we show that emu results in lower prices for tradable goods and lower real wages in the traded sector while opposite results hold for sheltered sector prices and wages thus if large unions behave strategically the choice of monetary regime has far reaching structural implications

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

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

inflation targeting what inflation rate to target abstract in an economy with nominal rigidities in both an intermediate good sector and a finished good sector and thus with a natural distinction between cpi and ppi inflation rates a benevolent central bank faces a tradeoff between stabilizing the two measures of inflation a final output gap and unique to our model a real marginal cost gap in the intermediate sector so that optimal monetary policy is second best we discuss how to implement the optimal policy with minimal information requirement and evaluate the robustness of these simple rules when the central bank may not know the exact sources of shocks or nominal rigidities a main finding is that a simple hybrid rule under which the short term interest rate responds to cpi inflation and ppi inflation results in a welfare level close to the optimum whereas policy rules that ignore ppi inflation or ppi sector shocks can result in significant welfare losses

policy credibility and inflation in a wage setting game this paper combines the conventional monetary policy game with a wage setting game among several non cooperating wage setters each with some monopoly power the inflationary bias in market economies is explained in terms of the wage competition bias this bias does not disappear even when the central bank communicates its policy goals precisely and credibly in a policy game with several non cooperative monopolistic wage setters and a central bank if discretionary policy is interpreted as wage setters being stackelberg leaders relative to the central bank a discretionary policy leads to both higher inflation and lower output

real exchange rate dynamics revisited a case with financial market imperfections abstract in this paper we investigate the relationship between real exchange rate dynamics and financial market imperfections for this purpose we first construct a new open economy macroeconomics noem model that incorporates staggered loan contracts as a simple form of the financial market imperfections our model with such a financial market friction replicates persistent volatile and realistic hump shaped responses of real exchange rates which have been thought very difficult to materialize in standard noem models remarkably these realistic responses can materialize even with both supply and demand shocks such as cost push loan rate and monetary policy shocks this implies that the financial market development is a key element for understanding real exchange rate dynamics

redesigning the aid contract donors use of performance indicators in uganda abstract the perceived failure of traditional ex ante conditionality has led to proposals for using performance indicators as a basis for aid allocations ex post conditionality in this article we assess the role of performance indicators and their impact on the aid contract between donors and the government of uganda in uganda the use of performance indicators has radically changed donor recipient relations by improving both program monitoring and donor coordination it has however not yet fundamentally changed the incentive structure in the aid contract to improve the incentive structure we propose a distinction between indicators used for monitoring and those designed to guide aid allocations

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

contract length heterogeneity and the persistence of monetary shocks in a dynamic generalized taylor economy we develop the generalized taylor economy gte in which there are many sectors with overlapping contracts of different lengths in economies with the same average contract length monetary shocks will be more persistent when longer contracts are present using the bils klenow distribution of contract lengths we find that the corresponding gte tracks the u s data well when we choose a gte with the same distribution of completed contract lengths as the calvo the economies behave in a similar manner

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

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

has the inflation process changed does it change inflation has been low in many countries for at least a decade but have inflation processes changed in ways that would help make low inflation permanent using both aggregate and disaggregated inflation data we find that the means of inflation processes have become smaller over the past two decades and that allowing for these changes in the mean their persistence has not declined much changes in monetary policy frameworks and recessions appear to have contributed to a reduction in the mean of inflation but do not appear to have a meaningful impact on persistence and there is some evidence that the shifts in inflation expectations are the proximate cause of the changes in the mean of inflation these findings suggest that policy makers should focus on maintaining credibility and carefully monitoring inflation expectations for any indication that they are rising stephen g cecchetti and guy debelle

the nonneutrality of monetary policy with large price or wage setters monetary rules matter for the equilibrium rate of employment when the number of price wage setters is small even when assuming rational expectations complete information central bank precommitment and absence of nominal rigidities if the central bank is nonaccommodating sufficiently large unions bargaining independently have an incentive to moderate sectoral money wages and thereby expected real wages the result is an increase in the real money supply and hence higher demand and employment this does not hold with accommodating monetary policy since unions wage decisions cannot then affect the real money supply a similar argument holds for large monopolistically competitive price setters

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

explaining african economic performance africa has had slow growth and a massive exodus of capital in many respects it has been the most capital hostile region we review and interpret the aggregate level and microeconomic literatures to identify the key explanations for this performance there is a reasonable correspondence of the two sets of evidence pointing to four factors as being important these are a lack of openness to international trade a high risk environment a low level of social capital and poor infrastructure these problems are to a substantial extent attributable to government behaviour and the paper includes a review of the political economy literature which addresses that behaviour

the immediate challenges for the european central bank immediate challenges for the ecb issues in formulating a single monetary policy this paper discusses a number of issues that the newly constituted board of the ecb will face early on conducting a european monetary policy will be very different from living under the protective umbrella of the bundesbank we discuss voting on the ecb board and argue that the ability to communicate with the public will be critical for the success of the new institution we also ask how a single monetary policy a common change in the interest rate controlled by the ecb is transmitted to the economy of each member country we show that the monetary process differs significantly inside emu initially at least the cost of a disinflation episode could fall disproportionately on a few member countries those with both a financial structure that spreads a monetary contraction widely and a wage price structure that is relatively inflexible this process moreover is sure to evolve in part as a result of financial industry restructuring already under way but in part accentuated by the common money furthermore as the lucas principle suggests the wage price process itself will adapt to the changing focus of european monetary policy rudi dornbusch carlo favero and francesco giavazzi

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

pattern bargaining and wage leadership in a small open economy pattern bargaining where the tradables manufacturing sector acts as wage leader is a common form of wage bargaining in europe our results question the conventional wisdom that such a bargaining set up produces wage restraint we find that all forms of pattern bargaining give the same macroeconomic outcomes as uncoordinated bargaining under inflation targeting and a flexible exchange rate under monetary union a fixed exchange rate wage leadership for the non tradables sector is conducive to wage restraint and high employment whereas wage leadership for the tradables sector is not loss aversion and comparison thinking in wage setting where unions evaluate the utility of the wages of their members relative to a wage norm may lead the follower to set the same wage as the leader such equilibria can arise when the leader sector is the smaller sector and promote high employment

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

monetary regimes and the co ordination of wage setting abstract a recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters as wage setters abstain from raising wages to avoid a monetary contraction however in this literature the wage setters are assumed not to co ordinate their wage setting the present paper argues that precisely because a strict monetary regime may discipline the unco ordinated wage setting thus lowering unemployment in the unco ordinated outcome it also reduces wage setters incentives to co ordinate it is shown that an accommodating monetary regime may reduce equilibrium unemployment via the strengthening of the wage setters incentives to co ordinate

smoothed interest rate setting by central banks and staggered loan contracts i investigate a new source of economic stickiness namely staggered loan interest rate contracts under monopolistic competition this study introduces this mechanism into a standard new keynesian model simulations show that a response to a financial shock is greatly amplified by the staggered loan contracts although a response to a productivity cost push or monetary policy shock is not much affected i derive an approximated loss function and analyse optimal monetary policy unlike other models the function includes a quadratic loss of the first order difference in loan rates thus central banks have an incentive to smooth the policy rate

the optimal rate of inflation with trending relative prices relative price trends mean that monetary policy cannot stabilize the nominal prices of all consumption categories if prices are sticky monetary policy must then trade off distortions within different categories more weight should be placed on stabilizing prices for which adjustment entails greater distortions with exogenous price stickiness a simple model calibrated to u s data implies that slight deflation is optimal even absent money demand considerations if price stickiness is endogenous because of fixed costs of adjustment small inflation or small deflation can be optimal depending on whether demand conditions or price adjustment costs vary across sectors

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

wage setting under different monetary regimes in an economy with large wage setters like industry unions the monetary regime affects the trade off between consumer real wages and employment and profits faced by the wage setters this paper shows that an exchange rate target including participation in a monetary union is likely to involve lower wages in the traded sector and higher wages in the non traded sector than does a price target an exchange rate target also involves higher prices on non traded goods relative to on traded goods overall welfare is likely to be higher under a price target

regional inflation spatial locations and the balassa samuelson effect evidence from japan we empirically analyse regional inflation using data from japan where there is no regulation to impede the free movement of labour capital goods and services across regions in particular our analysis will focus on the geographical location of regions and the productivity known as the balassa samuelson bs effect as explanations for the dynamics of regional inflation based on a spatial model which is consistent with the theoretical specification of the bs we have confirmed that while it is a relatively small country in terms of land area both spatial location and productivity are important determinants of regional inflation

the inherent benefit of monetary unions abstract if the monetary authority lacks commitment a monetary union can dominate flexible exchange rates with forward looking staggered pricing inertia in the terms of trade induced by a fixed exchange rate is a benefit under discretion since it acts like a commitment device by trading off flexibility in the adjustment of the terms of trade the monetary authority improves on its ability to manage private sector s expectations the higher the incidence of asymmetric inefficient shocks and or the higher the degree of nominal price rigidity the greater the inherent benefit of monetary unions in stark contrast to the traditional optimum currency area theory

macroeconomic policy wage setting and employment what difference does the emu make the likely impact of the emu on the variability and level of employment is analysed the major conclusions are 1 although an inflation target regime will constrain monetary policy of a non parti

central bank independence centralization of wage bargaining inflation and unemployment theory and some evidence abstract this paper proposes a conceptual framework to investigate the effects of central bank independence of the degree of centralization of wage bargaining and of the interaction between those institutional variables on real wages unemployment and inflation in a framework in which unions are averse to inflation this aversion moderates union s wage demands as they attempt to induce the central bank to inflate at a lower rate an increase in the degree of centralization of wage bargaining a decrease in the number of unions triggers two opposite effects on real wages unemployment and inflation it reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them this reduced competition effect raises real wages unemployment and inflation but the decrease in the number of unions also strengthens the moderating effect of inflationary fears on the real wage demands of each union this strategic effect lowers real wages unemployment and inflation for sufficiently inflation averse unions the interaction between those two effects produces a calmfors driffill type relation between real wages and centralization the paper analyzes the effects of central bank independence on the position and the shape of this relation as well as on inflation and unemployment the paper features two mechanisms one of which is novel through which monetary institutions have real effects the model implies that if there is a single union social welfare is maximized when the central bank attaches a zero weight to inflation but when the number of unions is larger than one this result is no longer true in general empirical evaluation of some of the theoretical implications using data from 19 developed economies is for the most part supportive of those implications

regional inflation persistence evidence from italy vaona a and ascari g regional inflation persistence evidence from italy regional studies regional patterns of inflation persistence have received attention only at the level of european monetary union member states however economic disparities within european monetary union member states are an equally important policy issue this paper considers a country with a large regional divide italy at a fine level of territorial disaggregation nuts 3 it is shown that economically backward regions display greater inflation persistence moreover higher persistence is linked to a lower degree of competitiveness in the retail sector finally the inflation persistence at the national level does not present any geographical aggregation bias because it equals the mean of inflation persistence of provincial data vaona a et ascari g la continuite de l inflation regionale des preuves provenant de l italie regional studies c est seulement par rapport aux pays membres de la zone euro que la distributio

exchange rate flexibility under the zero lower bound an independent monetary policy and a flexible exchange rate generally help a country in adjusting to macroeconomic shocks but recently in many countries interest rates have been pushed down close to the lower bound limiting the ability of policy makers to accommodate shocks even with flexible exchange rates this paper argues that when the zero bound constraint on nominal interest rates is binding and policy lacks an effective forward guidance mechanism a flexible exchange rate system may be inferior to a single currency area with monetary policy constrained by the zero bound a flexible exchange rate exacerbates the impact of shocks remarkably this may hold true even if only a subset of countries are constrained by the zero bound and other countries optimally adjust their interest rate targets for a regime of multiple currencies to dominate a single currency in a zero bound environment it is necessary to have effective forward guidance in monetary policy

does it matter for equilibrium determinacy what price index the central bank targets what inflation rate should the central bank target we address determinacy issues related to this question in a two sector model in which prices can differ in equilibrium we assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile the contribution of this paper is to demonstrate that a modified taylor principle holds in this environment if the central bank elects to target sector one and if it responds with a coefficient greater than unity to price movements in this sector then this policy rule will ensure determinacy across all sectors the results of this paper have at least two implications first the equilibrium determinacy criterion does not imply a preference to any particular measure of inflation second since the taylor principle applies at the sectoral level there is no need for a taylor principle at the aggregate level

monetary policy under emu this paper considers a number of issues connected with the implementation of monetary policy in the euro zone these include the techniques of monetary control whether to adopt an explicit inflation target and if so for what index the politics of decision making within the governing council of the european system of central banks the likelihood of there being conflicts of interest between the member countries of the euro zone the interaction of monetary and fiscal policy and the role of the escb in maintaining financial stability copyright 1998 by oxford university press