equilibrium exchange rates and supply side performance this paper develops a two country optimising sticky price model of real exchange rate determination in the new open macroeconomics tradition which allows several different forms of deviation from purchasing power parity ppp both along the adjustment path and in the steady state the model has a rich structure and is designed to provide a flexible tool for policy analysis unlike most other papers in the literature both of the key components of the real exchange rate the relative price of non tradables and the terms of trade are made endogenous allowing a more complete analysis of the impact of structural shocks to illustrate one possible application the model is calibrated to match key elements of the uk and euro area economies and used to examine the extent to which possible improvements in the united kingdom s relative supply side performance might account for the sharp and persistent appreciation in sterling since 1996 the results are not supportive of this hypothesis in the model improvements in productivity goods market and labour market competitiveness are all associated with a depreciation in both the spot and the equilibrium real sterling exchange rates two potential supply side sources of an equilibrium appreciation a productivity improvement biased towards traded goods balassa samuelson effect and an anticipated future productivity rise are considered however each is insufficient to account for a long run equilibrium appreciation the latter may account for an initial appreciation of the real exchange rate we conclude by considering further mechanisms that could affect our results

will the new keynesian macroeconomics resurrect the is lm model the is lm model has no greater prospect of being a viable analytical vehicle for macroeconomics in the 1990s than the ford pinto has of being a sporty reliable car for the 1990s because of its treatment of expectations the is lm model as traditionally constructed and currently used is a hazardous base on which to build positive theories of business fluctuations and to undertake policy analysis to simplify economic reality sufficiently to use the is lm model as an analytical tool economists must essentially ignore expectations we now know that this simplification eliminates key determinants of aggregate demand the last two decades of research have taught economists that the assumption of rational expectations is a powerful part of economic explanations of individual and market behavior ranging from consumption and investment dynamics to pricing of stocks and bonds the emphasis on expectations in the macro model is the end result of a process of building microeconomic underpinnings that was initiated in the 1950s and 1960s when the goal was to develop dynamic theoretical foundations for the is and lm schedules inevitably consideration of dynamic choice pushed the question of expectations to the forefront as a result most of the equations of the is lm model are now viewed as summarizing purposeful economic behavior in which choices over time play a central role however as we will see this finding means there is no way to maintain traditional uses of the is lm model

network effects software provision and standardization in this paper we examine the software provision decision of software firms the provision decision by software firms determines the value and hence the market share of competing hardware technologies we show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization with only one hardware technology supplied with software in equilibrium we show that when consumers place a high value on software variety there is a suboptimal amount of standardization by the market

the balassa samuelson hypothesis in estonia oil shale tradable goods regulated prices and other culprits this paper analyses the balassa samuelson b s framework for the case of estonia using a unique dataset that consists of a 15 sectoral breakdown of gdp and a five digit level cpi disaggregation with 260 items over the period from 1993 to 2002 unlike the existing literature the paper focuses on the following four aspects of the phenomenon a data disaggregation b definition of goods tradability c price regulatedness in services and d possible heterogeneity across transition countries it turns out that the first three aspects do matter and in addition to this estonia appears to bear very specific characteristics when compared with other transition countries a battery of cointegration techniques dols ardl johansen shows that productivity is strongly related to relative prices only when regulated prices are controlled for appropriately in the consumer price index and when country specific classification is applied to the open and closed sectors the b s effect contributed to cpi by 1 to 1 5 per cent at the outset of the period and by 0 4 to 0 6 per cent in 2002 whereas its potential long run impact is estimated to be 1 to 1 2 per cent although real appreciation due to the b s effect seems higher in the early 1990s it explains that better real appreciation occurred in recent years

a quick refresher course in macroeconomics this paper presents a non technical discussion of some of the important developments in macroeconomics over the past twenty years it considers three broad categories of research first it discusses how the notion of rational expectations has affected economists views on the role of economic policy the debate over rules versus discretion and empirical work in macroeconomics second it discusses various new classical approaches to the business cycle including imperfect information theories real business cycle theories and sectoral shift theories third it discusses various new keynesian approaches to the business cycle includes theories based on general disequilibrium labor contracting and menu costs this abstract was borrowed from another version of this item

why are services cheaper in the poor countries in their important work on international comparisons of national incomes and of comparative price structure kravis heston and summers i982 p 8 have noted that services are much cheaper in the relative price structure of a typical poor country than in that of a rich country this phenonomen has been documented now fairly systematically by the data gathered under their guiding hand of the united nations international comparison icp which covers 34 countries table i reproduced from their work i982 and fig i based on rows 3 and ii 13 indeed show this tendencyfor the relationship between relative service prices and real per capita gdp in this kravis heston summers 34 country 6 group sample the tendency is strongly evident except for the intermediate groups iii and iv

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

pirated for profit this paper explains why a software manufacturer may permit limited piracy of its software piracy can be viewed as a form of price discrimination in which the manufacturer sells some of the software at a price of zero in the presence of significant network externalities for the software it may be profit maximizing for the software manufacturer to tolerate piracy by home consumers most of whom have a low willingness to pay this can increase the demand for the software by business users

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

the output employment and interest rate effects of government consumption abstract we study the impact on aggregate variables of changes in government consumption using the neoclassical stochastic growth model we show theoretically that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change we also show that in principle there can be an analog to the keynesian multiplier in the neoclassical growth model finally in an empirically plausible version of the model we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one our results provide counterexamples to existing claims in the literature

dynamic effects of permanent and temporary tax policies in a q model of investment abstract this paper incorporates the tax policy analysis of hall and jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment this framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy it is shown that contrary to the conventional intertemporal substitution argument a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit the role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated

structural determinants of real exchange rates and national price levels some empirical evidence contrary to the long held notion of purchasing power parity ppp economists have found systematic evidence that the general level of prices across countries at a point in time varies dramatically irving b kravis alan w heston and robert summers 1982 for example report that some countries national price levels are no more than one third the u s price level extensions of this work show that such departures from ppp have persisted for decades recently efforts have been made to explain systematically these persistent or structural departures from ppp pioneering work by kravis and robert e lipsey 1983 1987 1988 has demonstrated that a positive correlation between the price level and real per capita gross domestic product is robust across numerous cross sectional specifications for instance using data from kravis et al 1982 table 6 12 87 percent of the variation in national price levels pl of 21 countries in 1975 is explained by per capita gdp y and a constant

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

how well does the is lm model fit postwar u s data postwar u s time series for money interest rates prices and gnp are characterized by a multivariate process driven by four exogenous disturbances those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the is lm phillips curve model money supply money demand is and aggregate supply shocks the dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model the estimated decomposition is also used to measure the relative importance of each shock to interpret some macroeconomic episodes and to study sources of permanent shocks to nominal variables

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

real exchange rates in small open oecd and transition economies comparing apples with oranges abstract we find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the cee 5 and have no affect in the baltic countries while they lead to a depreciation of the real exchange rate of tradables in oecd economies that overcompensates the appreciation due to nontradable prices rising net foreign liabilities lead to a real appreciation in the baltic countries instead of the expected depreciation found in oecd and cee 5 countries these differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied

a dynamic analysis of asymmetric shocks in eu manufacturing available empirical evidence regarding the degree of symmetry between european economies in the context of monetary unification is not conclusive this study offers new empirical evidence concerning this issue related to the manufacturing sector instead of using a static approach as most empirical studies do the dynamic evolution of shock symmetry is analysed using a state space model the results show a clear reduction of asymmetries in terms of demand shocks between 1978 and 1996 with an increase in terms of supply shocks at the end of the period

real exchange rates and transition economies in a number of empirical studies transition economies have been shown to be subject to the harrod balassa samuelson effect this implies that the currencies of these countries have experienced a prolonged appreciation in real terms as their convergence proceeded in this paper we find that a long run relationship exists between the real exchange rate productivity differentials real interest rate differentials and the capital account for eight transition economies of central and eastern europe using monthly data over a period which extends from 1996 to 2013 we find that there are two sources of appreciation of the currencies of these countries namely the harrod balassa samuelson effect and the capital account effect and argue that their significance depends on the type of investment received by the countries while long run foreign direct investment enhances productivity porfolio investment leaves productivity unaffected so our argument is that the larger foreign direct investment relative to portfolio investment the greater the contribution of productivity in the determination of the real exchange rate moreover we find that while the variables are linked by a linear long run equilibrium relationship adjustment towards equilibrium is nonlinear and is well represented by a smooth transition mechanism where the degree of equilibrium correction is a function of the sign and or the size of the deviation from equilibrium interestingly we find that a logistic smooth transition model fits well a larger number of countries by allowing a different response of the real exchange rate to misalignments of different sign

growth in transition what we know what we don t and what we should abstract this essay surveys macroeconomic issues that marked the transition from planned to market economy in central and eastern european and former soviet union countries we first establish stylized facts of the transition so far we then critically survey the theoretical literature on transition discussing explanations for the initial output fall and mediumterm issues such as optimal speed of transition disorganization institutions and sectoral reallocation as source of output dynamics we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts we conclude with suggestions for future research

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

testing the implications of long run neutrality for monetary business cycle models this paper compares sample fluctuations of the us business cycle with those predicted by a class of equilibrium monetary business cycle models the predictions of the models are generated using the longrun neutrality restrictions implicit in the models by imposing these restrictions on sample data tests of the ability of the models to replicate the dynamics of the us business cycle are constructed although the predictions of the models for real side variables are rejected there is evidence that the nominal side predictions of the models are not rejected

examining dutch disease across australian regions the recent mining boom represents one of the largest external shocks to the australian economy in its post war history although most agree that it had a positive effect on the australian economy as well as on people s living standards there is disagreement over the extent to which this boom has caused deindustrialisation and the so called dutch disease in australia our empirical findings support the presence of dutch disease nationally for australia using data for the period 1984 2013 regionally the results show that dutch disease was concentrated mainly in the eastern and southern states of australia victoria queensland south australia and tasmania

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

equilibrium exchange rates in transition economies taking stock of the issues in this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc in particular we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual balassa samuelson effect such as the behaviour of the real exchange rate of the open sector and regulated prices we then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model namely differences in the theoretical underpinnings differences in the econometric estimation techniques and differences relating to the time series and cross sectional dimensions of the data the ensuing three dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size copyright blackwell publishers ltd 2006

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

understanding real business cycles he 1 960s were a time of great optimism for macroeconomists many economists viewed the business cycle as dead the keynesian model was the reigning paradigm and it provided all the necessary instructions for manipulating the levers of monetary and fiscal policy to control aggregate demand inflation occurred if aggregate demand was stimulated excessively and unemployment arose if demand was insufficient the only dilemma faced by policymakers was determining the most desirable location along this inflation unemployment tradeoff or phillips curve the remaining intellectual challenge was to establish coherent microeconomic foundations for the aggregate behavioral relations posited by the keynesian framework but this was broadly regarded as a detail that should not deter policymakers in their efforts to stabilize the economy the return of the business cycle in the 1970s after almost a decade of economic expansion and the accompanying high rates of inflation came as a rude awakening for many economists it became increasingly apparent that the basic keynesian framework was not the appropriate vehicle for understanding what happens during a business cycle nor did it seem capable of providing the empirically correct answers to questions involving changes in the economic environment or changes in monetary or fiscal policy the view that keynesian economics was an empirical success even if it lacked sound theoretical foundations could no longer be taken seriously the essential flaw in the keynesian interpretation of macroeconomic phenomenon was the absence of a consistent foundation based on the choice theoretic framework of microeconomics two important papers one by milton friedman 1968 and the other by robert lucas 1976 forcefully demonstrated examples of