euler equations and money market interest rates a challenge for monetary policy models standard macroeconomic models equate the money market rate targeted by the central bank with the interest rate implied by a consumption euler equation we use u s data to calculate the interest rates implied by euler equations derived from a number of specifications of household preferences correlations between these euler equation rates and the federal funds rate are generally negative regression results and impulse response functions imply that the spreads between the euler equation rates and the federal funds rate are systematically linked to the stance of monetary policy our findings pose a fundamental challenge for models that equate the two

inflation and output volatility under asymmetric incomplete information abstract the assumption of asymmetric and incomplete information in a standard new keynesian model creates strong incentives for monetary policy transparency we assume that the central bank has better information about its objectives than the private sector and that the private sector has better information about shocks than the central bank transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised our analysis improves upon existing work by endogenising the volatility of both output and inflation improved transparency most likely manifests itself in falling output volatility

are contributions to public pension programmes a tax on employment many studies describe the potentially adverse impact on employment of the payroll costs of financing public pension programmes conventionally empirical studies treat contributions to public pension programmes as a pure tax in for example calculations of the tax wedge by oecd but this approach ignores any future rights to benefits that are perceived by contributors in fact public pension programmes contain both an actuarial and a redistributive component the former closer to saving the latter a tax the paper constructs indicators of the tax component of pension programmes both between and within generations across a range of oecd countries and time periods it uses these measures in a cross country panel analysis of the determinants of age and gender specific economic activity rates the results reveal robust evidence that when public pension programme contributions are broken down into a tax component and a savings component the tax component of the payroll contribution reduces economic activity rates among women while a higher retirement saving component has the opposite effect there is little evidence that average tax rates however constructed have any adverse impact on the economic activity rates of men richard disney

central bank policy paths and market forward rates a simple model increasingly many central banks announce likely paths for future policy rates recent experience suggests that market forward rates can differ substantially from those announced models commonly adopted in policy analysis ignore such differences this paper studies a simple model that can capture deviations between announced paths and market forward rates we detail the macroeconomic transmission of such deviations and show how the model can inform policy deliberations

the effect of unemployment insurance sanctions on the transition rate from unemployment to employment sanctions or punitive benefits reductions are increasingly used as a tool to enforce compliance of unemployment insurance claimants with search requirements this article analyses sanctions using a unique administrative data set of individuals who started collecting unemployment insurance in the netherlands in 1992 after correction for selectivity in the imposition of sanctions we find that sanctions substantially raise individual re employment rates

the aging population and the size of the welfare state data for the united states and countries in western europe indicate a negative correlation between the dependency ratio and labor tax rates and the generosity of social transfers after other factors that influence the size of the welfare state are controlled for this occurs despite the increased political clout of the dependent population implied by the aging of the population this paper develops an overlapping generations model of intra and intergenerational transfers including old age social security and human capital formation that addresses this seeming puzzle we show that with democratic voting an increase in the dependency ratio can lead to lower taxes or less generous social transfers

evaluating an estimated new keynesian small open economy model abstract this paper estimates and tests a new keynesian small open economy model in the tradition of christiano et al 2005 nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 1 45 and smets and wouters 2003 an estimated stochastic dynamic general equilibrium model of the euro area journal of the european economic association 1 5 1123 1175 using bayesian estimation techniques on swedish data to account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank s instrument rule a key equation in the model the uncovered interest rate parity uip condition is well known to be rejected empirically therefore we explore the consequences of modifying the uip condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate the results show that the modification increases the persistence in the real exchange rate and that this model has an empirical advantage compared with the standard uip specification

on the structural interpretation of the smets wouters risk premium shock this article shows that the risk premium shock in smets and wouters 2007 can be interpreted as a structural shock to the demand for safe and liquid assets such as short term u s treasury securities several implications of this interpretation are discussed

identity and the economics of organizations on plebes first day at west point called r day they strip down to their underwear their hair is cut off they are put in uniform they then must address an older cadet with the proper salute and with the statement sir new cadet doe reports to the cadet in the red sash for the first time as ordered plebes must stand and salute and repeat and stand and salute and repeat until they get it exactly right all the while being reprimanded for every tiny mistake in the summary of david lipsky 2003 pp 145 154 who spent four years tracking a company of cadets at west point on r day you surrender your old self in stages but r day is just the beginning of the training and personal re engineering that is to come so that west point graduates emerge four years later as loyal officers in the u s army lipsky shows that despite some failure this tough program is remarkably successful in creating officers with the will to lead in battle economists current picture of organizations and work incentives has no place for the west point program and the motivations it seeks to inculcate in recruits in a standard economic model an individual s preferences are fixed and utility depends only on pecuniary variables the army s aim at west point is to change cadets preferences they wish to inculcate non economic motives in the cadets so that they have the same goals as the u s army alternatively stated the goal of west point is to change the identity of the cadets so they will think of themselves above all else as officers in the u s army they will feel bad about themselves they will lose utility if they fall short of the ideals of such an officer this change in identity

the macroeconomic effects of large scale asset purchase programmes the effects of asset purchase programs on macroeconomic variables are likely to be moderate we reach this conclusion after simulating the impact of the federal reserve s second large scale asset purchase program lsap ii in a dsge model enriched with a preferred habitat framework and estimated on u s data our simulations suggest that such a program increases gdp growth by less than half a percentage point although the effect on the level of gdp is very persistent the program s marginal contribution to infl ation is very small one key reason for our fi ndings is that we estimate a small degree of fi nancial market segmentation if we enrich the set of observables with a measure of long term debt the semi elasticity of the risk premium to the amount of debt in privatesector hands is substantially smaller than that reported in the recent empirical literature in this case our baseline estimates of the effects of lsap ii on the macroeconomy decrease by at least a factor of two throughout the analysis a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on gdp growth and infl ation

stagflationary effect of government bond financing in the transforming chinese economy a general equilibrium analysis abstract this paper studies how the method of government debt financing affects the macroeconomic performance of the transforming chinese economy the investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the chinese economy using this framework we evaluate the effects on the growth rate of output and inflation if the chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing it is shown that although this policy change can reduce the growth rate of the money supply it can generate a stagflationary effect reducing the rate of output growth while raising the rate of inflation if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low

the political economy of naturalization this paper presents a political economy model in which self interested natives decide when citizenship and or voting rights should be granted to foreign born workers native voters know that immigrants hold different political preferences and would thus tend to postpone their enfranchisement as much as possible they also consider however that a more restrictive naturalization policy may reduce the gains from immigration we find that the optimal timing of naturalization depends on the quantity quality productivity and preferences of potential immigrants the political composition and the age structure of the native population as well as the sensitivity of migration choices to the citizenship issue

immigration and welfare magnets this article investigates if the location choices made by immigrants when they arrive in the united states are influenced by the interstate dispersion in welfare benefits income maximizing behavior implies that foreign born welfare recipients unlike their native born counterparts may be clustered in the states that offer the highest benefits the empirical analysis indicates that immigrant welfare recipients are indeed more heavily clustered in high benefit states than the immigrants who do not receive welfare or than natives as a result the welfare participation rate of immigrants is much more sensitive to changes in welfare benefits than that of natives

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

indicator variables for optimal policy under asymmetric information the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment the private sector is assumed to have more information about the state of the economy than the policymaker certainty equivalence holds for the optimal reaction function in state space form t he coefficients are independent of the degree of uncertainty about the state of the economy however in the case of commitment certainty equivalence does not hold for the reaction function in integrative form the policy instrument cannot be written as a distributed lag of past estimates of past states of the economy instead optimal policy will generally depend on new estimates of past states of the economy and in ways that depend on the information structure furthermore the usual separation principle does not hold since the estimation of the state of the economy is not independent of optimization and is in general quite complex we present a general characterization of optimal filtering and control in settings of this kind and discuss an application of our methods to the problem of the optimal use of real time macroeconomic data in the conduct of monetary policy

competition transmission and bank pricing policies evidence from belgian loan and deposit markets abstract this paper addresses the pass through from market interest rates to retail bank interest rates the paper advocates a heterogeneous approach and applies it to the belgian banking market a substantial proportion of the heterogeneity in bank pricing policies can be explained by the bank lending channel and the relative market power hypothesis the results also suggest that the long term pass through is typically less than one for one rejecting the completeness hypothesis while there is no convincing evidence for asymmetry in retail rates large deviations from equilibrium mark ups are faster reduced than small deviations overall conditions for corporate loans are more competitive compared to consumer loans demand and savings deposits have by far the most rigid prices

imperfect credibility and the zero lower bound as the nominal interest rate cannot fall below zero a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a new keynesian model during a large recession we characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect confronting monetary policy communication of the u s federal reserve and the swedish riksbank with such a framework the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis

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

self selection and the earnings of immigrants this paper analyzes the way in which the earnings of the immigrant population may be expected to differ from the earnings of the native population because of the endogeneity of the decision to migrate the empirical study shows that differences in the u s earnings of immigrants with the same measured skills but from different home countries are attributable to variations in political and economic conditions in the countries of origin at the time of migration excerpt

catching up the educational mobility of migrants and natives children in europe migrants into european countries are often less educated than european natives we analyse whether migrants children are more or less likely than natives children to achieve upward educational mobility across generations and study differences in the factors which contribute to differences in mobility for the two groups we find that migrants descendants are more often upwardly mobile and less often downwardly mobile than their native peers in the majority of countries studied and show that the main factor contributing to these patterns is the education level of parents although a lower parental education means that their children are less likely to access the same amount of human social and financial capital as children of more highly educated parents migrants descendants over the last two generations were able to make significant progress in reducing education gaps with natives

on the political economy of immigration the authors study how immigration policies that impose capital and skill requirements would be determined under majority voting when native agents differ in their wealth holdings and vote to maximize their income the results of the model calculations indicate that the native population will be polarized between those who would like an immigration policy to maximize the domestic capital labor ratio and those who would like an immigration policy that would minimize it

tax burden and migration a political economy theory and evidence abstract the extent of taxation and redistribution policy is generally determined as a political economy equilibrium by a balance between those who gain from higher taxes transfers and those who lose the standard theory of the size of government in a representative democracy links the tax burden to measures of the pre tax income inequality we develop in this paper a theory which encompasses the existing literature and provides a complementary channel linking the tax burden in the presence of migration to the fiscal leakage from native born to the migrants in a stylized model of migration and human capital formation we show somewhat against the conventional wisdom that low skill immigration can lead to a lower tax burden and less redistribution than would be the case with no immigration even though migrants naturally join the pro tax transfer coalition data on 11 european countries over the period 1974 1992 are consistent with the implications of the theory a higher share of low education immigrants in the population leads to a lower tax rate on labor income and less generous social transfers

seeking asylum in europe seeking asylum in europe over the last three decades the annual number of applications for asylum in the countries of the european union has increased from about 15 000 to more than 300 000 this has sparked a political backlash a revolution in policy a lively academic debate but very little economic analysis although the causes of asylum flows and the effects of policy are much discussed they have rarely been the subject of quantitative analysis this article examines the evolution of asylum flows and asylum policy across the eu since the early 1980s it investigates the effects of war and conflict economic incentives and asylum policies on the total numbers and on the proportions going to the different countries of the eu special attention is given to the growth of policy restrictiveness across the eu and to the harmonization of asylum policies contrary to some views policy has worked to stem the flows but it has been overwhelmed by other forces timothy j hatton

immigration to the land of redistribution negative perceptions about migrants in europe are driven by concerns that foreigners abuse welfare paradoxically instruments of social inclusion are becoming weapons of mass exclusion we compare evidence on welfare access and the net fiscal position of migrants with perceptions based on a largely unexploited database eu silc we find no evidence that legal migrants notably skilled migrants are net recipients of transfers from the state however there is evidence of residual dependency on non contributory transfers and self selection of unskilled migrants in the countries with the most generous welfare states alternative strategies to unbundle migration from welfare access are discussed

the effect of immigration on public finances the impact of immigration on the public finances is an important influence on public opinion this study aims to provide a thorough conceptual survey pointing out the complexities of a full understanding and the relevance of indirect effects and covering both static perspectives and longer run dynamic issues it considers simple accounting approaches which are relatively neglectful of behavioural responses but also tries to bring out the complexities in the nature of the relationship between immigration and the public exchequer that come with more sophisticated modelling of its economic effects

why are some people and countries more protectionist than others we analyze two cross country data sets that contain information on attitudes toward trade as well as a broad range of socio demographic and other indicators we nd that pro trade preferences are signi cantly and robustly correlated with an individual s level of human capital in the manner predicted by the factor endowments model preferences over trade are also correlated with the trade exposure of the sector in which an individual is employed individuals in non traded sectors tend to be the most pro trade while individuals in sectors with a revealed comparative disadvantage are the most protectionist third an individual s relative economic status has a very strong positive association withpro trade attitudes finally non economic determinants in the form of values identities and attachments play an important role in explaining the variation in preferences over trade high degrees of neighborhood attachment and nationalism patriotism are associated withprotectionist tendencies c

on the political economy of immigration and income redistribution in this article we analyze an economy in which agents vote over immigration policy and redistributive tax policy we show that natives preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy we also show that changes in the degree of international capital mobility the distribution of initial capital among natives the wealth or poverty of the immigrant pool and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies finally we provide some empirical support for the model s predictions