monetary policy rules in the open economy effects on welfare and business cycles abstract this paper computes welfare maximizing taylor style interest rate rules in a business cycle model of a small open economy the model assumes staggered price setting and shocks to domestic productivity to the world interest rate to world inflation and to the uncovered interest rate parity condition optimized policy rules have a pronounced anti inflation stance and entail significant nominal and real exchange rate volatility the country responds to an increase in external volatility by holding more foreign assets the policy rule affects the variance and the mean of consumption the effect on the mean matters significantly for welfare

prices and the winner s curse we usually assume that increases in supply allocation by rationing and exclusion of potential buyers reduce prices but all these activities raise the expected price in an important set of cases when common value assets are sold furthermore when we make the assumptions needed to rule out these anomalies for symmetric buyers small asymmetries among the buyers necessarily cause the anomalies to reappear our results help explain rationing in initial public offerings and outcomes of spectrum auctions we illustrate our results in the wallet game and in another new game we introduce the maximum game

a simple framework for international monetary policy analysis abstract we study the international monetary policy design problem within an optimizing two country sticky price model where each country faces a short run tradeoff between output and inflation the model is sufficiently tractable to solve analytically we find that in the nash equilibrium the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy gains from cooperation arise however that stem from the impact of foreign economic activity on the domestic marginal cost of production while under nash central banks need only adjust the interest rate in response to domestic inflation under cooperation they should respond to foreign inflation as well in either scenario flexible exchange rates are desirable

limited participation and exchange rate dynamics does theory meet the data the paper explores the empirical dimensions of a new open economy macronomy model characterized by credit market frictions we find that these frictions are essential for the model to match a large set of moments of german data moreover the simulated impulse response functions to supply and nominal shocks are consistent with var findings since the model is estimated on moments rather than on conditional irfs this underlines the ability of the model to match the data finally monetary shocks do not seem to be the primary driving force behind the aggregate dynamics which is consistent with the var literature

international evidence on the demand for money one of the current questions in the literature on the demand for money is whethe r the adjustment of actual to desired money holdings is in nominal or real terms this paper describes a simple procedure that can be used to test the nominal against the real hypothesis the test is carried out for twenty seven countries the paper also tests the structural stability of the demand for money equations and the correctness of th e dynamic specification the results are strongly in favor of the nom inal adjustment hypothesis there is however some evidence of moder ate structural instability before and after 1973 the instability doe s not affect the conclusion that the nominal adjustment hypothesis do minates the real adjustment hypothesis copyright 1987 by mit press

identifying a forward looking monetary policy in an open economy i identify a forward looking monetary policy function in a forecast augmented var foavar model by using forecasted macroeconomic variables in addition to the realized variables used in a standard var i find that forecasted variables play a greater role than realized variables in a central bank s policy decisions i also find that a contractionary policy shock in the foavar generates impulse responses of macroeconomic variables that are consistent with the predictions of economic theory while the same shock causes a price puzzle and a delayed overshooting response of the exchange rate in the standard model

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

monetary regime change and business cycles abstract this paper proposes a method to structurally estimate a model with a regime shift and evaluates the importance of acknowledging the break in the estimation we estimate a dsge model on swedish data taking into account the regime change in 1993 from exchange rate targeting to inflation targeting ignoring the break leads to spurious estimates accounting for the break suggests that monetary policy reacted strongly to exchange rate movements in the first regime and mostly to inflation in the second the sources of business cycles and their transmission mechanism are significantly affected by the exchange rate regime

preconditions windows of opportunity and innovation strategies successive leadership changes in the regional jet industry abstract we analyse the drivers of two successive leadership changes in the regional or mid sized jet market a particularly dynamic segment of the commercial aircraft industry in the first instance bombardier a canadian newcomer assumed leadership over the incumbents bae and fokker in 1995 in 2005 the brazilian firm embraer became the market leader in terms of number of regional jet deliveries our theoretical framework considers discontinuities in the building blocks of sectoral innovation systems as windows of opportunity for which challenger firms can devise strategic responses allowing them to assume market leadership it also considers preconditions as necessary capabilities limiting the number of potential challenger companies the analysis of leadership change shows that more efficient engines and technological improvements in subsystems changing oil prices business cycles liberalization of air transport services scope clauses and government interventions provided technological demand and regulatory windows of opportunity launching new aircraft families an architectural innovation targeting the 50 and the 100 120 seat niche markets gave first bombardier s crj family and later embraer s e jet family the leadership the fate of failed challengers and incumbents point to the importance of incumbent traps technological and financial capabilities the timing of windows of opportunity speedy strategic response a proper evaluation of future demand and sheer luck as long lead times and sunk costs entrap incumbents and other inadequately responding companies

location and competition in retail banking abstract we investigate the impact of banking deregulation during the 1990s on consumer welfare we estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled this is important given the substantial changes in banks branch networks observed in the data our model indicates that cross price elasticities between banks whose branches are close to consumers close banks are larger than those between far banks and more than double the cross price elasticity of close banks with respect to far banks we distinguish between thrifts and other banks and find that within thrift competitive effects are stronger than within bank effects or those between thrifts and banks we use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the riegle neal act of 1994 our results indicate that the median household gained around 60 per year from the changes approximately two thirds of the gains come from within market changes in market structure the gains were greater in markets with high initial numbers of banks than elsewhere

optimal monetary policy in a small open economy with home bias we analyze optimal monetary policy in a small open economy characterized by home bias in consumption peculiar to our framework is the application of a ramseytype analysis to a model of the recent open economy new keynesian literature we show that home bias in consumption is a su cient condition for inducing the monetary policy maker of an open economy to deviate from a strategy of strict markup stabilization and contemplate some optimal degree of exchange rate stabilization we focus on the optimal setting of policy both in the case of rms setting prices one period in advance and in a gradual fashion subject to adjustment costs while the rst setup allows us to analytically highlight home bias as an independent source of equilibrium

openness and optimal monetary policy abstract we show that the composition of international trade has important implications for the optimal volatility of the exchange rate above and beyond the size of trade flows using an analytically tractable small open economy model we characterize the impact of the trade composition on the policy trade off and on the role played by the exchange rate in correcting for price misalignments contrary to models where openness can be summarized by the degree of home bias we find that openness can be a poor proxy of the welfare impact of alternative monetary policies using input output data for 25 countries we document substantial differences in the import and non tradable content of final demand components and in the role played by imported inputs in domestic production the estimates are used in a richer small open economy dsge model to quantify the loss from an exchange rate peg relative to the ramsey policy conditional on the composition of imports we find that the main determinant of the losses is the share of non traded goods in final demand

fiscal policy banks and the financial crisis this paper studies the effectiveness of euro area ea fiscal policy during the recent financial crisis using an estimated new keynesian model with a bank a key dimension of policy in the crisis was massive government support for banks that dimension has so far received little attention in the macroeconomics literature we use the estimated model to analyze the effects of bank asset losses of government support for banks and other fiscal stimulus measures in the ea our results suggest that support for banks had a stabilizing effect on ea output consumption and investment increased government purchases helped to stabilize output but crowded out consumption higher transfers to households had a positive impact on private consumption but a negligible effect on output and investment banking shocks and increased government spending explain half of the rise in the public debt gdp ratio since the onset of the crisis

time varying dynamics of the real exchange rate an empirical analysis summary we use a time varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the uk euro area and canada we show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s real exchange rate volatility relative to fundamentals also shows a marked increase after this point in time however there is some evidence suggesting a closer business cycle co movement of the real exchange rate and fundamentals simulations from an open economy dsge model show that these results are consistent with a decline in exchange rate pass through copyright 2012 john wiley sons ltd

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

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

international capital flows and the boom bust cycle in spain we study the joint dynamics of foreign capital flows and real activity during the recent boom bust cycle of the spanish economy using a three country new keynesian model with credit constrained households and firms a construction sector and a government we estimate the model using 1995q1 2013q2 data for spain the rest of the euro area rea and the rest of the world we show that falling risk premia on spanish housing and non residential capital a loosening of collateral constraints for spanish households and firms as well as a fall in the interest rate spread between spain and the rea fuelled the spanish output boom and the persistent rise in foreign capital flows to spain before the global financial crisis during and after the global financial crisis falling house prices and a tightening of collateral constraints for spanish borrowers contributed to a sharp reduction in capital inflows and to the persistent slump in spanish real activity the credit crunch was especially pronounced for spanish households firm credit constraints tightened later and more gradually and contributed much less to the slump

monetary policy choices in emerging market economies the case of high productivity growth we develop a general equilibrium model of an emerging market economy where productivity growth differentials between tradable and non tradable sectors result in an equilibrium appreciation of the real exchange rate the so called balassa samuelson effect the paper explores the dynamic properties of this economy and the welfare implications of alternative policy rules we show that the real exchange rate appreciation limits the range of policy rules that with a given probability keep inflation and exchange rate within predetermined numerical targets we also find that the b s effect raises by an order of magnitude the welfare loss associated with policy rules that prescribe active exchange rate management

modelling the sectoral allocation of labour in open economy models indivisible labour is not the only type of nonconvexity affecting labour supply decisions another type of nonconvexity arises in economies with sectors whenever individuals can work in only one sector at a time i introduce this restriction into an open economy model with a tradeable and a nontradeable sector and i use lotteries to convexify the consumption possibilities set this approach implies that the aggregate elasticity of labour supply becomes infinite i compare the performance of the model with an analogous model in which the labour supply elasticity is finite i find that the infinite labour supply elasticity helps explain the persistence of net exports however all the other consequences of the labour supply elasticity for the model implied second order moments depend on whether the pricing assumption is producer currency pricing pcp or local currency pricing lcp

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

accounting for the east asian crisis a quantitative model of capital outflows in small open economies to what degree can the qualitative and quantitative aspects of the east asian crisis be accounted for within a dynamic general equilibrium model this paper investigates that question using a framework in which the crisis itself is modeled as an exogenous shock to the country risk premium this exercise has empirical discipline because the scale of the shock can be measured by the movement in the reported risk premium we calibrate a quantitative sticky price dynamic general equilibrium model of a small open economy to match the features of three east asian economies thailand korea and malaysia we identify a shock to the country risk premium using published data from international bond markets and identify shortrun monetary policy using observed domestic interest rates we find that the modeled response to the observed increase in external interest rates substantially matches macroeconomic data on prices and quantities at the aggregate and sectoral level however the model has more difficulty explaining the large exchange rate devaluations that occurred in those economies

noise trading and delayed exchange rate overshooting abstract a number of empirical studies have reported that exchange rates show a delayed overshooting in response to a monetary policy shock this finding is puzzling economic theory suggests that overshooting should occur immediately after the shock i e with no delay this paper uses a new open economy macroeconomics model with pricing to market behavior to analyze whether noise trading in the foreign exchange market helps to explain the delayed overshooting puzzle to this end the implications of noise trading for the effects of a monetary policy shock on the nominal and on the real exchange rate are analyzed

deleveraging deflation and depreciation in the euro area abstract during the post crisis period economic performance has been highly heterogenous across the euro area while some economies rebounded quickly after the 2009 output collapse others are undergoing a protracted further decline as part of an extensive deleveraging process at the same time inflation has been subdued throughout the whole of the euro area and intra euro area exchange rates have hardly moved we interpret these facts through the lens of a two country model of a currency union we find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy as it becomes constrained by the zero lower bound as a result the real exchange rate response becomes muted and the output collapse concentrated in the deleveraging economies

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

the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics a svar analysis the article is an empirical investigation of the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics three new open economy macro economics noem models are studied to motivate the empirical investigation then i apply the blanchard quah decomposition to identify a svar model the empirical evidence supports the noem model with the simplified household preference specification and with the small degree of pricing to market the evidence also illustrates monetary shocks important for the real exchange rate and the terms of trade movements but not for the current account fluctuations

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

ppp strikes back aggregation and the real exchange rate we show the importance of a dynamic aggregation bias in accounting for the ppp puzzle we prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics established time series and panel methods fail to control for this using eurostat data we find that when heterogeneity is taken into account the estimated persistence of real exchange rates falls dramatically its half life for instance may fall to as low as eleven months significantly below the consensus view of three to five years

inward technology transfer and competitiveness the role of national innovation systems this paper examines the role of national innovation systems in the inward transfer of technology that has underpinned the transformation of japan and other east asian economies since 1945 the economies that have benefited most from inward technology transfer have national innovation systems that have strengthened their national absorptive capacity this capacity relies primarily on investments in scientific and technical training and on economic policies that enforce competition among domestic firms the particular channels for inward technology transfer the identity of any strategic industries targeted for public intervention and the overall level of a nation s trade restrictions are ail of secondary importance a central theme of global economic change during the postwar period has been the application in less developed countries of technologies developed within economically advanced regions this phenomenon underpinned the post 1945 transformation of japan and other east asian economies and influenced the reconstruction of western european economies after world war ii the application of externally developed technologies within latecomer economies is hardly unique to the postwar period however samuel slater s introduction of british textile manufacturing is but one example of inward technology transfer in the nineteenth century us economy and david 1992 traces the origins of patent monopolies to efforts by medieval european city states and nations to attract experts in industrial arts to practice their craft within these jurisdictions both international technology flows and government efforts to influence them for national competitive advantage thus have ample historical precedent several characteristics nevertheless distinguish the post 1945 era from earlier historical periods the influence of international technology transfer on national economic development has increased as the postwar development of such economies as taiwan and south korea has relied much less on natural resource endowments than nineteenth

do the ecb and the fed really need to cooperate optimal monetary policy in a two country world abstract a two country model with monopolistic competition and price stickiness is employed to investigate the implications for macroeconomic stability and the welfare properties of three international policy arrangements a cooperative b non cooperative and c monetary union i characterize the conditions under which there is scope for policy cooperation and quantify the costs of non cooperation and monetary union the non cooperative equilibrium may be suboptimal because of terms of trade spillover effects while monetary union may be suboptimal because of the sluggishness of relative prices both the costs of policy competition and of a monetary union are sensitive to the values assumed for the intertemporal and international demand elasticity and the degree of openness of the economy independently of the calibration scenario adopted the ecb has little to gain by coordinating with the fed

pricing to market limited participation and exchange rate dynamics abstract explaining the wide gap between exchanges rates fluctuations and those of their macroeconomic fundamentals since 1973 remains a challenging task for international macroeconomics betts and devereux 1996 the exchange rate in a model of pricing to market european economic review 96 1007 1021 among others stress the role of pricing to market ptm hairault et al 2004 overshooting and the exchange rate disconnect puzzle a reappraisal journal of international money and finance 23 615 643 highlight an alternative explanation based on credit market frictions through the limited participation assumption lp the paper investigates the combined role of both types of frictions in a two country framework given ptm and lp we show that monetary shocks generate amplified exchange rate volatilities the model hence contributes to a better understanding of the large observed exchange rate fluctuations

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

net foreign assets and the exchange rate redux revived abstract we revisit obstfeld and rogoff s 1995 results on exchange rate dynamics in a two country monetary model with incomplete asset markets stationary net foreign assets and endogenous monetary policy the nominal exchange rate exhibits a unit root under flexible prices it also depends on the stock of real net foreign assets with sticky prices the exchange rate depends on the past gdp differential along with net foreign assets endogenous monetary policy and asset dynamics have consequences for exchange rate overshooting a persistent relative productivity shock results in delayed overshooting under both flexible and sticky prices a persistent relative interest rate shock generates undershooting under flexible prices

shifts in monetary policy and exchange rate dynamics is dornbusch s overshooting hypothesis intact after all abstract how do nominal exchange rates adjust after surprise contractions in monetary policy while the seminal contribution by dornbusch provides concise predictions exchange rates appreciate i e overshoot on impact before depreciating gradually empirical support for his hypothesis is at best mixed i argue that the failure to discover overshooting may result from assumptions researchers have imposed to recover structural vars specifically simultaneous feedback effects between interest rates and exchange rates which are inherently forward looking variables are often excluded or modeled alongside with strong restrictions in this paper i identify u s monetary policy shocks using surprises in federal funds futures around policy announcements as external instruments which recent literature has established to represent the appropriate laboratory in settings encompassing macroeconomic and financial variables resulting adjustments of the dollar conditional on shifts in policy generally align with dornbusch s predictions during the post bretton woods era including volcker s tenure as fed chair

monetary policy in emerging markets can liability dollarization explain contractionary devaluations abstract in emerging markets external debt is denominated almost entirely in large developed country currencies such as the u s dollar this liability dollarization offers a channel through which exchange rate variation can lead to business cycle instability when firms assets are denominated in domestic currency and liabilities are denominated in foreign currency an exchange rate depreciation worsens firms balance sheets which leads to higher capital costs and contractions in capital spending to illustrate this i construct a quantitative sticky price small open economy model in which a monetary policy induced devaluation leads to a persistent contraction in output in this model fixed exchange rates offer greater stability than an interest rule that targets inflation

us trade balance dynamics the role of fiscal policy and productivity shocks and of financial market linkages abstract this paper examines whether domestic and foreign productivity and fiscal policy changes can account for the wide swings in us net exports during the period 1975 1991 a two country real business cycle model is used for that purpose the model is simulated using data on productivity government purchases and taxes for the g7 countries a version of the model with incomplete asset markets in which only bonds can be used for international capital flows tracks the us trade balance fairly closely provided permanent country specific productivity shifts are assumed the simulations suggest that us productivity changes were the main source of fluctuations in us net exports

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

from free entry to patent protection welfare implications for the indian pharmaceutical industry abstract there has been fierce debate over the imposition of stronger intellectual property rights laws for pharmaceutical products in developing countries this paper uses data from the indian pharmaceutical industry to develop a structural model of demand supply and entry the estimation yields demand and supply parameters that indicate significant heterogeneity among firms both within and across different therapeutic segments the estimated parameters are used to simulate patent enforcement and price deregulation for 43 drugs which predicts large losses for consumers and relatively small gains in profits for the global patent holders

seasonal fluctuations and the demand for money the reaction of money holders to the systematic seasonal changes in the level of transactions represents an interesting experiment for learning about the money demand function an analysis of the seasonal fluctuations of the real quantity of money and several measures of transactions in the united states germany the united kingdom and canada reveals the following first consumption expenditures in semidurables nondurables and services appears to be a good proxy for transactions in a money demand function and superior to gross domestic product or consumption expenditures second the transactions elasticity of the demand for money is substantially lower than one

size openness and macroeconomic interdependence the curse of dimensionality a problem associated with analyzing the interaction of a relatively large number of endogenous macroeconomic variables is a prevailing issue in the open economy macro literature the most common practice to mitigate this problem is to apply the so called small open economy framework soef in this paper we aim to review under which conditions the soef is a justifiable approximation and how severe the consequences of violation of key conditions might be thereby we use a multicountry general equilibrium model as a laboratory first we derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large n asymptotics second we show that the soef is a valid approximation only for economies i that have a diversified foreign trade structure and if ii there is no globally dominant economy in the system third we illustrate that macroeconomic interdependence is primarily related to the degree of trade diversification and not to the extent of trade openness furthermore we provide some evidence on the pattern of global macroeconomic interdependence by calculating probability impulse response functions in our calibrated multicountry model using data for 153 economies

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

welfare effects of a monetary union the role of trade openness this paper evaluates the welfare effects of a monetary union mu compared to a e oating exchange rate regime using a quantitative business cycle model of a two country world with sticky prices it is assumed that under a e oat there are shocks to the uncovered interest rate parity uip condition these shocks are shown to have a negative effect on welfare the detrimental effect is stronger the higher the degree of trade openness a mu eliminates uip shocks and it may thus raise welfare the welfare gain from mu is positively linked to openness jel e4 f3 f4

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

state dependent pricing local currency pricing and exchange rate pass through this paper presents a two country dsge model with state dependent pricing as in dotsey et al 1999 in which firms discriminate across countries by setting prices in local currency in this model a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time dependent pricing in addition the predictions of the state dependent pricing model match the business cycle moments better than the predictions of the time dependent pricing model when driven by monetary policy shocks

product differentiation and efficiencies in the retail banking industry abstract we empirically quantify the welfare implications of bank entry in the united states between 2000 and 2008 we use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes we find no evidence for under or over entry compared with the socially efficient outcome there is a mild welfare loss resulting from banks entering wrong locations in product space compared with the observed outcome consumer surplus drops by 20 38 and bank profits decline by 48 59 when banks are homogeneous therefore product differentiation significantly improves welfare under free entry

the structure of technology with endogenous capital utilization a model is presented for the estimation of production technology when capital is endogenously utiliz ed the present model permits the firm to choose the rate of utilizat ion and level of maintenance applied to its capital equipment such th at the user cost of capital services is minimized the model is one o f two stage optimization and estimation the two stages are integrate d using duality theory through the generation of an instrumental us er cost variable in the first stage the instrumental user cost is th en utilized for the estimation of the aggregate technology the resul ts are compared to results obtained from standard models with exogeno us capital utilization and the emerging biases are discussed copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

organisational capabilities and learning in complex product systems towards repeatable solutions this paper suggests that chandler s chandler a d 1990 scale and scope the dynamics of industrial capitalism belknap press of harvard univ press cambridge ma organisational capabilities framework can be modified to explain how suppliers of complex product systems cops build the capabilities necessary to expand successfully into new lines of business in addition to chandler s functional and strategic capabilities we propose the concept of project capabilities to refer to important cops activities of bid preparation and project execution an organisational learning cycle model is presented to show cops firms can move from the first bid or project of its kind in a new domain of business to achieve what we call economies of repetition by putting in place organisational changes routines and learning processes to provide a growing number of similar bids and projects more efficiently and effectively

socially optimal subsidies for entry the case of medicare payments to hmos the u s medicare program has increased its spending on private medicare plans in anticipation of larger consumer surplus and higher efficiency to evaluate the welfare consequences of such policy interventions i develop an empirical model with endogenous entry counterfactual simulation reveals the following subsidizing hmo entry can be justified to enhance national welfare no excessive entry the level of price subsidies in 2008 however is far beyond the optimal level and the geographic inconsistency between the subsidies and the medicare fee for service costs is another source of inefficiency resolving this geographic inconsistency significantly raises national welfare by restructuring entry

real exchange rate convergence the roles of price stickiness and monetary policy abstract in many open economy models based on dornbusch 1976 the speed of convergence of the real exchange rate is tied to the stickiness of prices the purchasing power parity puzzle concerns the empirical fact that real exchange rates appear to converge more slowly than nominal prices in some new keynesian models when there is no interest rate smoothing the stickiness of prices does not matter at all for persistence as benigno 2004 showed we show that in the presence of interest rate smoothing price stickiness does matter and endogenous real exchange rate persistence is bounded above by the interest rate smoothing parameter and by the probability of a firm not changing prices under calvo pricing we also explain the relationship between the new keynesian framework with calvo pricing and the dornbusch framework where price stickiness is integral to real exchange rate convergence

public monopoly and economic efficiency evidence from the pennsylvania liquor control board s entry decisions we estimate a spatial model of liquor demand to analyze the impact of government controlled retailing on entry patterns in the absence of the pennsylvania liquor control board the state would have roughly 2 5 times the current number of stores higher consumer surplus and lower payments to liquor store employees with just over half the number of stores that would maximize welfare the government system is instead best rationalized as profit maximization with profit sharing government operation mitigates but does not eliminate free entry s bias against rural consumers we find only limited evidence of political influence on entry jel d42 d72 l11 l12 l43 l81

explaining the exchange rate pass through in different prices abstract this paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass through in a wide range of prices quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock predicted responses are compared with the evidence based on var models to examine how well different models fit the data the results show that the best fitting model incorporates a number of features highlighted by different strands of the literature sticky prices sticky wages distribution costs and a combination of local lcp and producer currency pricing pcp

causes of nonlinearities in low order models of the real exchange rate abstract this paper investigates the extent to which modern dsge models which feature local currency pricing home bias nontraded goods and incomplete markets can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current floating period our key findings are as follows first if the true model can be appropriately characterized as a set of linear equations then linearity tests that utilize univariate autoregressions of the real exchange rate suffer from an omitted variables problem which leads them to overestimate the true incidence of nonlinearity consequently studies that fail to control for this problem may spuriously find evidence of nonlinearities in the data despite the fact that the data generating process may be linear second we propose a strategy that can largely eliminate this distortion finally we find that dsge models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples

what drives the german current account and how does it affect other eu member states we estimate a three country model using 1995 2013 data for germany the rest of the euro area rea and the rest of the world row to analyse the determinants of germany s current account ca surplus after the launch of the euro our results suggest that the german surplus reflects a succession of distinct shocks mono causal explanations of the surplus are thus insufficient the most important factors driving the german surplus were positive shocks to the german saving rate and to row demand for german exports as well as german labour market reforms and other positive german aggregate supply shocks the key shocks that drove the rise in the german ca tended to worsen the rea trade balance but had a weak effect on rea real activity our analysis suggests these driving factors are likely to be slowly eroded leading to a very gradual reduction of the german ca surplus an expansion in german government consumption and investment would raise german gdp and reduce the ca surplus but the effects on the surplus would be weak

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

introducing financial frictions and unemployment into a small open economy model the current nancial crisis has made it abundantly clear that business cycle modeling no longer can abstract from nancial factors it is also becoming increasingly clear that the stylized modeling of labor markets without explicit unemployment that is the current standard approach has its limitations some questions which the dominating extant business cycle models are mute on but that we would like to answer are how important are nancial and labor market frictions for the business cycle dynamics of a

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 transmission mechanisms in a small open economy a bayesian structural var approach abstract this paper develops a bayesian structural var model for canada in order to estimate the effects of monetary policy shocks using the overnight rate target as the policy instrument i allow the policy variable and other home and foreign variables to interact with each other contemporaneously the key finding is that monetary policy affects the real economy through both the market interest rate and the exchange rate i also find that the bank of canada responds to any home and foreign variables that embodies information about future inflation and that external shocks are an important source of output fluctuations

learning and technical progress in the commuter aircraft industry an analysis of embraer s experience abstract companies in industrializing nations face major hurdles when moving into complex and highly competitive manufacturing industries this paper examines the example of such an entrant the brazilian aircraft company enbraer the paper is concerned with the technological strategy pursued by embraer and its learning experience with the brasilia commuter turboprop which achieved a 25 world market share in its seat category due in no small measure to its cost competitiveness and technological proficiency the paper presents econometric evidence of substantial learning effects as captured by the learning curve elasticities of the brasilia which conforms to frontier parameters although embraer was successful in its early product offerings aimed at a narrow niche its subsequent difficulties in moving to a broader product line and sustaining its technological development illustrate some of the problems that industrializing nations enterprises may encounter in building on a successful entry in technology intensive industries at a time of growing competition without crafting alliances to share the large associated technological and commercial risks

macroeconomic effects of nominal exchange rate regimes new insights into the role of price dynamics abstract this paper analyzes the effects of pegged and floating exchange rates using a two country dynamic general equilibrium model that is calibrated to the us and a european aggregate the model assumes shocks to money productivity and the interest rate parity condition it captures the fact that the sharp increase in nominal exchange rate volatility after the end of the bretton woods bw system was accompanied by a commensurate rise in real exchange rate volatility but had no pronounced effect on the volatility of gdp this holds irrespective of whether flexible or sticky prices are assumed which casts doubt on the widespread view that the roughly equal post bw rise in nominal and real exchange rate volatility reflects price stickiness a flex prices variant of the model captures better the fact that the correlation between us and european gdp has been higher in the post bw era than under bw

has exchange rate pass through really declined evidence from canada several empirical studies suggest that exchange rate pass through has declined in recent years among industrialized countries results for canada also indicate that import and consumer prices have become less responsive to exchange rate movements in the 1990s these findings are based on reduced form regressions that are typically motivated by partial equilibrium models of pricing this paper uses instead a structural general equilibrium approach to test the premise that exchange rate pass through has decreased in canada our approach consists in estimating a dynamic stochastic generalequilibrium model for canada over two sub samples which cover the periods before and after the adoption of inflation targeting by the bank of canada we then use impulseresponse analysis to assess the stability of exchange rate pass through across the two sub samples our results indicate that pass through to canadian import prices has been rather stable while pass through to canadian consumer prices has declined in recent years counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline

monetary shocks in the g 6 countries is there a puzzle les auteurs cherchent a clarifier la dynamique du mecanisme de transmission de la politique monetaire l identification des chocs de politique monetaire est au coeur de ce genre d analyse divers chercheurs ont reussi recemment a isoler de tels chocs en imposant des restrictions de suridentification a des modeles vectoriels autoregressifs var

exchange rate regimes and wage comovements in a ricardian model with money we construct a ricardian model of trade with money and trade costs the model predicts that the nominal wages of the trading countries exhibit stronger positive comovements when the countries fix their bilateral exchange rates while comovements of real wages are not affected by exchange rate regimes our numerical experiments suggest that a reduction in trade costs increases both nominal and real wage comovements regardless of regimes when downward nominal wage rigidity is introduced nominal wage comovements under the fixed regime remain stronger than under the flexible regime and the difference is smaller on the shorter time horizon while a slight difference in real wage comovements between the two regimes shows up and is larger on the shorter time horizon when we consider membership in the economic and monetary union of the european union as a fixed exchange rate regime panel regression results based on data from oecd countries are broadly consistent with our model and numerical experiments

when shakeout doesn t occur the evolution of the turboprop engine industry abstract a careful case study of the history of the turboprop engine industry 1948 1997 is offered as an example of non shakeout pattern the persistence of high concentration is not associated with the exit of smaller manufacturers but instead a stable coexistence of generalist and specialist strategies emerges in sharp contrast to the pattern observed in the otherwise similar jet engine industry this paper identifies the relevant variables of a more general theory of industry life cycle by taking into account the lack of creation of significant increasing returns in r d manufacturing or marketing all of which are commonly found in industries that produce systemic products

crazy explanations of international business cycles international real business cycle models have been unable to provide a good explanation for the consumption output anomaly in theoretical economies consumption is more strongly correlated across countries than is output whereas the opposite is the case in the data this paper examines an increasing returns to scale model in which the economy is subject to belief shocks that affect the consumption euler equations rather than productivity under the assumption that there are no contingent claim markets on the realizations of sunspots the belief driven model can account for the consumption output anomaly even with a separable period utility function copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

liquidity and real activity in a simple open economy model abstract this paper analyzes the ability of an open economy version of lucas s 1990 liquidity model to account for properties of international data the focus is on the model s ability to account for exchange rate dynamics and measured effects of monetary policy shocks on exchange rates interest rates and real activities across countries the model generates a prediction that a positive domestic monetary innovation is associated with nominal and real currency depreciations however the model s predictions with respect to nominal and real exchange rate volatilities are low

international comparisons of pricing to market behavior this paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using u s u k german and japanese industry level data given the industries sampled more price discrimination across destinations is observed in the u k german and japanese data for industries that match across source countries however behavior is very similar across source countries furthermore destination specific price adjustment on exports to the united states from germany and japan is similar to price adjustment observed on shipments to other destinations most variation in the data appears to be related to industry copyright 1993 by american economic association