political cycles and economic performance in oecd countries empirical evidence from 1951 2006 this paper examines whether electoral motives and government ideology influence short term economic performance i employ data on annual gdp growth in 21 oecd countries over the 1951 2006 period and provide a battery of empirical tests in countries with two party systems gdp growth is boosted before elections and under leftwing governments in the first two years of a legislative period these findings indicate that political cycles are more prevalent in two party systems because voters can clearly punish or reward political parties for governmental performance my findings imply that we need more elaborate theories of how government ideology and electoral motives influence short term economic performance

political cycles in oecd economies this paper studies whether the dynamic behaviour of gnp growth unemployment and inflation is systematically affected by the timing of elections and of changes of governments the sample include the last three decades in 18 oecd economies we explicitly test the implication of several models of political cycles both of the opportunistic and of the partisan type also we confront the implication of recent rational models with more traditional approaches our results can be summarized as follows a the political business cycle hypothesis as formulated in nordhaus 1975 on output and unemployment is generally rejected by the data b inflation tends to increase immediately after elections perhaps as a result of pre electoral expansionary monetary and fiscal policies c we find evidence of temporary partisan differences in output and unemployment and of long run partisan differences in the inflation rate as implied by the rational partisan theory by alesina 1987 d we find virtually no evidence of permanent partisan differences in output growth and unemployment

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

the effect of group size on public good provision in a repeated game setting abstract the ability to cooperate in the provision of a pubic good is analyzed in a repeated game holding the level of provision fixed with quasi linear utility we find that the critical value of the discount parameter converges to 0 in the limit thus cooperation is feasible in a large market next we allow the level cooperation to be adjusted optimally as the group size increases both for a specific form of quasi linear utility and for cobb douglas utility in each case we find that there are admissible values of the discount parameter such that cooperation may be maintained in the limit

olson s logic of collective action at fifty in the 50 years since its publication mancur olson s logic of collective action has had an enormous impact on the academic literature in both economics and political science in this review essay i discuss olson s work in light of the ensuing research particularly developments in the theoretical literature much of the discussion focuses on the group size paradox as applied to politics i e the extent to which the group size paradox can explain why the interests of some groups are better represented in the political process than others i also discuss selective incentives with an emphasis on the byproduct mechanism under which a firm sells a private good and uses the resulting profits to provide a public good

a cobweb model with local externalities abstract this paper considers an extension of the standard cobweb model in a market with local externalities in contrast with the standard cobweb model firms must forecast both prices and local quantities we develop new constructive stability and existence conditions for equilibria with positive outputs we find evidence of clusters of firms whose output behavior is correlated as equilibrium is reached we also show that an appropriately defined representative agent model with a global externality exhibits the same mean or second order properties of aggregate output as the more complex model with local externalities

monetary policy in open economies abstract the recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates we argue that this result may owe much to the combination of two commonly made assumptions that nominal goods prices are rigid and that the monetary authorities have a lot of information about the economy when the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules such as a standard interest rate rule policies that stabilize the money supply or the nominal exchange rate may perform better

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

unemployment and inflation consequences of unexpected election results the empirical evidence toward rational partisan theory of business cycles is mixed and thus inconclusive this is due to the enormous heterogeneity of the existing empirical studies only a few of these test explicitly for the central theoretical innovation that post electoral blips in economic activity depend on the degree of the electoral surprise using polling data we present empirical evidence in favor of rational partisan theory for a panel of oecd countries

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

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

globalization and its challenges rudi was born and grew up in krefeld germany he was an undergraduate at the university of geneva and completed his ph d at the university of chicago in 1971 which is where we met he was a student of robert mundell and both the subject matter the development of the mundell fleming model and the elegance and insights of his early work reflected mundell s influence he taught at the university of rochester and at the university of chicago before accepting an offer from mit in 1975

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

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

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

does better information about foreign shocks improve monetary policy abstract this paper examines whether better information about foreign shocks leads to welfare improving monetary policy using a stylised two country new keynesian general equilibrium model we demonstrate that when terms of trade externality exist and national central banks have the incentives to shift terms of trade in their own favour the equilibrium under imperfect information may be welfare superior relative to an equilibrium with perfect information in addition the welfare gains or losses from information sharing between central banks are found to be small for empirically plausible range of parameters for risk aversion and elasticity of labour supply

public good provision in a repeated game the role of small fixed costs of participation pecorino 1998 models tariff lobbying in a repeated game and finds that cooperation can be maintained in a large group even though tariff lobbying provides a rival public good to interest group members we add small fixed costs of participation to this model and find that cooperation must break down in large groups by contrast if a fully rival public good directly enters the utility function then cooperation is possible in large groups even with small participation costs thus we find only partial support for olson s 1965 proposition that collective action must break down in large groups

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

global implications of self oriented national monetary rules author s obstfeld maurice rogoff kenneth abstract it is well known that if international linkages are relatively small the potential gains to international monetary policy coordination are typically quite limited but what if goods and financial markets are tightly linked is it then problematic if countries unilaterally design their institutions for monetary stabilization are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination we argue that under plausible assumptions the answer is no unless risk aversion is very high lack of coordination in rule setting is a second order problem compared to the overall gains from monetary policy stabilization

when international policy coordination matters an empirical analysis the interdependence of national economies implies externalities in policy making and these externalities lead to inefficient outcomes when policy makers are decentralized and independent these externalities have been well documented from a theoretical point of view this paper reports our attempts to discover when and if policy coordination matters using the liverpool world model which exhibits strong spillover effects for monetary policy and would therefore we thought yield very different results from those of earlier researchers however strong spillover effects do not guarantee that cooperative policies will differ much from the uncooperative other aspects of the game s structure can be equally important indeed we found many plausible game situations in which the uncooperative and cooperative solutions are so close together as to be operationally indistinguishable given the precision with which central banks seem to be able to control their money supplies we also found situations in which c

monetary policy determinacy and learnability in a two block world economy we study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple two country new keynesian framework under both fixed and flexible exchange rates we find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation

dynamic behaviour in large markets for differentiated products an important question is how well competitive models approximate models of large finite economies for a class of differentiated products models static nash equilibria if they exist always converge to competition as the number of firms increases dynamic nash equilibria need not so converge easily checked conditions for convergence to competition do however exist

aggregate efficiency market demand and the sustainability of collusion this paper studies the effects of firms aggregate efficiency and the level of demand on collusion collusion is more difficult in markets where aggregate efficiency i e the ability of firms to profitably produce at prices exceeding the cournot price is large relative to the level of demand

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

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

variable rational partisan business cycles theory and some evidence the variable rational partisan business cycle model is developed where agents face uncertainty regarding the timing and outcome of the next election the model predicts that partisan influences on the economy persist throughout the government s rule and are further influenced in the opposite direction by which party ruled in the previous period party popularity also has a causal effect on the business cycle finally the effects from changes in election timing expectations are dependent on which party ruled in the previous period empirical results for output and unemployment in canada germany and united kingdom yield mixed support for the model jel classification d72 e32 le modele des cycles d affaires variables fonde sur le comportement du partisan rationnel theorie et resultats le modele de cycles d affaires variables fonde sur le comportement du partisan rationnel est developpe pour le cas ou les agents font face a de l incertitude quant au moment du declenchement des elections et quant aux resultats des prochaines elections le modele predit que les influences partisanes sur l economie persistent tout au long du mandat du gouvernement et qu elles sont influencees dans la direction opposee par le type de parti au pouvoir au cours du mandat anterieur la popularite du parti a un effet de causalite sur le cycle d affaires enfin les effets des changements dans les anticipations du moment du declenchement des elections dependent de quel parti etait au pouvoir au cours de la periode anterieure les resultats empiriques de la calibration du modele pour la production et le chomage au canada en allemagne et au royaume uni donnent des resultats mitiges

political business cycles and endogenous elections empirical research of political business cycles pbcs may suffer from endogeneity bias when incumbent governments have discretion to call for an early election using an instrumental variable iv routine on data from japan and the u k we find strong evidence to support the notion that election timing is a function of the economy rather than the macroeconomy being driven by elections as assumed in pbc in single equation regressions no evidence of political cycles are found but hausman tests suggest elections are endogenous in our regressions a monetary cycle in japan and an inflation cycle in the u k are uncovered through iv estimation

exchange rate economics is always and everywhere controversial abstractthis article reviews the major developments in the recent literature on exchange rate economics it is argued that the link between the exchange rate and economic fundamentals is breaking new ground evidence indicates that alternative analytical frameworks such as the new open economy macroeconomics and exchange rate arrangements such as the euro have their theoretical and analytical elegance but are proving empirically very difficult to implement the role of methodological advances and alternative fundamental instruments such as world commodity prices is also highlighted

strategic monetary policy in interdependent economies gains from coordination reconsidered abstract there is a wide acceptance that gains to international monetary policy coordination are small at best and that the need of policy coordination is questionable this conclusion however follows from the underlying presumption that monetary policy is concerned with the stabilization of macroeconomic fluctuations only this paper presents a general short run monetary policy analysis within a familiar two country new open economy macroeconomics noem framework where national monetary policy involves the choice of a deterministic growth trend of money supply average inflation rate and stochastic state dependent deviations of actual money supply from the deterministic trend stabilization strategic beggar thy neighbor considerations induce the deviation of both policy choices from their socially optimal values the gains from international coordination of the average inflation rate are of first order and hence larger than the gains from the coordination of the stabilization policies which are of second order

political parties and the business cycle in the united states 1948 1984 this paper tests the existence and the extent of a politically induced business cycle in the u s in the post world war ii period the cycle described in this paper is different from the traditional political business cycle of nordhaus it is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts from an explicit optimization problem we derive a system of equations for output and money growth then we successfully test the non linear restriction imposed by the theory on the parameters of the system of equations we cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations

the unemployment rate consequences of partisan monetary policies economists and political scientists have identified several ways in which political motivations and institutional arrangements can affect macroeconomic policymaking one way is described by the political business cycle model 42 37 in which vote seeking politicians manipulate the path of the economy to secure unsustainably favorable conditions at election times variants of this model have been widely tested with limited success a second channel for political impacts comes through partisan policy changes brought about by electoral turnover the pathbreaking work in this literature includes the contributions of hibbs 30 31 32 33 and beck 11 these works have focused on the empirical issue of how unemployment rates vary under democratic and republican presidents in the u s and have found strong support for the proposition that unemployment rates decline under democratic administrations a third phenomenon has been studied primarily by economists and concerns the credibility problem faced by a central bank selecting money growth rates models of the credibility problem 8 21 describe a setting in which the central bank and the public interact by respectively choosing actual and expected money growth rates in a variant of the prisoners dilemma this interaction can result in excessive inflation

to be or not to be in monetary union a synthesis article i nfo monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks but it also carries costs as some stabilization may be feasible even in the absence of credibility and this may be more than what an individual country can hope for in a monetary union in this paper we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements we produce examples where monetary union may be welfare improving even for low modest levels of inflation bias 2 3 as long as business cycles are not too a synchronized across countries

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

asymmetries in an open economy model abstract this paper revisits interdependence in a noem framework introducing two asymmetries in a two country general equilibrium model of the world economy with imperfect competition and nominal rigidities a world with asymmetric nominal rigidities where one country has flexible prices and the other sticky prices and a world with asymmetric behavior from monetary policymakers where one country non optimally sets a constant nominal exchange rate we show that the welfare loss is not dependent on the variance of the productivity shock in the first asymmetric world as regards the second asymmetry we show that welfare gains arise under discretionary policy if the shock is higher than expected by agents at the cost of a welfare loss to the other country whereas under monetary policy with rules a welfare loss happens in both countries we also call into question the zero lower bound constraint in an open economy endorsing expectations of price increases as an escape from a liquidity trap

the information content of elections and varieties of the partisan political business cycle this event study uses economic forecasts and opinion polls to measure the response of expectations to election surprise use of forecast data complements older work on partisan cycles by allowing a tighter link between election and response thereby mitigating concerns of endogeneity and omitted variables i find that forecasters respond swiftly and significantly to election surprise i further argue that the response ought to vary across countries with different institutional foundations in support i find that there exist three distinct patterns in forecasters responses to partisan surprise corresponding to hall and soskice s three varieties of capitalism

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

common currencies vs monetary independence we study the optimal monetary policy in a two country open economy model under two monetary arrangements a multiple currencies controlled by independent policy makers b common currencies with a centralized policy maker our findings suggest that i monetary policy competition leads to higher long term inflation and interest rates with large welfare losses ii the inflation bias and the consequent losses are larger when countries are unable to commit to future policies iii the welfare losses from higher long term inflation dominates the welfare costs of losing the ability to react optimally to shocks

the role of countercyclical monetary policy when firms set nominal prices in advance optimal monetary policy insulates aggregate output against shocks to demand it can do so however by following the constant money growth rule advocated by milton friedman it need not respond to the shocks in an actively countercyclical way in addition to the extent that output fluctuations are driven by shocks to supply money growth should be procyclical

partisan effects in economies with variable electoral terms in fixed time electoral economies partisan surprises are associated with a change in government as in alberto alesina 1987 this paper models additional partisan surprises present in variable electoral term economies due to the timing of the change in government two versions of the model are presented one in which the timing of the change is exogenous and one in which it is endogenous the model is interesting as it provides an explanation of movements in expected inflation output and employment in all periods not just those immediately after an election as in fixed electoral term models copyright 1991 by ohio state university press

on constraining fiscal policy discretion in emu we review the theoretical and empirical literature on the benefits and costs of imposing restrictions on fiscal policy we emphasize that the arguments in favour of restricting discretion of fiscal policy go beyond the notion of avoiding unsustainable budgetary plans that can lead to pressure on the central bank restrictions on fiscal policy can also be justified on the grounds that discretionary changes in spending or taxes can lead to unnecessary volatility in output and lower economic growth empirically there is evidence that implicit constraints on governments can be as effective as explicit constraints i e rules from the analysis in emu countries in the last 10 years we conclude that there has been a significant change in the conduct of fiscal policy in terms of increased discipline and less use of discretion however since 1999 there are clear signs of fatigue in this process as previous trends have either stopped or even reversed copyright 2003 oxford university press

rationality causality and the relation between economic conditions and the popularity of parties an empirical investigation for the federal republic of germany 1971 1982 abstract two questions are discussed using german popularity data from 1971 to 1982 it is asked whether it is true that using time series methods no relation can be found between economic variables and the popularity of parties taking ex post predictions strong evidence is presented that such a relation exists even if usual granger causality tests cannot detect it but is this relation compatible with rational expectations of the electorate this is at best partly the case as the anticipated part of the unemployment rate has a significant impact on the popularities of the two major german parties

an optimum currency area odyssey abstract the theory of optimum currency areas was conceived and developed in three highly influential papers written by mundell 1961 mckinnon 1963 and kenen 1969 those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally tailored monetary policy and the adjustment of an exchange rate of a national currency we trace the development of optimum currency area theory which after a flurry of research into the subject in the 1960s was relegated to intellectual purgatory for about 20 years we then discuss factors that led to a renewed interest into the subject beginning in the early 1990s milton friedman plays a pivotal role in our narrative friedman s work on monetary integration in the early 1950s presaged subsequent optimum currency area contributions mundell s classic formulation of an optimal currency area was aimed in part at refuting friedman s strong case for floating exchange rates and friedman s work on the role of monetary policy had the effect of helping to revive interest in optimum currency area analysis the paper concludes with a discussion of recent analytical work using new keynesian models which has the promise of fulfilling the unfinished agenda set out by the original contributors to the optimum currency area literature that is providing a consistent framework in which a country s characteristics can be used to determine its optimal exchange rate regime

trade firm size and product variety under monopolistic competition monopolistic competition is used to examine rationalization behavior in response to market integration a particular second order condition on demand functions for differentiated products must be satisfied to generate an increase in firm size with an associated decline in equilibrium price when market size increases for identical products the firm size increase is guaranteed the number of firms increases less than it does in proportion to market size for identical products but may increase more than in proportion to market size for differentiated products the latter results implies that market integration need not lead to exit of firms