deposit insurance and external finance i introduction capital markets serve an essential purpose in the growth and development of modern economies they provide for the efficient channeling of funds from savers to investors there are two basic methods for financing capital investment primary issuance of equity or bonds and securing of bank loans looking around the world we see that countries differ substantially in the relative importance of banks and capital markets in providing investment financing equity market capitalization currently ranges from close to zero in countries like austria argentina and greece to nearly two times gross domestic product gdp in the united kingdom south africa and malaysia the importance of bank loan financing is essentially the mirror image of this what accounts for the cross country differences in the importance of banks and capital market financing of investment the purpose of this article is to address this question directly we contend that much of the variation across countries in the depth and breadth of capital markets can be explained by a combination of the existence of deposit insurance and the extent to which a country s banking system is state owned because of the importance of financial intermediation and the difficulties associated with potential bank failures governments in most countries have established a set of institutional structures to ensure the stability of their banking systems primary among these is the creation of deposit insurance by insuring deposits banks liability holders are significantly less likely to request the return of callable deposits reducing the chances of bank runs but at the same time deposit insurance subsidizes bank risk taking activities and allows the payment of lower interest rates to depositors 1 this channels money through banks and away from financial markets direct state bank ownership has a similar impact see barth et al 2001 la porta et al 2000 we present a simple three sector model in which the economy is composed of firms banks and households the firms require operating capital and can obtain it either through equity issuance or from bank loans banks take deposits from households and make loans to firms while households both allocate their wealth and purchase the firms output the model allows us to show how increases in deposit insurance or the percentage of the banking system that is state owned both reduces the size of the capital market and shrinks the amount of bank credit to the private sector and may decrease the number of firms seeking equity financing to examine the predictions of the model we study a data set composed of 49 countries of these 33 currently have explicit deposit insurance and 42 have some state ownership of banks ranging from less than 2 to almost 90 the data confirm the predictions of the model an increase in either state bank ownership or presence of deposit insurance both decreases the size of capital markets and the extent of bank lending for example we would predict that decreasing the percentage of the banking system that is state owned from 36 as it is in italy to zero would increase in the size of the capital market from less than 10 to over 30 of gdp and a raise in the level of bank lending from 57 to close to 90 of gdp our conclusions are in contrast with those in la porta et al 1997 who study the relationship between law and finance la porta et al note the importance of the countries legal system in determining the structure of the financial system in particular they point out that investors provide capital to firms only if they believe they will get their money back for equity holders this means that they must be able to vote out directors and managers who do not pay them for creditors and holders of bonds this means that they must have authority to repossess collateral furthermore these nominal legal rights must be accompanied by confidence that the laws will be enforced

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

sticky prices and volatile output abstract we examine the effect of introducing a specific type of price stickiness into a stochastic growth model subject to a cash in advance constraint as in previous studies we find the introduction of price rigidities provides a substantial source of monetary non neutrality which contributes significantly to output volatility we show that the introduction of this form of sticky prices improves the model s performance at explaining inflation but worsens it for output the most dramatic failure of the model is the extremely high frequency fluctuations in output that it generates sticky prices not only fail to produce persistent business cycle fluctuations but they generate extreme volatility at very high frequencies

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

consumption housing collateral and the canadian business cycle using bayesian methods we estimate a small open economy model in which consumers face limits to credit determined by the value of their housing stock the purpose of this paper is to quantify the role of collateralized household debt in the canadian business cycle

a note on interest parity and the supply of arbitrage funds the divergence of the actual forward premium on foreign exchange from that dictated by the principle of interest rate parity can arise from two separately identifiable causes 1 an equilibrium position as indicated by the interest parity principle has not been reached or 2 that the principle itself is not a correctly specified equilibrium condition it is the purpose of this note to offer a revised specification of the interest parity condition and to determine whether this version approximates more closely the actual premium as determined in the market it should be made clear however that this is a partial analysis and does not deal with the impact of other forces for example speculation on the forward premium as a result a complete model of the spot and forward markets for foreign exchange such as stein s 1965 is not attempted here in general the principle of interest parity maintains that in equilibrium

household production and the short and long run demand for electricity this paper deals with the residential demand for electricity a theoretical model is formulated which is based on intertemporal optimization in a household production context the model is estimated using a dynamic version of the pls partial least squares approach most important determinants of electricity consumption are the prices of appliances and of those goods which can either be purchased in the market or produced at home the dynamic interrelationship between capital stock and electricity consumption is also an important element of the estimated model

money new keynesian macroeconomics and the business cycle abstract we show in this paper that the typical modern business cycle cannot be reduced to the real business cycles archetype a monopolistic competition model with price adjustment costs affected by technological and monetary shocks better mimics the economic fluctuations in two countries with very different cyclical properties namely france and the united states in our model monetary shocks are necessary to reproduce the standard deviation of output the money output correlation the labour productivity worked hours relative standard deviation the labour productivity worked hours correlation and the mark up output correlation with two independent shocks one real more specifically defined than the solow residual and one nominal the model gives an answer to some empirical puzzles which were left unexplained by traditional rbc models

the fisher hypothesis and international capital markets in a closed economy with interest taxes at rate and with a constant real et rate of interest the nominal rate of interest should rise by 1 1 points for every point rise in the expected rate of inflation however a large body of empirical work examines the determinants of nominal interest rates and generally finds that the coefficient of expected inflation is close to or less than one we model the determination of interest rates in an open economy with taxes under plausible conditions increases in inflation cause the nominal interest rate to rise roughly point for point this suggests that open capital market considerations are central for understanding aggregate economic behavior the analysis also suggests that inflation is not neutral with respect to the real net interest rate earned by domestic savers or paid by domestic borrowers

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

the optimal choice of monetary policy instruments in a small open economy this paper studies how the nature of shocks affects the optimal choice of monetary policy instruments in a small open economy three classic rules fixed exchange rates monetary targeting and inflation targeting are studied and ranked by comparing with the optimal monetary policy under commitment we find that the ranking of the simple rules can be mapped to the terms of trade variability that the rule allows relative to what a particular shock optimally calls for it turns out that inflation targeting dominates the other two rules under productivity or velocity shocks whereas monetary targeting is the best performer under fiscal shocks ce memoire etudie comment la nature des chocs affecte le choix des instruments de politique monetaire dans une petite economie ouverte on etudie trois regles classiques taux de change fixes cibles monetaires cibles d inflation et on cherche laquelle semble preferable dans differentes conditions on decouvre que le rang de ces regles simples est reliea la variabilite des termes d echange que la regle permet par rapport a ce qu un choc particulier commanderait optimalement les cibles d inflation dominent les deux autres regles quand il s agit de chocs de productivite et de velocite alors que les cibles monetaires sont preferables quand il s agit de chocs fiscaux

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

staggered price setting translog preferences and endogenous persistence abstract this paper generates persistent real effects of a monetary disturbance in the context of staggered price setters the model combines two related and reinforcing features a translog demand structure and a particular input output production structure these features offer a rationale why a firm when computing its own optimal contract price is influenced by the prices set in other overlapping contracts practically the two features interact in a positive manner and provide a way to generate significant endogenous persistence

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

forecasting canadian time series with the new keynesian model this paper assesses the out of sample forecasting accuracy of the new key nesian model for canada we estimate a variant of the model on a series of rolling sub samples computing out of sample forecasts one to eight quarters ahead at each step we compare these forecasts with those arising from vector autoregression var models us ing econometric tests of forecasting accuracy we show that the forecasting accuracy of the new keynesian model compares favourably with that of the benchmarks particularly as the forecasting horizon increases these results suggest that the model could become a useful forecasting tool for canadian time series jel classification e32 e37

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

factor adjustment costs a structural investigation abstract this paper assesses various capital and labor adjustment costs functions estimating a general equilibrium framework with bayesian methods using us aggregate data the estimation finds that the adjustment costs are convex in both capital and labor and allowing for their joint interaction is important the structural model enables us to identify the response of factor adjustment costs to exogenous disturbances and to establish that shocks to technology and the job separation rate are key drivers of adjustment costs the analysis shows that factor adjustment costs enable the model to explain fluctuations in the firm s market value in the data

promotion of market access for renewable energy in the nordic power markets this study investigates how renewable targets for the nordic power market might be achieved at the lowest costs the instruments investigated are fixed feed in tariff economically sound premium based feed in tariff and shadow prices for co2 emissions we utilize a real time price based simulation model in the analysis we show that even with strong assumptions regarding the emission permit price the targeted level of wind power is not reached without feed in tariffs emission trading produces the lowest total emissions but with the highest total costs from the studied instruments the most cost efficient way to reach the targets for wind energy market shares is the premium based feed in tariff this tariff is also the most cost efficient way to reduce co2 emissions

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

partial adjustment and staggered price setting this paper compares taylor style staggered price setting to partial adjustment of prices or calvo staggering in a small optimizing is lm model in contrast to the overwhelming perception in the literature the models are not similar for most parameterizations in particular the dynamic response of the economy to shocks is quite different in the two models and the welfare cost of price rigidity is eight or more times larger in the calvo model than in the taylor model for typical calibrations suggestions for calibrations under which the models are more similar are also presented

prices output and hours an empirical analysis based on a sticky price model abstract i show that a simple sticky price model based on rotemberg 1982 is consistent with a variety of facts concerning the correlation of prices hours and output it is consistent with the negative correlation between forecastable movements in prices and output as well as the smaller negative correlation between forecastable movements in prices and hours it is also consistent with the positive correlations of unexpected movements in prices output and hours these patterns are harder to reconcile with the flexible price version of the model in particular they require that money respond differently to forecastable and to unforecastable real shocks

smart meter devices and the effect of feedback on residential electricity consumption evidence from a natural experiment in northern ireland abstract using a unique set of data and exploiting a large scale natural experiment we estimate the effect of real time usage information on residential electricity consumption in northern ireland starting in april 2002 the utility replaced prepayment meters with advanced meters that allow the consumer to track usage in real time we rely on this event account for the endogeneity of price and payment plan with consumption through a plan selection correction term and find that the provision of information is associated with a decline in electricity consumption of 11 17 we find that the reduction is robust to different specifications selection bias correction methods and subsamples of the original data the advanced metering program delivers reasonably cost effective reductions in carbon dioxide emissions even under the most conservative usage reduction scenarios

interactions of commitment and discretion in monetary and fiscal policies we consider monetary scal interactions when the monetary authority is more conservative than the scal with both policies discretionary 1 nash equilibrium yields lower output and higher price than the ideal points of both authorities 2 of the two leadership possibilities scal leadership is generally better with scal discretion monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks but scal commitment is not similarly negated by monetary discretion second best outcomes require either joint commitment or identical targets for both authorities output socially optimal and price level appropriately conservative or complete separation of tasks jel e61 e63

spatial and temporal variations of marginal electricity generation the case of the finnish nordic and european energy systems up to 2030 abstract assumptions related to energy generation often play a decisive role in abatement studies for estimating the effects of demand side interventions however there can be significant geographical and temporal variation in the emission intensities of electricity generation in different regions the aim of this article is to describe how spatial and temporal variations related to a particular energy system may affect an electricity generation unit operating on the margins the approach takes the generation mix within interconnected electricity markets and the exchange of electricity between these markets into account the short term 2009 2010 and long term until 2030 hour by hour marginal electricity generation unit and marginal emission intensities are identified for electricity use using the finnish nordic and european energy systems as actual cases the estimated marginal electricity generation technology and marginal emission intensities for electricity use differed significantly within the studied time horizon and between the studied countries and energy systems furthermore due to the projected structural changes in the energy systems i e changes in the fuel mix and electricity generation technologies the carbon dioxide co 2 intensity of marginal electricity generation will decrease in the nordic countries and in the eu in the long term however the approach used for calculating the effect of change in electricity exchange on the margin increased the variability of the results considerably for some nordic countries such as sweden and norway whose export of electricity was high and whose marginal generation mix differed significantly from the european system furthermore the spatial and temporal variations of marginal electricity generation will increase in the future this variation combined with the interconnections between market areas for exchanging electricity in the eu will require improved understanding of the impacts of exchanged marginal electricity generation on the possible emission leakage between eu countries to better inform policy decisions

theoretical developments in the light of macroeconomic policy and empirical research macroeconomics is surveyed with emphasis on the implications of the new classical and rational expectations critiques for the keynesian paradigm and the role of macro policies at the background are the main macro developments of the 1 970s and 1 980s as well as the specific lessons of recent high chronic inflation processes a synthesis is emerging in which the basic keynesian view of the existence of market and price coordination failures as well as room for pareto improving policy intervention are maintained at the same time the theoretical underpinnings are undergoing substantial change mainly due to a rational expectations reformulation

diffusion of solar electricity in the network of private actors as a strategic experiment to mitigate climate change abstract low carbon experiments offer interesting opportunities for climate change mitigation they can be seen as niche activities that eventually challenge the existing regime of energy production and consumption the role of actors in these potential transitions has not been extensively studied this study bridges this gap by analysing ten cases of joint procurement experiments of on grid solar photovoltaic energy in finland the study deepens the understanding of how such experimenting can contribute to climate change mitigation in an area that in many countries is still a largely untapped source of change the study shows that the expansion of solar pv can be enhanced through joint procurement experiments which thereby become strategic the joint procurement lowered several barriers of adoption and can therefore accelerate diffusion of solar pv significantly even when there is a lack of explicit political support in the form of a subsidy system joint procurements help to overcome one of the most important barriers of solar panel purchase the price but the joint procurement experiments also offer important social support to the peers the positive image of solar electricity greatly empowers consumers and increases acceptance of large investment costs further mainstreaming of the experiments towards a regime shift would benefit from institutional support that eases the laborious process of joint procurement and that strengthens the small scale producers negotiating position relative to the utilities and power network operators in trading surplus electricity

asymmetric effects of money supply shocks and trend inflation in recent years a number of empirical studies have presented evidence that money supply shocks have asymmetric effects that is unexpected negative changes in the money supply slow the economy more than unexpected positive changes accelerate the economy evidence of asymmetry was documented by cover 1992 for the postwar u s economy and his finding was confirmed by de long and summers 1988 morgan 1993 rhee and rich 1995 and karras 1996a b stimulated by these empirical works several attempts have been made to provide microeconomic foundations for the asymmetric effects of money supply shocks 1 among those theories this paper examines the one that focuses on asymmetric price adjustment and let us call it a sticky price theory money supply shocks will have asymmetric effects on real output if prices are less flexible downward than upward this sticky price theory was proposed by tsiddon 1993 ball and mankiw 1994 and caballero and engel 1992 by employing a menu cost model the above researchers show that positive trend inflation can produce the asymmetric effects of money supply shocks the logic of their theory is the following along with price adjustment costs positive trend infla

one way arbitrage foreign exchange and securities markets a note theorem in the case of traders with exogenous needs to acquire foreign currency recently deardorff 3 coitned the phrase one way arbitrage to describe the behavior of those traders and showed that it probably precludes round trip covered interest arbitrage from breaking even deardorff s analysis focuses on the conditions under which in the presence of transaction costs there would be both spot and forward transactions on the foreign exchange markets at equilibrium in this paper we extend the analysis to derive the conditions under which transactions would exist in both the home and foreign securities markets and we generalize the results to the case of transactions in all markets

an estimated canadian dsge model with nominal and real rigidities this paper develops a dynamic stochastic general equilibrium dgse model for the canadian economy and evaluates the real effects of monetary policy shocks to generate high and persistent real effects the model combines nominal frictions in the form of costly price adjustment with real rigidities modelled as convex costs of adjusting capital and employment

a model of covered interest arbitrage under market segmentation existing models of covered interest arbitrage typically assume market participants have equal capital and foreign exchange market access this paper derives sufficient conditions for the existence of neutral interest parity forward price bands when capital markets are segmented and exchange rates are dually quoted all forward price intervals are completely characterized in terms of simultaneous two way and one way arbitrage flow possibilities the parameters of the no arbitrage price region are shown to be established on the basis of relative advantage with respect to the set of available arbitrage strategies copyright 1991 by ohio state university press

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

estimation of dsge models when the data are persistent dynamic stochastic general equilibrium dsge models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary however even mild departures of the data generating process from these assumptions can severely bias the estimates of the model parameters this paper proposes new estimators that do not require researchers to take a stand on whether shocks have permanent or transitory effects these procedures have two key features first the same filter is applied to both the data and the model variables second the filtered variables are stationary when evaluated at the true parameter vector the estimators are approximately normally distributed not only when the shocks are mildly persistent but also when they have near or exact unit roots simulations show that these robust estimators perform well especially when the shocks are highly persistent yet stationary in such cases linear detrending and first differencing are shown to yield biased or imprecise estimates

man cessions fiscal policy and the gender composition of employment recessions are man cessions as men are disproportionately exposed to cyclical employment fluctuations we provide evidence that fiscal expansions stimulate predominantly female employment implying a further destabilization of the gender composition of employment in recessions our findings can be understood as a consequence of differences in the industry occupation mix of employment by gender

real time pricing in the nordic power markets abstract in this paper we study the potential effects of real time pricing rtp of electricity on the need for long run capacities in the nordic power markets a characteristic of the nordic power market is the large variety of production technologies of which hydro and nuclear power are capacity constrained we analyze the impact of rtp on the need for total peak and midmerit capacities total demand prices peak demand hours and economic welfare we have also studied whether the results of rtp are sensitive to the simultaneous implementation of tradable emission permits we find that rtp diminishes the need for total capacity even with inelastic demand our results show that even with modest assumptions related to rtp participation the annual midmerit and peaker capacity efficiency savings amount to 97 million euros which are around 6 of their total annual investment costs the price of the peak demand hour clearly diminishes as the share of the rtp customers increases or demand becomes more price elastic we compare rtp and tradable emission permits as two separate instruments in reaching energy use efficiencies and show how these two instruments must be seen as complementary and not as substitutable instruments we show how rtp and tradable emission permits have a positive correlation in promoting market access of renewable energy sources we find that welfare effects of the implementation of rtp are positive

transactions costs and covered interest arbitrage theory and evidence the extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored it is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets the swap market or either of the two relevant securities markets this reconciles the theory with the data which show spreads of no more than a few basis points however the empirical results have no direct bearing on the conventional market efficiency hypothesis

assessment of sustainability indicators for renewable energy technologies the non combustion based renewable electricity generation technologies were assessed against a range of sustainability indicators and using data obtained from the literature the indicators used to assess each technology were price of generated electricity greenhouse gas emissions during full life cycle of the technology availability of renewable sources efficiency of energy conversion land requirements water consumption and social impacts the cost of electricity greenhouse gas emissions and the efficiency of electricity generation were found to have a very wide range for each technology mainly due to variations in technological options as well as geographical dependence of each renewable energy source the social impacts were assessed qualitatively based on the major individual impacts discussed in literature renewable energy technologies were then ranked against each indicator assuming that indicators have equal importance for sustainable development it was found that wind power is the most sustainable followed by hydropower photovoltaic and then geothermal wind power was identified with the lowest relative greenhouse gas emissions the least water consumption demands and with the most favourable social impacts comparing to other technologies but requires larger land and has high relative capital costs

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

what determines aggregate returns to scale abstract this paper develops a unified framework that incorporates four features important in existing models with increasing returns fixed costs decreasing marginal costs product variety and market power when fixed costs are not allowed to vary and profits are imposed to be zero in every period only the degree of returns to variety determines the degree of aggregate increasing returns to scale when fixed costs respond to changes in aggregate activity or the zero profit condition does not hold in the short run aggregate returns depend not only on product variety but also on diminishing marginal costs or market power the degree of market power however does not affect input prices which are critical to determine the uniqueness of equilibrium

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

price rigidities and market structure conventional wisdom has it that a large part of the explanation of keynesian unemployment is the observed rigidities of wages and prices what has been lacking however is a satisfactory theory or conjunction of theories which explains how wages and prices can be at non market clearing levels the objective of this paper is to sketch out several alternative theoretical explanations of this phenomenon each in contrast with keynesian theory is consistent with the observation that as the economy goes into a recession real product wages do not increase and may in fact decrease all of the theories assume rational profit maximizing firms and all entail some important departure from the standard competitive paradigm the first three explanations represent minor adaptations of standard models

increasing returns and the foundations of unemployment theory current approaches to macroeconomic theory divide roughly into two basic schools of thought one approach typically associated with rational expectations views the economy as basically at or near walrasian market clearing equilibrium in which case it becomes very difficult to explain away convincingly the undeniable persistence at times of involuntary unemployment another approach views the underemployed economy as being in a state of temporary fixed price disequilibrium in which case aside from having to repress suspicions that the essence of effective demand failure might not have to do with prices fixed at wrong values there is a lot of rationalising to be done about why profitable adjustments are so slow this paper argues that something like an internally consistent theory of steady state involuntary unemployment is possible and even plausible the cornerstone of this third approach is increasing returns to scale which blocks unemployed agents from breaking out of a low level equilibrium trap unless there is overall coordination or stimulation a simple model is presented which contains the basic ideas

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

wage setting and the tax system theory and evidence for the united kingdom abstract this paper analyses the effects of a non linear tax system on wage bargaining the main conclusions are an increase in the marginal income or payroll tax rate reduces the pre tax wage in the isoelastic case an increase in the average tax rate increases the pre tax wage by more than the tax increase and a measure of the progressivity of the tax system residual income progression is a sufficient measure of the effect of the tax system on wage pressure empirical evidence is presented to support these propositions and the predictions of the model regarding the effect of recent changes to the u k tax system on the distribution of earnings discussed

taxation unemployment and growth dynamic welfare effects of green policies abstract this paper analyzes the effects of environmental tax reforms on a small open economy the labor market is characterized by union wage setting the carbon tax acts as an implicit tariff which gives rise to terms of trade gains the terms of trade effect together with the union wage setting leads to a positive relationship between the capital labor ratio and net foreign wealth in the short run the disinvestments in real and financial capital give temporary room for higher consumption and instantaneous utility the long run effect on instantaneous utility is more uncertain a strong double dividend may exist

fiscal policy and occupational employment dynamics we document substantial heterogeneity in occupational employment dynamics in response to government spending shocks in the united states employment rises most strongly in service sales and office pink collar occupations by contrast employment in blue collar occupations is hardly affected by fiscal policy we provide evidence that occupation specific changes in labor demand are key for understanding these findings we develop a business cycle model that explains the heterogeneous occupational employment dynamics as a consequence of composition effects due to heterogeneous employment changes across industries and occupation specific within industry employment shifts due to differences in the short run substitutability between labor and capital services across occupations

hourly based greenhouse gas emissions of electricity cases demonstrating possibilities for households and companies to decrease their emissions abstract greenhouse gas emissions from electricity production are a crucial part of the environmental impact assessments of any kind of product service or consumption usually average annual emissions are used but lately there has been increased interest in the daily based and hourly based emission coefficients for electricity in such markets where the technology mix in the production process includes technologies with different emission factors there is potential for large variation in hourly based emission factors and consequently this offers potential for decreasing the emissions by real time based demand management however in real life the timing of electricity use in households and companies has restrictions in this paper we show illustrative household and company cases with realistic shifts in the timing of electricity use we determine hourly based emission factors and give examples of how emissions may be decreased in households and companies by changing usage patterns and consequently the timing of electricity use with the total amount of electricity consumed remaining unchanged the examples show decreases of emissions in the range 3 8 due to optimised timing indicating that there is important potential for managing hourly based demand loads and the resulting emissions even with realistic assumptions of the timing of consumption