target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

occupational downgrading and upgrading in britain the willingness of workers to move down an occupational hierarchy is a potentially important source of flexibility in the labour market but relatively little is known about the scale or pattern of occupational up and downgrading this paper examines who downgrades and the cyclical structure of up and downgrading we find that occupational downgrading is surprisingly large relative to flows into unemployment individuals who have a high payoff to skilled work such as educated workers are less likely to downgrade contrary to expectations the rate of downgrading is found to be greater in the boom while upgrading follows the more conventional expectation of also being procyclical this finding is interpreted as evidence consistent with the rationing of jobs in the downgrading process contrary to the assumptions of simple dual labour market models

price and trade effects of exchange rate fluctuations and the design of policy coordination abstract we analyze a two country zone facing a joint inflationary shock and responding with coordinated and uncoordinated monetary and fiscal policies we show that the standard presumption that the absence of coordination results in an excessive exchange rate appreciation of the zone with respect to the rest of the world hinges on a specific assumption within the two countries considered the price effect of exchange rate fluctuations dominates the trade effects relative to the corresponding effects via a vis the rest of the world if the relative hierarchy goes the other way around as we argue is likely for ec countries the standard conclusion is reversed a result of insufficiently active monetary and fiscal policies the paper also considers asymmetric shocks as well as monetary policy coordination

how should control theory be used to calculate a time consistent government policy we study different solutions to a simple one dimensional linear quadratic game with a large number of private agents and a government a time consistent solution is defined as a solution to the hamilton jacobi bellman equation i e as a policy for which the government has noprecommitment capability this solution is compared to a policy where the government has an instantaneous pre commitment i e an equilibrium in which the government has a period by period leadership in both cases we show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature

a signalling theory of nominal wage inflexibility a model of learning in local labor markets is constructed in which the emphasis placed by employers on job applicants employment histories induces workers to reject low nominal wages to avoid subsequently signalling a low ability this wage censoring behavior leads to inefficiently high levels of unemployment and generates an apparent downwardly inflexible nominal wage monetary policy may be of use if it affects the quality of the nominal wage signal copyright 1993 by royal economic society

the choice of exchange rate bands balancing credibility and flexibility abstract this paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability but value the flexibility to adjust the nominal exchange rate in response to shocks in order to attain real exchange rate objectives the paper provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks to the current and capital accounts of the balance of payments and in terms of the commitment reputation of policymakers

why exchange rate bands monetary independence in spite of fixed exchange rates abstract the paper argues that the reason real world fixed exchange rate regimes usually have finite bands instead of completely fixed exchange rates between realignments is that exchange rate bands counter to the textbook result give central banks some monetary independence even with free international capital mobility the nature and amount of monetary independence is specified informally and in a formal model and quantified with swedish krona data altogether the amount of monetary independence appears sizable for instance an increase in the swedish krona band from zero to about 2 percent may reduce the krona interest rate s standard deviation by about a half

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

the british low wage sector and the employment prospects of the unemployed abstractare low wages a way for the unemployed to switch to higher paying jobs using data from the british household panel survey the labour market dynamics of unemployed low paid and higher paid employed men are analysed moreover the respective un employment duration and occupational skill level are accounted for results show that in general low wages significantly reduce the risk of future unemployment and increase the chances of ascending the salary ladder especially in the case of long term unemployment 360 days furthermore the occupational skill level has a substantial influence on the upward mobility of low paid jobs individuals working in the initial period in a low paid and higher skilled occupation have on average an 11 percentage points higher probability of entering higher pay compared to when working in a low paid and low skilled occupation

optimal anti inflation programs in semi industrialized economies orthodox versus heterodox policies abstract the paper characterizes the optimal time consistent anti inflation program in a small open semi industrialized economy when policy makers choose the rate of exchange rate crawl the rate of change of fiscal spending and a wage and price control parameter to minimize deviations of output and inflation the optimal program involves a rapidly decelerating rate of crawl a sharp reduction in spending and a short initial period of wage and price controls the paper also assesses the importance of controls in helping to reduce the output loss associated with fighting inflation

coordinating monetary and macroprudential policies this paper studies noncooperative games between a monetary authority and a macroprudential regulator whose objectives are a subset of those in the social loss function the analysis is based on a new keynesian model with a financial sector and a financial friction a la gertler and karadi 2011 when the friction affects the financing of all factors of production equally macroprudential policy is shown to be a powerful additional tool fully eliminating inefficiencies regardless of the source of the shock and no matter whether the central bank and the regulator cooperate but when trade offs are present and policy is discretionary the institutional arrangements become crucial while coordination leads to higher welfare than a setting in which each authority takes the decision rule of the other as given namely the nash equilibrium our analysis shows that a noncooperative setting in which the macroprudential authority acts as a leader within the period can be superior to cooperation finally our conclusions are unaffected by whether the macroprudential instrument affects funding costs or acts as a liquidity requirement

equity and the time consistent taxation of income in a theoretical model the share of intraindustry trade in an industry s bilateral trade flows is determined by relative factor prices in the trading countries factor intensity and the elasticity of substitution in demand between products in the industry the more similar the relative factor prices in different countries the less extreme the factor intensity while the lower the elasticity of substitution between the products in an industry the larger the intraindustry trade the empirical study confirms these implications furthermore tariffs and transport costs are shown to have a greater negative effect on intraindustry trade copyright 1991 by the editors of the scandinavian journal of economics

forward rate target zones and exchange rate dynamics abstract a target zone for the forward exchange rate is developed using a log linear monetary model exchange rates are driven by a wiener process a central bank purchases or sells foreign exchange forward to keep the target forward rate in a specified band defending such a target zone does not require regulated wiener process for the central bank s forward exchange intervention can avoid disturbing the money supply a forward rate target zone can stabilize the spot rate against a free float and its stabilizing effects become more significant if the delivery term applying to the target forward rate is shorter

optimal target zones how an exchange rate mechanism can improve upon discretion abstract using krugman s 1991 target zone model we find an explicit subgame perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention we demonstrate however that precommitment to narrower bands would yield a welfare gain which provides a theoretical rationale for an exchange rate mechanism erm numerical simulations suggest that the optimal currency band with precommitment via an erm is only half as wide as that under discretion and that the welfare benefits are sufficient to sustain the system

large external debt and slow domestic growth a theoretical analysis abstract this paper analyzes the optimal rescheduling strategy of lenders whose claims on a country show a discount on the secondary markets the paper shows that lenders should proceed as follows they should split the debt into two components a performing and a nonperforming part they should act as if the debt amounted to the performing part and scale down how much money the borrower should service on that part only as a result it is shown that the efficient servicing of the debt crowds in investment the paper relates this result to the debt overhang argument according to which too large a nominal claim may reduce investment and the market value of the debt

time consistent public expenditures in this paper we study the optimal choice of public expenditures when there is no way of committing to future policy and reputational mechanisms are not operative this amounts to conflning our attention to markov equilibria the environment is a neoclassical growth model where consumers derive utility from a public good this environment gives rise to a dynamic game between successive governments and the private sector and this game is made interesting by the presence of a state variable the capital stock we characterize equilibria in terms of an intertemporal flrst order condition a generalized euler equation gee for the government and we use this condition both to gain insight into the nature of the equilibrium and as a basis for computation the gee reveals how the government optimally trades ofi tax wedges over time it also allows us to discuss in what sense a current government may be strategically in uencing future governments in their taxation decisions for a calibrated economy we flnd that when the tax base available to the government is capital income an inelastic source of funds at any moment in time the government still refrains from taxing at high rates in order to smooth distortions over time as a result the economy is far from the mix of public and private goods that would be optimal in a static context in return the savings distortion is not very severe and the capital stock is quite high

capital requirements screening and interlinked sharecropping and credit contracts this paper provides one more rationale for interlinking credit and tenancy contracts in the context of production loans in an environment characterized by a heterogeneous labor pool and imperfect information landlords will have an incentive to avail themselves of screening devices by linking tenancy and credit contracts a screening device can be implemented the equilibrium set of contracts is characterized by a variety of interest rates some of which might be below the market interest rate the interest rate principal schedule is downward sloping with higher ability tenants choosing larger principals at lower interest rates

a theory of signalling during job search employment efficiency and stigmatised jobs this paper discusses why redundant skilled workers may be reluctant to accept interim unskilled jobs if skilled work is more satisfying or less arduous for highly productive workers then such workers invest more in moving quickly between skilled jobs thus high productivity workers tend to search on the job and if unemployed will specialise in job search rather than take an interim position if individual differences in productivity are known to the worker but not the potential employer then search strategy may be used as a productivity signal with more than the efficient proportion of workers searching on the job and too few accepting interim unskilled jobs optimal policy requires a subsidy on interim unskilled jobs

social polarization fiscal instability and growth abstract we present a dynamic model of fiscal policy in a simple growth framework where social polarization of preferences plays a central role in the evolution of fiscal instability and growth collapse in a highly polarized society a deficit occurs endogenously fiscal spending path becomes more volatile output collapses and economic growth rate is reduced along the transition path to a new lower level of output one novel feature is that the size of fiscal deficit the magnitude of fiscal volatility and the size of reduction in output and growth rate are explicitly shown to be increasing functions of the degree of social polarization this is because of the positive relationship between the polarization of preferences and the incentive for policymakers or socio economic groups to overexploit the government resources in a common pool setting polarization effect thereby we offer a fiscal instability channel that negatively links social polarization and growth which is an alternative yet distinct explanation for the empirical finding that social polarization is harmful to growth moreover we fully distinguish the incentive to engage in such short term policies under political uncertainty from that under polarization polarization and political uncertainty are shown to be distinct yet critical to the dynamic coordination failure in the common pool setting

optimal central bank intervention in the foreign exchange market abstract we consider a currency with exchange rate dynamics modeled as a geometric brownian motion the objective of the central bank is to keep this exchange rate as close as possible to a given target so there is a running cost associated to the difference between the exchange rate and the target additionally there are also fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal level of intervention and the optimal sizes of the interventions so as to minimize the total cost we solve this problem by applying the theory of stochastic impulse controls journal of economic literature classification numbers c61 d81 f31 g15

modelling price movements in housing micro markets identifying long term components in local housing market dynamics this study identifies housing sub markets micro markets that may be price leaders within local housing market areas and relates their performance to potentially relevant economic factors this ca

seasonality and cointegration of regional house prices in the uk the data generation process underlying regional house prices in the uk is investigated using new statistical tests it is found that causal flows tend to be northwards the south east rather than greater london acts as an exogenous price determinator of the other regions in the south the midland regions have a great influence on prices in the north and flows through the east midlands are characterised by bi directional causality these results are largely independent of assumptions made about the data generation process and tests of these assumptions have low power in any case there are also similarities between this causality and migration patterns particularly in the south of england

optimal policy business cycles the effectiveness of economic policies depends on the nature of expectations under adaptive expectations the philipps curve allows a governement to surprise agents under rational expectations there is less room for economic policies we assume that only an endogenously determined proportion of agents form rational expectations and show that this leads the government to optimal policies which result in a policy cycle with real effects c 1998 elsevier science b v all rights reserved

when is discretion superior to timeless perspective policymaking the monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective woodford 1999a however by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely using standard new keynesian dsge models discretion is found to dominate timeless perspective policymaking when the price wage phillips curves are relatively flat due perhaps to firm specific capital or labor and or kimball 1995 aggregation in combination with nominal rigidities these results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion paying careful attention to how policy performance is evaluated

the choice of exchange rate regime and speculative attacks we develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks the optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty against the cost of maintaining a given regime this cost is affected in turn by the likelihood of a speculative attack searching for the optimal regime within the class of exchange rate bands we show that the optimal regime is either a peg a zero width band a free float an infinite width band or a non degenerate finite width band the paper shows that lower costs of moving across currencies induce policymakers to set more flexible exchange rate systems this lowers ceteris paribus the likelihood of financial crises one implication is that a tobin tax does not necessarily reduce the likelihood of currency crises the paper also investigates the effects of country size openess variability in fundamentals and reputation on the choice of exchange rate regime the role of abrupt changes in reputation in triggerering crises even with unchanged fundamentals as an alternative to sunspots is discussed and illustrated

an empirical model of sectoral movements by unemployed workers using canadian data i investigate the relationships among sectoral mobility unemployment spells and total unemployment recent north american evidence suggests that incidence shifts toward high wage high tenure workers may increase equilibrium unemployment through decreasing sectoral mobility and increasing spells using a multiple spell transition model i find that while shifts toward such workers may have these effects composition changes that lead to higher mobility can also increase unemployment a further investigation into the relative roles of mobility and spell lengths in driving total unemployment indicates that the influence of the former is comparatively small

the interrelated dynamics of unemployment and low wage employment this paper examines the extent of state dependence in unemployment and the role played in this by intervening low wage employment a range of dynamic random and fixed effects estimators are compared low wage employment is found to have almost as large an adverse effect as unemployment on future prospects and the difference in their effects is found to be insignificant evidence is presented that low wage jobs act as the main conduit for repeat unemployment and considerably increases its probability obtaining a higher wage job reduces the increased risk of repeat unemployment to insignificance

the challenge of high unemployment it is argued that policymakers macroeconomists and microeconomists should all take high unemployment more seriously the shortcomings of existing theories of unemployment are discussed and a new definition of involuntary unemployment is proposed a model is sketched in which falling aggregate demand leads to keynesian unemployment because labor is heterogeneous and relative wages matter microeconomic theory is criticized for assuming away unemployment and in the process radically changing the answers to some basic questions in trade theory and public finance finally some speculative explanations are offered for the low unemployment now found in states like new jersey and massachusetts this abstract was borrowed from another version of this item

structural breaks and diversification the impact of the 1997 asian financial crisis on the integration of asia pacific real estate markets abstract currently there exists relatively little research on the influence that the 1997 asian financial crisis has had upon capital flows within the property market and the associated long run implications of it this paper examines the impact that the crisis has had upon the integration and dynamic links between a number of asia pacific real estate markets the results show that asia pacific property markets are integrated despite a structural shift occurring at the time of the crisis these results are a particularly important finding for fund managers concerned with the impact of globalization on the performance of their real estate portfolios showing that in the asia pacific region diversification benefits are actually less than that suggested by an analysis incorrectly ignoring the crisis

a theory of dual labor markets with application to industrial policy discrimination and keynesian unemployment this paper develops a model of dual labor markets based on employers need to motivate workers in order to elicit effort from their workers employers may find it optimal to pay more than the going wage this changes fundamentally the character of labor markets the model is applied to a wide range of labor market phenomena it provides a coherent framework for understanding the claims of industrial policy advocates it also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces finally the model provides the basis for a theory of involuntary unemployment

the laissez faire bias of managed floating abstract the government of a small open economy trying to manage its exchange rate faces a time consistency problem if markets expect implementation of the optimal linear intervention rule the government will be tempted to defect knowing this markets will expect less activism and in the discretionary equilibrium this is what they get how far this credibility problem can shift discretionary policy towards a free float is shown in two popular models of floating rates one way of offsetting the laissez faire bias of discretionary policy is to appoint a relatively conservative central banker but as the time period of policy action and precommitment shrinks towards zero the required conservative bias is found to go towards infinity other institutional features such as central bank reputation contracts and intermediate targets may be crucial for successful exchange rate management

appraisal smoothing and price discovery in real estate markets this paper reviews the literature on price determination in the private and public real estate markets in particular it discusses the processes of appraisal smoothing in the private market and of price discovery between the public and the private markets in real estate markets the absence of good quality information on price whether because of lack of trades or confidentiality has led to the widespread use of appraisals for market tracking and as the basis for performance measurement appraisers have to make an optimum assessment of value based on fundamental variables and market information including transactions and a market wide appraisal index however transaction prices are a noisy signal and it is the appraiser s role to extract the signal from the noise in an efficient manner this involves a process of optimal combination of past and current information and leads to appraisal smoothing price discovery is the process by which the opinions of market participants about the value of an asset

a signaling theory of unemployment abstract this paper presents a signaling explanation for unemployment employment at an unskilled job may be regarded as a bad signal therefore good workers who are more likely to qualify for employment at a skilled job in the future may be better off being unemployed than accepting an unskilled job we present conditions under which all equilibria satisfying the cho kreps intuitive criterion involve unemployment however there always exist balanced budget wage tax and subsidy schedules that eliminate unemployment and increase the expected incomes of all workers moreover unemployment can be eliminated with tax schedules that do not raise any revenue and that place very weak informational demands on policy makers however these tax schedules do not always increase the expected income of every worker

discrimination and open unemployment in a segmented labour market jobs in the primary sector require firm specific training with wages determined as a result of bargaining firms pay for the training and since they are imperfectly informed about worker productivity they test workers before hiring them the secondary sector is competitive taking a job in the secondary sector signals low productivity and therefore workers in the secondary sector are unable to get jobs in the primary sector open unemployment coexists with unfilled vacancies for low wage jobs

the effects of unemployment and underemployment on employment opportunities results from a correspondence audit of the labor market for college graduates the authors use data from a resume audit to estimate the impact of unemployment and underemployment on the employment prospects of recent college graduates they find no statistical evidence linking unemployment spells of different durations to employment opportunities by contrast college graduates who are underemployed have callback rates that are 30 lower than those of applicants who are adequately employed the null effects associated with unemployment and the adverse effects associated with underemployment are robust across cities with relatively tight and loose labor market conditions internship experience obtained while completing one s degree substantially reduces the negative effects of underemployment the data support the proposition that employers view underemployment as a strong signal of lower expected productivity

hyperinflation and stabilisation cagan revisited using a variant of the cagan model with rational expectations this paper shows that expected stabilisation can result in a budget deficit in excess of the maximum inflation tax a cap on the deficit dampens inflation expectations and raises real balances thus increasing the yield of the inflation tax for any given rate of inflation this study extends the work of drazen and helpman 1990 by including a stochastic budgetary process and using option pricing theory it uses parameter values of the semi elasticity of demand for money to provide estimates of the maximum viable real deficit

conservative central bankers in a two country world abstract in a closed economy framework rogoff has developed the argument that it can be beneficial for society to appoint a conservative central banker we extend this analysis to a two country world in order to take into account the game between the monetary authorities of the two countries we show that conservative central bankers may now deteriorate the situations of both countries and that the distinction between symmetric and asymmetric shocks becomes crucial while symmetric shocks weaken the case for conservative central bankers asymmetric shocks strengthen it the paper also considers the case where central bankers are nominated noncooperatively by the countries

a structural threshold model of the exchange rate under optimal intervention abstract by considering a social trade off between targeting the exchange rate and minimizing intervention costs nonlinear exchange rate dynamics can be captured by a structural threshold model this article provides a theory based empirical exchange rate model and shows how to put the model into an empirical investigation to estimate the structural threshold model we propose a two step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market a demonstration of our approach is applied to 1981q3 2008q3 taiwan s foreign exchange market with a brief review of its monetary policies and central bank given prior estimation results are consistent with theoretical predictions and many intervention operations of taiwan s central bank are successfully identified

fixed versus flexible exchange rates which provides more fiscal discipline abstract conventional wisdom holds that fixed rates provide more fiscal discipline than do flexible rates in this paper we show that this wisdom need not hold in a standard model in which fiscal policy is endogenously determined by a maximizing fiscal authority the claim that fixed rates induce more discipline stresses that sustained adoption of lax fiscal policies must eventually lead to an exhaustion of reserves and thus to a politically costly collapse of the peg hence under fixed rates bad behavior today leads to punishment tomorrow under flexible rates bad behavior has costs as well the difference is in the intertemporal distribution of these costs flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in the exchange rate hence bad behavior today leads to punishment today if fiscal authorities are impatient flexible rates by forcing the costs to be paid up front provide more fiscal discipline and higher welfare for the representative private agent the recent experience of sub saharan countries supplies evidence that matches the predictions of the model

worker turnover at the firm level and crowding out of lower educated workers this paper investigates whether employers exploit cyclical downturns to improve the average skill level of their work force we use a unique dataset that contains information on workers jobs as well as firm characteristics our findings are that at each job level mainly lower educated workers leave during downturns furthermore at each level of job complexity workers with a higher education are not more productive than lower educated workers we find no evidence that higher educated workers crowd out lower educated workers during recessions

costes de contratacion y empresas de trabajo temporal una explicacion de la disparidad regional en espana the temporary work agencies twa industry experienced continuous growth throughout the 90s and now represents around 15 of temporary hiring in spain more interestingly are markable regional disparity in this sector exists across spanish provinces by developing a simple theoretical model and using panel data methodology this article examines the spanish caseand suggests that the costs of recruiting training and screening could explain a large part of the regional disparity this result is supported by the empirical fact that the twa firms have greater success in markets with low unemployment rates where the average duration of unemploymen tis longer and in provinces with higher concentrations of urban population respectively