labor market institutions and inflation volatility in the euro area despite having had the same currency for many years emu countries still have quite different inflation dynamics in this paper we explore one possible reason country specific labor market institutions giving rise to different inflation volatilities when unemployment insurance schemes differ as they do in emu reservation wages react differently in each country to area wide shocks this implies that real marginal costs and inflation also react differently we report evidence for emu countries supporting the existence of a cross country link over the cycle between labor market structures on the one side and real wages and inflation on the other we then build a dsge model that replicates the data evidence the inflation volatility differentials produced by asymmetric labor markets generate welfare losses at the currency area level of approximately 0 3 of steady state consumption

exchange rates and the fiscal theory of the price level abstract this paper addresses exchange rate determination under a nominal interest peg in a two country cash in advance model under two types of cash in advance constraints if both governments peg the nominal interest rate on domestic bonds there is a continuum of equilibria each consistent with different nominal exchange rates and real resource allocations the well known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi country multi currency setting

interactions between monetary and fiscal policy under flexible exchange rates we examine fiscal and monetary policy interactions by developing a two country open economy model under flexible exchange rates where overlapping generations of consumers supply labour to imperfectly competitive firms that change their prices infrequently we show in this context that the implications of lax fiscal policy in country a are significant for country b determinacy can be ensured by adopting a passive monetary policy in either country a or country b in both cases however lack of fiscal feedback in country a will imply that fiscal shocks have significant macroeconomic consequences for both countries we examine how the size of these spillovers is influenced by the degree of debt indexation we also show that the fiscal response required to support an active monetary policy is greater when consumers have finite lives and that the characterisation of active and passive regimes does not depend on whether or not debt is indexed

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

exchange rate crises and fiscal solvency this paper combines insights from generation one currency crisis models and the fiscal theory of the price level ftpl to create a dynamic ftpl model of currency crises the initial fixed exchange rate policy entails risks due to an upper bound on government debt and stochastic surplus shocks agents refuse to lend into a position for which the value of debt exceeds the present value of expected future surpluses policy switching usually combined with currency depreciation restores fiscal solvency and lending this model can explain a wide variety of crises including those involving sovereign default we illustrate by explaining the crisis in argentina 2001

compatibility between monetary and fiscal policy under emu the debate over the stability and growth pact sgp as a part of european monetary union has highlighted the need to assess the extent to which fiscal policies of union members should be constrained as a pre requisite for price stability within the union in this paper we develop a two country open economy model where each country has overlapping generations of finitely lived consumers who supply labour to imperfectly competitive firms which can only change their prices infrequently we examine the case where the two countries have formed a monetary union but where the fiscal authorities remain independent we show that the fiscal response required to ensure stability of the real debt stock is greater when consumers are not infinitely lived in principle this allows for some compensating behaviour between governments but we show that the scope for compensation is limited the monetary authority can abandon its active targeting of inflation to stabilise the debt of at most one fiscal authority and any other combination of policies will either result in price level indeterminacy and or indefinite transfers of wealth between the two economies finally in a series of simulations we show that fiscal shocks have limited impact on output and inflation provided the fiscal authorities meet the weak requirements of fiscal solvency however when monetary policy is forced to abandon its active targeting of inflation then fiscal shocks have a much greater impact on both output and inflation

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

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

a game theoretic view of the fiscal theory of the price level the goal of this paper is to probe the validity of the fiscal theory of the price level by modelling explicitly the market structure in which households and the government make their decisions i describe the economy as a game and i am thus able to state precisely the consequences of actions that are out of the equilibrium path i show that there exist government strategies that lead to a version of the fiscal theory in which the price level is determined by fiscal variables alone these strategies are however more complex than the simple budgetary rules usually associated with the fiscal theory and the government budget constraint cannot be merely viewed as an equilibrium condition

spurious welfare reversals in international business cycle models several papers have documented spurious welfare reversals incompletemarkets economy produces a higher level of welfare than the completemarkets economy this paper first demonstrates how conventional linearization can generate approximation errors that can result in welfare reversals using a two country production economy we argue that spurious welfare reversals are not only possible but also plausible under reasonable values for model parameters this paper then proposes an approximation method that modifies the conventional linearization by a bias correction this method can be easily implemented and approximates welfare as accurately as a second order perturbation method

industrial sector fuel price elasticities following the first and second major oil price shocks abstract estimated fuel price elasticities are consistent with reactions following the second major oil shock having been significantly different from reactions to its predecessor in turn elasticities for both sub periods are not well represented by those estimated for 1960 1982 as a whole

labor market matching with precautionary savings and aggregate fluctuations we analyze a bewley huggett aiyagari incomplete markets model with labor market frictions consumers are subject to idiosyncratic employment shocks against which they cannot insure directly the labor market has a diamond mortensen pissarides structure firms enter by posting vacancies and match with workers bilaterally with match probabilities given by an aggregate matching function wages are determined through nash bargaining we also consider aggregate productivity shocks and a complete set of contingent claims conditional on this risk we use the model to evaluate a tax financed unemployment insurance scheme higher insurance is beneficial for consumption smoothing but because it raises workers outside option value it discourages firm entry we find that the latter effect is more potent for welfare outcomes we tabulate the effects quantitatively for different kinds of consumers we also demonstrate that productivity changes in the model in steady state as well as stochastic ones generate rather limited unemployment effects unless workers are close to indifferent between working and not working thus recent findings are corroborated in our more general setting

unconventional energy taxation and interstate welfare an analysis of pennsylvania s severance tax policy abstract natural gas production from unconventional sources has increased over the past decade a significant portion of this increase has come from output in the marcellus region of pennsylvania this output has altered gas markets and repositioned pennsylvania as a major gas exporter it has also put pennsylvania at odds with other states as it is one of a few without a formal severance tax on extractive resources in this paper we combine results from a structural demand model with a two sector trade model to analyze the interstate welfare impacts of pennsylvania s current severance tax proposal our results demonstrate that most of the welfare losses from this proposed policy are likely to be shifted to residents in other states we also demonstrate how fluctuations in gas prices can substantially reduce tax revenue these findings have important implications for both pennsylvania and u s energy policy given the significant rise in energy production from new sources throughout the u s

search frictions real wage rigidities and the optimal design of unemployment insurance abstract in this paper we study the optimal unemployment benefits financing scheme when the economy is subject to labor market imperfections characterized by real wage rigidities and search frictions the us unemployment insurance financing is such that firms are taxed proportionately to their layoffs to finance unemployment benefits using dsge methodology we investigate how policy instruments should interact with labor market imperfections it is shown that wage rigidities in a search and matching environment cause welfare costs especially in the absence of an incentive based unemployment insurance this cost is mainly due to the distorting effect of wage rigidities which generate inefficient separations we show that the optimal unemployment benefits financing scheme corresponding to the ramsey policy offsets labor market imperfections and allows implementation of the pareto allocation the second best allocation brings the economy close to the ramsey allocation the implementation of the optimal policies clearly highlights the role of labor market institutions for short run stabilization

the design of monetary and fiscal policy a global perspective abstract we study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies we show that the presence of capital is indeed another independent source of local and global multiplicities even under active policies that yield local determinacy we also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation we then explore the design of monetary policies that avoid multiple equilibria we show that interest rate policies that respond to the output gap while potentially a source of significant inefficiencies may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics

major oecd country industrial sector interfuel substitution estimates 1960 1979 abstract a range of static and dynamic translog based expenditure shares models are estimated for non energy producing industrial sectors of the major seven countries of the oecd area sectoral energy volume and fuel efficiency bias variables are shown to be significant over and above individual prices in explaining individual fuel expenditure shares statistically significant own price and cross price elasticities of demand are presented for individual countries with some magnitudes varying considerably across alternative model specifications

interfuel substitution a meta analysis interfuel substitutability has been of longstanding interest to the energy economics and policy community however no quantitative meta analysis has yet been carried out of this literature this paper fills this gap by analyzing a broad sample of studies of interfuel substitution in the industrial sector manufacturing industry or subindustries or macro economy of a variety of developed and developing economies publication bias is controlled for by including the primary study sample size in the meta regression results for the shadow elasticities of substitution between coal oil gas and electricity for forty six primary studies show that at the level of the industrial sector there are easy substitution possibilities between all the fuel pairs with the exception of gas electricity and coal electricity substitution possibilities seem more constrained at the macro level and less constrained in sub industries estimates also vary across countries publication bias does not seem to be present but model and data specification issues very significantly affect the estimates derived by each individual study estimates from cross section regressions are generally largest fixed effects panel estimates intermediate in magnitude and time series estimates are mostly much smaller econometric research suggests that the fixed effects estimates are likely the best among the existing studies though biased downwards

monetary policy under a fiscal theory of sovereign default abstract this paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt we apply a cash in advance model where the government does not have access to non distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate solvency is then not guaranteed and sovereign default can affect the return on public debt if the central bank sets the interest rate in a conventional way the equilibrium allocation cannot be determined if instead money supply is controlled the equilibrium allocation can uniquely be determined

fiscal risk in a monetary union diverse fiscal policies which are subject to fiscal limits and stochastic shocks can threaten price stability in a monetary union the fiscal limits arise due to distortionary taxation and political will stochastic shocks are random and could push a fiscally sound policy towards its limit in equilibrium agents refuse to lend along a path which violates the fiscal limits creating a crisis the crisis requires a policy response to restore lending we focus on two responses default and policy switching both of which must be designed to restore fiscal solvency under the assumption that agents know the policy response we show that default poses no risk to price stability but that policy switching does we simulate the model to quantify fiscal risk in the european monetary union with fiscal variables at end of 2009 values we find that the probability of a fiscal crisis in greece and italy countries whose debt relative to gdp had strayed far above the 60 percent limit is positive but small however a small increase in debt can lead to a large increase in risk

government finance in the wake of currency crises we address three questions i can classical models be reconciled with the fact that many crises are marked by high rates of depreciation and small increases in seignorage revenue ii what are the implications of different financing methods for post crisis rates of inflation and depreciation iii how do governments pay for the fiscal costs associated with currency crises to study these questions we use a general equilibrium model in which prospective government deficits trigger a currency crisis we then use our model in conjunction with fiscal data to interpret government financing in the wake of three recent currency crises korea 1997 mexico 1994 and turkey 2001

unemployment compensation finance and labor market rigidity abstract the systematic use of experience rating is an original feature of the u s unemployment benefits system at first glance experience rating does not appear to be a desirable choice for a lot of european labor markets which are characterized by high firing costs we provide a simple matching model of a rigid labor market that includes firing costs temporary jobs and a minimum wage in order to analyze this issue our analysis leads us to argue that experience rating is likely to reduce unemployment and improve the welfare of low skilled workers in france and more generally for low skilled workers in a typical rigid continental european labor market

a pooled dynamic analysis of interfuel substitution in industrial energy demand by the g 7 countries a dynamic version of considine s 1990 linear logit model is used to obtain theoretically consistent estimates of long run price elasticities from pooled intercountry data on industrial energy consumption this model also provides a rare direct estimate of the important rate of dynamic adjustment revealing a median lag of ten years the long run demands for oil and coal are the most elastic and the strongest channels for interfuel substitution are between oil and natural gas with no significant evidence of complementarity between fuels

the role of real wage rigidity and labor market frictions for inflation persistence we analyze the transmission mechanism of wages to inflation within a new keynesian business cycle model with wage rigidities and labor market frictions our main focus is on the channel of real wage rigidities on inflation persistence for which we find the specification of the wage bargaining process to be of crucial importance under the standard efficient nash bargaining the feedback of wage rigidities on inflation is ambiguous and depends on other labor market variables however under the alternative right to manage bargaining we find that more rigid wages translate directly into more persistent movements of aggregate inflation

risk assessment under a nonlinear fiscal policy rule i introduction countries around the world are establishing nonlinear fiscal rules whereby governments respond more aggressively to lower deficits when debt is above some threshold level these policies range from the german style debt break which imposes limits on the deficits to fiscal rules that intensify fiscal consolidation at high debt levels the purpose of this paper is to study the implications of a nonlinear fiscal rule on solvency crisis do nonlinear fiscal rules allay the possibility of future insolvency does the increased responsiveness suggested by the nonlinear fiscal rules need to be exhibited at low levels of debt could fiscal authorities offset the stronger responsiveness at high levels of debt with a weaker responsiveness at low levels of debt without altering the probability of a solvency crisis we build on daniel and shiamptanis 2012 framework where negative shocks such as the 2007 2009 worldwide financial turmoil could lead a government to a position where agents refuse to lend thereby creating a solvency crisis to restore lending monetary and fiscal authorities could implement a policy switch in which the fiscal policy switches to active and the monetary policy to passive and the post crisis equilibrium is characterized by the fiscal theory of the price level ftpl 1 their analysis however utilizes a linear fiscal policy rule and assumes that authorities remain in the ftpl regime once they switch this paper modifies daniel and shiamptanis 2012 dynamic policy switching model to allow for a nonlinear fiscal policy rule that governs the evolution of the primary surplus relative to gdp and to allow the authorities to switch back to the original regime an important feature of the nonlinear fiscal rule is that it naturally yields an endogenous stochastic responsiveness to debt to capture changes in policy over time 2 we also build on bohn 1998 who argues that it is sufficient for a sustainable fiscal policy to satisfy the government s intertemporal budget constraint ibc bohn s analysis however does not incorporate a fiscal limit on the size of debt defined as the maximum level of debt that the country can repay bi 2012 bi et al 2010 2013 cochrane 2011 ghosh et al 2013 this paper can be viewed as an extension of bohn 1998 when a country faces fiscal limits we derive the criteria necessary for a nonlinear fiscal rule to satisfy both the government s ibc and eliminate explosive behavior the final contribution of the paper is empirical we apply the model to canada which is often cited as an example of a small open economy that implemented a significant fiscal adjustment lloyd ellis and zhu 2001 we estimate a nonlinear fiscal rule with annual data from 1970 to 2012 and utilize it to quantify the probability of a solvency crisis the following key results emerge first to eliminate explosive behavior the responsiveness of the nonlinear fiscal rule to debt should be larger than bohn s 1998 criterion second a nonlinear fiscal rule lowers the expected maximum level of debt on the path back to its long run target and also shortens the expected adjustment time third the strong responsiveness suggested by a nonlinear fiscal rule is very important to reduce the probability of a solvency crisis however this strength need not be exhibited until debt is high as long as the government has a stronger responsiveness at high levels of debt the responsiveness at low levels of debt has miniscule impact on solvency risk this paper is organized as follows section ii derives the necessary conditions for global stability and the dynamics leading to a solvency crisis under a nonlinear fiscal rule section iii estimates the policy parameters of the canadian fiscal rule and the probability of a solvency crisis section iv provides conclusions ii model we set up a simple small open economy model with a stochastic endowment

optimal monetary policy rules with labor market frictions abstract this paper studies optimal monetary policy rules in a framework with sticky prices matching frictions and real wage rigidities optimal policy is given by a constrained ramsey plan in which the monetary authority maximizes the agents welfare subject to the competitive economy relations and the assumed monetary policy rule i find that the optimal rule should respond to unemployment alongside with inflation this is so since models with matching frictions unlike standard new keynesian models feature a congestion externality that makes unemployment inefficiently high a strong response to inflation remains optimal while a response to output is always welfare detrimental

business cycles and labor market search the quantitative implications of labor market search for economic fluctuations are evaluated in the context of a real business cycle model incorporating labor market search into the model is found to improve its empirical performance along several dimensions in particular hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls in addition the model replicates the observation that output growth displays positive autocorrelation at short horizons overall the empirical results suggest that the labor market search environment embodies a quantitatively important propagation mechanism copyright 1996 by american economic association

labor market institutions and aggregate fluctuations in a search and matching model abstract this paper explores the influence of labor market institutions on aggregate fluctuations it uses a dynamic stochastic general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market it finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations increasing firing costs decreases the volatility of output employment and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers hence firms adjust to shocks mainly through prices causing inflation to become more volatile raising unemployment benefits has the reverse effect on aggregate fluctuations

exchange rate policy under sovereign default risk abstract we examine monetary policy options for a small open economy where sovereign default might occur due to intertemporal insolvency under interest rate policy and floating exchange rates the equilibrium is indetermined under a fixed exchange rate the equilibrium is uniquely determined and independent of sovereign default

the joint design of unemployment insurance and employment protection a first pass unemployment insurance and employment protection are typically discussed and studied in isolation in this paper we argue that they are tightly linked and we focus on their joint optimal design in a simple model with risk averse workers risk neutral firms and random shocks to productivity we show that in the first best unemployment insurance comes with employment protection in the form of layoff taxes indeed optimality requires that layoff taxes be equal to unemployment benefits we then explore the implications of four broad categories of deviations from first best limits on insurance limits on layoff taxes ex post wage bargaining and ex ante heterogeneity of firms or workers we show how the design must be modified in each case finally we draw out the implications of our analysis for current policy debates and reform proposals from the financing of unemployment insurance to the respective roles of severance payments and unemployment benefits

the fiscal myth of the price level i examine the fiscal theory of the price level according to which non ricardian policy and predetermined nominal government debt fiscally determine prices i argue that the non ricardian policy

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

the fiscal theory of the price level in an open economy abstract recent work loyo e going international with the fiscal theory of the price level manuscript john f kennedy school of government harvard university 1998 dupor b exchange rates and the fiscal theory of the price level journal of monetary economics 45 613 630 has shown that extension of the fiscal theory of the price level to an open economy yields indeterminate prices and exchange rates calling into question the usefulness of the theory this paper shows that by carefully tailoring policies in an independent fashion governments can eliminate price and exchange rate indeterminacy specifically governments are assumed to care about the welfare of their agents so that they never set policy to yield an intertemporal government budget surplus

employment protection reform in search economies the design of employment protection legislation epl is of particular importance in the european debate on the contours of labor market reform in this article we appeal to an equilibrium unemployment model to investigate the virtues of epl reform which reduces the red tape and legal costs associated with layo s and introduces a u s style experiencerating system which we model as a combination of a layo tax and a payroll subsidy the reform considered shows that it is possible to improve the e ciency of employment protection policies without a ecting the extent of worker protection on the labor market these results are consistent with the conventional wisdom that experience rating is desirable not only as an integral component of unemployment compensation nance as most studies acknowledge but also as part and parcel of a virtuous epl system

industrial sector interfuel substitution following the first major oil shock abstract strict conditions for a two stage translog expenditure shares model are violated a single stage homothetic symmetry equality model is rejected in favour of a non homothetic equality model international own price elasticities derived from the latter for oil gas coal and electricity are 0 26 0 81 0 97 and 0 02 little changed from 0 24 0 71 1 35 and 0 09 for the former