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Countercyclical Fiscal Policy and Cyclical Factor Utilization
Full text linkIn a neoclassical growth model with monopolistic competition in the product
market, the presence of cyclical factor utilization enhances the stabilization role
of countercyclical taxes. The costs of varying capital utilization take the form of
varying rates of depreciation, which in turn have amplifying effect on investment
decisions as well as the volatility of most aggregate variables. This creates an
additional channel through which taxes affect the economy, a channel that enhances
the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives
Public Sector Pay in Finland
Full text linkThis study analyses the forces determining public and private sector pay in Finland. The data used is a 7 per cent sample taken from the Finnish 2001 census. It contains information on 42 680 male workers, of which 8 759 are employed in public and 33 921 in the private sector. The study documents and describes data by education, occupation and industry. We estimate earnings equations for the whole sample as well as for four industries (construction, real estate,
transportation and health) that provide an adequate mix of both public and sector workers. The results suggest that the private-public sector pay gap of about one per cent can be accounted for by
differences in observable characteristics between the sectors (3.4 per cent) and lower returns from these characteristics (-2.3 per cent). However, the industry-level analysis indicates that the earnings gaps vary across industries, and are negative in some cases. These inter-industry differences in
public-private gaps persist even when the usual controls are introduced. This suggests that public sector wage setters need greater local flexibility, which should result in less uniform wages within the public sector
Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship
Full text linkIn this paper we empirically examine the relationship between the real exchange rate and real interest rate differentials using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK-US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to endogenously determined structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more
global context, we carry out multiple country analysis. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific
Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model
Full text linkWe show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii)
preference shocks; (iv) deviations from UIP condition for the exchange rates;
and (v) creditor status in net foreign assets. We find that there is a good case for
both traded and non-traded productivity shocks as well as UIP deviations in
explaining the puzzles
Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption
Full text linkWhile consumption habits have been utilised as a means of generating a humpshaped
output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly,external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the
stabilising properties of standard simple rules