In the present paper we examine how the introduction of endogenous participation in an otherwise ... more In the present paper we examine how the introduction of endogenous participation in an otherwise standard DSGE model with matching frictions and nominal rigidities affects business cycle dynamics and monetary policy. The contribution of the paper is threefold: first, we show that the model provides a good fit for employment and unemployment volatility, as well as participation volatility and its correlation with output for US data. Second, we show that in such a model, and contrary to a model with exogenous participation, a monetary authority that becomes more aggressive in fighting inflation decreases the volatility of employment and unemployment. Finally, we show the role of search costs in shaping those results.
We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, impor... more We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, import and export subsidies/taxes. We consider non-cooperative and cooperative trade policy, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. While previous studies have identified the home market externality, which gives incentives to agglomerate firms in the domestic economy, as the driving force behind non cooperative trade policy in this model, we show that this, in fact, is not the case. Instead, the incentives for a non-cooperative trade policy arise from the desire to eliminate monopolistic distortions and to improve domestic terms of trade. As a consequence, terms of-trade externalities remain the only motive for international trade agreements in the Krugman (1980) model once a complete set of instruments is available.
Abstract We investigate the impact of monetary commitment on the term structure of interest rates... more Abstract We investigate the impact of monetary commitment on the term structure of interest rates. We formulate our question in a baseline New-Keynesian model featuring habits persistence in consumption and a short-run stabilization tradeoff between inflation and output. We find that, compared to a discretionary regime, commitment steepens the yield curve by increasing term premia.
Currency fluctuations are an important determinant of labour market dynamics. Vice-versa relative... more Currency fluctuations are an important determinant of labour market dynamics. Vice-versa relative labour costs affect real exchange rate dynamics. The optimal choice of exchange rate regimes cannot neglect such nexus. We asses such a choice using a two-country model with frictional labour markets. The monetary authority faces a tension between the classical insulating property of floating exchange rates and the destabilizing effects of currency fluctuations on (relative) job flows. Results show that the second motive is important: optimal monetary policy prescribes (some) response to the exchange rate. We also re-examine the conditions for optimal policy in a currency area whose members experience asymmetries in labour market institutions.
Despite having had the same currency for many years, EMU countries still have quite different inf... more 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 labour markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.
There is common agreement on price inflation stabilization being one of the objectives of monetar... more There is common agreement on price inflation stabilization being one of the objectives of monetary policy. But, in an open economy, two alternative measures of inflation coexist: domestic inflation (GDP deflator) and consumer price inflation (CPI inflation). Which one of the two should be the target variable? Most of the New Open Economy Macroeconomics (NOEM) literature suggests that monetary authority should stabilize domestic inflation. This is in sharp contrast with the practice of many inflation-targeting central banks that are using CPI inflation as target variable. The paper shows that the standard result in the NOEM literature is derived under the simplifying assumption of flexible wages. The inclusion of sticky wages in an otherwise standard small open economy model is shown to rationalize CPI inflation targeting. This conclusion is robust to changes in key parameters, including the trade elasticity.
During the Great Recession large fiscal stimuli were implemented to contrast labor market scleros... more During the Great Recession large fiscal stimuli were implemented to contrast labor market sclerosis. We explore the effectiveness of fiscal stimuli in a model with matching frictions and endogenous participation. Results show that hiring subsidies, contrary to increase in government spending, deliver large multipliers, even with distortionary taxation. Those policies increase the incentives to post vacancies, hence employment. Furthermore, by reducing marginal costs they also reduce inflation and increase private consumption.
From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103... more From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973 yet, the behaviour of real GDP growth, price and wage inflation and real wages in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? The contribution of the paper is twofold: first, to provide a unified framework consistent with both episodes; second, to underly the role played by demand factors in the 2000s, with particular emphasis on the role played by the recent change in trade flows in U.S. Within a two-country framework where oil is used in production, two kinds of shocks are analysed: (a) a reduction in oil supply (b) a persistent increase in foreign productivity. It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s. The availability of cheaper imports can more than offset the inflationary pressures caused by higher oil prices, keeping CPI inflation low. Some interesting conclusions on the desirability of monetary policy reaction to increased oil prices can also be drawn.
En los últimos años se ha desarollado mucho la literatura que utiliza modelos estocásticos de equ... more En los últimos años se ha desarollado mucho la literatura que utiliza modelos estocásticos de equilibrio económico general en economía abierta. En esta clase de modelos el primer capítulo estudia si el banco central tiene que fijarse en al inflación medida mirando al los precios al consumo (CPI) oa los precios a la producción. Se demonstra como la introducción de competencia monopolística en el mercado del trabajo y rigidez de los salarios nominales justifica el utilizo de la inflación medida sobre CPI.
In the present paper we examine how the introduction of endogenous participation in an otherwise ... more In the present paper we examine how the introduction of endogenous participation in an otherwise standard DSGE model with matching frictions and nominal rigidities affects business cycle dynamics and monetary policy. The contribution of the paper is threefold: first, we show that the model provides a good fit for employment and unemployment volatility, as well as participation volatility and its correlation with output for US data. Second, we show that in such a model, and contrary to a model with exogenous participation, a monetary authority that becomes more aggressive in fighting inflation decreases the volatility of employment and unemployment. Finally, we show the role of search costs in shaping those results.
We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, impor... more We study trade policy in a two-sector Krugman (1980) trade model, allowing for production, import and export subsidies/taxes. We consider non-cooperative and cooperative trade policy, first for each individual instrument and then for the situation where all instruments can be set simultaneously, and contrast those with the efficient allocation. While previous studies have identified the home market externality, which gives incentives to agglomerate firms in the domestic economy, as the driving force behind non cooperative trade policy in this model, we show that this, in fact, is not the case. Instead, the incentives for a non-cooperative trade policy arise from the desire to eliminate monopolistic distortions and to improve domestic terms of trade. As a consequence, terms of-trade externalities remain the only motive for international trade agreements in the Krugman (1980) model once a complete set of instruments is available.
Abstract We investigate the impact of monetary commitment on the term structure of interest rates... more Abstract We investigate the impact of monetary commitment on the term structure of interest rates. We formulate our question in a baseline New-Keynesian model featuring habits persistence in consumption and a short-run stabilization tradeoff between inflation and output. We find that, compared to a discretionary regime, commitment steepens the yield curve by increasing term premia.
Currency fluctuations are an important determinant of labour market dynamics. Vice-versa relative... more Currency fluctuations are an important determinant of labour market dynamics. Vice-versa relative labour costs affect real exchange rate dynamics. The optimal choice of exchange rate regimes cannot neglect such nexus. We asses such a choice using a two-country model with frictional labour markets. The monetary authority faces a tension between the classical insulating property of floating exchange rates and the destabilizing effects of currency fluctuations on (relative) job flows. Results show that the second motive is important: optimal monetary policy prescribes (some) response to the exchange rate. We also re-examine the conditions for optimal policy in a currency area whose members experience asymmetries in labour market institutions.
Despite having had the same currency for many years, EMU countries still have quite different inf... more 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 labour markets generate welfare losses at the currency area level of approximately 0.3% of steady state consumption.
There is common agreement on price inflation stabilization being one of the objectives of monetar... more There is common agreement on price inflation stabilization being one of the objectives of monetary policy. But, in an open economy, two alternative measures of inflation coexist: domestic inflation (GDP deflator) and consumer price inflation (CPI inflation). Which one of the two should be the target variable? Most of the New Open Economy Macroeconomics (NOEM) literature suggests that monetary authority should stabilize domestic inflation. This is in sharp contrast with the practice of many inflation-targeting central banks that are using CPI inflation as target variable. The paper shows that the standard result in the NOEM literature is derived under the simplifying assumption of flexible wages. The inclusion of sticky wages in an otherwise standard small open economy model is shown to rationalize CPI inflation targeting. This conclusion is robust to changes in key parameters, including the trade elasticity.
During the Great Recession large fiscal stimuli were implemented to contrast labor market scleros... more During the Great Recession large fiscal stimuli were implemented to contrast labor market sclerosis. We explore the effectiveness of fiscal stimuli in a model with matching frictions and endogenous participation. Results show that hiring subsidies, contrary to increase in government spending, deliver large multipliers, even with distortionary taxation. Those policies increase the incentives to post vacancies, hence employment. Furthermore, by reducing marginal costs they also reduce inflation and increase private consumption.
From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103... more From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973 yet, the behaviour of real GDP growth, price and wage inflation and real wages in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? The contribution of the paper is twofold: first, to provide a unified framework consistent with both episodes; second, to underly the role played by demand factors in the 2000s, with particular emphasis on the role played by the recent change in trade flows in U.S. Within a two-country framework where oil is used in production, two kinds of shocks are analysed: (a) a reduction in oil supply (b) a persistent increase in foreign productivity. It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s. The availability of cheaper imports can more than offset the inflationary pressures caused by higher oil prices, keeping CPI inflation low. Some interesting conclusions on the desirability of monetary policy reaction to increased oil prices can also be drawn.
En los últimos años se ha desarollado mucho la literatura que utiliza modelos estocásticos de equ... more En los últimos años se ha desarollado mucho la literatura que utiliza modelos estocásticos de equilibrio económico general en economía abierta. En esta clase de modelos el primer capítulo estudia si el banco central tiene que fijarse en al inflación medida mirando al los precios al consumo (CPI) oa los precios a la producción. Se demonstra como la introducción de competencia monopolística en el mercado del trabajo y rigidez de los salarios nominales justifica el utilizo de la inflación medida sobre CPI.
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