Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0601 Title: Understanding Labour Market Frictions: A Tobin’s Q Approach Author-Name: Parantap Basu Abstract: Labour market friction is viewed as the Tobin’s Q of an employed worker as opposed to the position of the Beveridge curve. This Tobin’s Q is inversely proportional to the average quality of the match between employers and workers. Based on this measure, I find that the labour market friction behaves procyclically in the US, which is indicative of the fact that firms compromise on the quality of the skill match during an expansion. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0601.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0602 Title: Using Taylor Rules to Assess the Relative Activism of the European Central Bank, the Bank of England and the Federal Reserve Board Author-Name: David Cobham Author-Person: pco208 Abstract: This paper attempts to assess the relative activism of these three central banks, with reference to the debate on interest rate smoothing. It investigates smoothing in terms of the pattern of interest rate changes, and estimates a series of Taylor-type policy rules for each bank, using quarterly and monthly data, with ‘backward’ and ‘forward’-looking arguments, and with and without lagged dependent variables. It also examines the effect of introducing an auto-correlated error term. There is some (non-robust) evidence that the FRB is more activist, but it also seems to be more smooth; the ECB seems to adjust faster but less strongly in the long run; and the BoE’s behaviour is more difficult to identify. However, these standard policy rules are out of kilter with central banks’ own descriptions of what they do, while the long lags involved raise questions about the relevance of the Taylor principle as conventionally applied. It is therefore suggested that researchers should pay more attention to the institutional context of central banks’ behaviour, in order to produce better estimates of their policy rules which would in turn shed more light on the issues of activism and smoothing. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0602.pdf File-Format: Application/pdf Classification-JEL: E43, E52. Keywords: Monetary policy, activism, interest rate smoothing, central banks. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0603 Title: Labor Contracts, Equal Treatment and Wage-Unemployment Dynamics Author-Name: Andy Snell Author-Person: psn16 Author-Name: Jonathan Thomas Author-Person: pth3 Abstract: This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0603.pdf File-Format: Application/pdf Classification-JEL: E32, J41. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0604 Title: Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks Author-Name: Szilárd Benk Author-Person: pbe85 Author-Name: Max Gillman Author-Email: gillmanm@cf.ac.uk Author-Person: pgi22 Author-Name: Michal Kejak Author-Person: pke82 Abstract: The explanation of velocity has been based in substitution and income effects, since Keynes’s (1923) interest rate explanation and Friedman’s (1956) application of the permanent income hypothesis to money demand. Modern real business cycle theory relies on a goods productivity shocks to mimic the data’s procyclic velocity feature, as in Friedman’s explanation, while finding money shocks unimportant and not integrating financial innovation explanations. This paper sets the model within endogenous growth and adds credit shocks. It models velocity more closely, with significant roles for money shocks and credit shocks, along with the goods productivity shocks. Endogenous growth is key to the construction of the money and credit shocks since they have similar effects on velocity, through substitution effects from changes in the nominal interest rate and in the cost of financial intermediation, but opposite effects upon growth, through permanent income effects that are absent with exogenous growth. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0604.pdf File-Format: Application/pdf Classification-JEL: E13, E32, E44. Keywords: Velocity, business cycle, credit shocks, endogenous growth. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0605 Title: The Optimal Monetary Policy Response to Exchange Rate Misalignments Author-Name: Cambell Leith Author-Email: c.b.leith@lbss.gla.ac.uk Author-Person: ple41 Author-Name: Simon Wren-Lewis Author-Email: s.wren-lewis@exeter.ac.uk Abstract: A common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, which appears to pose a dilemma for policy makers. In this paper we develop a small open economy model which features traded and non-traded goods sectors with which to assess the extent to which monetary policy should respond to exchange rate misalignments. To do so we initially contrast the efficient outcome of the model with that under flexible prices and find that the flex price equilibrium exhibits an excessive exchange rate appreciation in the face of a positive UIP shock. By introducing sticky prices in both sectors we provide a role for policy in the face of UIP shocks. We then derive a quadratic approximation to welfare which comprises quadratic terms in the output gaps in both sectors as well as sectoral rates of inflation. These can be rewritten in terms of the usual aggregate variables, but only after including terms in relative sectoral prices and/or the terms of trade to capture the sectoral composition of aggregates. We derive optimal policy analytically before giving numerical examples of the optimal response to UIP shocks. Finally, we contrast the optimal policy with a number of alternative policy stances and assess the robustness of results to changes in model parameters. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0605.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0606 Title: Testing a Simple Structural Model of Endogenous Growth Author-Name: Patrick Minford Author-Person: pmi137 Author-Name: David Meenagh Author-Person: pme154 Author-Name: Jiang Wang Abstract: The efect of taxation on growth is embodied in a model of a small open economy with endogenous growth. The structural model is estimated on post-war panel data for 76 countries and the bootstrap is used to produce the model’s sampling variation. Panel data regressions of growth on taxation do not reject this model but do reject a model with no tax effects. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0606.pdf File-Format: Application/pdf Classification-JEL: H25, O11, O41, O50. Keywords: endogenous growth, taxation, business regulation, bootstrap, model validation. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0607 Title: The Relationship between Output and Unemployment with Efficiency Wages Author-Name: Jim Malley Author-Person: pma160 Author-Name: Hassan Molana Author-Email: h.h.molana@dundee.ac.uk Author-Person: pmo294 Abstract: We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at an inefficient, or ‘low-effort’, state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960-2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilization policies and a positive demand shock might have adverse effects on employment. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0607.pdf File-Format: Application/pdf Classification-JEL: E62, J41, H3. Keywords: Efficiency wages, effort supply, Kalman filter, monopolistic competition, Okun’s law. Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0608 Title: A Simple Guide to the Basic Macroeconomics of Oil Author-Name: Peter Sinclair Author-Email: p.j.n.sinclair@bham.ac.uk Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0608.pdf File-Format: Application/pdf Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0609 Title: Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities Author-Name: Tatiana Kirsanova Author-Email: t.kirsanova@exeter.ac.uk Author-Person: pki87 Author-Name: Simon Wren-Lewis Author-Email: s.wren-lewis@exeter.ac.uk Abstract: We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However this fiscal stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0609.pdf File-Format: Application/pdf Classification-JEL: E52, E61, E63, F41. Keywords: Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation Template-Type: ReDIF-Paper 1.0 Handle: RePEc:san:cdmacp:0610 Title: The New Consensus in Monetary Policy: Is the NKM fit for the purpose of inflation targeting? Author-Name: Peter N. Smith Author-Email: pns2@york.ac.uk Author-Name: Mike Wickens Author-Email: mike.wickens@york.ac.uk Author-Person: psm22 Abstract: In this paper we examine whether or not the NKM is .t for the purpose of providing a suitable basis for the conduct of monetary policy through inflation targeting. We focus on a number of issues: the dynamic response of inflation to interest rates in a theoretical NKM under discretion and commitment to a Taylor rule; the implications for the specification of the New Keynesian Phillips equation of alternative models of imperfect competition in a closed and an open economy; the general equilibrium underpinnings of the IS function; the extent of empirical support for the NKM; what the empirical evidence on the NKM implies for inflation targeting. Our findings reveal a number of problems with the NKM. Theoretically, the NKM predicts that a discretionary increase in interest rates will increase inflation, not reduce it. This is supported by our VAR evidence. Estimates of the NKM indicate a negative relation between interest rates and inflation, but the signs in the structural equations are inconsistent with the theory. We conclude that the standard specifications of the inflation and output equations are inadequate and that these equations should be embedded in a larger model. Creation-Date: 2006-09 File-URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0610.pdf File-Format: Application/pdf Classification-JEL: E3, E5. Keywords: Inflation targeting, monetary policy, New Keynesian model