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Good Policies or Good Luck? New Insights on Globalization and the International Monetary Policy Transmission Mechanism
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The open-economy dimension is central to the discussion of the trade-offs that monetary policy faces in an increasingly integrated world. I investigate the monetary policy transmission mechanism in a two-country workhorse New Keynesian model where policy is set according to Taylor (1993) rules. I find that a common monetary policy isolates the effects of trade openness on the cross-country dispersion alone, and that the establishment of a currency union as a means of deepening economic integration may lead to indeterminacy. I argue that the common (coordinated) monetary policy equilibrium is the relevant benchmark for policy analysis showing that in that case open economies tend to experience lower macro volatility, a flatter Phillips curve, and more accentuated trade-offs between inflation and slack. Moreover, the trade elasticity often magnifies the effects of trade integration (globalization) beyond what conventional measures of trade openness would imply. I also discuss how other features such as the impact of a common and stronger anti-inflation bias, technological diffusion across countries, and the sensitivity of labor supply to real wages influence the quantitative effects of policy and openness in this context. Finally, I conclude that these theoretical predictions are largely consistent with the stylized facts of the Great Moderation.
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This article develops the concept of housing market ‘rentierization’ to describe the shift in the treatment of housing away from its use as a consumption good to an asset from which economic rent can be extracted. Rentierization encompasses, but goes beyond, the ‘financialisation of housing’ that has been the focus of attention in the recent political economy of housing literature as it involves changes across land and housing market policy, fiscal-policy as well as financial policy spheres. We examine Australia as a canonical example of rentierization, conducting a historical case study that examines the returns to land and housing over the 20th century and trace its roots to developments that preceded the financial liberalization of the 1980s, including the privatization of public housing in the 1960s and 70s.
In this paper, we examine the political gridlock in reforming the Economic and Monetary Union. We utilize a two-stage game with imperfect information in order to study the optimal sequencing. The main results are: first, optimal sequencing requires for incompliant Member States a default option in stage-two, which in principle is related to the today's fiscal architecture (EMU-I). Second, we show that compliant countries prefer a reform equilibrium today if and only if they have a free choice about the preferred fiscal architecture at the end-either EMU-II with binding European coordination or EMU-I related to Maastricht. Noteworthy, our sequencing approach works for any design of the EMU-II architecture.
In this paper, I explore the changes in international business cycles with quarterly data for the eight largest advanced economies (US, UK, Germany, France, Italy, Spain, Japan, and Canada) since the 1960s. Using a time-varying parameter model with stochastic volatility for real GDP growth and inflation allows their dynamics to change over time, approximating nonlinearities in the data that otherwise would not be adequately accounted for with linear models [Granger, Clive W.J., Timo Teräsvirta, and Heather M. Anderson. 1991. “Modeling Nonlinearity over the Business Cycle.” In NBER book Business Cycles, Indicators and Forecasting (1993) , edited by James H. Stock and Mark W. Watson, University of Chicago Press.; Granger, Clive W.J. 2008. “Non-Linear Models: Where Do We Go Next – Time Varying Parameter Models?” Studies in Nonlinear Dynamics and Econometrics 12 (3): 1–11.]. With that empirical model, I document a period of declining macro volatility since the 1980s, followed by increasing (and diverging) inflation volatility since the mid-1990s. I also find significant shifts in inflation persistence and cyclicality, as well as in macro synchronization and even forecastability. The 2008 global recession appears to have had an impact on some of this. I ground my empirical strategy on the reduced-form solution of the workhorse New Keynesian model and, motivated by theory, explore the relationship between greater trade openness (globalization) and the reported shifts in international business cycle. I show that globalization has sizeable (yet nonlinear) effects in the data consistent with the implications of the model – yet globalization’s contribution is not a foregone conclusion, depending crucially on more than the degree of openness of the international economy.
The global slack hypothesis is central to the discussion of the trade-offs that monetary policy faces in an increasingly more integrated world. The workhorse New Open Economy Macro (NOEM) model of Martínez-García and Wynne (2010), which fleshes out this hypothesis, shows how expected future local inflation and global slack affect current local inflation. In this chapter, I propose the use of the orthogonalization method of Aoki (1981) and Fukuda (1993) on the workhorse NOEM model to further decompose local inflation into a global component and an inflation differential component. I find that the log-linearized rational expectations model of Martínez-García and Wynne (2010) can be solved with two separate subsystems to describe each of these two components of inflation.
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Coming at a critical juncture for the euro, the book takes stock of the ECB's experience during its first ten years and discusses the way ahead. The articles are written by well-known experts in the field and provide the reader with a comprehensive overview of relevant policy issues, including the ECB's communication and its monetary strategy and instruments.
According to the Globalization Hypothesis, global economic slack should progressively replace the domestic output gap in driving inflation as globalization increases. We investigate the empirical evidence in favor of this prediction by using a Time-varying VAR. Two main results emerge from the analysis: First, global slack is found to affect the dynamics of inflation in many countries, yet its influence did not become stronger over time. Second, a panel analysis that exploits the cross-section characteristics of our dataset shows that globalization, measured in terms of trade and financial openness, is positively related to the effects of global slack on inflation. We conclude that integration in the global economy is in fact important, but globalization has not yet induced changes in openness large enough to justify significant brakes in inflation dynamics.
We provide evidence on the fit of the New Phillips Curve (NPC) for the Euro area over the period 1970–1998, and use it as a tool to compare the characteristics of European inflation dynamics with those observed in the U.S. We also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs, as well as that of its two main components, namely, labor productivity and real wages. Some of the findings can be summarized as follows: (a) the NPC fits Euro area data very well, possibly better than U.S. data, (b) the degree of price stickiness implied by the estimates is substantial, but in line with survey evidence and U.S. estimates, (c) inflation dynamics in the Euro area appear to have a stronger forward-looking component (i.e., less inertia) than in the U.S., (d) labor market frictions, as manifested in the behavior of the wage markup, appear to have played a key role in shaping the behavior of marginal costs and, consequently, inflation in Europe.
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