China's Changing Competitive Position: Lessons from a Unit-Labor- Cost-Based REER

This paper calculates a unit labor-cost based real effective exchange rate for China for the period 1987-2002. It examines carefully which data sources can be used given the known limitations of Chinese data and constructs to them together with internationally available unit labor cost estimations for a number of industrialized countries, including Korea and Taiwan. It is found that gauged by the ULC measure the increase in manufacturing competitiveness from the late 1980s to the mid 1990s has been even more remarkably than given known industrial-price- based measures for real effective exchange rates suggest. However, since then, Chinese manufacturers have lost more ground than previously thought.China, international competitiveness, real exchange rate

The New Consensus from a Traditional Keynesian and Post-Keynesian Perspective

This paper examines in how far the DSGE model which is often dubbed the New Keynesian Consensus is compatibel with a Post-Keynesian or traditional Keynesian understanding of the economy. It is argued that while at first sight DSGE models seem to include a lot of traditional Keynesian or even Post-Keynesian elements such as endogeneous money or the need for an active central bank, the mechanisms at work are completely incompatible with a traditional or Post-Keynesian understanding of the working of the macroeconomy.DSGE, New Keynesian Consensus, Monetary Policy, Fiscal Policy, endogenous money

CENTRAL BANKING, FINANCIAL INSTITUTIONS AND CREDIT CREATION IN DEVELOPING COUNTRIES

This paper examines how developing countries can embark on a sustained path of strong investment, capital accumulation and economic growth without capital imports. It is argued that the key lies in the Keynesian-Schumpeterian credit-investment nexus: Given certain preconditions, the central bank can allow a credit expansion which finances new investment and creates the savings necessary to balance the national accounts. It is further argued and confirmed in empirical data that one of the biggest impediments to such a process is formal or informal dollarization which limits the policy scope of the central bank. Moreover, a stable banking system with a broad outreach as well as a low degree of pass-through between the exchange rate and domestic prices seem to be a necessary condition for this process to work

Measuring China's Fiscal Policy Stance

This paper argues that the tradtitional way of gauging a country's fiscal policy stance by looking at government budget deficit or cyclically adjusted budget deficits is misleading in the case of China, since a lot of what usually would be considered fiscal policy is conducted via investment by state owned enterprises. The paper therefore proposes a different indicator for the fiscal policy stance, constructed from government consumption, government expenditure, the state-owned- enterprises' investments and tax revenue. Using this indicator, it can be shown that fiscal policy has been strongly counter-cyclical in China over the past two decades.Fiscal Policy, China, State-Owned Enterprises, Statistics

How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany

This paper compares relative unit labour cost developments in the countries of the euro-area since the beginning of the European Monetary Union (EMU) both with historical developments and with intra-regional unit labour cost developments in the United States of America and Germany. To this end, unit labour cost indices for the US states and census regions from 1977 to 1997 as well as for the German Länder from 1970 to 2004 have been constructed. Against this benchmark, it is found that unit labour cost increases since 1999 in Portugal and to a lesser extent in Spain and Greece can be judged as excessive, pointing at labour market rigidities which might impair smooth working of EMU in the future.Unit labor costs, divergence, convergence, Euro-zone, inflation

Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Länder we investigate inflation convergence using different approaches, namely panel unit root tests, co-integration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs

Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-run Divergence? Results from a Comparison with the United States of America and Germany

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Laender we investigate inflation convergence using different approaches, namely panel unit root tests, cointegration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs

Adjustment in EMU: Is Convergence Assured?

Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.EMU, convergence, stability, inflation

Anhaltende Divergenz der Lohnstückkostenentwicklung im Euroraum problematisch

Die Wachstumsschwäche in einigen europäischen Ländern wie Portugal und Italien in der ersten Hälfte dieses Jahrzehnts sowie anhaltend hohe Inflationsraten und ein Bauboom in Spanien haben zu einer Debatte darüber geführt, ob sich möglicherweise die einzelnen Länder der Eurozone gefährlich auseinander entwickeln und damit auf längere Sicht die Stabilität der Europäischen Währungsunion gefährden. Eine Untersuchung der Lohnstückkostenentwicklung in den einzelnen Euro-Ländern und ein Vergleich der nationalen Differenzierungen im Euroraum mit regionalen Entwicklungen in den beiden "Währungsräumen" USA und Westdeutschland zeigt, dass der Euroraum tatsächlich eine Reihe von Besonderheiten aufweist: Während sich die Entwicklung in einem Großteil des Euroraums durchaus im Rahmen dessen hält, was in anderen Währungsräumen zu beobachten ist, haben einige Länder seit Beginn der Währungsunion ihre Wettbewerbsfähigkeit stark verändert. So hat sich die Position der südeuropäischen Länder um rund ein Zehntel verschlechtert, während sich diejenige Deutschlands in fast dem gleichen Ausmaß verbessert hat. Auch zeigen die Untersuchungen, dass der Lohnstückkostenanstieg in einzelnen Ländern immer noch strukturell deutlich vom Durchschnitt abweicht; dies deutet auf eine dauerhafte Divergenz hin. Schließlich scheinen länderspezifische Faktoren im Euroraum bei der Lohnkostenentwicklung eine sehr große Rolle zu spielen; Abweichungen vom gemeinsamen Trend wirken zudem länger nach als entsprechende regionale Divergenzen in den USA oder in Westdeutschland. Das dauerhafte Auseinanderlaufen nationaler Lohnstückkostenentwicklungen im Euroraum kann längerfristig zu Wachstumseinbußen führen, und es birgt Risiken bezüglich des Fortbestehens der Währungsunion.Unit labor costs, inflation, EMU, convergence

Did the Euro Area benefit from the Fund’s Experience in Crisis fighting?

The paper analyses how the IMF brought its experience gained in emerging market sovereign debt crises in the troika’s handling of the euro crisis. We link models of multiple equilibria with the IMF’s experience made in Latin American crises in the 2000s. We examine subsequent changes in the IMF’s policy guidelines and show that previous insights have been taken in, but applied only with a significant delay and partially against institutional rules and internal advice for the case of Greece. Hence, we argue that the inclusion of the IMF in Europe’s crisis fighting did not completely deliver what had been hoped for