The Municipal Budgetary Response to Changing Labor Costs: The Case of San Francisco

This paper analyzes how expenditures of the city of San Francisco were altered in response to changes in municipal labor costs over the period 1945 through 1976. A hybrid of the demands and the organizational models of budgeting is used to measure the budgetary response to changes in the relative prices of labor inputs. Descriptive and econometric evidence reveals significant adjustments both among and within departments in reaction to changes in relative labor costs. The empirical evidence demonstrates that the city\u27s budgetary process is guided by simple allocative rules modified by price-responsive adjustments

Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence

This paper proposes a conceptual framework to investigate the effects of central bank independence, of the degree of centralization of wage bargaining and of the interaction between those institutional variables, on real wages, unemployment and inflation, in a framework in which unions are averse to inflation. This aversion moderates unions wage demands as they attempt to induce the central bank to inflate at a lower rate. An increase in the degree of centralization of wage bargaining (a decrease in the number of unions) triggers two opposite effects on real wages, unemployment and inflation. It reduces the substitutability between the labor of different unions and therefore the degree of effective competition between them. This "reduced competition effect" raises real wages, unemployment and in°ation. But the decrease in the number of unions also strengthens the moderating effect of in°ationary fears on the real wage demands of each union. This "strategic effect" lowers real wages, unemployment and inflation. For sufficiently inflation averse unions the interaction between those two effects produces a Calmfors-Driffill type relation between real wages and centralization. The paper analyzes the effects of central bank independence on the position and the shape of this relation, as well as on inflation and unemployment. The paper features two mechanisms, one of which is novel, through which monetary institutions have real effects. The paper's framework implies that social welfare is maximized when the central bank is ultra liberal. This result is critically assessed. Empirical evaluation of some of the theoretical implications, using data from nineteen developed economies, is for the most part supportive of those implications.central banks;independence;wages;bargaining;inflation;unemployment

A new model for market-based regulation of subnational borrowing - the Mexican approach

Faced with weak sub-national finances that pose a risk to macroeconomic stability, Mexico's federal government in April 2000 established an innovative incentive framework to bring fiscal discipline to state and municipal governments. That framework is based on two pillars: an explicit renunciation of federal bail-outs, and a Basel-consistent link between the capital-risk weighting of bank loans to sub-national governments, and the borrower's credit rating. In theory, this new regulatory arrangement should reduce moral hazard among banks and their state, and municipal clients; differentiate interest rates on the basis of the borrower's creditworthiness; and, elicit a strong demand for institutional development at the sub-national level. But its access will depend on three factors critical to implementation: 1) Whether markets find thefederal commitment not to bail out defaulting sub-national governments credible. 2) Whether sub-national governments have access to financing other than bank loans. 3) How well bank capital rules are enforced.Environmental Economics&Policies,Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Financial Intermediation,Insurance&Risk Mitigation

Productivity Shock and Optimal Monetary Policy in a Unionized Labor Market. Forthcoming: The Manchester School

This paper presents a New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The bargaining process between unions and firms introduces real wage rigidity and creates an endogenous trade-off between inflation and output stabilization. Under an optimal discretionary monetary policy a negative productivity shock requires an increase in the nominal interest rate. Moreover, an operational instrument rule will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model calibration studies the response of the unionzed economy to productivity shocks under different monetary policy rules. Download Inf

Chapter 4: The Swedish Model

This chapter tries to explain the strong performance of public finances in Sweden and looks at what lessons for other countries can be drawn. Section 4.2 reviews the development of public finances over time. Section 4.3 begins by surveying the research on why fiscal policy in modern democracies may be subject to a deficit bias and then discusses how the fiscal framework established in Sweden may have helped to contain such tendencies. The importance of output growth to fiscal consolidation is highlighted in Section 4.4. Section 4.5 sums up the conclusions.

Measuring Fiscal Stance in Australia: Theoretical, Empirical and Policy Considerations

Cyclical volatility in the rate of economic growth has been a source of concern for economic policy makers since the Keynesian revolution changed governments’ perception of their role in macroeconomic management. While the variables that should be stabilised, and the tools that should be relied upon, are still debated, governments in developed economies rarely eschew responsibility for delivering economic stability, or minimising economic instability. This thesis is primarily concerned with the interrelationship between cyclical volatility in the rate of growth of Gross Domestic Product (GDP) and the Commonwealth budget. The pro-cyclical nature of employment combined with the cyclical sensitivity of tax bases such as personal income tax, company tax and the Goods and Services Tax ensure that government expenditures and revenues are influenced by changes in the level of economic activity

Fiscal indicators - Proceedings of the the Directorate-General for Economic and Financial Affairs Workshop held on 22 September 2006 in Brussels

Fiscal indicators are the backbone of effective fiscal policy-making, including the coordination and surveillance of budgetary policy at the EU level. The quality and success of the EU surveillance framework, in particular the timeliness and appropriateness of any policy recommendation or decision taken in the context of the Stability and Growth Pact (SGP), crucially depend on the quality of its diagnostic instruments. The right conclusions can only be drawn if the underlying analysis is comprehensive and accurate.fiscal indicators, government budget, EU fiscal surveillance, sustainability of fiscal policy, cyclically adjusted budget balance, Larch, Nogueira Martins

The Determination and Development of Sectoral Structure

The development over time of sectors in terms of value added and employment has common characteristics in all economies. We develop a simple Ricardian multi-sector general equilibrium model that allows for (i) non-unitary income elasticities, (ii) different paces of technological progress per sector, and (iii) endogenously determined technological progress per sector. A model with these ingredients allows us to replicate the sectoral developments that are found empirically, and which are shown to be the outcome of an interplay between factors of demand and supply. Under reasonable assumptions, deindustrialization is shown to be a natural and unavoidable consequence of increases in the wealth of nations.sectoral change;endogenous growth;deindustrialization

The Portuguese Public Finances and the Spanish Horse

This study is based on the idea that inadequate use of fiscal policy through restrictive policies shifts the short-run demand curve that in turn induces shifts in the long-run supply curve leading to a dynamic reduction of growth. The analogy with the old metaphor of the Spanish horse seems obvious. We apply this idea to Portugal to 2002-2009, we will prove that in order not to be caught in the horse’s trap we have to keep the concept of potential output in the evaluation of the structural budget balance instead of replacing it by a trend indicator, which, can lead to a sustainable reduction of the “food” and consequently to a disaster. The goal of full employment is no longer present in the idea of zero public balances. In the medium-term, the cycles will offset each other when calculated in relation to a trend and thus the same applies to budget balances as defined in the Stability and Growth Pact (SGP). If actual output moves away persistently from full employment output, trend output will also move away from full employment. As a consequence, expenditures will tend to increase and incomes to decrease. This situation creates deficits that should be corrected by the SGP. This correction will lead to a reduction in demand and thus in actual output and therefore, necessarily, in trend output itself. We present an empirical solution to this problem based on the concept of trend output in order to correct its inflection after 2002. This analysis has two drawbacks, the influence of deficits in the prices of non-tradable goods and the fact that we may not have food to give to our horse. This is the case if public debt is too high. Nevertheless, this study shows that the criteria and methods that are used by the SGP in the definition of fiscal policy are incorrect.Budget deficit, cyclically adjusted budget balance, fiscal policy, Hodrick-Prescott filter and output gap.