Nominal and real wage flexibility in EMU

Both common macroeconomic shocks and country-specific developments have subjected the flexibility of wage setting mechanisms in the euro area to a stress test in recent years. Against this background, this paper takes a fresh look at wage flexibility in EMU and attempts to draw a few lessons from the experience of the early years. First, we set the stage for the analysis by providing a brief description of the stylised facts regarding nominal and real wage and unit labour cost developments in the euro area over the recent business cycle. Then, the paper presents an empirical assessment of wage inertia based on new econometric estimates of a Phillips-curve type wage equation across euro area countries and offers an interpretation of the main findings with respect to nominal and real wage flexibility. Finally, we investigate the cyclical responsiveness of relative competitive positions among euro area countries. We conclude that from a bird's eye perspective euro area wage and labour cost dynamics have been quite benign in the past couple of years. However, our estimates suggest that persistent cross-country differences in wage and labour cost developments have not always reflected warranted adjustment needs; they are rather indicative of an eventually insufficient degree of nominal and real wage flexibility in the euro area.wage, EMU, Wage flexibility, real wage, nominal wage, labour cost, Arpaia, Pichelmann

This changes everything : climate Shocks and sovereign bonds

Climate change is already a systemic risk to the global economy. While there is a large body of literature documenting economic consequences, there is scarce research on the link between climate change and sovereign risk. This paper investigates the impact of climate change vulnerability and resilience on sovereign bond yields and spreads in 98 countries over the period 1995–2017. We find that the vulnerability and resilience to climate change have a significant impact on the cost government borrowing, after controlling for conventional determinants of sovereign risk. That is, countries that are more resilient to climate change have lower bond yields and spreads relative to countries with greater vulnerability to climate change. Furthermore, partitioning the sample into country groups reveals that the magnitude and statistical significance of these effects are much greater in developing countries with weaker capacity to adapt to and mitigate the consequences of climate change.info:eu-repo/semantics/publishedVersio

How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States

We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.dollarization, business cycle comovement, serial correlation common feature, Central America, Costa Rica

The Impact of Extreme Weather Events on Budget Balances and Implications for Fiscal Policy.

This paper explores implications of climate change for fiscal policy by assessing the impact of large scale extreme weather events on changes in public budgets. We apply alternative measures for large scale extreme weather events and conclude that the budgetary impact of such events ranges between 0.23% and 1.1% of GDP depending on the country group. Developing countries face a much larger effect on changes in budget balances following an extreme weather event than do advanced economies. Based on these findings, we discuss implications for fiscal policy and publicly-provided disaster insurance. Our policy conclusions point to the enhanced need to reach and maintain sound fiscal positions given that climate change is expected to cause an increase in the frequency and severity of natural disasters. JEL Classification: Q54, Q58, F59, H87.Global warming, climate change, fiscal sustainability, disasters.

Is Economic Recovery a Myth? Robust Estimation of Impulse Responses

There is a lively debate on the persistence of the current banking crisis' impact on GDP. Impulse Response Functions (IRF) estimated by Cerra and Saxena (2008) suggest that the effects of earlier crises were long-lasting. We show that standard estimates of IRFs are highly sensitive to misspecification of the underlying data generation process. Direct estimation of IRFs by a methodology similar to Jorda's (2005) local projection method is robust to misspecifications of the data generation process but yields biased estimates when country fixed effects are added. We propose a simple method to deal with this bias, which we apply to panel data from 99 countries for the period 1974-2001. Our estimates suggest that an average banking crisis leads to an output loss of around 10 percent with little sign of recovery. GDP losses from banking crises are more severe for African countries and economies in transition.banking crisis, impulse response, panel data

The Effects of Monetary Policy in the Czech Republic: An Empirical Study

In this paper, we examine the effects of Czech monetary policy on the economy within the VAR, structural VAR, and factor-augmented VAR frameworks. We document a wellfunctioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so.Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the realtime output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.Monetary policy transmission, real-time data, sectoral prices, VAR.

The Effects of Monetary Policy in the Czech Republic: An Empirical Study

within VAR, structural VAR, and the Factor-Augmented VAR framework. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.http://deepblue.lib.umich.edu/bitstream/2027.42/64350/1/wp922.pd