Equity prices and the real economy - A vector error-correction approach

We assess the impact of equity prices on the level of output in the Europe Union economies and the US using Vector Error Correction (VECM) time series techniques. The distinction between impacts in bank based and equity market based economies is shown to be important, with equity prices having a greater impact on output in market-based economies. Share prices are shown to be largely autonomous in variance decompositions, whilst equity price do have a strong impact on output in the UK and US in their variance decompositions. An analysis of impulse responses suggests that large market based economies have more effective fiscal and monetary policy instruments

Asymmetric Labour Markets in a Converging Europe: Do differences matter? ENEPRI Working Paper No. 2, January 2001

Asymmetric economic structures across Europe may result in common shocks having asymmetric effects. In this paper we investigate whether the differences in the structure and dynamics that we observe in the European economies matter for policy design. In particular it is widely believed that labour market responses are different, with the structure of labour demand and the nature of the bargain over wages differing between countries. In addition the European economies move at different speeds in response to common shocks. In this paper we construct three different models of Europe, one where the labour market relationships are separately estimated and assumed to be different, one where the most statistically acceptable commonalties are imposed and one where common labour market relationships are imposed across all member countries. We use panel estimation techniques to test for the imposition of commonalties among countries. We find that it is possible to divide Europe into sub-groups, but it is not possible to have one model of European labour markets. We use stochastic simulation techniques on these different models of Europe and find that the preferred rule for the ECB is a combined nominal aggregate and inflation-targeting rule. We find that while this rule is dominant in all our models, the more inertia that is introduced into the labour markets, the more a nominal aggregate-targeting rule alone may be preferred. However, we conclude, that differences in the labour market transmission mechanisms across the European countries appear to have little influence on the setting of monetary policy for the ECB, although this depends on the relative importance of the different components in the welfare loss function

Fiscal policy, fairness between generations, and national saving

This article is available open access through the publisher’s website at the link below. © The Author 2010.This paper takes a close look at the Keynesian theory underlying the policy of fiscal stimulus being undertaken or considered in many countries, led by the United States. A central question is whether a debt-financed fiscal stimulus now must adversely affect future taxpayers, owing to the debt burden being created. There are many interesting issues considered, for example, the role of automatic stabilizers, and the basis for Keynes's paradox of thrift. The model used is for a single country with a floating exchange rate. It is assumed that, for various reasons, monetary policy cannot eliminate high unemployment and a resultant output gap. In fact, there is a market failure, which government action needs to compensate for, at least temporarily

The role of capital, liquidity and credit growth in financial crises in Latin America and East Asia

We construct a dataset of bank capital adequacy and liquidity to test their relationships to crises in Asia and Latin America. Event studies, logit and ROC estimations suggest these variables are valuable leading indicators of crises. They can be used to improve Early Warning System design although there are trade-offs between model simplicity, which implies less monitoring costs and complexity which may improve accuracy. There are significant differences between the regions so pooling assumptions are unsound. AUCs show that capital and/or liquidity can be used in a parsimonious model without substantial loss in crisis predictive accuracy. We find no direct role for credit growth in either region. Our results have implications for Asian and Latin American financial regulators concerned with the impacts of Basel III on their banking systems.This work is funded under ESRC Grant No. PTA – 053 – 27 – 0002, entitled “An Investigation into the Causes of Banking Crises and Early Warning System Design”

Macroeconomic impact from extending working lives (WP95)

This report presents findings from research, conducted by the National Institute of Economic and Social Research (NIESR) and funded by the Department for Work and Pensions (DWP). NIESR were commissioned to use their global econometric model, NiGEM, in order to model various scenarios involving extending working lives, and to quantify the macroeconomic effects therein. The core scenario is a one year increase in working life for the UK population that is gradually phased in over the period 2010-14. In addition to this, NIESR carried out a series of counterfactual analyses which modelled the loss to the economy from older people leaving the labour market early

Financial liberalization and capital adequacy in models of financial crises

We characterize the effects of financial liberalization indices on OECD banking crises, controlling for the standard macro prudential variables that prevail in the current literature. We use the Fraser Institute’s Economic Freedom of the World database. This yields a variable that captures credit market regulations which broadly measures the restrictions under which banks operate. We then test for the direct impacts of some of its components, deposit interest rate regulations and private sector credit controls, on crisis probabilities and their indirect effects via capital adequacy. Over the period 1980 – 2012, we find that less regulated markets are associated with a lower crisis frequency, and it appears that the channel comes through strengthening the defence that capital provides. Deposit interest rate liberalisation adds to the strength of capital in protecting against crises. However, private sector credit liberalisation, appears to increase the probability of having a crisis, albeit not significantly. If policy makers are concerned about the costs of low risk events, they may wish to control private sector credit even if it has a probability of affecting significantly crises of between 10 and 20 per cent

Down with the drain : looking after our urban runoff and waterways in the era of sustainable management : a thesis presented in partial fulfilment of the requirements for the degree of Master of Philosophy in Resource and Environmental Planning at Massey University

Recent reforms of environmental and local government legislation have radically changed the nature of environmental management in New Zealand. There is a new mandate for the "sustainable management" of natural and physical resources. This thesis examines how environmental considerations are currently being incorporated into the management of urban runoff and waterways in New Zealand. Three case studies of urban councils were conducted. Two main data collection methods were employed. Interviews were conducted with the relevant council staff and this information was supplemented by an analysis of regional policy statements, regional plans and district plans that employed a method of plan coding. This sought to establish what policies and programmes the councils were involved in, whether this was different from the late 1980s, and the extent to which they were carrying out various types of innovative solutions to environmental problems. The research findings suggest that councils vary considerably in their approach to urban runoff and waterways. It showed that urban streams in New Zealand have suffered levels of degradation including pollution and channel modification that are consistent with many urban areas overseas. Recently, elements of a new philosophy have been applied to their management, which has coincided with the introduction of the Resource Management Act (RMA). Following overseas trends, there has been a recognition by managers of our waterways and stormwater systems that former practices in managing urban runoff have neglected environmental issues and natural resource conservation. This research suggests that stormwater management practices are taking on board the considerations of water quality, quantity and biodiversity to a greater extent than that which happened in the past. The extent to which this is happening in any particular area depends on the scale of the issues, the sensitivity and utility of affected resources, and the level of commitment by both community and council to changing traditional practices

Choosing the Regime in an Uncertain World, the UK and Monetary Union

The UK has to take a decision on EMU membership at some point, and the costs and benefits have to be evaluated. Different policy frameworks result in differing outcomes for the means and variances of economic variables such as inflation, output, and nominal and real exchange rates and interest rates. Changing the level of uncertainty in the economy may change the equilibrium level of output and investment. Hence membership of EMU has to be evaluated in the light of its impact on the volatility of target variables and on the impact of volatility on the level of output and welfare. We discuss a theoretical framework within which we can discuss these issues, and we undertake stochastic simulation on a large, New Keynesian model including all the European economies in order to evaluate the effects of membership on the level and volatility of output. Our experiments suggest that membership of EMU would reduce volatility and as a result raise the sustainable level of output and employment in the UK.EMU, exchange rate regimes, uncertainty and investment, UK membership

Sustainable Adjustment of Global Imbalances

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.global imbalances, real exchange rate realignment, risk premia, US current account