The relative price of non-traded goods under imperfect competition

We consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa-Samuelson framework. Under imperfect competition in these two sectors, relative prices depend on both productivity and mark-up differentials. We test this hypothesis using a panel of sectors for 12 OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials.This study is partly funded by the Galician government under grants INCITE09201042PR and MTM2008-03010

Investment cost channel and monetary transmission

Copyright @ 2011 Central Bank Review. This article is available open access through the publisher’s website at the link below.We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects

The relative price of non-traded goods under imperfect competition

This article is available open access through the publisher’s website. Copyright @ 2012 The Department of Economics, University of Oxford.We consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa–Samuelson framework. Under imperfect competition in these two sectors, relative prices depend on both productivity and mark-up differentials. We test this hypothesis using a panel of sectors for 12 OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials.The Galician governmen

The Relative Price of Non-traded Goods in an Imperfectly Competitive Economy: Empirical Evidence for G7 Countries

In this paper, we consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa-Samuelson framework. Under imperfect competition in the two sectors, relative prices depend on both productivity differentials and mark-up differentials. We test this implication using a panel of sectors for the seven major OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials. Unlike the original Balassa-Samuelson model, aggregate demand could affect the real exchange rate by changing the mark ups. The empirical results show that aggregate demand fluctuations lead to changes on the mark-ups

Fiscal Policy in an Imperfectly Competitive Dynamic Small Open Economy

In this paper we develop a general model of an imperfectly competitive small open economy. There is a traded and non-traded sector, whose outputs are combined in order to produce a single final good that can be either consumed or invested. We make general assumptions about preferences and technology, and analyse the impact of fiscal policy on the economy. We find that the fiscal mutiplier is between zero and one, and provide sufficient conditions for it to be increasing in the degree of imperfect competition. We also are able to compare the multiplier under free-entry and with a fixed number of firms, the speed of convergence to equilibrium and welfare. A simple graphical representation of the model is developed.imperfect competition, open economy, fiscal policy.

Lending relationships and monetary policy

Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements

Investment cost channel and monetary transmission

We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects

Liquidity effects and cost channels in monetary transmission

We study liquidity effects and cost channels within a model of nominal rigidities and imperfect competition that gives explicit role for money-credit markets and investment decisions. We find that cost channels matter for monetary transmission, amplifying the impact of supply shocks and dampening the effects of demand shocks. Liquidity effects only obtain when the policy is specified by an interest rate policy rule and money-credit conditions are determined endogenously. We also find that determinacy issues are particularly relevant when models include the cost channel and explicit money-credit markets

Investment Cost Channel and Monetary Transmission

We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects.Cost channel, Investment finance, Taylor Rule, indeterminacy