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

AN ENCOMPASSING FRAMEWORK FOR EVALUATING SIMPLE MONETARY POLICY RULES

In this paper we build an encompassing framework to analyse the stability conditions associated with various policy rules. Taylor and others have argued that model stability requires interest rate policy rules to have an inflation feedback parameter greater than one. In a world where there are nominal rigidities in the short-term evolution of demand this may not be the case. We show that with a combined nominal GDP and inflation targeting rule, this stability condition is overly restrictive. We use stochastic simulations to evaluate various monetary policy rules, and parameterisations, that are nested within a general framework. We do this using the National Institutes Global Econometric Model, NiGEM, which combines a neo-classical structure and rational expectations with institutional detail. Our results show that while one rule may be the most effective at stabilising the EMU aggregates, another may be more effective for individual economies, implying a change in the covariance structure of output and inflation within EMU. We discuss the resulting covariance structure and their implications for decision making within the ECB.

Essays in environmental and natural resource economics as a contribution to sustainable development.

This research focuses on the use of dynamic optimisation modelling techniques to describe the interactions between the economy and the environment. The environment not only provides us with economical1y valuable resources but also provides us ,with many essential services that support human welfare. Overexploitation of these resources and the destruction of the natural environment not only affects human welfare but may severely limit future production possibilities. For natural resources to continue to be inputs to production and to ensure equal access to environmental services by future generations, all ecological systems must remain in operation. The issue is how we treat our natural resources so that we have a sustainable economy. In this thesis, models are formulated that combine the economic and environmental processes. Current environmental concerns are incorporated into the framework of economic optimisation problems. The issues addressed are: 1. The competition for land of preservation and development. What is the optimal balance between the two? 2. Pollution from production can have negative effects on the environme~t. This in turn can affect the economy through diminished resource supply. What is viii the optimal use of these environmental resources so that we can sustain our productive capabilities? 3. Carbon emissions need to be controlled. A tax on emissions would encourage switching away from carbon intensive fuels. How should this tax behave over time - should it rise or fall? 4. With increasing populations, resources are being used up dramatically. Can we get to a point where the economy can be sustained while maximising human welfare? 5. What happens to a private firm's output decisions when it has to conform to environmental regulations? The models are useful for studying sustainable development in that they provide us with the steady state relations of a sustainable economy and, in some cases, the short run dynamics

Asymmetric Labour Markets in a Converging Europe: Do Differences Matter?

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.Labour markets, Asymmetries, Monetary policy rules, feedback rules, stochastic simulations, Macro-economic stabilisation.

The real exchange rate and quality improvements

This paper studies how the real exchange rate might respond to product innovation (improvements in the quality of goods) as opposed to process innovation (increased efficiency in the production of goods). We develop a two-country dynamic stochastic general equilibrium model, where quality improvements affect both the demand and the supply side of the economy. We show that the real exchange rate defined in terms of prices per quality unit (quality-adjusted prices) does not always move in the same direction as that defined in terms unit prices (quality-unadjusted prices), illustrating the importance of measuring quality correctly.

Fiscal policy in EMU : simulating the operation of the stability pact

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