Booms and Busts in EMU

A floating exchange rate combined with a clear inflation target can be a powerful stabilizer even if there are fluctuations in exchange rates that are unrelated to current fundamentals. Under plausible conditions, most of the stabilisation will occur through the exchange rate, and fundamental shocks will generate considerable medium term exchange rate volatility. The consequences of asymmetric shocks inside EMU are worse than envisaged in early analyses of the EMU project such as Calmfors et al. (1997). Inflation and real interest rate differentials arise which magnify the imbalances and cause boom-bust cycles in the member countries.optimal currency area; imperfect competition; interest parity; real interest rate

Insider Bargaining Power, Starting Wages, and Involuntary Unemployment

Recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders, yet one typically assumes that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage for outsiders may be lower than the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces hiring of outsiders.starting wage; bargain; seniority; unemployment

Real and nominal wage adjustment in open economies

How are wages set in an open economy? What role is played by demand pressure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the medium term evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for aggregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.Wage formation; efficiency wage; turnover; bargaining; rent sharing; nominal wage rigidity; exchange rate policy; competitiveness

Why Don't Prices Fall in a Recession? Financial Constraints, Investment, and Customer Relations

We construct a model of a financially constrained firm making pricing and investment decisions. The firm operates in a market where customers respond slowly to price changes and there are implementation lags in investment (time to build). Our model implies that the markup over marginal cost is counter-cyclical, the product price responds slowly to demand shocks, and quickly to cost shocks, and the price is strongly related to investment. Estimating the decision rules on aggregate data for Swedish industry, we find that the qualitative results are in line with our model.customer market; price rigidity; price equation; investment equation

Real and Nominal Wage Adjustment in Open Economies

How are wages set in an open economy? What role is played by demand pressure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for aggregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.wage formation, efficiency wage, turnover, bargaining, rent sharing, nominal wage rigidity, exchange rate policy, competitiveness

Testing Theories of Job Creation: Does Supply Create Its Own Demand?

Although search-matching theory has come to dominate labor economics in recent years, few attempts have been made to compare the empirical relevance of search-matching theory to efficiency wage and bargaining theories, where employment is determined by labor demand. In this paper we formulate an empirical equation for net job creation, which encompasses search-matching theory and a standard labor demand model. Estimation on firm-level data yields support for the labor demand model, wages and product demand affect job creation, but we find no evidence that unemployed workers contribute to job creation, as predicted by search-matching theory.job creation, involuntary unemployment, search-matching, labor demand, competitiveness

Do Sticky Prices Make Sense?

Dynamic stochastic general equilibrium models with sticky prices are prominent in recent research on macroeconomic ‡uctuations. A main argument for these models is that they have solid microfoundations. But staggered prices and wages are imposed exogenously. How plausible are sticky prices and wages in these models? We show that, in a standard model, staggered wage and price setting implies implausibly large reshu ing of production and labor supply on the microeconomic level. Furthermore, rationality is violated because households sometimes end up with negative markups. Substantial “menu costs ” are needed in order to rationalize the assumed behavior. We present an alternative model with deep habits, e ¢ ciency wages, and ranking, which can generate a high degree of persistence without the above mentioned problems.

A Permanent Demand Theory of Pricing

Based on standard statis models of firm behavior one would expect the price of goods to increase with demand for a given level of costs. In empirical studies prices have generally been found to be unaffected by short run variations in demand, however. The model in this paper is consistent with this stylised fact. In the model, a demand shock that is perceived as temporary may lead to unchanged or even lower prices, while a permanent demand shock leads to higher prices

A Model of Nominal Contracts

A simple macroeconomic model with labor contracts is formulated. Under plausible conditions, i) the optimal labor contract leaves employment to be determined by the firm, ii) a small cost for writing a state-contingent contract may be sufficient to induce forms and insiders to write contracts with fixed nominal wages, so that iii) fluctuations in nominal demand lead to variations in output and employment