Smooth it Like the “Joneses?” Estimating Peer-Group Effects in Intertemporal Consumption Choice

Recent theoretical contributions have suggested peer-group effects as a potential explanation for several puzzles in macroeconomics, but their empirical relevance for intertemporal consumption choice is an open question. We derive an extension of the standard life-cycle model that allows for consumption externalities. In this framework, we propose a social multiplier approach to distinguish true externalities from merely correlated effects. Estimating our model using US panel data, we find strong predictable co-movement of household consumption within peer groups. Although much of this co-movement reflects correlated effects only, there is statistically significant evidence for moderate consumption externalities across several plausible peer-group specifications.

Do the "Joneses" really matter? Peer-group versus correlated effects in intertemporal consumption choice

Recent theoretical contributions have suggested consumption externalities, or peergroup effects, as a potential explanation for some of the puzzles in macroeconomics and finance. However, the empirical relevance of peer effects for intertemporal consumption choice is a completely open question. To shed some light on the issue, we derive an extension of the standard life-cycle model that allows for consumption externalities. The analysis is complicated by the challenge of disentangling actual peer effects from merely correlated effects operating through common features or shocks within peer groups. We show how to conduct reliable inference under these circumstances based on within-group equilibrium conditions that give rise to a social multiplier. This approach can be understood as an adaptation of Manski's "reflection problem framework" to the case of dynamic models with endogenous regressors. We estimate our model using US panel data from the PSID. While there is strong predictable consumption co-movement within peer groups, the evidence for true consumption externalities vanishes once correlated effects are adequately accounted for.Consumption, Life-Cycle Model, Peer Effects, Reflection Problem

For a stable monetary policy and tax competition in Euroland

Since the fall of last year, EMU countries have experienced a slowdown in economic activity triggered by a deceleration of exports. The expansion of internal demand has been more or less intact due to low interest rates and higher terms of trade. Consumer confidence has continued to rise and business confidence seems to have stabilized in early 1999. Economic activity in Euroland will gain momentum again in the course of 1999, mainly driven by domestic demand. The increase in real GDP will amount to 2 percent in 1999 and 2.7 percent in the year 2000. Monetary conditions are currently very favorable and will support the upswing. The three-month money market rate fell to 3.1 % following the concerted reduction of central banks' key interest rates in December 1998. Long-term interest rates are extremely low; corrected for inflation, the rate for Euroland is lower than the long-term average for Germany. In recent months, the growth rate of M3 has been somewhat higher than the reference value announced by the ECB (4.5 percent); narrow money has expanded twice as fast as M3. In addition, the euro has devalued considerably against the US dollar since the beginning of this year. Given the expectation that the slowdown in the economy is only of temporary nature, the ECB will not loosen its policy further but keep its key interest rate at the current low level for the rest of this year. The ECB decided to follow a medium-term strategy. Against this background, the current weakness in Euroland does not imply a need for action. Low inflation is also no reason to cut interest rates because consumer prices have been dampened by special factors, in particular the weakness of raw material prices, and not by a tight monetary policy. If interest rates were lowered in response to this transitory change, they would have to be raised again as soon as this effect fades away. Such a stop-and-go policy should be avoided. Likewise, the recent weakness of the euro against major currencies does not suggest that interest rates should be raised. For very good reasons, the ECB—as well as the American Federal Reserve Board—does not follow a target for exchange rates. According to the Stability and Growth Programs published by the governments, budget deficits in relation to GDP are projected to decline from 2.3 percent in 1998 to 0.9 percent in the year 2002 in Euroland. As the Stability and Growth Pact calls for a balanced budget or even a surplus over the medium term, fiscal policy is, in general, not yet on a course compatible with the intentions of the Maastricht Treaty. Only in smaller countries fiscal policy is making progress, while consolidation in larger member countries is not sufficient. It has often been argued that it is necessary to harmonize VAT rates and particularly capital income taxation in the EU in order to prevent a "race to the bottom", otherwise it would be impossible to supply an adequate level of public goods and to finance the welfare state. However, the development of capital income tax rates in the EU and in other industrialized countries does not provide evidence of a race to the bottom. But even if tax competition should become fiercer, there are still arguments in favor of competition: If tax rates are cut in a process of competition, government expenditures will have to decline with the result that inefficiencies in the public sector will be reduced. Given the high levels of government expenditures in most of the EU countries, there seems to be no risk that governments would be unable to fulfill their specific functions. In addition, tax competition might help to find better tax systems, and every country could learn from the experiences of other countries. In contrast, tax harmonization would probably lead to higher taxes in the EU. --

Higher economic growth through macroeconomic policy coordination? The combination of wage policy and monetary policy

Strengthening potential output is high on the agenda for economic policy in the European Union. While there is widespread agreement that structural policies have a positive impact on long-term growth, there is a controversial discussion whether coordination of macroeconomic policies can contribute to this goal. Against the background of the new economic conditions in the euro area, we analyze what could be gained from a combination of wage policy and monetary policy. Using a small theoretical macroeconomic model, we show that coordination between wage policy and monetary policy can be beneficial under certain assumptions. A policy of sustained wage moderation results in an increase in employment and potential output. Assuming that expectations are not completely forward-looking and prices are sticky, the upward shift in potential output will not be matched by a similar increase in aggregate demand. To prevent an output gap from emerging, the optimal monetary policy is to lower interest rates. However, a central bank aiming at price stability will only do so when the announcement of a policy of sustained wage moderation is credible. Simulations with a large macroeconometric multicountry model confirm that a coordination of German wage policy and ECB monetary policy would help to realize the beneficial effects of wage moderation somewhat faster, although the quantitative effect is relatively small. The long-run gain in employment would accrue regardless of a coordination with monetary policy. According to the simulations, employment in Germany would increase by about 750,000 persons in the long run if wages increase one percentage point slower than usual over a period of five years. Frequently, countries with a particularly positive economic development are said to have benefited from a coordination of macroeconomic policies. However, only a small part of the growth and employment success in these countries can be accounted for such a coordination. In the case of the United States, it is hard to see any evidence of ex ante policy coordination at all. In the Netherlands and in Ireland, a consensual strategy of wage restraint for improving the competitiveness of the economy and stimulating employment has been a significant factor of the economic success. It was important in both cases that significant supply side reforms were implemented by the governments at the same time, whereas monetary policy played no active role. Coordination of macro policies is severely complicated by the pronounced differences in national wage bargaining systems. The systems would have to be harmonized and centralized to create a single European wage policy. It is, however, unlikely that centrally designed harmonization of labor market institutions in the EU can cope with the differences across Euroland regarding productivity and employment. In the framework of the European Union, the presumed positive effects of policy coordination are stressed over and over again, for example in the Broad Economic Policy Guidelines. However, clear definitions and mechanisms how such a coordination can be achieved are missing. The fundamental difficulty concerning a coordination between wage policy and monetary policy arises from two facts: First, there is no such thing as “the” wage policy at the European level. Second, the statute of the ECB does not allow a binding commitment by the central bank. This does not mean, however, that the ECB would not take account of what is happening, for example, to wage developments. According to the monetary policy strategy, it should react if there is an increase in the growth rate of potential output as a result of wage moderation. For example: If the social partners in a large country such as Germany give a credible signal that wage increases will be moderate for several years, the ECB could accommodate this change. However, such a strategy cannot be reversed in that the ECB moves first hoping that wage moderation will follow. --

Evidence of the new economy at the macroeconomic level and implications for monetary policy

The notion of new economy was coined in the United States when there was increasing evidence that, as a result of the introduction of new technologies, the traditional behavior of macroeconomic variables might have changed. The expansion of the 1990s differed from its predecessors in three important respects: productivity, inflation, and cyclical variability. In the United States, labor productivity increased much faster in the 1990s than in the previous decades and, contrary to the usual pattern, accelerated with the duration of the expansion. The view that most of the productivity acceleration was only cyclical and therefore not sustainable over a longer period of time has proven overly pessimistic. Productivity growth has remained on its elevated since the economy peaked. In other large industrial countries, by contrast, productivity growth has continued to decline or has improved only very slightly at best. Differences in productivity trends between the United States and other large industrial countries can be explained partly by the fact that in the United States IT production is more important and IT implementation relatively advanced. In addition, the identification of IT-related productivity gains in Europe is complicated by the general trend towards deregulation in labor and product markets and moderate wage increases that contributed to a rise in labor intensity, which tends to lower advances in productivity. In contrast to productivity developments, the behavior of inflation is consistent with a new economy in all large industrial countries. The moderate inflation can, however, be explained by adequate monetary policies and cyclical influences. Similarly, the analysis of cyclical variability concludes that changes in economic policies are a more important factor in explaining the reduced fluctuations in U.S. GDP than the advent of IT. A technology shock which raises the permanent level of output and, at least temporarily, the growth rate of the production potential has implications for monetary policy. In a world with rational expectations and sticky prices, the optimal reaction of monetary policy to an acceleration of potential output growth is to raise interest rates. The reason is that the expectation of higher incomes in the future causes current spending to grow faster than potential output and thus leads to inflationary pressure. In reality the optimal response of monetary policy to a shift in production potential is difficult to assess given the uncertainty concerning the timing and magnitude of new economy effects on the real economy. Being too expansionary probably has more severe consequences than erring on the other side, because the positive real effects would work through anyway, while inflationary expectations, once triggered, are difficult to reduce. --

Moderate upswing in Euroland

Economic activity in the euro area is recovering. In the second half of 2003, real GDP grew at an annualized rate of roughly 1½ percent. In contrast with other large industrialized countries, economy-wide capacity utilization has not yet increased. Private consumption has remained the major weak point. However, private investment has increased for the first time since 2½ years and exports have risen rapidly, stimulated by the strong upswing in the rest of the world. A number of leading indicators suggest that the recovery in Euroland has gained some momentum since the turn of the year. Despite an expansionary monetary policy and the dynamic world economy, real GDP in the euro area will rise only moderately in comparison with earlier upswings. This is due to two factors. First, potential output growth in the euro area has apparently decelerated. Second, fiscal policy especially in the large euro-area economies is not sustainable. As governments do not have a credible consolidation strategy, the tax burden is likely to increase in the coming years. Against this background private households? income prospects are subdued and, as a consequence, private consumption will remain comparatively weak. The appreciation of the euro has had a considerable effect on economic activity, but it will not stop recovery. The results of our macroeconometric model imply also that the effects will be small in 2005 if, as we assume, the euro/ dollar exchange rate remains unchanged. Some observers urge the ECB to react to the strength of the euro by cutting interest rates. Whether the ECB should do so depends solely on the way in which the appreciation of the euro impacts the targets embedded in its monetary policy strategy. The main issue is whether the appreciation of the euro will push the inflation rate considerably below the target value. Past experience suggests that it would be unwise to assume it will have a strong dampening effect on consumer prices. Since the beginning of monetary union inflation forecasts have usually been too optimistic. All in all, the ECB is well advised not to cut interest rates in response to recent exchange rate developments. Interest rates in the euro area are already unusually low and stimulate economic activity. The Stability and Growth Pact requires the governments in euro-area countries to achieve a balanced budget or a budget surplus in the medium run. The main problem at present is not that budget deficit to GDP ratios are higher than 3 percent in some countries, but that structural deficits are also very high. Seven years after the adoption of the Pact the large countries still have made no progress on the way to a balanced budget. In Germany and France the structural deficits are even higher than before the monetary union. The recent Stability Programs of these countries suggest that the balanced- budget target has been given up altogether. This is eroding the credibility of fiscal policy and constitutes a heavy blow to economic stability in the euro area. Unsound fiscal policy negatively affects expectations in the private sector and is likely to result in a further deceleration of potential output growth. --

Strong exports and low interest rates drive Euroland's economy

In the fall of 1999, the recovery in Euroland is back on track. The turnaround was caused by the improvement in the world economy. After exports had been depressed in the past winter due to the weak demand in the crisis countries particularly in Asia, the impulses from abroad have picked up again. Furthermore, monetary policy has been expansionary, especially after the reduction of key interest rates in April this year. All in all, the upswing will gain momentum and will continue in the year 2000. In this paper, rules for monetary policy which are being discussed in the literature are used to gauge the stance of monetary policy. The conclusion is that interest rates will have to be raised if the reference path for money shall not be exceeded and if the target for inflation shall be achieved. Furthermore, the differences in growth rates of output across Euroland's economies are analyzed; it is found that there has been no significant convergence of income levels during the past decade. Finally, it is analyzed why inflation rates have differed in recent years. The main reason appears to be that the prices for nontradables in the various countries show different rates of change over time. Since such differences can also be expected for the future, inflation rates will not be equal, i.e., there will also be changes in real exchange rates in the monetary union. However, there is no reason for monetary policy to be concerned about this. --

Survey of Water and Ammonia in Nearby galaxies (SWAN): Resolved Ammonia Thermometry, and Water and Methanol Masers in IC 342, NGC 6946 and NGC 2146

The Survey of Water and Ammonia in Nearby galaxies (SWAN) studies atomic and molecular species across the nuclei of four star forming galaxies: NGC\,253, IC\,342, NGC\,6946, and NGC\,2146. As part of this survey, we present Karl G. Jansky Very Large Array (VLA) molecular line observations of three galaxies: IC\,342, NGC\,6946 and NGC\,2146. NGC\,253 is covered in a previous paper. These galaxies were chosen to span an order of magnitude in star formation rates and to select a variety of galaxy types. We target the metastable transitions of ammonia NH$_{3}$(1,1) to (5,5), the 22\,GHz water (H$_2$O) ($6_{16}-5_{23}$) transition, and the 36.1\,GHz methanol (CH$_3$OH) ($4_{-1}-3_{0}$) transition. {We use the NH$_{3}$\ metastable lines to perform thermometry of the dense molecular gas.} We show evidence for uniform heating across the central kpc of IC\,342 with two temperature components for the molecular gas, similar to NGC 253,} of 27\,K and 308\,K, and that the dense molecular gas in NGC\,2146 has a temperature $<$86 K. We identify two new water masers in IC\,342, and one new water maser in each of NGC\,6946 and NGC\,2146. The two galaxies NGC\,253 and NGC\,2146, with the most vigorous star formation, host H$_2$O kilomasers. Lastly, we detect the first 36\,GHz CH$_3$OH\ masers in IC\,342 and NGC\,6946. For the four external galaxies the total CH$_3$OH\ luminosity in each galaxy suggests a correlation with galactic star formation rate, whereas the morphology of the emission is similar to that of HNCO, a weak shock tracer