Do the ECB and the Fed really need to cooperate? Optimal monetary policy in a two-country world.

A two-country model with monopolistic competition and price stickiness is employed to investigate the implications for macroeconomic stability and the welfare properties of three international policy arrangements: (a) cooperative, (b) non-cooperative and (c) monetary union. I characterize the conditions under which there is scope for policy cooperation and quantify the costs of non cooperation and monetary union. The non-cooperative equilibrium may be suboptimal because of beggar-thy-neighbor and beggar-thyself effects, while monetary union may be suboptimal because of the sluggishness of relative prices. Both the costs of policy competition and of a monetary union are sensitive to the values assumed for the intertemporal and international demand elasticity and the degree of openness of the economy. Independently of the calibration scenario adopted, the ECB has little to gain by coordinating with the Fed.

For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics

We examine the effects that hosting and bidding for the Olympic Games has on macroeconomic outcomes in a panel of 184 countries spanning the period 1950-2006. Actual hosting of the Games generates positive investment, consumption, and output responses before, during, and after hosting. We detect anticipation effects: (i) bidding for the Olympic Games generates positive investment, consumption, and output responses at the time of the bidding; (ii) bidding for the Games has a transitory level effect. We confirm the presence of legacy effects: hosting the Games has a permanent level effect.mega-events, anticipation effects, demand shocks

The transition from national currencies to the Euro.

We initiated a survey to examine whether the transition from national currencies to the Euro involved significant increases in transaction times. Based on our sample of 42 observations, we found that the pure transaction time for making change did actually increase, while queuing time increased only in small shops. This increase in transaction time represented a more significant welfare loss than most estimated studies of shoe-leather cost have previously found.

Fiscal policy, pricing frictions and monetary accommodation

We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics

Gains from international monetary policy coordination: does it pay to be different?

This paper presents a new argument for international monetary policy coordination based on considerations of structural asymmetries across countries. In a two-country world with a traded and a non-traded sector in each country, optimal independent monetary policy cannot replicate the natural-rate allocations. There are potential welfare gains from coordination since the planner under a cooperating regime internalizes a terms-of-trade externality that independent central banks tend to overlook. Yet, with symmetric structures across countries, the gains are quantitatively small. If the size of the traded sector differs across countries, the gains can be sizable and increase with the degree of asymmetry. The planner's optimal policy not only internalizes the terms-of-trade externality, it also creates a terms-of-trade bias in favor the country with a larger traded sector. Further, the planner tries to balance the terms-of-trade bias against the need to stabilize fluctuations in the terms-of-trade gap. JEL Classification: E52, F41, F42Asymmetric Structures, International Policy Coordination, optimal monetary policy, Terms-of-Trade Bias

Does it cost to be virtuous? The macroeconomic effects of fiscal constraints

We study whether and how fiscal restrictions alter the business cycle features of macrovariables for a sample of 48 US states. We also examine the ”typical” transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.Budget restrictions, Fiscal policy transmission, Policy Rules, Dynamic Panels

Price differentials in monetary unions: The role of fiscal shocks

We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of deficits and output and construct two estimates for structural price differentials dynamics which optimally weight the information contained in the data for all units. Fiscal shocks explain between 14 and 23 percent of the variability of price differentials both in the US and in the EU. On average, expansionary fiscal disturbances produce positive price differential responses while distortionary balance budget shocks produce negative price differential responses. In a number of units, price differential responses to expansionary fiscal shocks are negative. Spillovers and labor supply effects partially explain this pattern while geographical, political, and economic indicators do not.Price differentials, Fiscal policy, Monetary unions, Bayesian methods

The elusive costs and the immaterial gains of fiscal contraints

We study whether and how fiscal restrictions alter the business cycle features macrovariables for a sample of 48 US states. We also examine the 'typical' transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.Business cycles, excessive debt, fiscal restrictions and US states

The structural dynamics of US output and inflation: What explains the changes?

We examine the dynamics of US output and inflation using a structural time varying coefficient VAR. We show that there are changes in the volatility of both variables and in the persistence of inflation. Technology shocks explain changes in output volatility, while a combination of technology, demand and monetary shocks explain variations in the persistence and volatility of inflation. We detect changes over time in the transmission of technology shocks and in the variance of technology and of monetary policy shocks. Hours and labor productivity always increase in response to technology shocks.Variability, Persistence, Transmission, Structural time varying VARs