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

World trade and global integration in production processes: a re-assessment of import demand equations

It is common to observe that demand elasticities in trade equations for imports are implausibly large, and that they differ between countries. Both of these present us with problems, as they imply trade will rise without bound as a proportion of GDP. The research reported here looks for alternative empirical evidence of possible factors driving the increase in trade as a proportion of GDP. We show that the inclusion of the ratios of outward and inward FDI to GDP as additional openness and globalisation indicators appear to remove the spurious accuracy with which we are measuring demand elasticities. JEL Classification: F10, F23FDI, international trade

Macroeconomic impact from extending working lives (WP95)

This report presents findings from research, conducted by the National Institute of Economic and Social Research (NIESR) and funded by the Department for Work and Pensions (DWP). NIESR were commissioned to use their global econometric model, NiGEM, in order to model various scenarios involving extending working lives, and to quantify the macroeconomic effects therein. The core scenario is a one year increase in working life for the UK population that is gradually phased in over the period 2010-14. In addition to this, NIESR carried out a series of counterfactual analyses which modelled the loss to the economy from older people leaving the labour market early

Sustainable Adjustment of Global Imbalances

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.global imbalances, real exchange rate realignment, risk premia, US current account

Choosing the Regime in an Uncertain World, the UK and Monetary Union

The UK has to take a decision on EMU membership at some point, and the costs and benefits have to be evaluated. Different policy frameworks result in differing outcomes for the means and variances of economic variables such as inflation, output, and nominal and real exchange rates and interest rates. Changing the level of uncertainty in the economy may change the equilibrium level of output and investment. Hence membership of EMU has to be evaluated in the light of its impact on the volatility of target variables and on the impact of volatility on the level of output and welfare. We discuss a theoretical framework within which we can discuss these issues, and we undertake stochastic simulation on a large, New Keynesian model including all the European economies in order to evaluate the effects of membership on the level and volatility of output. Our experiments suggest that membership of EMU would reduce volatility and as a result raise the sustainable level of output and employment in the UK.EMU, exchange rate regimes, uncertainty and investment, UK membership