Adjustment in EMU: A model-based analysis of country experiences

This paper uses a two-country-three-sector DSGE model to analyse adjustment in the Euro area. A particular distinction is made between tradeables and non tradeables and non tradeables are further disaggregated into housing and services. The experience of six countries which have shown strong divergences in the early years of the euro area, namely Germany, Ireland, Italy, the Netherlands, Portugal and Spain is analysed. The framework allows replication of actual developments in euro-area Member States using a model that is inherently stable. It is found that to a large extent, the diverging growth and inflation developments and current account shifts can be attributed to one-off adjustment to EMU which broadly seems to have run its course. The absence of an exchange risk premium in EMU allows an increase in capital mobility resulting in a lower correlation between domestic savings and investment. Increased capital mobility seems to have been an important driving force behind the current account dynamics. Due to the absence of risk premia, investment - and especially housing investment - responds strongly to exogenous shocks.DSGE model, adjustment in the Euro area, exchange risk premium in EMU, capital mobility, risk premia, exogenous shocks, Langedijk, Roeger

Effects of exclusion on social preferences

In three party ultimatum games the proposer can first decide whether to exclude one responder, what increases the available pie. The experiments control for intentionality of exclusion and veto power of the third party. We do not find evidence for indirect reciprocity of the remaining responder after the exclusion of the other. Similarly, not excluding the second responder is only insignificantly reciprocated by it. Overall, we find little evidence that intentional exclusion has substantial effects on behavior.Exclusion, bargaining, ultimatum game, social preferences, experiment

Reviewing adjustment dynamics in EMU: from overheating to overcooling

This paper analyses how adjustment dynamics, in an environment with some degree of price and wage rigidity, may create and strengthen asymmetric developments in a monetary union. It presents a simple illustrative model of adjustment dynamics that reproduces quite nicely actual developments in the first years of EMU. The model is used to analyse adjustments to two types of shocksrelative competitiveness shifts and demand disturbances. It is shown that the interaction between real exchange rate adjustment and real interest rate developments may contribute to periods of overheating and overcooling during which output might be for a number of years either above or below potential.Furthermore, the paper looks at the circumstances in which smooth adjustment to shocks can be expected and, on the other hand, when a cycle with greater amplitude is more likely. Finally, the paper examines policy options that could improve the functioning of EMU. The analysis provides another strong argument for pressing ahead with reforms that increase flexibility in labour and product markets and further integrate the economies of the euro area.economic and monetary union, EMU, adjustment dynamics, demand disturbances, relative competitiveness shifts, overheating, overcooling, Deroose, Langedijk, Roeger

Do Social Networks Inspire Employment? - An Experimental Analysis -

There is robust field data showing that a frequent and successful way of looking for a job is via the intermediation of friends and relatives. Here we want to test this experimentally. Participants first play a simple public goods game with two interaction partners ('friends'), and share whatever they earn this way with two different sharing partners ('cousins') who have different friends. Thus one's social network contains two 'friends' and two 'cousins'. In the second phase of the experiment participants learn about a job opportunity for themselves and one additional vacancy and decide whom of their network they want to recommend and, if so, in which order. In case of coemployment, both employees compete for a bonus. Will one recommend others for the additional job in spite of this competition, will one prefer 'friends' or 'cousins' and how does this depend on contributions (of 'friends') or shared profits (with 'cousins')? Our findings are partly quite puzzling. Most participants, for instance, recommend quite actively but compete very fiercely for the bonus.

Something is sustainable in the state of Denmark:A review of the Danish district heating sector

This paper provides a coherent review of district heating in Denmark, exploring past, present and future perspectives. Danish district heating is known as unique internationally in terms of heat planning strategies, technical solutions and combinations, energy efficiency and sustainability, ownership models and financing, and it has captured the attention of district heating communities and stakeholders worldwide from the early days. Historically, a ban on landfills incentivised waste incineration, and the strategic integration of combined heat and power plants and recycling of waste heat from industry all increased energy efficiency in the energy system. Ultimately, this contributed to the top World Energy Council ranking of the Danish energy system according to the energy trilemma criteria. A cooperative mind-set, welfare state values and the notions of energy efficiency-, availability-, independency- and sustainability were all pivotal for the evolution of the district heating networks throughout Denmark. Other unique features of the Danish district heating sector include large-scale collective heat planning, the mandatory connection, the non-profit principle, the same approximate price for customers irrespective of heat density, and the relatively high average price of district heating. Moreover, district heating knowledge hubs have led to world-wide exports of district heating technologies and know-how. Future challenges for the Danish district heating sector include increasing biomass import dependency, the changing role of combined heat and power plants in the energy system, transitions to non-combustion heat supplies, and competition from individual heat pumps in single-family houses. However, future ‘smart’ thermal grids will increasingly facilitate sector coupling processes as more renewable energy resources are integrated into the energy system in Denmark and internationally

Bernanke/Blinder revisited - The New Keynesian model with credit channel

This paper integrates a money and credit market into a static approximation of the baseline New Keynesian model based on a money-and-credit-in-the-utility approach, in which real balances and borrowing contribute to the household's utility. In this framework, the central bank has no direct control over the interest rate on bonds. Instead, the central bank's instrument variables are the monetary base and the refinancing rate, i.e. the rate at which the central bank provides loans to the banking sector. Our approach gives rise to a credit channel, in which current and expected future interest rates on the bond and loan market directly affect current goods demand. The credit channel amplifies the output effects of isolated monetary disturbances. Taking changes in private (inflation and interest rate) expectations into account, we find that - contrarily to Bernanke and Blinder (1988) - the credit channel may also dampen the output effects of monetary disturbances

Volatility effects of news shocks in (B)RE models with optimal monetary policy

This paper studies the volatility implications of anticipated cost-push shocks (i.e. news shocks) in a New Keynesian model under optimal unrestricted monetary policy with forward-looking rational expectations (RE) and backward-looking boundedly rational expectations (BRE). If the degree of backward-looking price setting behavior is sufficiently small (large), anticipated cost-push shocks lead to a higher (lower) volatility in the output gap and in the central bank's loss than an unanticipated shock of the same size. The inversion of the volatility effects of news shocks between rational and boundedly rational expectations follows from the inverse relation between the price-setting behavior and the optimal monetary policy. By contrast, if the central bank does not optimize and follows a standard Taylor-type rule and the price setters are purely (forward-) backward-looking, the volatility of the economy is (increasing with) independent of the anticipation horizon. The volatility results for the inflation rate are ambiguous

A terminological note on cyclotomic polynomials and Blaschke matrices

In a recent paper, Mertens and Ravn (2010) study the effects of anticipated fiscal policy shocks in a structural vector autoregressive model. The authors maintain that (i) the lag polynomial associated with news shocks is a cyclotomic polynomial and (ii) the matrix B(L) which transforms a nonfundamental MA representation into a fundamental one is a Blaschke matrix. Though the results in Mertens and Ravn (2010) are correct, we find that the terms 'cyclotomic' and 'Blaschke matrix' are misused