Scotland: A New Fiscal Settlement

Tax and Expenditure Devolution, Inter-Government Relations, Fiscal Federalism, State Budget, Fiscal Coordination.

Labour and Product Market Reforms in the Economy with Distortionary Taxation

It is widely accepted that in order to improve the economic position of the EU relative to the USA certain structural reforms need to be undertaken, mainly in the labour market. However few EU countries have undertaken such reforms. The reason lies in the fact that those reforms are going to be costly in terms of economic performance, unemployment and hence the cost of financing them - at least in the short term. Blanchard and Giavazzi (2003) develop a model based on imperfect competition in both product and labour markets in order to show the impact of deregulation on the economy. However they do not consider the question of how to finance such reforms or overcome the short run costs, a key consideration if the short run costs are large relative to the long run gains. We extend their model by including the effects of another inevitable source of imperfections: distortionary taxation - not only the most likely candidate for reform, but also the most likely instrument for financing the restructuring process. By extending the model in this way we can establish formally that reforms imply significant short run costs as well as long run gains; that (political opposition apart) the financing of such reforms will be the main stumbling block. We come to a number of conclusions which reverse the Blanchard and Giavazzi results; and find that, in addition, the composition of the reform package matters, as does the distribution of the tax burden. This model therefore supplies new results on the design and sequencing of reforms.Structural Reform, Wage Bargains, Short vs Long Run Sustainability.

Central Bank Transparency in Theory and Practice

We study the effects of Central Bank transparency on inflation and the output gap. We thus first identify a small analytical model which concludes that transparency affects the variability of inflation and output and not their average levels. Then we examine whether this conjecture holds empirically, employing the recently derived index of transparency by Eijffinger and Geraats. The empirical findings confirm that the averages are not affected by transparency. It does seem to explain however, about 50% of the variability in inflation. The relation between transparency and output volatility is less clear but appears to be positive rather than negative.central bank, economic and political transparency, inflation and output gap performance

A Time-Frequency Analysis of the Coherences of the US Business

The dating of a possible European business cycle has been inconclusive. At this stage, there is no consensus on the existence of such a cycle, or of its periodicity and amplitude, or of the relationship of individual member countries to that cycle. Yet cyclical convergence is the key consideration for countries that wish to be members of the currency union. The confusion over whether and to what degree the UK is converging on the cycles of her European partners, or whether her cycle is more in line with the US, is an example of this lack of consensus. We show that countries will vary in the components and characteristics that make up their output cycles, as well as in the state of their cycle at any point of time. Next, we show how to decompose a business cycle in a time-frequency framework. This allows us to decompose movements in output, both at the European level and in member countries, into their component cycles and allows those component cycles to vary in importance and cyclical characteristics over time. It also allows us to determine if the inconclusive convergence results so far have appeared because member countries have some cycles in common, but diverge at other frequenciesTime-Frequency Analysis, Coherence, Growth Rates, Business Cycle

When can an Independent Central Bank offer lower Inflation at no Cost? A Political Economy Analysis.

An Independent Central Bank is often associated with being able to achieve low inflation and greater output stability than government run policies. In this paper we examine whether, and under what circumstances, an independent Central Bank can achieve both these targets with only one policy instrument at its disposal. This turns out to be possible in some special cases, or sometimes for limited periods of time, but not in general. It is an outcome which arises when increasingly conservative policies reduce the 2 target, 1 instrument conflicts, rather than from the suppression of any political cycle.

Trans-Pacific Economic Relations and US-China Business Cycles: Convergence within Asia versus US Economic Leadership

This paper tests the hypothesis that the links and leadership/dependency relationships between the People’s Republic of China (PRC), the United States (US), and the other large Asian economies have changed over the past 20 years with the industrialization of the PRC economy. We use time-varying spectral methods to decompose the links between seven advanced Asian economies and the US. We find: (a) the links with the US have been weakening, while those within a bloc based on the PRC have strengthened; (b) that this is not new—it has been happening since the 1980s, but has been partly reversed by the recent surge in trade; (c) that there are two blocs within the Asian economic area: one based on Japan and the Republic of Korea and the other on the PRC and her satellites; (d) that product composition is responsible for this division (and for some movement between the blocs); and (e) that the links between the PRC and the US are rather complex, with the US able to shape the cycles elsewhere through her control of monetary conditions, but the PRC able to control the size of the cycles at home and (to some extent) abroad.trans-pacific economic relations; us-china trade; us economic leadership; industrialization prc economy; advanced asian economies

Time Varying Cyclical Analysis for Economies in Transition

The identification of a possible European business cycle has been inconclusive and is complicated by the enlargement to the new member states and their transition to market economies. This paper shows how to decompose a business cycle into a time-frequency framework in a way that allows us to accommodate structural breaks and nonstationary variables. To illustrate, calculations of the growth rate spectrum and coherences for the Hungarian, Polish, German and French economies show the instability of the transition period. However, since then there has been convergence on the Eurozone economy at short cycle lengths, but little convergence in long cycles. We argue that this shows evidence of nominal convergence, but little real convergence. The Maastricht criteria for membership of the Euro therefore need to be adapted to test for real convergence.Time-Frequency Analysis, Coherence, Growth Rates, Business Cycle

Are Capital Markets Efficient? Evidence from the Term Structure of Interest Rates in Europe

This paper investigates the uncovered interest parity hypothesis in an unusual way. We provide empirical evidence on the efficiency of capital markets using a time domain approach. However, a common prediction from theoretical models is that inefficient capital markets cause greater volatility of the observed time series. By using cross spectral analysis we are able to test this proposition directly. We show, in particular, how this can be done for time-varying models and time-varying spectra. We use our techniques to examine the changing stability of the relationship between British and German interest rates during and following the ERM crisis of 1992/3.