The European Central Bank

The establishment of the ECB and with it the launch of the euro has arguably been a unique endeavor in economic history, representing an important experiment in central banking. This note aims to summarize some of the main lessons learned from this experiment and sketch some of the prospects for the ECB. It is written for "The New Palgrave Dictionary of Economics", 2nd edition. JEL Classification: E52, E5

International investment positions and exchange rate dynamics : a dynamic panel analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. JEL Classification: F31, F37, C2

Determinants of Human Development: Capturing the Role of Institutions

In this paper, we study development in a panel of 87 countries from 1970 to 2005. We focus on characterizing institutionally driven heterogeneities in the development effects of macroeconomic policies and on comparing the development process as measured by GDP to that measured by the Human Development Index (HDI). We do so within a novel dynamic panel modelling framework that can account for crucial aspects of both the cross-sectional and intertemporal features of the observed process of development, and that can capture the dependence of the development effects of macroeconomic policies on differences in countries’ persistent characteristics, such as their institutions. Among our findings are that macroeconomic policies affect development with less delay than suggested by conventional econometric frameworks, yet impact HDI with longer delay and overall less strongly than GDP. Differences in countries’ persistent characteristics may even affect the sign of the long-run development effects of a given macroeconomic policy: Fiscal stimuli in the form of government consumption expansions positively affect long-run GDP in countries with low institutional quality, but negatively affect long-run GDP in countries with high institutional quality.human development, institutions, dynamic panel modelling

International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks.Exchange Rate Determination, International Financial Integration, Dynamic Panel Data Models

Determinants of Human Development: Insights from State-Dependent Panel Models

In this paper, we study economic development in a panel of 84 countries from 1970 to 2005. We focus on characterizing heterogeneities in the development effects of macroeconomic policies and on comparing the development process as measured by GDP to that measured by the Human Development Index (HDI). We do so within a novel dynamic panel modelling framework that can account for crucial aspects of both the cross-sectional and intertemporal features of the observed process of economic development, and that can capture the dependence of the development effects of macroeconomic policies on differences in countries' persistent characteristics, such as their social norms and institutions. Among our findings are that macroeconomic policies affect economic development with less delay than suggested by conventional econometric frameworks, yet impact HDI with longer delay and overall less strongly than GDP. Differences in countries' persistent characteristics may even affect the sign of the long-run development effects of a given macroeconomic policy: Fiscal stimuli in the form of government consumption positively affect GDP in countries with low institutional quality, but negatively affect long-run GDP in countries with high institutional quality.human development, institutions and social norms, dynamic panel modelling.

On the Conditional Effects of IMF Program Participation on Output Growth

The empirical evidence currently available in the literature regarding the effects of a country's IMF program participation on its output growth is rather mixed. To shed new evidence on this issue, in this paper we specify a state-dependent panel data model accounting in particular for program participation selection and the potential conditionality of the output growth effects of program participation on a country's degree of program implementation and institutional factors such as quality of governance, internal stability, health, and educational attainment. We find that the effects of IMF program participation on output growth vary systematically with the degree of program implementation as well as our index of institutional factors, and that these effects are positive only if the IMF program is implemented to a sufficient degree or if the program participation is coupled with sufficient progress in improving institutional quality.IMF program participation, output growth, panel sample selection models, conditional pooling

Life-Cycle Models and Cross-Country Analysis of Saving

This paper develops a rational expectations life-cycle model designed as a framework for the cross-country analysis of (private) saving decisions. It is shown that a broad range of life-cycle models that have been used in the literature to study aggregate time series on consumption and saving fail to deliver plausible predictions for the purpose of analyzing saving decisions across countries as they imply that the level of saving has a constant mean and that the long-run saving rate may tend to zero. Introducing a utility specification that ties the long-run evolution of consumers' aspired consumption paths to that of aggregate labor income, an analytically tractable life-cycle model is proposed that has plausible long-run properties, including the implication that the net asset-labor income ratio, the saving rate, and the consumption-labor income ratio have meaningful long-run distributions. The moments of the long-run saving rate are shown to depend in a precise way on various characteristics of consumers' preferences, the real rate of interest, the growth rate and volatility of labor income, the government consumption-labor income ratio, and the government debt-labor income ratio. Employing a data set on saving rates and asset holdings across OECD economies and using techniques for the estimation of dynamic heterogeneous panels, the paper will also adduce empirical evidence assessing the model's ability to explain differences in the saving patterns across these economies.

International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis

In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks.exchange rate determination, international financial integration, dynamic panel data models