Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries

The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, for a class of technologies including Cobb-Douglas, the model implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, the model assumes that purchasing power parity holds for traded goods in the long-run. We test each of these implications using data from a panel of OECD countries. Our results suggest that the first of these two fits the data quite well. In the long run, relative prices generally reflect relative labor productivities. The evidence on purchasing power parity in traded goods is considerably less favorable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. On the other hand, when we look at DM exchange rates purchasing power parity appears to be a somewhat better characterization of traded goods prices.

How Do Monetary and Fiscal Policy Interact in the European Monetary Union?

Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).

The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?

Fifty years ago, the Chicago School argued that flexible exchange rates would insulate employment from foreign economic disturbances: there is no need for policy coordination; flexible exchange rates suffice. Twenty five years later, the Bretton Woods system was gone, and the first generation of policy coordination models was introduced. Chicago School arguments not withstanding, these Old-Keynesian models provided a theoretical rational for policy coordination. Now, a new generation of policy coordination models is emerging. These New-Keynesian models incorporate optimizing households, monopolistic competition and nominal inertia. Here, we examine macroeconomic interdependence and the scope for policy coordination in a tractable second generation model that has received much recent attention. We relate our discussion to the old Chicago School arguments, to earlier analyses of first generation models, to recent empirical work on productivity, and to recent theoretical work on closed economy models. We conclude that second generation models may have more scope for policy coordination than did the first, and we identify the empirical work that is needed to give a serious answer to the question.

Price- and wage- inflation targeting: variations on a theme by Erceg, Henderson, and Levin

Inflation (Finance) ; Prices ; Wages

The Macroeconomic Implications of a Key Currency

What are the macroeconomic consequences of the dominant role of the dollar in the international monetary system? Here, we present a calibrated two country model in which exports are invoiced in the key currency, and government bonds denominated in the key currency are held internationally to facilitate trade. Domestic government bonds and money are held in each country to facilitate domestic transactions. Our model generates deviations from uncovered interest parity that are as volatile as some empirical estimates, but much too small by others. Our model also speaks to some other empirical anomalies, such as the Backus - Smith puzzle. Shocks affecting asset supplies -- such as bond financed tax cuts, and open market operations -- have large effects in our model because they generate non-Ricardian changes in household wealth. Generally, shocks emanating from the key currency country do more to destabilize the world economy than equal sized shocks coming from the other country. Similarly, monetary and fiscal policy innovations in the key currency country are more potent than those in the other country. On the other hand, the key currency country is more vulnerable to financial market turbulence, such as a sell off of key currency bonds, which can lower consumption dramatically.

Social modulation of peripersonal space boundaries

The space around the body, i.e., peripersonal space (PPS), is conceived as a multisensory-motor interface between body and environment. PPS is represented by frontoparietal neurons integrating tactile, visual, and auditory stimuli occurring near the body [1-7]. PPS is plastic, because it extends by using a tool to reach far objects [8-10]. Although interactions with others occur within PPS, little is known about how social environment modulates it. Here, we show that presence and interaction with others shape PPS representation. Participants performed a tactile detection task on their face while concurrent task-irrelevant sounds approached toward or receded from their face. Because a sound affects touch when occurring within PPS [6, 10-12], we calculated the critical distance where sounds speeded up tactile reaction time as a proxy of PPS boundaries. Experiment 1 shows that PPS boundaries shrink when subjects face another individual, as compared to a mannequin, placed in far space. Experiment 2 and 3 show that, after playing an economic game with another person, PPS boundaries between self and other merge, but only if the other behaved cooperatively. These results reveal that PPS representation is sensitive to social modulation, showing a link between low-level sensorimotor processing and high-level social cognition. © 2013 Elsevier Ltd

Changes in cortical oscillations linked to multisensory modulation of nociception

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