Savings, Investment and Growth: New Approaches for Macroeconomic Modelling

We prove that profit maximization behavior and the neoclassical growth model can be consistent. Moreover, we present a new medium term Keynes-Solow macro model. The short-term Keynesian macroeconomic model shows that a rise in the savings rate will reduce output, while higher savings imply for the neoclassical growth model a rise in the long run per capita income. The Keynes-Solow model sheds new light on the role of the savings rate. The Keynes-Solow model presented links both the short run and the long run, thus suggesting a new way of consistent macroeconomic modelling and of analyzing the efficiency of fiscal and monetary policy - and the role of supply-side policy. The model also is applied to some key issues of the New Economy, whose characteristics affect the effectiveness of fiscal policy and other policy instruments. The model presented suggests that government policy should focus not only on short term effects but more on medium term aspects. The medium term effect of monetary policy is larger than in the short run. Supply-side policy will raise medium term output whenever the golden rule is fulfilled and under certain other conditions, too. Our conclusions go well beyond the monetarist debate and put the focus on the consumption function, the output elasticity of capital and the depreciation rate - as well as the role of foreign direct investment.Neoclassical growth model, Keynes-Solow model, macroeconomic modelling

Marshall-Lerner Condition and Economic Globalization

The analysis considers the impact of FDI inflows and FDI outflows and shows that the presence of (cumulated) FDI requires higher import elasticities in absolute terms than stated in the standard Marshall Lerner condition. One may derive a range for the elasticity of the ratio of exports to imports with respect to the real exchange rate, namely that the sum of the absolute import elasticities at home and abroad must exceed unity plus an addi-tional parameter - for standard special cases the sum of both elasticities must exceed 2 if a real depreciation is to improve the real current account. Not only can one determine a modified Marshall Lerner condition for a world economy with economic globalization, rather one also can get new insights from considering a broader macroeconomic perspective. The insights obtained are highly relevant for the discussion about high deficits of the US and high surplus positions of countries such as Japan, China and Germany. The relevance of real income effects for current account adjustment - much emphasized by McKinnon - is emphasized here in a specific way: there is a direct real income effect of changes of the real exchange rate.Marshall-Lerner Condition, FDI, Current Account, Globalization

Growth, Structural Dynamics and EU Integration in the Context of the Lisbon Agenda

The long term dynamics of growth and structural change in open economies are discussed where integration aspects are included. Taking a closer look at basic economic dynamics, namely developments in terms of sustainable growth and international interdependencies, the theoretical section emphasizes international links on the demand side as well as (within a theoretical innovation) on the supply side. The latter basically means the production function where a broader range of inputs, including technology effects and aspects of foreign direct investment are considered. For the first time, the distinction between efficient international specialization and golden efficient international specialization is discussed here. With respect to the EU, the Lisbon Agenda is discussed and various policy conclusions are drawn. The Euro area has considerable strong points in terms of a high potential for sustained growth; at the same time, one cannot overlook that aging, and partly weak prudential supervision represent serious challenges. The EU has achieved some increase in the growth of productivity and output due to its modernization efforts in the field of telecommunications and information as well as communication technology. Major challenges for policymakers are identified, including the field of green ICT, which could become a common field of cooperation between the EU and China.Economic Growth, Structural Change, Economic Integration, Lisbon Agenda

Portfolio Modelling and Growth

The standard BRANSON model is modified in a way which allows one to focus on the short term dynamics of foreign bonds markets, the money market and the stock market - or alternatively the oil market. This allows us to explain the dynamics of the exchange rate and the oil price within a portfolio choice model; also we identify critical expectation dynamics in a more conventional pricing approach to the oil market - expectations determine whether or not the oil market equilibrium is compatible with a stationary price or with sustained oil price inflation. Moreover, a straightforward innovative way to combine a portfolio approach with a growth model is developed. New results are obtained – through multiplier analysis – about the long term effects of changes in the savings rate, the process innovation rate, the product innovation variable and the money supply on the exchange rate and the stock market price; this raises many empirical issues. Finally, the analysis presented sheds new light on the global asset price dynamics in the context of the banking crisis.growth, portfolio model, innovation, stock markets, macroeconomics

Information and Communication Technology: Dynamics, Integration and Economic Stability

Information and Communication Technology (ICT) has become a major driver of investment and growth in OECD countries. The analysis puts the focus on key developments in the ICT sector and international outsourcing dynamics as well as the specific role of ICT in the financial sector. One can show that the expansion of ICT is not only contributing to national and international outsourcing but to insourcing as well. Furthermore, ICT affects regional integration. In the context of a modified Dornbusch model – including foreign direct investment – the impact of ICT on output and the exchange rate are discussed. The risk of overshooting in foreign exchange markets is likely to be reduced through the expansion of ICT which allows a more pro-active monetary policy.Integration, ICT, Growth, Foreign Exchange Markets, Stability

Significant Market Power in Telecommunications: Theoretical and Practical Aspects

From an economic perspective efficiency and innovation are crucial aspects of functional competition in telecommunications where one has to take into account sector specific problems. Besides those specific aspects we consider the topic of significant market power and its evolution. As a special problem we focus on product bundling issues and aspects of network dynamics. As regards policy conclusions there is need for differentiated approaches. We emphasize the need for a dynamic perspective of competition in telecommunications markets. With respect to oligopolistic markets we present as a theoretically new approach an application of the Hitch-Sweezy model of competition - the implication is that (price)regulation should be restricted to a very small field.Telecommunications, market power, network economies

Explaining oil price dynamics

The price dynamics of oil and other non-renewables is a complex field of theoretical and empirical analysis. The Analysis takes the Hotelling rule as an analytical point of departure - basically relevant for the supply-side dynamics - and also considers resources demand, which is assumed to negatively depend on the price of oil and positively on net real wealth of the private sector (wealth and real income are, of course, related to each other through the interest rate). The net wealth variable is of particular interest in the approach presented, which emphasizes, that pricing of non-renewable resources should be considered in the context of portfolio analysis and the role of wealth, respectively. The fairly standard assumption, that the change in the price of natural resources per unit of time is a positive function of the excess demand in the oil market, implies a differential equation, which shows how crucial the role of oil inflation expectations are. If those expectations are below a critical level, there will be stable long run oil price. If, however, the expected oil inflation rate exceeds the critical value, there will be an ongoing increase of the oil price. From this perspective, it is clear that the long run price developments of natural (non-renewable) resources are strongly shaped by global expectation dynamics. To the extent that global real demand shocks or restrictive shifts in monetary or credit expansion dynamics occur, oil inflation expectations could switch from the range of above the critical inflation expectations to below such range, which then amounts to a price regime shift. Such a shift obviously has occurred during the transatlantic banking crisis and the following global recession. A somewhat alternative short-term analytical approach considers oil pricing in the context of a broader portfolio model - thus, oil and several standard financial assets are considered. Policy makers should consider both volatility issues and the challenges of sustainable growth.Hotelling rule, price dynamic, oil, non-renewables resource

Innovations in the Digital Economy: Promotion of R&D and Growth in Open Economies

This paper presents key figures on innovativeness and export dynamics in selected OECD countries and develops some new ideas on optimum R&D policies in open economies. We take a look at some selected indicators of technological and economic competitiveness in the field of RCAs and export unit values with a special focus on the US, France, Italy, Germany and the UK on the one hand and Hungary as an accession country on the other. Specialization patterns differ across countries; as do weighted export unit values. The US has been very successful in the 1990s in several key sectors which have improved both RCAs and export unit values. France has made progress in some high technology fields, Italy also stands for considerable successful structural adjustment. Germany's dynamics has been very strong in the automotive sector and in the field of precision instruments; however, Hungary and the UK also have a positive development in the automotive sector which could signal problems for Germany's exports in the lower segment of the market. As regards welfare effects of R&D support in particular, interesting cases concern technology-intensive intermediate tradables and network effects. We also emphasize the macroeconomic effects of government R&D subsidies for promoting product innovations and process innovations. It would be useful to have an EU (or OECD) tax revenue sharing system which would particularly compensate producers of intermediate innovative tradables. In a more general policy perspective, one may argue that the government should subsidize those technologyintensive fields in which the respective country has a comparative advantage or enjoys sustained increases in (weighted) export unit values. The new Schumpeter-Mundell-Fleming model presented clearly points to the benefits of an expansionary fiscal policy which would stimulate product innovations, with output and employment being higher. By contrast, there is an ambiguous result in the case of stimulating process innovations by way of expansionary supply-oriented (R&D promoting) fiscal policy. Knowledge transfer from universities to the business community would be stimulated by privatization of a considerable share of stateowned universities and the introduction of incentives for professors to create technologyintensive firms on or off campus. Knowledge and skills can be kept in the region only if the overall mix of policies creates positive growth prospects or if the country has specialized in immobile Schumpeter industries.Digital economy, product and process innovation, R&D policies

Rational Regulatory Policy for the Digital Economy: Theory and EU Policy Options

Telecommunications is a key element of the ICT sector which has been shaped by strong innovation dynamics since the 1990s. Market dynamics in selected OECD telecommunications markets are analyzed. We present new ideas about efficient regulation, emphasizing the need to adopt a broader international perspective. Analytical innovations also include the discussion of an adequately-modified Hitch-Sweezy oligopoly model. Moreover, we suggest differentiated two-part tariffs as an ideal welfare-maximizing approach in both wholesale and end-product markets. From a theoretical point-of-view, the need to avoid regulatory uncertainty is also emphasized. Theoretical progress is contrasted with regulations in the EU and the US. The EU offers a broad range of different regulatory approaches where the link between framework regulation and national regulation is rather complex. The internationalization of telecommunications requires a broader cooperation among regulators in the OECD.Digital Economy, Regulatory Policy, European Union

Exchange Rate Developments and Stock Market Dynamics in Transition Countries: Theory and Empirical Analysis

We present new theoretical approaches to exchange rate determination and stock market price dynamics as well as first empirical results for selected transition countries. The exchange rate is considered as reflecting both the interest parity - with a specific formulation for exchange rate expectations - and impulses from purchasing power parity which in turn is related to a modified monetary approach to exchange rate determination; the modification concerns the role of stock market prices in the demand for money. Our main focus is on the nominal exchange rate. The empirical results for the dollar exchange rate presented, based on quarterly data, are two-stage and three-stage least squares estimations. The three stage estimation reflects - which is a superior approach to the two-stage estimates in terms of exploiting the information in the data of the sample - the theoretical basis, namely that exchange rate dynamics and stock market prices are interdependent. The estimations for Hungary, the Czech Republic and Poland show significant coefficients for the lagged exchange rate, the stock market price and US GDP as well as other variables which are significant only in some of the countries considered. The in-sample forecast is excellent for all three countries so that anticipation of future exchange rate changes seems to be possible: this is not only relevant for economic actors but also for the issue of Euro area membership. Moreover, the considerable impact of stock market prices on the nominal exchange rate suggest that problems of stock market bubbles in the US might strongly contribute to unstable exchange rates in Europe.Transition Countries, Exchange Rate Determination, Stock Markets.