Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism

The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy's steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications

Collateral, liquidity and debt sustainability

We study the sustainability of public debt in a closed production economy where a benevolent government chooses fiscal policies, including haircuts on its outstanding debt, in a discretionary manner. Government bonds are held by domestic agents to smooth consumption over time and because they provide collateral and liquidity services. We characterize a recursive equilibrium where public debt amounts to a sizeable fraction of output in steady state and is nevertheless fully serviced by the government. In a calibrated economy, steady state debt amounts to around 84% of output, the government's default threshold is at around 94% of output, and the haircut on outstanding debt at this threshold is around 40%. Both reputational costs of default and contemporaneous costs due to lost collateral and liquidity are essential to generate these empirically plausible predictions

Channels of Firm Adjustment: Theory and Empirical Evidence

We provide a comprehensive analysis of how firms choose between different expansion and contraction forms, unifying existing approaches from the industrial organization and corporate finance literature. Using novel data covering almost the entire universe of UK firms, we document firms? use of internal adjustment, greenfield investment and mergers and acquisitions (M&As). We describe frequency and aggregate importance of the different channels, and show that their use varies systematically with observable firm characteristics, in particular firm size and the magnitude of adjustment. We also demonstrate that there is positive assortative matching on the UK merger market. Based on these facts, we propose a theoretical framework which accommodates all three adjustment channels in a unified setting, and is able to replicate the adjustment and matching patterns found in the data

Inflation, Investment Composition and Total Factor Productivity

This paper employs a dynamic stochastic general equilibrium model with a financial market friction to rationalize the empirically observed negative relationship between inflation and total factor productivity (TFP). Specifically, an empirical analysis of US macroeconomic time series establishes that there is a negative causal effect of inflation on aggregate productivity. Rather than taking the productivity process as exogenous, the model is therefore set up to feature an endogenous component of TFP. This is achieved by allowing physical investment to be channelled into two distinct technologies: a safe, but return-dominated technology and a superior technology which is subject to idiosyncratic liquidity risk. An agency problem prevents complete insurance against liquidity risk, and the scope for insurance is endogenously determined via the relevant liquidity premium. Since the liquidity premium is positively related to the rate of inflation, the model demonstrates how nominal fluctuations have an influence not only on the overall amount, but also on the qualitative composition of aggregate investment and hence on TFP. The quantitative relevance of the underlying transmission mechanism which links nominal fluctuations to TFP via corporate liquidity holdings and the composition of aggregate investment is corroborated by means of the quantitative analysis of the calibrated model economy as well as a detailed analysis of industry-level and firm-level panel data. Notably, the empirical findings are consistent with both the properties of the agency problem postulated in the theoretical model and its implications for corporate liquidity holdings and physical investment portfolios

Gender differences in physical activity and fitness—association with self-reported health and health-relevant attitudes in a middle-aged Swiss urban population

In Switzerland lack of exercise is common. To improve physical exercise in both women and men, campaigns should consider the motivation for physical activity with respect to gender. This study explores the patterns of self-reported sport activity, habitual physical activity and physical fitness, and associated indicators of self-reported health, health-relevant attitudes, and resources in an urban Swiss population. Using the Bern Lifestyle Panel questionnaire, 511 women and 413 men, aged 55-65years, in the German-speaking capital of Switzerland were assessed. From the three surveys carried out from 1996 to 1998, this study used the data from the 1997 survey for a cross-sectional analysis. Women demonstrated a lower prevalence of sport activity than men but a higher prevalence of habitual physical activity. Forty-six percent of the women but 80% of the men reported a high level of fitness. In the logistic regression analysis, sport activity in the women was significantly associated with indicators of health, health-relevant attitudes such as internal and external health locus of control, and social class. Among the men, no association with health-relevant orientation could be found. The probability of habitual physical activity among the women was associated with perceived good health, health-relevant orientation and social class, while related factors among the men were indicators of health. In both women and men, perceived good health was strongly associated with self-reported physical fitness. Additionally, women's fitness was related to perceived disease-related limitation and indicators of health status. The findings indicate a gender-specific distribution of sport activity, habitual physical activity and fitness. Compared to men, physical activity in women is associated more with health-relevant orientation. Along with indicators of health, attention should be paid to both female and male perception of health and self-reported attitudes when there is an attempt to improve physical activity. Since self-reported health status, disease-related limitations, and habitual physical activity, among others, are strongly affected by sociocultural and structural influences, caution should be kept in drawing general conclusions from the finding

Central bank independence and the monetary instrument problem

We study the monetary instrument problem in a model of optimal discretionary fiscal and monetary policy. The policy problem is cast as a dynamic game between the central bank, the fiscal authority, and the private sector. We show that, as long as there is a conflict of interest between the two policy-makers, the central bank's monetary instrument choice critically affects the Markov-perfect Nash equilibrium of this game. Focusing on a scenario where the fiscal authority is impatient relative to the monetary authority, we show that the equilibrium allocation is typically characterized by a public spending bias if the central bank uses the nominal money supply as its instrument. If it uses instead the nominal interest rate, the central bank can prevent distortions due to fiscal impatience and implement the same equilibrium allocation that would obtain under cooperation of two benevolent policy authorities. Despite this property, the welfare-maximizing choice of instrument depends on the economic environment under consideration. In particular, the money growth instrument is to be preferred whenever fiscal impatience has positive welfare effects, which is easily possible under lack of commitment

A Portrait of firm Expansion and Contraction Channels

We present a novel set of stylised facts on forms of firm expansion and contraction, using unique business register data for the United Kingdom between 1997 and 2005. We distinguish between adjustments of employment and turnover at existing establishments, expansions and contractions taking place via greenfield investments and disinvestments, and via acquisitions and sell-offs. We document the relative importance of these three channels and how firms choose between them. We interpret our findings in the light of existing theories of firm dynamics, and propose directions for future theoretical developments

Inflation dynamics under optimal discretionary fiscal and monetary policies

We examine the dynamic properties of inflation in a model of optimal discretionary fiscal and monetary policies. The lack of commitment and the presence of nominally risk-free debt provide the government with an incentive to implement policies which induce positive and persistent inflation rates. We show that this property obtains already in an environment with flexible prices and perfectly competitive product markets. Introducing nominal rigidities and imperfect competition has no qualitative but important quantitative implications. In particular, with a modest degree of price stickiness our model generates inflation dynamics very similar to those experienced in the U.S. since the Volcker disinflation of the early 1980s