Total Unit Costs, Marginal Costs and the New Keynesian Phillips Curve

This paper considers the role of non-labor unit costs in estimating the new Keynesian Phillips curve (NKPC). We show that the theory-based marginal cost of a firm is a function of both labor and non-labor unit costs including, capital costs, net interest payments and production taxes. Using data on labor costs and non-labor payments in nonfarm GDP for the US, that closely match our theory-based model, we construct a total unit cost that we use as a proxy for marginal cost. We show that adding non-labor unit costs to the familiar unit labor costs improves the existing empirical support for the role of real marginal cost as the driving variable in the NKPC and of expectations-based inflation persistence. Total unit costs also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys than that implied by labor unit costs.

Financial Regulation, Credit and Liquidity Policy and the Business Cycle

The global financial crisis in 2007 prompted policy makers to introduce a combination of bank regulation and macroprudential policies, including non-conventional monetary policies, such as interest on reserves and changes in required reserves. This paper examines how the combination of such policies can help stabilize the effects of real and financial shocks in economies where financial frictions are important. Although there is an extensive literature on financial regulation and macro-prudential policy, and more recently some literature on the effects of interest on reserves, these policies are usually examined independently. The results point to the importance of coordination between financial regulation and monetary policy in minimizing welfare losses following such shocks. Interest on reserves is shown to be more effective in reducing welfare losses than changes in required reserves and to play a significant role in making stabilization policy more effective. The results also suggest an easing of bank capital requirements during recessions, when output and loans are falling and the risk of default is high

German macro: how it's different and why that matters. EPC Discussion Paper, May 2016

Do the macroeconomics of the German political establishment really differ from standard western macroeconomics? That question was the starting point for the seminar on ‘German macro: How it’s Different and Why that Matters’, which was held at Heriot-Watt University in December 2015, with financial support from the Scottish Institute for Research in Economics (SIRE) and the Money, Macro & Finance Research Group (MMF). This ebook, edited by George Bratsiotis and David Cobham, is the result of that exercise; six of the papers were presented at the seminar in earlier versions, and the editors sought some additional papers to complete the range of perspectives offered. The authors all sought out to discover whether or not there is something unique about German macroeconomics, and in what ways it differs from standard western macroeconomics; is it true that the former neglects demand management (although it may be quite interventionist in other ways), rejects debt relief and emphasises structural reform designed to improve competitiveness as the (only) key to economic growth? How much of whatever difference exists is due to a well worked out set of ideas in the form of Ordoliberalism? In what way does it relate to Germany’s own experiences in different periods? And how far is this the result of political preferences and how much do the idiosyncrasies of these German views matter, for the development of the Eurozone and indeed the health of the German economy