George Alogoskoufis

Limiting exchange rate flexibility : the European monetary system

Events of recent years have exacerbated the dissatisfaction with the performance of flexible exchange rates, and prompted a number of proposals to limit exchange rate fluctuations among industrialized countries. This book provides the first in depth analysis of the European Monetary System (EMS), the only lasting experiment of this kind.The books careful blend of theory and empirical analysis supports the view that, in Europe, nominal exchange rate targets have had significant real effects. Its detailed description of European economic institutions shows why exchange rate fluctuations are perceived as especially harmful.Giavazzi and Giovannini explain the institutional features of the EMS and describe how central banks run the system in practice. They offer an illuminating analysis of European capital controls and show how such regulations have guaranteed the survival of the EMS in a period characterized by unprecedented dollar fluctuations.The authors point out the lessons to be drawn from this experience with the EMS for the more general problem of reforming the international monetary system. Their forceful arguments are backed by analysis of such important issues as the determinants of international capital flows and international portfolio diversification, and the role of credibility and expectations in disinflation.Francesco Giavazzi is Professor of Economics at the University of Bologna. Alberto Giovannini is Associate Professor at the Columbia University Graduate School of Business.

On the persistence of unemployment

Unemployment persistence George S. Alogoskoufis and Alan Manning A comparison of unemployment across fourteen European countries, Japan and the US shows a great diversity of persistence: high in most of Europe outside the Scandinavian countries, Austria and Switzerland, low in Japan and the US. Three reasons for unemployment persistence are examined. First, employed workers may not care about the unemployed, and only wish to protect their own jobs. The authors find little support for this view, except perhaps in the US. Second, workers may be reluctant to revise downward their wage aspirations. This seems to be the case in Europe, as opposed to the US and Japan. Third, firms may be slow in adjusting employment to its optimum level. This is the case in Europe and Japan, not in the US. Labour market reforms might help, but have their own costs. The authors conclude that the best course of actions is a demand expansion combined with incomes policies.

Money and Endogenous Growth

The Ramsey-Romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non-interconnected generations of households. Tax-financed increases in government consumption and debt depress growth prospects and boost inflation, as long as a positive birth rate ensures that future taxes are shouldered by future, yet unborn, generations. Debt-financed increases in government consumption depress growth and boost inflation even more. Money-financed increases in government consumption depress growth less but increase inflation by more. Giving subsidies through an increase in monetary growth is non-neutral, since this increases real growth and thus inflation increases by a lesser amount than monetary growth. Bond-financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation. If there are cost adjustment for investment, cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate. Copyright 1994 by Ohio State University Press.

MONETARY ACCOMMODATION, EXCHANGE RATE REGIMES AND INFLATION PERSISTENCE*

This paper investigates the relation between the dynamics of inflation and international monetary and exchange rate regimes in the industrial economies. It demonstrates that fixed exchange rate regimes like the international gold standard and the Bretton Woods gold dollar standard appear to be associated with negligible persistence of inflation, while regimes of managed exchange rates are associated with very high persistence of inflation. The interwar period is associated with persistent deflation, and the more recent period of managed floating is associated with persistent inflation. The paper uses an overlapping contracts model to propose that the higher persistence of inflation is the result of a higher monetary and exchange rate accommodation of price changes in flexible exchange rate regimes. The evidence does not seem to contradict this hypothesis. The results highlight the importance of the effects of monetary regimes on expectations and the behaviour of wage- and price-setters.

Wage-setting and unemployment persistence in Europe, Japan and the USA

The persistence of high unemployment in the main European economies is one of the most puzzling economic developments of the past fifteen years. Average Japanese unemployment has risen slightly since the mid-seventies, whereas unemployment in the United States still exhibits cyclical fluctuations around a gently rising level. In marked contrast, average unemployment in France, Germany and the United Kingdom rose to a higher plateau during the latter part of the seventies, shot up again in the early eighties, and has remained persistently high. Identification of the causes of such unemployment persistence is crucial before one makes policy recommendations. Three possible causes spring to mind: first, persistence in the determinants of equilibrium and disequilibrium unemployment; second, excessive power of insiders in wage setting combined with high correlation between employment status and insider status, and finally a high degree of state dependence (sluggishness) in labour demand. Although in general one expects all three causes to have played a role in the persistence of high European unemployment, there is still a need to identify their relative importance. The first set of factors has been assessed empirically in recent papers by among others, Sachs (1983), Bruno and Sachs (19X5), Bruno (1986) Layard and Nickel1 (1985), Bean, Layard and Nickel1 (1986), Newell and Symons (1985) and others. Many of these papers have also allowed for sluggishness in labour demand, although they did not particularly focus on it. The second set of factors has been investigated by Blanchard and Summers (1986), who concluded that there is evidence of much higher correlation between employment status and insider status in the three largest European economies, than in the United States.

Tests of alternative wage employment bargaining models with an application to the UK aggregate labour market

Abstract In this paper we propose a test that discriminates among alternative models of bargaining for wages and employment. The test rests on a theoretical framework which encompasses both the labour demand and the efficient bargain models of wage and employment determination. It is based on testing the cross equation restrictions implied for the coefficients of union power variables in reduced form wage and employment equations. The test is illustrated for the Layard and Nickell model of the aggregate UK labour market, for which it is found that one can reject both the labour demand model and the hypothesis that wage employment bargains are efficient, in favour of a generalised model of inefficient bargaining for wages and employment.

Inflationary expectations, political parties and the exchange rate regime: Greece 1958-1989

Abstract We investigate the applicability of the ‘rational partisan’ and ‘exchange rate regime’ models of inflation to the case of Greece. Greece has fully participated in the Bretton Woods system of fixed exchange rates until 1972, but has since followed an independent ‘crawling peg’ policy. It has had a polarized political system and a problem of persistently high inflation in the last two decades. Outside fixed exchange rate regimes, persistently high inflation can be attributed to the failure of political parties to pre-commit to price stability. The higher aversion of ‘socialists” to unemployment results in an inflation rate which is higher by 8 percentage points than under the more anti-inflationary ‘conservatives’. Unemployment is independent of the identity of the party in power and elections.

Macroeconomics and Politics in the Accumulation of Greece's Debt: An Econometric Investigation, 1975-2009

This paper focuses on an econometric investigation of the macroeconomic and political factors that contributed to Greece’s excessive debt accumulation and its failure to adequately address its fiscal imbalances, from the restoration of democracy in 1974 till the crisis of 2009. The econometric investigation is based on a model in which two political parties alternate in power, and in which governments choose primary expenditure and taxes to minimize deviations from politically determined expenditure and tax targets, subject to a debt accumulation equation. The model predicts a political equilibrium in which primary expenditure and taxes follow feedback rules which go in the direction of stabilizing the debt to GDP ratio. However, this stabilization incentive is weaker in election years. The model also predicts potential partisan differences in the evolution of primary expenditure and taxes, due to the different preferences of political parties. Estimates of government reaction functions to public debt for the period 1975-2009 suggest a rather weak stabilizing reaction of primary deficits to public debt. This stabilizing reaction disappears in election years, which are characterized by strong fiscal expansions. We find no evidence of partisan differences in the reaction of primary deficits to inherited debt, but we do find evidence of lower primary deficits in the post-1992 Maastricht treaty period. Overall the model accounts for the accumulation of Greece’s government debt in terms of the trend increase in primary expenditure, the positive shocks to primary expenditure in election years and the weak stabilizing reaction of government revenue, due to tax smoothing.

Traded Goods, Competitiveness and Aggregate Fluctuations in the United Kingdom

In this paper I investigate the relationships between wage adjustment, competitiveness, and aggregate fluctuations in the United Kingdom. This is done in the context of a model based on the distinction between internationally traded and nontraded goods, which is estimated and thoroughly tested. The traded goods sector is assumed to be a price-taker, and the focus is on the supply side. Competitiveness is defined as the relative price of traded to nontraded goods. The model can account quite well for fluctuations in UK competitiveness, output, wages and the terms of trade, and is used to examine the macroeconomic effects of a variety of disturbances. The results suggest that the UK economy is characterized by output flexibility and wage-price rigidity, a combination that produces patterns of macroeconomic adjustment which parallel the predictions of Keynesian demand-side models.

Monetary Policy and the Informational Implications of the Phillips Curve

In this paper I examine optimal monetary policy and the informational implications of the Phillips curve in a stochastic macroeconomic model. It is assumed that wages are not only indexed to the price level, but respond to the state of the labor market as well. If information about current disturbances is conveyed only through market prices, it turns out that wages have independent informational content, over and above the informational content of other aggregate prices. The optimal policy in this model implies reactions to changes in both wages and the aggregate price level, as, unlike the commonly used model of Gray and Fischer, wages and prices are only partially correlated signals about the unobserved disturbances. The paper also discusses an extension to an open economy and the relation between exchange rate policy and wages. Copyright 1990 by The London School of Economics and Political Science.