Jacques Melitz

Social spending and automatic stabilizers in the OECD

The macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure except for unemployment compensation. Our results go sharply contrary to this view. We engage in an empirical analysis of 21 OECD countries from 1982 to 2003 and find that age and health-related social expenditure as well as incapacity and sick benefits all react to the cycle in a stabilizing manner. While possibly new in the macro literature, this conforms to many results in studies in labour economics. The policy implications are broad since much previous analysis of discretionary fiscal policy rests on official figures for automatic stabilization. There are also major implications for efforts to incorporate automatic fiscal policy in simulation models.

Fiscal Policy Independence in a European Monetary Union

Do plans for a monetary union in Europe call for limits on the freedom of the country members of the union to use fiscal policy? In order to provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries. The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irrelevant.

More about the law of one price

This article explores the general difficulty of testing the law of one price based on evidence about commodity prices and exchange rates, but without regard to transfer costs. It then reports on tests based on this sort of limited evidence using price data at the finest possible level of disaggregation in any official statistics. A part of the results are favorable to the law. But the clearest conclusion is that we shall probably never be able to come to any general verdict about the law in the absence of evidence about transfer costs.

English as a Global Language

How far has English already spread? How much further can we expect it to go? In response to the first question, this chapter tries to identify the areas of life where English already serves as a lingua franca in the world (more or less) and those where the language faces sharp competition and does not threaten to marginalize the other major languages. The former areas of life are international safety, the internal business of international organizations, internal communication within the international news industry, international sports and science. The latter areas are the press, television, the internet, publishing and international trade. As to the second question, about the future prospects of English, the chapter argues that the advance of English will depend heavily on the motives to learn the other major languages in the world as well. Based on the empirical evidence, the same model applies to the incentives to learn English and these other languages. On the important topic of welfare, the cultural market is the single one where it is arguable that the progress of English has gone too far. English dominance in the song, the cinema and the best-seller is indeed extraordinary and difficult to reconcile with the evidence of strong popular attachments to home languages, which is otherwise apparent.

The stability of the spot price of foreign exchange in the absence of speculative influences

Abstract This paper tries to resolve a problem of stability in portfolio-balance models of the exchange rate. The problem is shown to dissolve if we introduce a few practical considerations relating to deviations from the law of one price, costs of converting currencies and costs of issuing debts in foreign denominations. In addition, the paper develops a new argument for stability of the exchange rate on the spot market based on the transactions demand for money.