Mark A. Wynne

The role of intratemporal adjustment costs in a multisector economy

Abstract In this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross-sector measures of capital, employment and output. We start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts. We then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model. These costs make it difficult to alter the composition of production of new capital goods. The presence of these costs eliminates many counterfactual observations of the model that would otherwise be present. The dynamic response of variables in the model is different from what one would observe in the standard one-sector model. We also examine the implications of imposing intratemporal adjustment costs for labor. The model can also account for the cross-sector behavior of employment observed in the data.

Business Cycles under Monetary Union: A Comparison of the EU and US

This paper documents business cycle similarities and differences among the 12 Federal Reserve districts in the USA and the 15 countries that make up the EU. The comparison is suggestive of what might be expected to emerge in the way of business cycle synchronization from a monetary union between the member states of the EU. Copyright 2000 by The London School of Economics and Political Science

An Equilibrium Analysis Of Relative Price Changes And Aggregate Inflation

Inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross-section distribution of prices, and also with the third moment (skewness) of the cross-section distribution of prices. The conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks. In this paper we question this interpretation. First, we show that similar correlations among the moments exist in alternative measures of underlying technology shocks. Second, when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices, the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross-section distribution. Keyword(s): Relative prices; Inflation; Cross-section distribution of prices

Are deep recessions followed by strong recoveries

We examine the hypothesis that deep recessions are followed by strong recoveries using a monthly data set for industrial production covering the period 1884-1990. There is a statistically significant relationship between growth in the first twelve months of a recovery and the peak-to-trough decline in industrial activity. This effect is still found when we exclude the Great Depression from our sample. We find no evidence that the length of the recession affects the strength of the subsequent recovery.

Inequality, inflation, and central bank independence

What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.

A First Assessment of Some Measures of Core Inflation for the Euro Area

Abstract Core inflation plays an important role in the deliberations of monetary policy-makers. In this paper we evaluate a number of measures of core inflation constructed using euro-area data. In addition to the traditional exclusion-type core measures, we examine two newer ones, documenting their properties and evaluating their performance in terms of their ability to track underlying or trend inflation in real time. We focus on core measures derived from the Harmonized Index of Consumer Prices (HICP) as the European Central Bank has chosen to define its mandate for price stability in terms of this index, and because this is the only index of consumer prices that is compiled in a comparable manner across all members of the European Union. We document significant excess kurtosis in the cross-section distribution of price changes in the euro area, and show that several categories of prices are more volatile than those typically excluded from traditional measures of core inflation. Contrary to what one might expect, traditional measures of core inflation are not significantly less volatile than headline measures.We document the superior performance of alternative measures of core inflation in tracking trend inflation on average, but show that none of the various measures of core gave significant advance warning of the pickup in trend inflation at the beginning of 1999.

Are deep recessions followed by strong recoveries? Results for the G-7 countries

The hypothesis is examined that the severity of a recession favourably affects the rate of growth of output during the period immediately after the recession. Our empirical analysis is based on the behaviour of industrial output in the G-7 countries during the period 1960 to 1985. The depth of a recession, defined as the cumulative output loss between the peak and trough dates, is shown to be negatively correlated with growth in the first 12 months of the subsequent expansion.

More on optimal denominations for coins and currency

Telser (1995) has shown that the problem of Bachet helps answer the question of the optimal denominational structure of currency in the U.S. and U.K. This note provides further evidence to support this claim using cross-country data.

Costly intermediation, the big push and the big crash

Abstract Why does financial activity generate large real effects? We argue that this may reflect a multiplicity of equilibria, due to dynamic interactions between workers saving decisions and banks monopolistic competition. We show that the equilibrium-responses of key aggregates to changes in investment uncertainty and intermediation costs depend crucially on intertemporal substitutability and aggregate employment. Small financial disturbances may cause the economy to shift between low and high-employment equilibria, thus providing explanation for the big push and the big crash. The high-employment, high-real-interest-rate equilibrium is consistent with the development experience of the financially repressed East Asian economies prior to July 1997.

Endogenous Market Structures and Financial Development

Existing theories that emphasize the significance of financial intermediation for economic development have not addressed two important empirical facts: (i) the relationship between financial and real activities depends crucially on the stage of development, and (ii) financial and industrial market structures vary widely across otherwise similar countries. To explain these observations, we develop a dynamic general equilibrium model allowing for endogenous market structures in which financial deepening spurs real activity through intermediate product broadening. We show the possibility of multiple steady-state equilibria and characterize how these equilibria respond to various shocks. In particular, we examine the determinants of financial deepening, product broadening, the saving rate, the loan-deposit interest rate spread, and the degree of competitiveness of financial and product markets. We find that the dynamic interactions between financial and real activities depend critically on the synergy of financial and industrial competitiveness.