Nils Gottfries

EMU - A Swedish Perspective

Provides a comprehensive survey of the EMU project. Evaluates the main advantages and disadvantages of a single currency, integrating the economic and political aspects. This volume is a revised version of the report by the Swedish Government Commission on the EMU.

Customer Markets, Credit Market Imperfections and Real Price Rigidity

According to standard theory, an increase in demand should raise prices of goods, given factor prices. Empirically, however, prices appear to be unaffected by short-run variations in demand. This paper suggests an explanation of this observation. If customers react slowly to price changes and credit markets are imperfect, prices may be unchanged or even fall when demand increases. The reason is that when demand is high, profits are high, and firms can compete more intensely for customers without increasing their borrowing. Copyright 1991 by The London School of Economics and Political Science.

Market Shares, Financial Constraints and Pricing Behaviour in the Export Market

A parsimonious structural model of price and quantity dynamics is applied to Swedish exports and export prices for manufactured goods 1972-1996. Two sources of dynamics are considered: customer markets and pre-set prices. The dynamic adjustment of exports is very much in line with what the customer market model predicts: the market share adjusts slowly after a change in the relative price. Prices are sticky in the sense that they do not reflect the most recent information about costs and exchange rates. Prices are high when firms are borrowing heavily, supporting the argument in Gottfries (1991) that financial constraints affect pricing behavior.

Prices, Productivity and Wage Bargaining in Open Economies

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product-market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product-market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.

Insider bargaining power, starting wages, and involuntary unemployment

Recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders, yet one typically assumes that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage for outsiders may be lower than the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces hiring of outsiders.

Nominal wage contracts and the persistent effects of monetary policy

We consider an efficiency wage model where wages affect turnover and firms choose optimal labor contracts under uncertainty about demand and productivity. We show that there may be an equilibrium with nominal wage contracts where monetary shocks affect output. Furthermore, monetary shocks have persistent effects on output because the previous state of the labor market affects the reemployment probability of quitting workers. Persistence increases if workers have bargaining power. With endogenous policy, a credibility problem arises naturally in the model. Equilibrium inflation increases with persistence but decreases with the natural rate of unemployment for given persistence.

Profit Sharing, Employment Efficiency and Wage Stability

A contract between a risk-neutral firm and its risk-averse workers is considered under uncertainty about product demand. The authors show that profit sharing can be used to attain the efficient level of employment and, at the same time, preserve optimal risk sharing between the parties. Optimal profit sharing does not imply wage variability; instead, wages are stabilized across states. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

Booms and Busts in EMU

A floating exchange rate combined with a clear inflation target can be a powerful stabilizer even if there are fluctuations in exchange rates that are unrelated to current fundamentals. Under plausible conditions, most of the stabilisation will occur through the exchange rate, and fundamental shocks will generate considerable medium term exchange rate volatility. The consequences of asymmetric shocks inside EMU are worse than envisaged in early analyses of the EMU project such as Calmfors et al. (1997). Inflation and real interest rate differentials arise which magnify the imbalances and cause boom-bust cycles in the member countries.

Fiscal Policy and the EMU

By fiscal policy we mean decisions on taxation and public expenditure. Two aspects are central in connection with the monetary union. The first concerns how large government budget deficits and debts can be accepted. The second aspect relates to the role of fiscal policy in stabilising aggregate demand. The Maastricht Treaty contains fiscal policy rules for the size of government budget deficits and debts in each country. These rules were amended in the Stability and Growth Pact. There is also an ongoing discussion on what demands for flexibility of fiscal policy that arise because of the loss of monetary policy autonomy in a currency union.

Comment on R. W. Cooper, "Business Cycles: Theory, Evidence and Policy Implications."

Coopers paper reviews some current research directions in macroeconomics. The paper made me worried about the state of macroeconomic research and my comments below consist of some critical remarks ...