Olivier Cardi

ANOTHER VIEW OF THE J-CURVE

Most of empirical studies find evidence of the J-Curve, but recent results cast doubt over its standard explanation. By addressing the countercyclicality of the current account and its dynamic link with the terms of trade, this paper revisits the J-Curve phenomenon using a two-good dynamic optimizing small open economy model allowing for a habit-forming behavior and capital adjustment costs. While the nonmonotonic adjustment of the current account relies on the degree of habit persistence in consumption and the magnitude of capital installation costs after an unanticipated terms of trade worsening, we show that the sizes of the long-run intertemporal elasticity of substitution under time nonseparable preferences and the import content of real consumption and investment matter as well after a temporary perturbation. As a consequence of an intertemporal speculation effect and an inertia effect, the small country reaches the long-term equilibrium with higher foreign assets after a short-lived terms of trade worsening.

A NOTE ON THE CROWDING-OUT OF INVESTMENT BY PUBLIC SPENDING

One of the most prominent and consistent findings of the recent empirical literature on fiscal policy is that investment expenditure is crowded-out by public spending in the short-run. In this contribution, we address this empirical fact using a dynamic general equilibrium model and show that the introduction of a habit-forming behavior plays a major role in accommodating the observed negative relationship between investment and government expenditure. Our numerical experiments point out the role of consumption inertia in determining the reactions of the open economy: as habit persistence gets stronger, a fiscal expansion crowds-out real consumption by a smaller amount and investment by a larger one, while the current account enters into a greater deficit.

Permanent vs.temporary fiscal expansion in a two-sector small open economy model

This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.

Fiscal Shocks in a Two-Sector Open Economy with Endogenous Markups

We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding is that both sectoral capital intensities and labor supply elasticity matter in determining the response of key economic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector, and labor is supplied elastically. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can produce the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run.

The determinants of excess worker turnover in Luxembourg

Purpose - The purpose of this paper is to investigate the patterns and determinants of excess labour turnover (churning) in the Luxembourg labour market using a rich employer-employee matched data set. Design/methodology/approach - The paper formulates a model to explain churning rates using three sets of explanatory variables: various worker characteristics, establishment characteristics, and two-digit sector-specific characteristics. The data used are from the Luxembourg social security system for the period 1992-2003. Findings - The findings show that there are high churning levels in Luxembourg, that their determinants vary significantly across sectors, and that much of this variation can be explained by worker- and establishment-specific features. Research limitations/implications - A major question, still undecided in the research literature, is whether churning is simply the result of random job-worker mismatches. Originality/value - There are relatively few prior studies that have examined which employee and employer characteristics are associated with excess worker turnover, and the paper is the first to analyze the phenomenon of churning in the Luxembourg labour market. Luxembourg has recently experienced impressive employment growth (about 3.5 percent annually) since the beginning of the 1990s; and, Luxembourg being a small economy, it was feasible to analyze the entire population of workers and firms.

A Formal Model of Krugman's Intuition on the J-Curve

We use a two-good dynamic intertemporal general equilibrium model to formalize the economic intuition of Krugman about the explanation of the J-curve phenomenon in terms of habit persistence in consumption and sluggishness in capital adjustment. The results differ markedly according to the permanence or temporary nature of the shock. A short-lived terms of trade worsening may give rise to a once-for-all decrease in the marginal utility of wealth, a hump-shape response of real expense when the perturbation is at work and a definitely higher level of consumption at the new steady-state. Habitual standard of living and welfare are raised through the combination of an intertemporal speculation, habit persistence, and hysteresis effects. In accordance with recent empirical results, investment is procyclical, H-L-M effect holds, net foreign assets adjustment exhibits a J-curve, current account surplus is associated with a fall in real income. From an analytical viewpoint, a new consistent procedure to study temporary shocks in continuous time leads to formal solutions that allow to investigate accurately transitional dynamics in a complex dynamic system, comparing transitory and permanent perturbations analytically, underscoring hysteresis phenomenon, and bringing out the determinants of short and long-term reactions of macroeconomic aggregates.

TERMS OF TRADE SHOCKS AND THE NON MONOTONIC ADJUSTMENT OF THE CURRENT ACCOUNT

This paper investigates both the dynamic and steady-state effects of unanticipated permanent and temporary terms of trade shocks within a two-good small open economy with habit formation and capital adjustment costs. A permanent terms of trade worsening induces a deficit-surplus current account sequence if habits adjust faster than the physical capital. Following a temporary shock, the open country experiences first a larger short-run current account deficit triggered by a greater decline in savings, followed by a surplus driven by the drop in investment. Numerical results show that the hump-shaped adjustment of real consumption can lead to overall welfare gains if habit persistence is strong enough, the shock is short-lived, and trade openness is not too high.