William H. Branson

Macroeconomic theory and policy

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International adjustment with wage rigidity

Two of the puzzling macroeconomic phenomena of the 1970s have been the persistent stagnation in Europe, and the disagreement between the U.S. and Europe on the feasibility of recovery by demand expansion. This paper develops the hypothesis that the source of both the stagnation and the policy differences is money-wage stickiness in the U.S. and real-wage stickiness in Europe and Japan. A real wage which is sticky above its equilibrium level in Europe and Japan would account for stagnation and infeasibility of recovery by demand expansion. The theoretical models are developed in both the one-commodity and two-commodity-bundle cases. The empirical results confirm that in the U.S. the nominal wage adjusts slowly toward equilibrium, while in Germany, Italy, Japan, and the U.K. the real wage adjusts slowly.

Factor inputs in U.S. trade

Abstract This paper focuses on some open questions in the empirical literature on the factor content of U.S. trade. In a regression analysis on 1963 and 1967 cross-section data, it is found that U.S. trade is exporting the services of human capital and importing the services of raw labor and (marginally) of physical capital. The results are not sensitive to scaling for industry size or to using probit analysis rather than OLS regression. An important implication of the results is that it is inappropriate to aggregate physical and human capital in trade models.

Adjustment and income distribution: A micro-macro model for counterfactual analysis

Abstract This paper presents a structural macro simulation model to quantify the effects of alternative stabilization packages on the distribution of income and wealth. The model combines the explicit microeconomic optimizing behavior characteristic of computable general equilibrium models with asset portfolio behavior of macroeconomic models in Tobins tradition. In this model there are four main mechanisms by which policy changes affect the distribution of income and wealth. First, changes in factor rewards affect directly household income distribution. Second, household real incomes are affected by changes in their respective cost of living indexes. Third, household real incomes are affected by changes in real returns on financial assets since household incomes include income from financial holdings. Fourth, household wealth distribution is affected by capital gains and losses. Illustrative simulations with the model are carried out for a representative economy subject to the interest rate and terms-of-trade shocks of the early 1980s. The simulations suggest a large adverse impact on the distribution of income of a sharp contractionary package.

Exchange rates in the short run : Some further results

Abstract This note extends our earlier results [published in this Journal. Vol. 10 (1977)] on the dollar DM exchange rate to the 1977–78 period. The original equation estimated on 1971–76 data overpredicts the dollar value of the DM during most of 1978. Thus the rise of the DM in the second half of 1978 was consistent with the ‘fundamentals’ equation. We also show that a net foriegn liability position may destabilize the foreign exchange market and that this may have been empirically significant for the dollar DM rate in 1973–74.

Commodity Prices as a Leading Indicator of Inflation

This paper studies the value of broad commodity price indexes as predictors of consumer price inflation in the G-7 industrial countries. After an introduction, the paper discusses the theoretical relationship between commodity and consumer prices and the conditions under which, in general, one would expect commodity prices to be a leading indicator of inflation. It then presents tests of the relationships between conventional broad indexes of commodity prices and consumer prices, and uses the data on individual commodities to generate the optimum weights in a commodity price index for forecasting G-7 inflation. We find that commodity and consumer prices are not co-integrated; the hypothesis that there is a reliable long-run relationship between the level of commodity prices and the level of consumer prices may be rejected. There is a tendency for changes in commodity prices to lead those in consumer prices, at least when the data are denominated in a broad index of major-country currencies. However, although the inclusion of commodity prices significantly improves the in-sample fit of regressions of an aggregate (multi-country) consumer price index, the results may not be sufficiently stable to improve post-sample forecasts. Estimated alternative commodity price indexes, in which the weights are chosen so as to minimize the residual variance in aggregate inflation regressions, track the behavior of the aggregate CPI reasonably well in-sample. However, the estimated indexes work only moderately well in post-sample predictions, and they do not appear to offer significant advantages over the conventional export weighted index. Perhaps the most important result is that turning points in commodity-price inflation frequently precede turning points in consumer-price inflation for the large industrial countries as a group.

Chapter 15 The specification and influence of asset markets

Publisher Summary This chapter discusses portfolio balance models with postulated asset demands, asset demands broadly consistent with but not directly implied by microeconomic theory. The demand for the sum of assets denominated in each currency is homogeneous of degree one in nominal wealth, and the demand for money in each country depends on the return on the security denominated in that countrys currency but not on the return on securities denominated in other currencies. However, under these same assumptions the demand for money depends on real wealth. Because the conclusions of macroeconomic analysis often depend crucially on the form of asset demand functions, it is important to continue to explore the implications of the microeconomic theory and other microeconomic approaches. The chapter discusses that the consumer arrives at his or her asset demands by maximizing his or her utility given interest rates and the parameters of the distributions of prices and exchange rates. The distributions of prices and exchange rates are not invariant to changes in the distributions of policy variables and stochastic components of tastes and technology. It has been recognized that a very important item on the research agenda is imbedding consumers asset demands based on utility maximization in a general equilibrium model in which the distributions of prices and exchange rates are determined endogenously.

The Dual Roles of the Government Budget and the Balance of Payments in the Movement from Short-Run to Long-Run Equilibrium

I. Introduction and background, 346.—II. A two-asset model with trade, 349.—III. Instantaneous equilibrium with a flexible exchange rate, 355.—IV. Stock equilibrium with a flexible exchange rate, 357.—V. Monetary and fiscal policy reconsidered, 361.—VI. Stock equilibrium with a fixed exchange rate, 364.—Appendix: Determinant condition for stock equilibrium, 366.

Inflation in Open Economies: Supply-Determined Versus Demand-Determined Models

During the last few years there has been a gradual shift from emphasis on aggregate demand policy to emphasis on supply or cost factors as a determinant of the rate of inflation in the Scandinavian countries. This shift seems to have been accelerated by publication by Aukrust [1], [2] for Norway and Edgren, Faxen and Odhner [5], [6] of an analysis of inflation, sometimes called the “EFO model” in Sweden, that makes the rate of inflation “structurally determined” from the supply side of the economy. This view is now drawing international attention, as evidenced by the citations noted in section II below.

Exchange Rate Policy for Developing Countries

In his Per Jacobsson lecture, Arthur Lewis (1972 p. 33) said: ‘It is now the conventional wisdom that the currencies of the developed countries should float, but the currencies of the less-developed (LDCs) should not; that is to say that each LDC should choose a more developed country (MDC) as a partner—or the SDR—and tie itself in a fixed relationship.’