Whether the plight of OECD unskilled labour is due to trade or technology is examined with a general equilibrium Heckscher‐Ohlin calibrated model of North and South. Technology transfer from North to South via direct foreign investment in unskilled‐labour‐intensive manufacturing industries is identified as the trade shock. Simulations are carried out for this and other relevant shocks, and compared with the facts of the 1970–90 period. Weights on the shocks are selected by least squares. It is found that the roles of trade and technology in the plight of Northern unskilled labour are roughly equal.
It is argued that trigger mechanisms cannot support reputation if voters are atomistic and have access to good information about party preferences. Therefore the choice for a party lies between precommitment, enforced by penalties, and discretion. The paper uses a model of Labor and Conservative preferences derived from Minford and Peel (1982) and estimates the difference of policies and outcomes for each party over an electoral period. Under discretion inflation is 10-30 per cent higher than under precommitment and unemployment is temporarily and modestly lower; under precommitment inflation is negligible (Labour is only slightly more inflationary in this case). Higher levels of welfare are achieved under both parties with precommitment but the penalties would have to be greater under Labour to support this strategy. The paper therefore suggests that rational policy should never have been discretionary in practice; episodes of apparent discretion may therefore have simply represented mistakes in attempted precommitment. An implication of modelling government preferences explicitly (appendix) is that the Lucas critique has little scope over policy change, since agents are fully aware of these preferences.
Crises can be triggered by the inherent uncertainty of the capitalist system. We cannot pretend we can ever know the future, which is mired in Knightian uncertainty ('unknown unknowns'). Hence, in designing new regulative systems we need to avoid throwing the capitalist baby out with the risky bathwater.
This second edition brings up to date a thorough review of all economic aspects of the UK's relationship with the EU, which also puts it in the political context of the upcoming referendum. It notes the intention of the EU to move to 'ever closer union' and the nature of the regulatory and general economic philosophy of the dominant countries of the EU whose writ is enforced by qualified majority voting. The book highlights the UK dilemma that, while extending free markets to its local region is attractive, this philosophy and intended union are substantially at odds with the UK's traditions of free markets and freedom under the common law. BOOK LAUNCH: http://www.iea.org.uk/events/launch-new-edition-of-should-britain-leave-the-eu
Deficits and trade Jose Vinals Does the balance of payments act as an external constraint on the design of domestic economic policy? In practice, most governments believe it does. Yet popular discussion is sometimes confused. This paper begins by evaluating the nature of the external constraint and the extent to which it can adequately be measured by the current account of the balance of payments. It is often argued that a fiscal expansion will increase employment. It is also widely held that a fiscal expansion necessarily leads to a deterioration of the current account. While these propositions may hold in specific circumstances, neither is generally true. The theoretical basis of the two propositions is examined and compared with recent international experience when important changes in fiscal stance occurred. The popular presumptions are confirmed by recent experience in the US, the UK, and Germany; but France is a counterexample to the first and Spain to the second. The important policy implication is that one can identify, both in theory and in practice, clear circumstances in which expansionary fiscal policy is appropriate and will not be thwarted by external considerations.
We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macroeconomic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model's simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. Credit shocks are the main contributor to the variation in the output gap during the crisis.
Abstract Friedman's "as if " methodology has been widely accepted by economists, at least in principle, and he himself followed it in his own work on macroeconomics. His methodological principles have, however, been more honored in the breach than the observance by macroeconomists in recent years, when there has been great emphasis on theoretical elegance and less on empirical performance. One result was the wide use of the moneyless New Keynesian model by central banks and the rest of the policy community in the two decades before the Great Recession, triggered by the monetary events of 2007 onwards. Like the Great Depression, this empirical failure of the dominant model is leading to much new work, in this case paying more attention both to money and to empirical performance.
SUMMARY Patrick Minford argues that the major short‐run cause of disturbance in the world economy in the 1980s has been US macro‐economic policy. He suggests that the elimination of this source of distortion and instability from the world economy by reducing US budget deficits, coupled with other reforms to elimate market inefficiency, particularly labour market distortions, will provide the best hope for the regeneration of long‐run growth through the market mechanism. In line with the New Classical economics, he concludes that government attempts to reduce unemployment through reflation will be selfdefeating. RESUMEN Los efectos de las politicas de los Estados Unidos, una interpretacion neoclasica El autor argumenta que en el corto plazo, la causa mas importante de las perturbaciones ocurridas en la economia mundial en la decada de 1980, ha sido la politica macroeconomica de Estados Unidos. Sugiere que la eliminacion de esta fuente de distorsion e inestabilidad sobre la economia mundial, mediante la reduccion del deficit presupuestario de Estados Unidos junto con otras reformas para eliminar las ineficiencias del mercado, especialmente las distorsiones del mercado del trabajo, proporcionaran la mejor posibilidad para la regeneracion del crecimiento en el largo plazo atraves de los mecanismos del mercado. De acuerdo con la economia neoclasica, concluye que cualquier intento gubernamental para reducir el desempleo mediante reflacion sera auto‐derrotado. RESUME Les consequences de la politique americaine — une interpretation de l'ecole ‘New Classical’ Patrick Minford soutient que la cause principale a court‐terme de troubles dans l'economie mondiale des annees '80 a ete la politique macro‐economique des Etats Unis. Il suggere que l'elimination de cette source de distortion et d'instabilite de l'economie mondiale par la reduction du deficit budgetaire, de pair avec d'autres reformes pour eliminer l'inefficacite du marche, en particulier les distortions du marche du travail, fourniront le meilleur espoir pour la regeneration de la croissance a long terme par l'intermediaire du mecanisme du marche. Du meme avis que les etudes economiques de l'ecole ‘New Classical’ il conclut que les essais du gouvernement pour reduire le chomage par l'intermediaire d'une nouvelle inflation ne meneront a rien.
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