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Yossi
Yakhin, Ben-Gurion University |
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Yossi Yakhin - Research |
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Financial Integration and Cyclicality of Monetary Policy in Small Open Economies |
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Under review.
Paper, Presentation |
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| Abstract: Should countries follow counter-cyclical or pro-cyclical monetary policies? This paper documents that in contrast to developed economies, developing countries tend to follow pro-cyclical monetary policies. The paper then constructs a New-Keynesian small open economy model with wage rigidity and solves for the optimal monetary policy under different levels of integration in the international financial markets. The model suggests that as economies gain access to the international financial markets the optimal monetary policy shifts from pro-cyclical to counter-cyclical. Also, when economies are denied access to financial markets the optimal policy partially offset exchange rate movements which may be perceived as “fear of floating”. Results are robust to a wide range of parameter values and utility specifications. | ||||
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| Staggered
Wages, Financial Frictions, and the International Comovement
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| Review of Economic Dynamics 10 (1), 2007. Paper, WP version, Presentation | ||||
| Abstract: Standard international real business cycle models often generate negative cross-country correlations in labor and investment. The data, however, display positive correlations. This paper studies the effect of real wage rigidity and financial frictions on international comovement. We find that staggered wages mainly improve the cross-country correlation of labor, while financial frictions improve investment comovement. However, each friction alone cannot account for the magnitude of international correlations of either variable. When the two imperfections are introduced together, the effect of each friction endogenously reinforces the other and the model generates realistic correlations in both variables. | ||||
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| Risk Sharing and the International Consumption Correlation Puzzle | ||||
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| Abstract: International real business cycle models often generate consumption correlations that exceed GDP correlations. In the data, however, the opposite is true. The paper uses a simple endowment model with trade costs to evaluate the role of risk sharing in generating this discrepancy between theory and data. I show that a two-country version of the model always generates consumption correlations that are greater than output correlations; however, this ranking can be inverted simply by adding countries to the model. Specifically, consumption correlations tend to be lower than output correlations when the latter are high. These results hold also after extending the model to include production; however, the comparable quantity to endowment in the production economy is GDP net of government spending and investment, not GDP. Notably, the pattern of correlations across the G7 countries is consistent with the prediction of the model. The quantitative results, however, are ambiguous. If preferences display sufficient non-separability between consumption and leisure then the model generates the correct ranking of correlations for most pairs of countries even in a frictionless environment. Separable preferences, on the other hand, require unrealistically high level of trade costs in order to produce similar results. | ||||
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| Exchange Rate Flexibility and the Structure of Financial Markets in a Small Open Economy | ||||
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| Abstract: A stochastic small open economy model with nominal wage rigidity is used to analyze macroeconomic performances under different exchange rate regimes and structures of financial markets. Exchange rate flexibility ceases to offset real shocks if financial markets are complete; instead, contingent assets are used to absorb these shocks. In that sense, completeness of financial markets is a substitute for exchange rate flexibility. If financial markets are incomplete the traditional result holds; a flexible exchange rate offsets real shocks. Under complete financial markets, a fixed exchange rate regime is always preferable to free floating since it eliminates the monetary uncertainty, while both regimes result in the same real uncertainty. As a consequence, a lower real wage risk premium (a term that is defined in the paper) is required. In turn, employment and output are higher. The paper also solves for the optimal monetary policy. This policy is counter-cyclical; it moves the exchange rate by injecting or contracting money in response to real shocks. An active monetary intervention is required since, under complete financial markets, the exchange rate does not react to real shocks. This policy eliminates the effect of the nominal rigidity by replicating the flexible wage equilibrium. | ||||
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| Mind the Gap: Structural and Non-Structural Approaches to Estimating Israel’s Output Gap. | ||||
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Israel Economic Review 2 (2), 2004. Download Paper |
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| Co-authored with Y. Menashe, Research Department, Bank of Israel. | ||||
| Abstract: The study reviews various methods of measuring the output-gap and applies two of them to the Israeli economy: the production function (PF) method, and SVAR estimation as in Blanchard and Quah (1989). Both are structural methods. PF focuses on decomposing production factors into trend and cyclical components. It also separates the Solow residual into productivity and capital utilization. The SVAR method decomposes output into similar components by applying long-run constraints. Since potential output can be defined in various ways (e.g. output that does not generate inflationary pressures, or long-run output), we show how the measurement may be adapted to the desired definition. By estimating a Phillips curve, we show that estimates of both methods have a positive effect on unexpected inflation, as implied by economic theory. Analysis of the behavior of the output-gap leads to several conclusions: (1) The annual growth rate of Israel’s potential output has fallen by approximately 1 percentage point in the second half of the 1990s. (2) The output-gap estimations with and without start-up companies show no significant difference. However, this result may be sensitive to the small number of observations that elicited data on start-ups. (3) The business cycle in the early 1990s seems to have been caused mainly by supply shocks (foremost, mass immigration) and the slump that begun in 1996 originated in demand shocks. | ||||
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Yossi Yakhin / Ben-Gurion University /
Revised January 13, 2008 |
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