Countercyclical Fiscal Policy and Cyclical Factor Utilization

In a neoclassical growth model with monopolistic competition in the product market, the presence of cyclical factor utilization enhances the stabilization role of countercyclical taxes. The costs of varying capital utilization take the form of varying rates of depreciation, which in turn have amplifying effect on investment decisions as well as the volatility of most aggregate variables. This creates an additional channel through which taxes affect the economy, a channel that enhances the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives.

IInflation and Globalisation: A Dynamic Factor Model with Stochastic Volatility

National inflation rates reflect domestic and international (regional and global) influences. The relative importance of these components remains a controversial empirical issue. We extend the literature on inflation co-movement by utilising a dynamic factor model with stochastic volatility to account for shifts in the variance of inflation and endogenously determined regional groupings. We find that most of inflation variability is explained by the country specific disturbance term. Nevertheless, the contribution of the global component in explaining industrialised countries’ inflation rates has increased over time.

Co-movements in Real Effective Exchange Rates: Evidence from the Dynamic Hierarchical Factor Model

We analyze and quantify co-movements in real effective exchange rates while considering the regional location of countries. More specifically, using the dynamic hierarchical factor model (Moench et al. (2011)), we decompose exchange rate movements into several latent components; worldwide and two regional factors as well as country-specific elements. Then, we provide evidence that the worldwide common factor is closely related to monetary policies in large advanced countries while regional common factors tend to be captured by those in the rest of the countries in a region. However, a substantial proportion of the variation in the real exchange rates is reported to be country-specific; even in Europe country-specific movements exceed worldwide and regional common factors.

Factor Proportions and the Growth of World Trade

Most of the expansion of global trade during the last three decades has been of the North-South kind - between capital-abundant developed and labour-abundant developing countries. Based on this observation, I argue that the recent growth of world trade is best understood from a factor-proportions perspective. I present novel evidence documenting that differences in capital-labour ratios across countries have increased in the wake of two shocks to the global economy: i) the opening up of China and ii) financial globalisation and the resulting upstream capital flows towards capital-abundant regions. I analyse their impact on specialisation and the volume of trade in a dynamic model which combines factor-proportions trade in goods with international trade in financial assets. Calibrating this model, I find that it can account for 60% of world trade growth between 1980 and 2007. It is also capable of predicting international investment patterns which are consistent with the data

Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive

We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household's risk sensitivity, but not by the fiscal authority's. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decisionmakers.