Endogenous Price Flexibility and Optimal Monetary Policy

Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endogenising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push disturbances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfarerelevant output gap.

Employment Protection, Flexibility and Firms’ Strategic Location Decisions under Uncertainty

We construct a model in which oligopolistic firms decide between locating in a country where employment protection implies costly output adjustments and in one without employment protection. Using a two-period three-stage game with uncertainty, we demonstrate that location is influenced by both flexibility and strategic concerns. The strategic effects under Cournot work towards domestic anchorage in the country with employment protection while those under Bertrand do not. Strategic agglomeration can occur in the inflexible country under Cournot and even under Bertrand, provided uncertainty and foreign direct investment costs are low.

Threshold Effects of Dismissal Protection Regulation and the Emergence of Temporary Work Agencies

Labour market regulations aimed at enhancing job-security are dominant in several OECD countries. These regulations seek to reduce dismissals of workers and fluctuations in employment. The main theoretical contribution is to gauge the effects of such regulations on labour demand across establishment sizes. In order to achieve this, we investigate an optimising model of labour demand under uncertainty through the application of real option theory. We also consider other forms of employment which increase the flexibility of the labour market. In particular, we are modelling the contribution of temporary employment agencies (Zeitarbeit) allowing for quick personnel adjustments in client firms. The calibration results indicate that labour market rigidities may be crucial for understanding sluggishness in firms´ labour demand and the emergence and growth of temporary work.

Public Sector Pay in Finland

This study analyses the forces determining public and private sector pay in Finland. The data used is a 7 per cent sample taken from the Finnish 2001 census. It contains information on 42 680 male workers, of which 8 759 are employed in public and 33 921 in the private sector. The study documents and describes data by education, occupation and industry. We estimate earnings equations for the whole sample as well as for four industries (construction, real estate, transportation and health) that provide an adequate mix of both public and sector workers. The results suggest that the private-public sector pay gap of about one per cent can be accounted for by differences in observable characteristics between the sectors (3.4 per cent) and lower returns from these characteristics (-2.3 per cent). However, the industry-level analysis indicates that the earnings gaps vary across industries, and are negative in some cases. These inter-industry differences in public-private gaps persist even when the usual controls are introduced. This suggests that public sector wage setters need greater local flexibility, which should result in less uniform wages within the public sector.

Adaptive Continuous time Markov Chain Approximation Model to General Jump-Diusions

We propose a non-equidistant Q rate matrix formula and an adaptive numerical algorithm for a continuous time Markov chain to approximate jump-diffusions with affine or non-affine functional specifications. Our approach also accommodates state-dependent jump intensity and jump distribution, a flexibility that is very hard to achieve with other numerical methods. The Kolmogorov-Smirnov test shows that the proposed Markov chain transition density converges to the one given by the likelihood expansion formula as in Ait-Sahalia (2008). We provide numerical examples for European stock option pricing in Black and Scholes (1973), Merton (1976) and Kou (2002).

Currency Issues and Options for an Independent Scotland

In this paper we take on the role of a ‘virtual consultant’ to a potentially independent Scotland. What should the exchange rate regime of an independent Scotland look like? We argue that the current proposal of the Scottish government to remain part of the sterling zone is doomed to failure, both because it falls short of a full political and monetary union and because it fails to recognize the reality of the Scottish economy post independence. We argue that the only tenable solution for an independent Scotland is to have a separate currency and for this currency to have some flexibility against Scotland’s main trading partners. One option offered here is managed float or crawl against a basket of currencies.

Imperfect Attention and Menu Evaluation

We model the choice behaviour of an agent who suffers from imperfect attention. We define inattention axiomatically through preference over menus and endowed alternatives: an agent is inattentive if it is better to be endowed with an alternative a than to be allowed to pick a from a menu in which a is is the best alternative. This property and vNM rationality on the domain of menus and alternatives imply that the agent notices each alternative with a given menu-dependent probability (attention parameter) and maximises a menu independent utility function over the alternatives he notices. Preference for flexibility restricts the model to menu independent attention parameters as in Manzini and Mariotti [19]. Our theory explains anomalies (e.g. the attraction and compromise effect) that the Random Utility Model cannot accommodate.

The rise and fall of piecework–timework wage differentials: market volatility, labor heterogeneity, and output pricing

Based on detailed payroll data of blue collar male and female labor in Britain’s engineering and metal working industrial sectors between the mid-1920s and mid-1960s, we provide empirical evidence in respect of several central themes in the piecework-timework wage literature. The period covers part of the heyday of pieceworking as well as the start of its post-war decline. We show the importance of relative piece rate flexibility during the Great Depression as well as during the build up to WWII and during the war itself. We account for the very significant decline in the differentials after the war. Labor market topics include piecework pay in respect of compensating differentials, labor heterogeneity, and the transaction costs of pricing piecework output.