Discussion papers 2017

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Agénor, P-R., Pengfei, J.,  (2017). 'Macroprudential Policy Coordination in a Currency Union', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 235.

This paper evaluates, using a game-theoretic approach, the benefits of coordinating macroprudential policy (in the form of reserve requirements) in a two-country model of a currency union with credit market imperfections. Financial stability is first defined in terms of the volatility of the credit-to-output ratio. The gains from coordination are measured by comparing outcomes under a centralized regime, where a common regulator sets the required reserve ratio to minimize union-wide financial volatility, and a decentralized (Nash) regime, where each country regulator sets that ratio to minimize its own policy loss. Experiments show that, under asymmetric real and financial shocks, the gains from coordination are significant at the union level. Moreover, these gains are higher when the common and national regulators have asymmetric preferences with respect to output stability, when financial markets are more integrated, and when the degree of asymmetry in credit markets between members is larger. Implications of the analysis for macroprudential policy coordination in the euro area are also discussed.

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Petrella, I., Rossi, R., Santoro, E., (2017). 'Monetary Policy with Sectoral Trade-offs', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 233.

We formulate a two-sector New Keynesian economy that features sectoral heterogeneity along three main dimensions: price stickiness, consumption goods durability, and the inter-sectoral trade of input materials. The combination of these factors deeply affects inter-sectoral and intra-sectoral stabilization. In this context, we examine the welfare properties of simple rules that adjust the policy rate in response to the output gap and alternative measures of final goods price inflation. Aggregating durable and non-durable goods prices depending on the relative frequency of sectoral price-setting may induce a severe bias. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector of the economy. As a result, measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment.

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Agénor, P-R., Lim, K.Y., (2017). 'Unemployment, Growth and Welfare Effects of Labor Market Reforms', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 232.

The effects of labor market reforms are studied in an innovation-driven model of endogenous growth with a heterogeneous labor force, labor market rigidities, and structural unemployment. The model is calibrated for stylized high- and middle-income economies and used to perform a range of experiments, including both individual labor market reforms (cuts in the minimum wage and unemployment benefit rates) and composite reform programs involving additional measures. The results show that individual reforms may generate conflicting effects on growth and welfare in the long run, even in the presence of positive policy externalities. A reduction in training costs may also create an oversupply of qualified labor and higher unemployment in the long run. Public investment in infrastructure, partly through its effects on innovation, can help to mitigate this oversupply problem.

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