Despite being a flexible tool that can address several macroeconomic issues, Dynamic Stochastic General Equilibrium (DSGE) models have been rarely used to analyse the interaction…
Abstract
Purpose
Despite being a flexible tool that can address several macroeconomic issues, Dynamic Stochastic General Equilibrium (DSGE) models have been rarely used to analyse the interaction between monetary and fiscal policy until the post-financial crisis, leaving a gap in the analysis of how government consumption affects the transmission mechanism of monetary policy. This motivates this paper to analyse how government consumption affects the dynamics of a small open economy, once the former is included in a non-separable form to the utility function. To the best of the authors' knowledge, this issue has not been addressed by the literature, and the authors aim to do so in this paper.
Design/methodology/approach
A standard New Keynesian model for a small open economy is used to allow for the presence of non-separable government consumption in the utility function. The model is supported by panel regressions.
Findings
The inclusion of Government consumption dampens the transmission mechanism of monetary policy. The degree of openness dampens the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it. Empirical estimates for 35 OECD countries support the theoretical findings of the model.
Originality/value
The effect of government consumption on the transmission mechanism of MP has not been addressed in the literature. This paper contributes to the literature by addressing this issue.
Highlights:
• The inclusion of Government consumption dampens the transmission mechanism of monetary policy.
• The degree of openness alleviates the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it.
• Empirical estimates for 35 OECD countries support the theoretical findings of the model.
• The inclusion of Government consumption dampens the transmission mechanism of monetary policy.
• The degree of openness alleviates the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it.
• Empirical estimates for 35 OECD countries support the theoretical findings of the model.
Details
Keywords
The purpose of this paper then, is to add to the existing literature on financial contagion. While a vast amount of the debate has been made using data from the late 1990s, this…
Abstract
Purpose
The purpose of this paper then, is to add to the existing literature on financial contagion. While a vast amount of the debate has been made using data from the late 1990s, this paper differentiates itself by analysing more current data, centred around the most recent global financial crisis, with specific focus on the stock markets of Hong Kong and Tokyo.
Design/methodology/approach
Employing Pearson and Spearman correlation measures, the dynamic relationship of the two markets is determined over tranquil and crisis periods, as specified by an Markov-Switching Bayesian Vector AutoRegression (MSBVAR) model.
Findings
The authors find evidence in support of the existence of financial contagion (defined as an increase in correlation during a crisis period) for all frequencies of data analysed. This contagion is greatest when examining lower-frequency data. Additionally, there is also weaker evidence in some data sub-samples to support “herding” behaviour, whereby higher market correlations persist, following a crisis period.
Research limitations/implications
The intention of this paper was not to analyse the cause or transmission mechanism of contagion between financial markets. Therefore future studies could extend the methodology used in this paper by including exogenous macroeconomic factors in the MSBVAR model.
Originality/value
The results of this paper serve to explain why the debate of the persistence and in fact existence of financial contagion remains alive. The authors have shown that the frequency of a time series dataset has a significant impact on the level of observed correlation and thus observation of financial contagion.
Details
Keywords
The presence of heterogeneity in price stickiness has been previously shown to be the main determinant of the real effects of nominal shocks. The paper presents theoretical…
Abstract
Purpose
The presence of heterogeneity in price stickiness has been previously shown to be the main determinant of the real effects of nominal shocks. The paper presents theoretical results that highlight the significance of labor mobility and intratemporal elasticity of substitution across sectors.
Design/methodology/approach
This paper explores output dynamics in a closed economy, relying on a New Keynesian model that accounts for heterogeneity in price stickiness across sectors.
Findings
The key finding from the analytical results is that changes in labor mobility and intratemporal elasticity of substitution across sectors have an equivalent impact on sectoral output when accounting for differences in price stickiness. The model is then calibrated for the US economy using data from the manufacturing and services sectors, providing validation for the analytical results.
Originality/value
Conventional models often assume either immediate labor reallocation across sectors following shocks or no labor mobility at all. Additionally, these models assume either strong complementarity in consumption or some degree of substitutability. This paper demonstrates the crucial role that labor reallocation and the elasticity of substitution across goods across sectors play in generating well-known economic outcomes.