Macroeconomic policy seeks to encourage and prolong expansions but seeks to make recessions as shallow and short as possible. We thus see asymmetry in both economic behaviour and in economic policy. While the asymmetry in the macroeconomy is very obvious the same asymmetry can be found in microeconomic and sectoral behaviour as well.
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A well-known example comes from consumption. When incomes rise, all but the poor spend much of the increase but save the rest. The proportions vary according to whether they expect this increase to be one off or enduring. However, if incomes fall by the same amount people resist seeing their consumption fall, particularly if the shock is expected to be temporary.
In the longer term consumption will fall as the ability to dissave or borrow is inhibited but the pattern of behaviour is clearly asymmetric. More trivially there are many actions that are not reversible because of experience. In this chapter we explore first the problems of estimating asymmetry before going on to consider the extent of the aggregation problems that we face in dealing with a group of countries rather than with aggregate data for the EU as a whole.
However we begin by summarising the model employed. The individual equations and their justification are developed in subsequent chapters. We do not attempt to look at the determination of the exchangerate or the components of the balance of payments, nor do we consider wealth acquisition.
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Our model is thus incomplete. However, we are not seeking to substitute for Dynamic Stochastic General Equilibrium DSGE or other system approaches on this scale, we simply wish to explore the problems of asymmetry and aggregation and the concerns they pose for macroeconomic policy particularly in the EU, where single policies are implemented for member states that are quite heterogeneous. The Phillips curve provides the key link between the real economy and inflation and lies at the heart of our analysis. Although there are various asymmetries involved in the relationship the most obvious facet is that the relationship is referred to as a curve.
Although in many models it is estimated as a linear relationship in part because of the difficulties that Phillips himself encountered in the original estimation Phillips, Indeed it is only partly an accident of history, with the collapse of the long-run regularity and its replacement with a short-run expectations augmented curve Phelps, , that it has frequently been estimated as a straight line.
- Camino de la alameda. Una novela de héroes cotidianos (Spanish Edition).
- Asymmetry and the Problem of Aggregation in the Euro Area.
- Asymmetry and Aggregation in the EU.
In the previous chapter on the Phillips curve we indicated that some of the problem came from the focus on aggregate unemployment without regard to its distribution over the regions of Europe. In this chapter we tackle that issue directly and whether the dispersion of output growth or unemployment rates within a country has a direct effect on the determination of inflation for the country as a whole in the context of a nonlinear relationship. This discussion is by no means the first in this area. Nonlinearity of the Phillips curve has been tested in numerous analyses see Laxton et al.
The whole issue itself is also quite old. Lipsey remarks p. While Lipsey does not attempt any estimates, Archibald offers some for the UK, where the variance of both regional and industry unemployment are shown to have a positive effect on wage inflation. Extending this to the US gives more problematic results with quarterly data. He also carried out some empirical tests with the US data. After the Phillips curve, the Okun curve—the relationship between output and unemployment — is probably the most obviously nonlinear.
Asymmetry and the Problem of Aggregation in the Euro Area | SpringerLink
In the growth phase of the economic cycle unemployment tends to fall steadily until the point when labour shortages are reached. In the downturn, even if it only represents slow growth, unemployment tends to rise disproportionately but with a lag. This inter-relationship, which is reflected in fluctuations in labour and total factor productivity, lies at the heart of the real business cycle literature and it has proved difficult to provide a totally convincing explanation that covers the whole cycle, the shocks that are experienced and the leads and lags that affect behaviour.
Hiring and firing have costs. Hence firms try to take a longer-term view of their labour needs. In periods of rapid expansion they prefer to get the workforce to work longer hours and seek means of increasing productivity, albeit temporarily, if they think that the growth may be exceptional. Haltiwanger, J. Hansen, B. Hendry, D. Kaufman, S. Keynes, J. Kim, C-J. Kortelainen, M. Koskela, E. Kouparitsas, M. Laxton, D.
Lilien, D. Lucas, R. Maclennan, D. Mayes, D. Mahadeva and G. Sterne eds. McDonald, I. Mishkin, F. Moosa, I. Obstfeld, M. Okun, A.
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