Showing papers on "Real gross domestic product published in 1998"

Measuring Monetary Policy

Abstract: Extending the approach of Bernanke and Blinder (1992), Strongin (1992), and Christiano, Eichenbaum, and Evans (1994a, 1994b), we develop and apply a VAR-based methodology for measuring the stance of monetary policy. More specifically, we develop a "semi-structural" VAR approach, which extracts information about monetary policy from data on bank reserves and the federal funds rate but leaves the relationships among the macroeconomic variables in the system unrestricted. The methodologynests earlier VAR-based measures and can be used to compare and evaluate these indicators. It can also be used to construct measures of the stance of policy that optimally incorporate estimates of the Fed's operating procedure for any given period. Among existing approaches, we find that innovations to the federal funds rate (Bernanke-Blinder) are a good measure of policy innovations during the periods 1965-79 and 1988-94; for the period 1979-94 as a whole, innovations to the component of nonborrowed reserves that is orthogonal to total reserves (Strongin) seems to be the best choice. We develop a new measure of policy stance that conforms well to qualitative indicators of policy such as the Boschen-Mills (1991) index. Innovations to our measure lead to reasonable and precisely estimated dynamic responses by variables such as real GDP and the GDP deflator.;

An almost practical step toward sustainability

Abstract: It will be useful if I tell you in advance where the argument is leading. It is a commonplace thought that the national income and product accounts, as currently laid out, give a misleading picture of the value of a nation’s economic activity to the people concerned. The conventional totals, gross domestic product (GDP) or gross national product (GNP) or national income, are not so bad for studying fluctuations in employment or analyzing the demand for goods and services. When it comes to measuring the economy’s contribution to the well-being of the country’s inhabitants, however, the conventional measures are incomplete. The most obvious omission is the depreciation of fixed capital assets. If two economies produce the same real GDP but one of them does so wastefully by wearing out half of its stock of plant and equipment while the other does so thriftily and holds depreciation to 10 percent of its stock of capital, it is pretty obvious which one is doing a better job for its citizens. Of course the national income accounts have always recognized this point, and they construct net aggregates, like net national product (NNP), to give an appropriate answer. Depreciation of fixed capital may be badly measured, and the error affects net product, but the effort is made.

Patterns of economic growth : hills, plateaus, mountains, and plains

Abstract: The recent growth literature has underestimated the importance - and ignored the implications - of the instability and volatility of growth rates. In particular, the use of panel data to investigate the effects of long-term growth in developing countries - especially with fixed effects estimates - is potentially more problematic than helpful. Except during the Great Depression, the historical path for per capita GDP in the United States has been reasonably stable exponential trend growth, with modest cyclical deviation. Graphically, growth in the United States displays as a modestly sloping, only slightly bumpy, hill. But almost nothing that is true about per capita GDP for the United States (or for other OECD countries) is true for developing countries. First, per capita GDP in most developing countries does not follow a single time trend: For a given country, there is great instability in growth rates over time, relative to both average level of growth and to cross-sectional variance. These shifts in growth rates lead to distinct patterns. Some countries have had steady growth (hills and steep hills); others have had rapid growth followed by stagnation (plateaus); others have had rapid growth followed by declines (mountains) or even catastrophic declines (cliffs); still others have experienced continuous stagnation (plains) or even steady decline (valleys). Second, volatility - however measured - is much greater in developing than in industrial countries. These stylized observations about growth rates, Pritchett concludes, suggest that it may be useless to use panel data to investigate long-term growth rates in developing countries. Perhaps more can be learned about developing countries by investigating what initiates (or halts) episodes of growth. There is something of a professional split in growth literature, Pritchett observes. Macroeconomists studying industrial countries discuss steady-state growth and ponder whether all countries in the convergence club will reach the same happy level in the end. Development economists, on the other hand, are the pathologists of economics, having discovered that developing countries are most emphatically not all alike. Developing countries have found ways to be ecstatic but they have also discovered many different ways to be unhappy. This paper - a product of the Development Research Group - is part of a larger effort in the group to understand the determinants of economic growth.

Exports and economic growth in Bangladesh

Abstract: This study investigates the effect of exports on economic growth in Bangladesh, based on a two‐sector growth model. Using annual data for the period 1961–92, the article estimates an Autoregressive Conditional Heteroscedastic model of economic growth, which is found to capture the volatility of the Bangladesh economy. The results suggest that an increase in the share of investment in GDP significantly increases the growth rate of GDP in normal years, but negligibly increases GDP growth in abnormal years. Abnormalities in the economy arise from war, political turmoil and natural disasters. The key finding is that export growth has significantly increased economic growth through its positive impact on total factor productivity in the economy. The contribution of exports to economic growth was more pronounced during 1982–90 when the government pursued a policy of trade liberalisation and structural reform, and political turmoil was not persistent. This finding is not sensitive to the choice of the model or t...

GDP growth, terms-of-trade effects, and total factor productivity

Abstract: The purpose of this paper is to assess the contribution of each one of the major factors explaining Australian nominal GDP growth: technological change, movements in the terms of trade, increases in the endowments of labour and capital, and changes in domestic output prices. We use an index number technique as well as an econometric approach. Moreover, we look at several methods to decompose total factor productivity growth into secular and unexpected components. All our empirical results have a tight theoretical foundation, being based on the GDP function approach to modelling the production sector of an open economy.

Foreign direct investment and employment in the industrial countries

Abstract: Since the trough in 1982, the growth of real foreign direct investment (FDI) outflows and inflows for the OECD countries has been very high, far outpacing that of foreign trade and real GDP. While such flows are likely to have increased the efficiency with which global capital is being used, they have also led to concerns that outflows from the industrial countries serve as an instrument for exporting jobs to low-wage countries. The purpose of this paper is to look for evidence regarding the precise relationship between FDI outflows and employment in the source countries. The empirical evidence mostly relies on estimated relationships between FDI flows and various components of demand but is derived from time-series analyses for individual countries as well as from panel regressions. All in all, we find only limited evidence that FDI outflows lead to job losses in the source countries. While it is true that domestic investment tends to decline in response to FDI outflows, emerging market economies receive only a small, albeit growing, share of global outflows. It also appears that high labour costs encourage outflows and that exchange rate movements may exacerbate such effects. However, the principal determinants of FDI flows are prior trade patterns, IT-related investments and the scope for cross-border mergers and acquisitions. Moreover, there is clear evidence that, by improving distribution and sales channels, FDI outflows complement rather than substitute for exports and thus help protect rather than destroy jobs in the source countries.

An Index of Sustainable Economic Welfare (ISEW) for Italy

Abstract: We try to build a macroeconomic index, that includes some non-market variables, to be compared to the traditional GDP. Over the last twenty years answers to the welfare accounting problem have been different. Economists have used dynamic optimization to rigorously derive an index that can be used to evaluate small projects and their contribution to well being. National Accountants are trying to extend the System of National Accounts (SNA) in the form of satellite accounts by increasing the system boundary. There is also a number of other studies which cannot be included in either of the previous categories and that we may call indices of welfare. They are not rigorously founded and start from common sense ideas of what should and what should not be considered as determinants of well being. This type of indices, however, has received wide attention thanks to their immediate comparability with GDP and to their characteristic of emphasizing the long run trend of "welfare" as compared to GDP. Our work falls in the third category. We start from the Index of Sustainable Economic Welfare (ISEW) built up by Cobb and Daly in 1989 and we reproduce it for Italy, though revisiting the methodology associated to the construction of some of the variables. The results show that up to the seventies the Italian GDP only slightly overestimates the growth of economic welfare, but since then it seems to have been misleading, at least as compared to our index. While GDP has continued to rise, economic welfare has been stagnating. The importance of the environmental variables included seems to be decreasing over time, going from 38% in 1980 to 31% in 1990. The cost of pollution (air, water and noise) has a greater weight in the sixties (about 13%) and falls to 8% in 1990. The ratio between GDP and environmental degradation has remained constant over the decades under consideration, thus contradicting the idea that the demand for environmental quality increases with income.

The construction industry and macroeconomy in Sub-Saharan Africa post 1970

Abstract: This paper reports research aimed at the establishment of a model of interdependence between the construction sector and the national economy, based on a long term trend, for the developing countries of Sub-Saharan Africa. This study follows research undertaken by previous writers who have investigated the relationship between the construction sector and economic development and found a positive relationship between the share of construction in gross domestic product (GDP) and the level of per capita national income. In addition, recent economic and demographic trends in Sub-Saharan Africa are presented and significant events that have had a great impact in this region are highlighted. Evidence is presented that a long term decreasing growth in GDP per capita corresponds directly to a relative decrease in construction volume. The converse does not appear to be true.

Growth and inflation: a cross-country study

Abstract: This paper examines the effect of inflation on real growth in a Solow growth model using data from a cross section of countries over a 30-year period. The advantage of using a theoretical model is that it reduces the risk that the results will reflect data-mining. The results suggest that the 5 percentage point reduction in inflation from the 1970s to the 1980s would increase the growth rate of real GDP per head by between 0.1 and 0.5 percentage point. This effect would be worth between 15 percent and 140 percent of one year's income. Even the lower of these projections would be larger than most estimates of the costs of bringing inflation down.

Exchange Rates and Economic Growth in Kenya: An Econometric Analysis

Abstract: The current paper expands on an earlier DDP (No.607), which had discussed the relationship between economic growth and exchange rate in Kenya. Based on data for the period 1970 to 1996, we analyze the possible direct and indirect relationship between the real and nominal exchange rates and GDP growth. We derive these relationships in three ways: within the context of a fully specified (but small) macroeconomic model, as a single-equation instrumental variable estimation, and as a vector-autoregression model. The estimation results from the three different settings show that there is no evidence of a strong direct relationship between changes in the exchange rate and GDP growth.

Life cycle investment behavior, demographics and asset prices

Abstract: This thesis investigates the relationship between demographics and asset prices. More specifically it examines the effect of changes in the age distribution of the U.S. population on housing, stock, and bond prices over the post World War II period in the U.S. This is done in two steps. First, survey data on household asset holdings is used to construct age profiles of household demand for housing, stocks, bonds, and debt. These asset demand profiles are combined with data on the age distribution of the U.S. population to construct time series measures of aggregate demographic demand for housing, financial assets net of debt, and stocks in excess of bonds, which are then used to analyze the effects of demographically driven changes in aggregate asset demand on equilibrium asset prices over the period from 1946 through 1997. The results of this exercise suggest several interesting findings. With respect to the microeconomic issue of life cycle investment behavior, one finds that the scale and composition of household asset demand changes dramatically over the course of the economic life cycle. Young households, that is, households with heads under age 40, tend to draw credit out of financial markets, primarily by issuing mortgage contracts for the purchase of houses. The extent of this and other borrowing done by young households tends to exceed any gross contributions they make to financial markets through transactions accounts, mutual funds, retirement plans, etc., making them net negative investors in financial assets on average. In contrast, households with heads between ages 40 and 60, tend to provide substantial amounts of credit to financial markets. Much of this saving is, at least nominally, retirement saving, held in personal retirement accounts and employer provided pensions. Households with heads over age 60 tend, like younger households, to drain credit from financial markets. However, unlike young households, older households draw credit out of financial markets not by borrowing, rather, by using previously accumulated assets to fund consumption during retirement. Due to large shifts in the age distribution of the U.S. population since 1946, these life cycle investment patterns appear to have had significant macroeconomic consequences. Tests of the correlation between the constructed demographic demand variables and corresponding asset price series, suggest a statistically significant link between demographic changes in the U.S. population and observed long run movements in housing, stock, and bond prices. This is true even after controlling for the effects of other factors such as fluctuations in real GDP (in the case of housing and bond prices) and dividends (in the case of stock prices). Estimated elasticities of real housing prices with respect to the demographic demand for housing suggest that demographic factors can account for approximately 59% of the observed annual increase in real housing prices between 1966 and 1986. Similarly, demographically driven changes in the demand for financial assets…

New Evidence Connecting Exchange Rates to Business Cycles

Abstract: Economic theory predicts connections between fluctuations in a country's exchange rate and its real GDP relative to other countries. Past evidence of such connections has been very weak. An examination of periods of large or sustained changes in GDP (rather than small, temporary changes), however, reveals new evidence of these connections. Focusing on Japanese yen exchange rates, such examination shows that the yen tends to depreciate when Japanese real GDP, relative to a comparison country, rises above its trend for several consecutive quarters.

Thailand in 1997: Financial Crisis and Constitutional Reform

Abstract: The Economy After a decade of spectacular performance, with per capita GNP growth averaging more than 8%, Thailand's overheated economy began to slow down in 1996. A considerably steeper downturn was anticipated for 1997. Not even the worst-case scenario, however, came close to predicting the meltdown that occurred. Macroeconomic projections for 1997 released by the Finance Ministry and the Bank of Thailand in November estimated real GDP growth at 0.6%, consumer price index inflation at 10%, and an external debt of US$94.9 billion, or 58.6% of GDP. Short-term debts, defined as those maturing in the next 12 months, amounted to US$39 billion, about half consisting of loans from Japanese banks. The Stock Exchange of Thailand (SET), mirroring the condition of the economy, fell steadily from 816.79 points on December 20, 1996, to 385.25 points on December 19, 1997, a loss of more than half its value and near nine-year low. The Thai baht, finally allowed to float on July 2 after costly attempts to defend it against a number of concentrated attacks by foreign speculators, promptly dropped 20% in value. The baht continued its decline to an all-time low; by mid-December, it had depreciated by roughly 77% of the fixed rate prior to the July 2 flotation.

Inflation, Uncertainty, and Growth in Colombia

Abstract: It has been argued that higher levels of inflation lead to greater uncertainty about future inflation and to greater dispersion of relative prices. In either case, inflation could reduce the efficiency of market prices in coordinating economic activities. This paper shows that the rise of inflation in Colombia, from low levels in the 1950s to average rates of 18–22 percent since the 1970s, has been accompanied by increased uncertainty and relative price dispersion; and that inflation has had a negative and persistent effect on real GDP growth.

Efficiency and Fragile Speculative Financial Markets: Against the Tobin Tax and for a Creditable Market Maker

Abstract: I Introduction Since the oil price shock of 1973 and the Mexican threat of default in 1982, there have been recurrent problems in international monetary payments balances. The result has been reduced global rates of employment, output, and economic growth from those experienced during the previous Bretton Woods period until 1973. This is not to say that the pre-1973 period was not without economic problems. From hindsight, however, despite two Asiatic wars, this early postwar period appears to be much more tranquil and beneficial in terms of economic processes. In large measure, the postwar international payments system until 1973 was shaped by Keynes' thesis that flexible exchange rates and free international capital mobility are incompatible with global full employment and rapid economic growth in an era of multilateral free trade. The Bretton Woods period was a golden age of economic development because both the international payments system, and domestic fiscal and monetary policies in most OECD nations followed (not always deliberately) the policy prescriptions suggested by Keynes' principle of effective demand (Davidson, 1994, ch 16). The resulting average real gross domestic product (GDP) per capita growth rate for OECD nations from 1950 to 1973 was almost double the peak annual growth rate of the industrializing nations during the Industrial Revolution, while labor productivity annual growth was almost triple that of the Industrial Revolution (Adelman, 1991, p. 17). Moreover, even the non-OECD nations, that is the less-developed countries (LDCs) had unprecedented increases in the GDP per capita. The 1973 oil price shock was the event that broke the Bretton Woods golden age relationships. The drastic oil price increase created huge international payments imbalances and unleashed inflationary forces in oil consuming nations. The resulting economic dislocation placed policy makers in a difficult position. Without having to admit that they did not know what to do, policymakers threw away Keynes' effective demand model and opted for the 1960s classical monetarist anti-Keynesian theories to justify their abandonment of any attempt to constrain international financial flows and fix exchange rates. If anything went wrong under the classical "leave it to the market" approach, policy makers could argue that they could not be blamed - for after all, the market "knows" best. The result was to make the exchange rate itself an object of speculation. With the removal of all restrictions on international capital flows in a world of flexible exchange rates, international financial transactions have grown thirty times as fast as the growth in international trade. Today, international financial flows dominate trade payments and exchange rate movements reflect changes in speculative positions rather than changes in trade patterns. When the world changed from a fixed to a flexible exchange rate system, the annual growth rate in investment in plant and equipment in OECD nations fell from 6 percent (before 1973) to fewer than 3 percent (since 1973). Less investment growth means a slower economic growth rate in OECD nations (from 5.9 percent to 2.8 percent) while labor productivity growth declined even more dramatically (from 4.6 percent to 1.6 percent). Since the 1970s, Nobel Prize winner James Tobin (1974) has been almost the only voice with significant visibility in the economics profession warning that free international financial markets with flexible exchange rates can have a "devastating impact on specific industries and whole economies" (Eichengreen, Tobin, and Wyplosz, 1995, p. 164). Tobin advocates that governments constrain international flows via a "Tobin tax." In the past year I have written several articles on why Tobin's assessment of the problem is correct, but why the "Tobin tax" solution is the wrong tool to solve the problem. In this article, I want to raise another issue that is clear to the hearts of many of Keynes' followers - namely whether international (or domestic) financial markets are inherently fragile. …

Accounting for South Korean GDP Growth: Index‐Number and Econometric Estimates

Abstract: The paper estimates the contribution of each one of the major determinants of South-Korean nominal GDP growth: technological change, movements in the terms of trade, increases in the endowments of labor and capital, and changes in domestic output prices. An index-number technique is used as well as an econometric approach. Both have a tight theoretical foundation, being based on the GDP function approach to modeling the production sector of an open economy.

Financial liberalization and financial depth in China

Abstract: This paper first investigates whether any meaningful financial liberalization has taken place in China since economic reforms began in 1978. An index of financial repression is constructed for this purpose. It shows that apart from official economic austerity programs in 1985, 1989-1991 and 1994, a steady decline in financial repression has eventuated. The paper then investigates whether this financial liberalization has contributed to financial deepening as the Mckinnon-Shaw hypothesis suggests should be the case. An econometric autoregressive distributed lag model(ADL) is estimated to shed light on this issue. Financial depth is modeled as a function of real GDP per capita, the real interest rate, financial institution density and our financial repression index. The results show that over the period 1978-1996, financial depth has been strongly influenced by real GDP per capita and the real interest rate. An error correction model(ECM) derived from the ADL model reveals that the real rate of interest is a particularly important factor in explaining short run fluctuations in financial depth. The results are therefore generally supportive of the McKinnon-Shaw hypotesis.

Financial Development, Liberalisation and Economic Development in Indonesia, 1966-1996: Cointegration and Causality

Abstract: This paper considers the link between financial and economic development. It does so by using cointegration and ECM modelling. The test procedures used to suggest that the structure of the relationships between those two forms of development did not differ over the pre- and post- liberalisation periods. Insufficient data prevented a comprehensive test of that hypothesis. Cointegration is found between three of our four measures of financial development and both real GDP per capita and real non-oil GDP per capita.

Technology Shocks or Coloured Noise? Why real-business-cycle models cannot explain actual business cycles

Abstract: Typically real-business-cycle models are assessed by their ability to mimic the covariances and variances of actual business cycle data. Recently, however, advocates of RBC models have used them to fit the historical path of real GDP using the Solow residual as a driving process. We demonstrate that the success of RBC models at matching historical GDP data does not confirm the validity of RBC models. Through simulations we demonstrate that the Solow residual does not carry useful information about technology shocks and that the RBC model does not add incremental information about GDP. RBC models fit historical GDP data entirely because the Solow Residual is itself just a noisy measure of GDP.

Mismatch explanations of European unemployment

Abstract: Relatively high growth rates of GDP make it difficult to explain the high European unemployment rates within the usual business cycle framework. Over the four year period 1987-90, for instance, real GDP increased by 13% and the unemployment rate declined from 10.7% in 1986 to 8.3% in 1990 for EC12. High unemployment rates remained despite an average growth rate of output of 3.4%. The persistence of European unemployment stands in striking contrast to the cyclical pattern of unemployment in the United States. Many people attribute the rise in European unemployment to increased imbalances between the pattern of labour demand and supply — in other words, to greater mismatch.

The Asian Financial Crisis: Singapore's Experience and Response

Abstract: Although Singapore has a very open economy, both in the current and capital accounts, the impact of the crisis has not been as severe as in several less open regional economies; thus economic openness and globalization are not sufficient factors. Further, despite sound fundamental macroeconomic policies, Singapore did not escape the fallout from the regional crisis; thus these factors are insufficient insurance against overreactions and herd behaviour of currency traders and speculators. Finally, Singapore's policy response to the crisis is not to reject globalization and liberalization, but to undertake further reforms and restructuring to ensure international competitiveness. Introduction More than a year after the currency and financial crisis exploded in Southeast Asia, starting with floating of the Thai baht in July 1997, much has been written and debated regarding the causes and effects of the crisis and the necessary and appropriate responses at national and international levels. Singapore's experience with, and response to, the regional crisis makes for an interesting case study. First, Singapore has a very open economy, both in the current and capital accounts, yet the impact of the crisis has not been as severe as in several less open regional economies because it has strong macroeconomic fundamentals, sound macroeconomic policies, a healthy domestic financial system, and political and social stability. Second, Singapore's policy response to the crisis is not to reject globalization and liberalization and impose capital controls but to strengthen the domestic financial system and improve the economy's international competitiveness. Sound Macroeconomic Fundamentals and Policies Economic Openness and Vulnerability By any set of criteria, Singapore is one of the most open economies in the world which, together with its small size, renders it highly vulnerable to external developments beyond its control. The economy is continually subject to the discipline of the market and hence has to maintain strong macroeconomic and financial fundamentals and political and social stability to remain attractive to international capital, and pursue sound macroeconomic and financial policies. Table 1 presents some indicators of economic openness. Total trade in goods and services reached US$327 billion or 331% of GDP in 1997, with external demand accounting for two-thirds of total demand. Foreign investment penetration is extensive - the stock of inward foreign equity investment (direct and portfolio) reached US$70 billion in 1995 or 81% of GNP, while foreign controlled companies (with foreign equity ownership of over 50%) comprised 18% of the total number of companies and nearly 60% of total corporate assets in Singapore. Outward equity investments are of a lesser order, but still reached US$34.2 billion by 1995 or 33% of GNP. Foreign participation in the Singapore financial sector is probably one of the highest in the world. As a financial centre, Singapore plays host to 142 foreign banks as well as a large number of other financial institutions, while the total assets of the Asian Dollar Market (ADM) reached US$375 billion by end-1997. Ranked as the world's eighth largest offshore lending centre, the ADM plays a crucial role in mobilizing global funds for onlending to the region. With full employment since the 1970s, the foreign workforce has also been on the rise, accounting for 2>25% of the total workforce in recent years.' Sound Economic Fundamentals That Singapore has been less affected by the regional crisis is in large part due to its strong macroeconomic and financial fundamentals. With financial liberalization and capital account convertibility, these have helped maintain investor confidence and fend off speculative attacks. Real GDP growth has been high and sustained, averaging 9% in the period 199-97; as a result, per capita GNP reached US$26,475 in 1997, higher than several OECD countries. …

Long‐run growth projections and the aggregate production function: a survey of models used by the u.s. government

Abstract: I. INTRODUCTION Long-run economic growth is an area of obvious interest to both economists and policymakers. This interest is evident in the large academic literature on economic growth and the considerable effort that policymakers undertake when projecting the growth of the U.S. economy. Accurate projections of future growth have clear implications for U.S government budget policy, the soundness of the Social Security and Medicare systems, and future standards of living in the United States. This paper examines the methodology of four prominent government models - the Congressional Budget Office (CBO), the Social Security Administration (SSA), the Office of Management and Budget (OMB), and the General Accounting Office (GAO) - and finds that all are essentially simple Solow growth models in the neoclassical tradition. While the details differ, each agency utilizes a similar framework where potential output depends on the aggregate levels of capital, labor, and technology through the familiar aggregate production function. Long-run growth then results from the accumulation of primary inputs due to demographic changes, education choices, saving and investment decisions, and exogenous increases in total factor productivity. The Congressional Budget Office (1997a,b,c, 1996, 1995) has the most sophisticated model of long-run growth and explicitly relies on an aggregate production function. CBO uses a detailed and fully developed model of the economy where potential Gross Domestic Product (GDP) growth is determined by a two-input, Cobb-Douglas production function in the nonfarm business sector. Output grows with increases in labor hours (due to exogenous population growth and demographic shifts), endogenous capital accumulation (due to investment and national savings rates), and exogenous increases in total factor productivity. The Social Security Administration (1996, 1992) and Board of Trustees (1996) use a long-run growth model that, implicitly at least, is in the neoclassical tradition. Since SSA is primarily interested in wage growth and labor supply, it does not explicitly model an aggregate production function, endogenize capital, or examine the sources of growth. Rather, SSA simply defines potential GDP growth as the sum of the growth in labor hours and the growth in labor productivity without modeling labor productivity growth. Labor hours are projected from internal demographic trends, and labor productivity growth is set exogenously at historical rates. This approach, however, is easily reconciled with the aggregate production function. The Office of Management and Budget (1997a,b) projects long-run real GDP using a framework very similar to SSA. OMB also is not interested in the sources of growth and instead focuses on the relationship between real output growth and the federal budget. Long-run real GDP projections are modeled as a function of demographic factors, which determine labor supply growth, and of exogenous increases in labor productivity. The General Accounting Office (1996, 1995, 1992a,b), like the CBO, explicitly uses an aggregate production function that depends on growth in labor hours, an endogenously determined capital stock, and total factor productivity. GAO then examines the impact of federal fiscal policy on the rate of capital accumulation and economic growth. Projections of labor hours are again taken from SSA, and total factor productivity growth is exogenous. The biggest difference between the models involves the relationship between capital accumulation and fiscal policy. Both CBO and GAO endogenize the capital stock by incorporating feedback relationships that link fiscal policy, national savings, and capital accumulation. These models both show that, given demographic trends, current U.S. fiscal policy is not sustainable in the long run. SSA and OMB, on the other hand, simply assume labor productivity will follow previous trends without accounting for the impact of fiscal policy on capital accumulation. …

Economic Performance across the UK Regions: Convergence or Divergence?

Abstract: The authors examine the evolution of UK regional gross domestic product (GDP) per capita since the mid-1970s, with particular emphasis on the degree of divergence or convergence of real GDP per head. They investigate three types of convergence, known as sigma convergence, beta convergence, and conditional beta convergence. They find little evidence of a diminution in the differences in the levels of regional incomes over the sample period, although the standard deviation in regional incomes docs vary over time. There is also some limited evidence of mobility of regions, indicative of beta convergence.

New Evidence Connnecting Exchange Rates to Business Cycles

Abstract: Virtually every theoretical model of exchange rates predicts that the real exchange rate between two countries (with floating nominal exchange rates) is correlated with the ratio of business-cycle conditions in the two countries. Yet almost no empirical evidence exists to support this prediction of the models. In fact, there is little empirical evidence that ties real exchange rates to any underlying economic conditions. Some well-known studies have concluded that exchange rates appear to have “a life of their own,” perhaps moving with speculators’ expectations far more than with changes in economic fundamentals. (See Flood and Rose [1995] for a prominent example.) Contrary to this widely held contention, this article presents new evidence that exchange rates are connected with fundamentals, in particular with the relative gross domestic product (GDP) of each of the two countries involved, as predicted by nearly all exchange-rate theories. Moreover, they are related in the direction predicted by standard models: a country’s currency tends to be depreciated in real terms when that country’s real GDP is relatively high, and vice versa. Why have previous studies not found this relationship between real exchange rates and ratios of real GDP? The answer is that the relationship is hard to detect with simple linear models, because it appears to be nonlinear and conditional on persistent movements (rather than purely transitory movements) in the data. Recent theoretical and empirical work has pointed to the potential

Patterns of development 1970-1994

Abstract: This paper characterizes the patterns of development based on 93 countries over the last 25 years (1970-74). It starts with a brief review of the literature in this area and then provides operational definitions of development and economic structure. Economic structure is defined by 45 macroeconomic indicators, such as sectoral shares of GDP, trade intensity, or financial market development. After discussing some of the main methodological issues, the empirical analysis shows that systematic relationships exist between the level of Gross Domestic Product (GDP) per capita and 33 macroeconomic indicators. The paper concludes with some implications for the growth literature and some warnings on how not to interpret patterns of development.

Stylized facts of Euroland's business cycle

Abstract: The paper presents some stylized facts of Euroland's business cycle using aggregated data. The main results are: The determination of turning points in Euroland's business cycle is not very sensitive to the detrending method used, although the level of the recent output gap depends on it. Investment, net exports and stock building explain the largest share of the swings in real GDP. The types of expenditures - except for net exports - are pro-cyclical with almost no lag or lead. The results for monetary variables are unclear, most of them show no clear-cut cyclical behavior. Prices are counter-cyclical, whereas labor productivity and real wages are pro-cyclical. The cyclical component of industrial production in all member countries shows a positive and over time increasing correlation coefficient with the one in the rest of Euroland.