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The paper presents new empirical evidence on the international effects of surprise and anticipated technology shocks in the US. We employ the proxy-instrumental variable approach to identify structural vector autoregressions in a panel setting and empirically study the transmission of US technology innovations to the G7 countries. Both unanticipated and anticipated exogenous technology improvements lead to a strong and persistent real appreciation (from the point of view of the US), along with an expansionary effect on US macroeconomic aggregates, except for hours worked which initially decline. Internationally, there is a strong and precisely estimated positive spillover on foreign output, consumption, and hours worked in the case of surprise shocks, and a weaker but still mostly non-negative effect in the case of technology news shocks. We show that the empirical evidence is qualitatively compatible with the predictions of a New Keynesian international business cycle model with imperfect financial markets, traded and non-traded goods and imported intermediate inputs in production.

We estimate nonlinear effects of government spending shocks on US macroeconomic activity using quantile regression methods. This amounts to allowing regression parameters to depend on how far output or the unemployment rate are from their means, conditional on past explanatory variables. Applying quantile methods to vector autoregressions and local projections as an alternative way to estimate impulse response functions, we find the output effects of fiscal policy to be notably larger for lower quantiles of the conditional output distribution. Conversely, higher government spending appears to lower the rate of unemployment considerably only at its highest deciles.

A two-level CES aggregate production function is used to empirically analyze the fluctuations in markups, technology, and utilization in the Great Recession. Quarterly US gross output data suggest a strong markup increase, limited technology movements, and a low labor–capital substitution elasticity.

Due to the US dollar's dominant role for international trade and finance, risk-free assets denominated in US currency not only offer a pecuniary return, but also provide transaction services, both nationally and internationally. Accordingly, the responses of bilateral US dollar exchange rates to interest rate shocks should differ substantially with respect to the (US or foreign) origin of the shock. We demonstrate this empirically and apply a model of liquidity premia on US treasuries originating from monetary policy implementation. The liquidity premium leads to a modification of uncovered interest rate parity (UIP), which enables the model to explain an appreciation of the dollar subsequent to an increase in US interest rates if foreign interest rates follow the US monetary policy rate.

We estimate the effect of government spending shocks on the U.S. economy with a time‐varying parameter vector autoregression. The recent Great Recession period appears to be characterized by uniquely large impulse responses of output to fiscal shocks. Moreover, the particularity of this period is underlined by highly unusual responses of several other variables. The pattern of fiscal shock responses neither completely fits the predictions of the New Keynesian model of an economy subject to the zero lower bound on nominal interest rates, nor does it suggest regular variation of fiscal policy effects depending on the state of the business cycle. Rather, the Great Recession period seems special in that government spending shocks had a strongly negative effect on the spread between corporate and government bond yields and a strongly positive effect on consumer confidence and private consumption spending.

We estimate vector autoregressions with time-varying parameters to demonstrate that the impulse response of inflation to government spending shocks underwent significant changes over time. Fiscal spending increases lowered inflation in the first half of the postwar period, but have been inflationary from about 1980 onwards. In contrast to estimates based on models with constant parameters, the evidence for more recent decades is in line with the prediction of basic New Keynesian models.

We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.

This paper studies the role of the markup of price over marginal cost for the transmission of fiscal policy shocks. We construct time series of markups allowing for fluctuations in capacity utilization and total factor productivity and use an aggregate production function that is more general than Cobb–Douglas. Including the constructed markup series in a bias-corrected panel vector autoregression with annual OECD data, we find that a positive shock to government spending tends to lower markups while raising output. The positive output response appears to result less from increases in hours worked than from the positive reaction of capital utilization.

We show that in New Keynesian models with non-neutral government debt, the Taylor principle ceases to be relevant for equilibrium determinacy if the government follows a fiscal rule of levying taxes in proportion to its interest payments on existing debt. This is in contrast with previous studies, which typically have assumed that taxes respond to the level of debt, and have found either a confirmation or reversal of the Taylor principle depending on the feedback from debt to taxes. We find, instead, that the equilibrium effect of the interest rate on debt is crucial for determinacy. If, as in our model, taxes are raised in response to debt interest payments, the range of indeterminacy monotonically decreases with the fiscal feedback parameter. When interest payments are completely tax-financed, indeterminacy is ruled out without any restrictions on monetary policy.

We study optimal government spending in a business cycle model with labor income taxes and unemployment due to hiring costs. Labor market frictions raise the optimal steady state ratio of government spending to private consumption. The labor tax rate is higher since profits are taxed that arise from employed workers which save hirings costs. For calibrated examples, the quantitative effect of labor market frictions on optimal fiscal policy is small. In the short run, optimal policy involves a strongly procyclical reaction of the tax rate to technology and preference shocks, while the ratio of public to private spending is close to flat. This ratio is, however, markedly countercyclical if taxes are constrained to be constant over the cycle.

The paper studies the effects of income tax rate changes in a general equilibrium model with frictional unemployment. Laffer curve effects, by which a tax rate reduction may increase the level of government spending or its share in output, are shown to be possible under certain conditions. These are the presence of unemployment benefit payments, government budget balance through fiscal spending adjustment and limited quantitative importance of labour reallocation costs. Endogenous government spending acts as a fiscal accelerator if the fiscal burden of unemployment benefit payments is large, but reduces the employment effects of tax rate cuts if it is low.

We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return and thus on private savings. Stability of equilibrium sequences requires a stationary evolution of real public debt, which steers inflation expectations and rules out endogenous fluctuations. Under anti-inflationary monetary policy regimes, macroeconomic fluctuations tend to decrease with the share of tax financing, which justifies tight debt constraints. In particular, a balanced budget policy stabilizes the economy under cost-push shocks, such that output and inflation variances can be lower than in a corresponding case where debt is neutral.

The paper discusses the short-run relation between public and private employment. Empirical evidence is presented suggesting that in aggregate US time series, increases in government employment appear to generate temporarily positive responses of private employment and real output. Unlike in the case of shocks to government spending on goods, this contradicts the predictions of business cycle models based on the neoclassical growth model. It is explored in how far a model which includes the production of useful public services can potentially explain the qualitative properties of the evidence.

It is well known that equilibrium indeterminacy can arise in a neoclassical growth model when the government continuously balances its budget through adjustments of the income tax rate. This paper demonstrates that indeterminacy is unlikely to occur if preferences are not restricted to be additively separable between consumption and leisure, but are still required to be compatible with a steady state in which leisure is constant although consumption may grow. In this case, complementarity between consumption and employment emerges as a stabilizing mechanism. For tax rates in the empirically observable range, equilibrium determinacy under balanced budget policy obtains.

The interest rate setting policy of the central bank influences the amount of funds the government must raise to pay the interest on its existing debt. With distortionary taxation, fiscal adjustments feed back on the model's endogenous variables. The conditions under which interest rate and tax policies are compatible with a uniquely determined stable equilibrium are derived for an optimizing sticky-price model. If the fiscal government continuously balances its budget, active interest rate policy easily leads to indeterminacy if there is a positive steady-state stock of public debt. When short-run deficits are allowed, active interest rate policy and determinacy are compatible unless the tax rate is too strongly increasing in response to changes in debt, the real interest rate, or output.

The empirical finding that cyclical changes in government spending tend to be associated with positive responses of private consumption has been interpreted as a challenge for representative agent intertemporal optimizing theories, which usually imply that the negative wealth effect of higher fiscal spending reduces the households' consumption and leisure. The present paper shows that the evidence can be explained by a standard real business cycle type model. With a nonadditively separable utility function and a small intertemporal consumption elasticity, higher fiscal spending can raise consumption and lower investment, as in the data. The nonseparable utility model is shown to imply the same consumption Euler equation as a model with "rule-of-thumb" consumers who mechanically spend their income.

When the government balances its budget through income taxes, a positive shock to the central bank's interest rate setting rule may increase inflation.

A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax-financed increase in government expenditures can lower the tax rate through a demand-induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.

Empirically, government expenditure shocks seem to crowd in private consumption, while neoclassical and New Keynesian models predict crowding out. We derive conditions under which a government-in-utility specification in a sticky-price model helps to reconcile theory and evidence.

This paper examines the role of financial market imperfections for output reactions to nominal interest rate shocks. Empirical evidence shows a humpshaped impulse response function of output and suggests that credit supply co-moves with output. A monetary business cycle model with staggered price setting is presented where the firms’ outlays for capital and labor must be covered by the sum of net worth of entrepreneurs and loans in the form of debt contracts. These properties are shown to generate a hump-shaped impulse response of output, which takes on the smooth and persistent appearance of the empirical output response when nominal wages are set in a staggered way, too.

We analytically derive the cyclical effects of fiscal policy shocks in a New Neoclassical Synthesis model. Price stickiness has the consequence that a rise in government demand affects labor demand, while at the same time the usual wealth effect boosts labor supply. The strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime. When the central bank controls money growth, fiscal expansions are deflationary and might even be contractionary, whereas output, wages, and, inflation can increase when the rise in the real interest rate is dampened by an interest rate rule. However, price stickiness alone is not sufficient to explain a rise in consumption as predicted by Keynesian theory.

Models of imperfect competition contain the possibility of multiple equilibria when the markup of price over marginal cost is negatively dependent on activity. The model most often used in applied work, the Dixit and Stiglitz (1977) model, is usually thought not to be able to produce such an effect. However, this paper presents a macroeconomic model where free market entry of firms is considered in the generalized version of that model, originally due to Yang and Heijdra (1993) and d'Aspremont et al. (1996) . A price index effect makes the markup depend on the number of firms which in turn depends on activity, so there may be multiple equilibria in this economy.

Sectoral and Aggregate Estimates of the Cyclical Behavior of Mark-ups: Evidence from Germany. — The paper presents evidence of the cyclical behavior of the price to marginal cost ratio for Germany. Average markups are estimated both for two-digit manufacturing industries and for the aggregate economy, the results being quite similar once the difference between gross output and and value-added markups is accounted for. Over the business cycle, markups appear to be countercyclical for most parameter constellations. This is interpreted as empirical support for business cycle theories that rely on aggregate demand shocks to affect markups inversely, thus producing procyclical real wages and productivity without having to assume technology shocks.

We develop a macroeconomic model where the government does not guarantee to repay debt. We ask whether movements in the prices of government bonds can be rationalized by lenders’ unwillingness to roll over debt when the outstanding debt level exceeds a government’s repayment capacity. Default occurs if a worsening state of the economy leads to a build-up of debt that exceeds the government’s ability to repay. Investors are unwilling to engage in a Ponzi game and withdraw lending in this case and thus force default at an endogenously determined fractional repayment rate. Interest rates on government bonds re‡ect expectations of this event. We analytically show that there exist two equilibrium bond prices. Our numerical analysis shows that, at moderate debt-to-gdp levels, default premia hardly emerge in the low risk equilibrium. High risk premia can either arise at high debt-to-gdp ratios, where even small changes in fundamentals lead to steeply rising interest rates, or as realizations of the high risk equilibrium.

This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large.

We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.

We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.

Nowadays, central banks mostly conduct monetary policy by setting nominal interest rates. A widely held view is that central banks can stabilize inflation if they follow the Taylor principle, which requires raising the nominal interest rate more than one-for-one in response to higher inflation. Is this also correct in an economy open to international trade? Exchange rate changes triggered by interest rate policy might interfere with inflation stabilization if they alter import prices. The paper shows that this destabilizing effect can prevail if (a) the central bank uses consumer (rather than producer) prices as its inflation indicator or directly reacts to currency depreciation, and (b) if it bases interest rate decisions on expected future inflation. Thus, if the central bank looks at current inflation rates and ignores exchange rate changes, Taylor-style interest rate setting policies are advisable in open economies as well.

We study the consequences of non-neutrality of government debt with respect to aggregate demand for short-run macroeconomic stability and for fiscal-monetary policy interactions in an environment where prices are sticky. Assuming either transaction services of government bonds or partial debt repayments, Ricardian equivalence fails because public debt has a negative impact on its total rate of return and thus on private savings. Equilibrium stability then requires real public debt to be stationary, which steers future expectations about prices and output, and rules out self-fulfilling expectations. Under aggressive anti-inflationary monetary policy regimes, macroeconomic fluctuations can then decrease with the share of tax financing. In particular, a balanced budget policy stabilizes the economy under cost-push shocks such that output and inflation variances can be lower than in a corresponding framework where debt is neutral.

This paper assesses the transmission of fiscal policy shocks in a New Keynesian framework where government expenditures contribute to aggregate production. It is shown that even if the impact of government expenditures on production is small, this assumption helps to reconcile the models’ predictions about fiscal policy effects with recent empirical evidence. In particular, it is shown that government expenditures can cause a rise in private consumption, real wages, and employment if the government share is not too large and public finance does not solely rely on distortionary taxation. When government expenditures are partially financed by public debt, unit labor costs fall in response to a fiscal expansion, such that inflation tends to decline. Households are willing to raise consumption if monetary policy is active, i.e. ensures that the real interest rate rises with inflation. Otherwise, private consumption can also be crowded-out, as in the conventional case where government expenditures are not productive. The interaction between monetary and fiscal policy is thus decisive for the short-run macroeconomic effects of government expenditure shocks.

Im vorangegangenen Kapitel wurde die bedeutende Rolle von MNUen fur die Weltwirtschaft und das Ausmas der wirtschaftspolitischen Eingriffe in den internationalen Handel festgestellt. Wie in der Einleitung bereits erwahnt wurde, sind bisher trotz dieser bedeutenden Rolle wenige Arbeiten in der Ausenhandelstheorie erschienen, in denen MNUen berucksichtigt werden. Zu diesen wenigen Ausnahmen zahlen BATRA/RAMACHANDRAN (1980), HELPMAN (1984), MARKUSEN (1984), ETHIER (1986) und HORSTMANN/MARKUSEN (1992), die alle MNUen in allgemeine Gleichgewichtsmodelle des Ausenhandels integrieren. ETHIER (1986) beschaftigt sich mit der endogenen Erklarung der Existenz von MNUen. HELPMAN (1984) und MARKUSEN (1984) betrachten MNUen bei unvollkommenem Wettbewerb und untersuchen grundlegende Fragen der Ausenhandelstheorie, wie z.B. die nach dem Handelsmuster, den Handelsvolumina und den Wohlfahrtsgewinnen aus Ausenhandel. In ihren Arbeiten lassen sie aber Aspekte der internationalen Wirtschaftspolitik auser acht. Diese werden hingegen von BATRA/RAMACHANDRAN (1980) behandelt. Ihr Ansatz beruht jedoch auf den Annahmen des vollkommenen Wettbewerbs und “kleiner” Lander, wodurch eine wesentliche Eigenschaft einer MNU, namlich Marktmacht, unberucksichtigt bleibt.

In diesem Kapitel soll die Rolle von MNUen in der Weltwirtschaft untersucht werden. Dieser Frage wird sowohl aus dem gesamtwirtschaftlichen Blickwinkel als auch aus der Perspektive der einzelnen Firma nachgegangen. Hierdurch sollen die nachfolgenden theoretischen Analysen in den Kapiteln 3 bis 6 motiviert und die empirische Relevanz des Untersuchungsgegenstands aufgezeigt werden.

In diesem Kapitel wird ein Oligopol mit MNUen betrachtet. Ausgehend vom vorigen Kapitel, in dem die Monopolposition der MNU auf dem Weltmarkt fur Gut X durch den alleinigen Besitz des Firmenwissens begrundet wurde, stellt sich die Frage, wie lange die MNU ihren Wissensvorsprung vor anderen Mitbewerbern aus dem In- und Ausland bewahren kann. Aber selbst wenn das Firmenwissen international allgemein zuganglich ware, gibt es dennoch Situationen, in denen die MNU Monopolist fur ihr Produkt bleibt. Dies ist z.B. beim naturlichen Monopol, bei der staatlichen Lizenzvergabe (HELPMAN, 1984a, S. 349) fur die ausschliesliche Produktion von Gut X und bei strategischem Abwehrverhalten der MNU (“limit pricing”) der Fall. Diese Falle werden aber in dieser Arbeit nicht betrachtet.

In diesem Kapitel sollen die Auswirkungen internationaler Wirtschaftspolitik in einem Ausenhandelsmodell mit einer MNU untersucht werden. Diese MNU entsteht dadurch, das eine inlandische Unternehmung, die alleiniger Besitzer bestimmter sektorspezifischer Produktionsfaktoren ist, eine Niederlassung im Ausland eroffnet. Dadurch wird sie zu einer MNU. Obwohl das in den speziellen Produktionsfaktoren enthaltene technische Wissen der MNU eine Monopolposition in ihrem Sektor verleiht, wird in diesem Kapitel von wettbewerblichem Verhalten der MNU ausgegangen; die Ausnutzung ihrer Monopolmacht wird erst in den beiden nachsten Kapiteln untersucht. Durch diese schrittweise Einfuhrung der MNU in das Ausenhandelsmodell kann die Abhangigkeit der Ergebnisse beim Einsatz von wirtschaftspolitischen Masnahmen von den beiden Hauptmerkmalen einer MNU deutlicher herausgestellt werden. Diese Merkmale sind Marktmacht und internationale Produktion unter einheitlicher Kontrolle.

Im vorangegangenen Kapitel ist die Wirkungsweise internationaler Wirtschaftspolitik in einem Ausenhandelsmodell mit einer sich wettbewerblich verhaltenden MNU untersucht worden. Der Schwerpunkt bei der Modellierung der MNU lag auf den unterschiedlichen Finanzierungsalternativen. In diesem Kapitel hingegen wird die marktbeherrschende Stellung der MNU durch die Aufgabe der Preisnehmerannahme und die Betrachtung eines Monopols auf dem Markt fur Gut X untersucht. Die Ausnutzung von Marktmacht auf den Faktormarkten (Monopson) wird in dieser Arbeit nicht behandelt.