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Economics

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Federal policies and local economies: Europe and the US

Article Abstract:

This paper establishes stylized facts on regional output fluctuations in Europe and the US. Moreover, it proposes a measure of the potential output target of the future European central bank, estimates the potential variance stabilization of a fiscal federation and constructs a regional map of the potential beneficiaries of monetary and fiscal federal policies. The econometric model is an extension of the dynamic factor model a la Sargent and Sims (1977. In: Sims, C.A. (Ed.), New methods in Business Research. Federal Reserve Bank of Minneapolis) where we introduce an intermediate-level shock, which is common to all regions (counties) in each country (state), but it is not common to Europe (US) as a whole. We build on Forni and Reichlin (1996. Empirical Economics, Long-Run Economic Growth (special issue) 21 (1996) 27-42. Review of Economic Studies 65 (1998) 453-473) to propose an estimation method which exploits the large cross-sectional dimension of our data set. Our analysis shows that (i) Europe has a level of integration similar to that of the US and that national shocks are not a sizeable source of fluctuations: around 75% of the output variance is explained by global and purely local dynamics; (ii) Europe, unlike the US, has no traditional business cycle; (iii) the core of the most integrated regions in Europe does not have national boundaries; (iv) the future European Central Bank has a potential stabilization target of about 18% of total output fluctuations; (v) a fiscal federation, if implemented, could have a smoothing effect on output in addition to what done by national fiscal policy, which accounts also for about 18% of total output fluctuations. JEL classification: C51; E32; O30 Keywords: Dynamic factor model; Business cycle; European integration

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Learning by doing and the Dutch disease

Article Abstract:

This paper develops a model of learning by doing and the Dutch disease that extends the earlier literature in two ways. First, it is assumed that both the traded and the non-traded sector can contribute to learning. Second, it is assumed that there are learning spillovers between the sectors. It is shown that within such a model a foreign exchange gift results in a real exchange rate depreciation in the long run, due to a shift in the steady-state relative productivity between the traded and the non-traded sector. In contrast to standard models of the Dutch disease, production and productivity in both sectors may go up or down. The conditions for the different cases are worked out. [C] 2001 Elsevier Science B.V. All rights reserved. JEL classification: F35; F43; O41 Keywords: Foreign exchange gift; Exchange rate behaviour; Endogenous growth

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Optimal secession rules

Article Abstract:

Should the constitution of a federation allow for peaceful secession? Constitutionally defined secession rules are optimal ex post if the federation breaks down. However, they may be suboptimal ex ante if the member countries receive a benefit from the perceived long-term stability of the federation and constitutionally defined secession rules increase the probability of a break-up. The optimal social contract trades off ex ante benefits and ex post losses, and it may avoid explicit secession rules. If transfers are costly, the trade-off is present even if ex post renegotiation is allowed. Finally, we show that under asymmetric information it is more difficult to keep the federation together and that a secession war may occur. JEL classification: H1; H7 Keywords: Secession; Federalism

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