Working papers results

In this paper we focus on the post Bretton Woods period and analyze whether a PPP relationship holds and what is the speed of adjustment to it. We adopt a multivariate system approach in which, initially, we test for cointegration and then we try to identify a cointegration space in which we have the PPP relationship (the "Johansen approach"). The studies that have adopted this approach have always rejected the PPP in favour of a long run relationship between the real exchange rate and the interest rate differential. On the contrary, our conclusions are in favour of the PPP for all the cases considered when we allow for a structural break in the data. We arrive to this conclusion, after having identified the cointegration space in two different ways: one in which we have the PPP as a cointegrated vector and one in which the real exchange rate plus the interest rate differential is a cointegrated vector. Adopting a dominance criterion we choose the former identification. We al so address the Rogoffs (1996) puzzle on the excess volatility of real exchange rate and the slow convergence to PPP. On the basis of persistence profiles obtained from a constrained VECM, we dont find any evidence in favour of the puzzle since we estimate a relatively fast speed of adjustment.

Now in:
American Economic Review, May 1997 (shorter version)

How can monetary policy in stage III of European Monetary Union be coordinated between the "ins" and the "outs"? This paper compares alternative institutional mechanisms, and concludes that a generalized system of inflation targets at the European level has several merits. It strengthens domestic credibility of monetary policy. It rules out deliberate attempts to gain competitiveness through devaluations. It forces monetary policy to respond automatically to various macroeconomic shocks which is stabilizing for the real exchange rate. It distributes these shocks symmetrically across countries. On the basis of a simple theoretical model of policy coordination, the paper shows that a system of inflation targets approximates an optimal policy of international cooperation. Preliminary empirical evidence supports these theoretical results.

This article analyzes married womens labour force transitions in a Male Breadwinner Regime in the context of an Insider-Outsider economy. The argument of the article is that transitions behave differently when wives are in insider rather than outsider households, and when they are long-run participating wives rather than a priori non-participant wives. In other words, the puzzle is that the standard predictions of womens behaviour in a Male Breadwinner regime may not apply if the initial conditions change: 1) mothers may not respond as expected if they are in outsider households, and 2) highly educated mothers may not respond as expected if they studied because they intend to participate in the long run. The model is a simple Transition Model that assumes a First Order Markov Process. This model is convenient because it allows us to capture mover-stayer effects in combination with effects promoting participation and promoting inactivity. Spain turns to be an ideal case to apply the analysis. The data used is the Household Income and Expenditures Survey (ECPF, 1985-90).

This paper uses the common agency approach to analyze the joint determination of product and labor market distortions in a small open economy. Capital owners and union members lobby the government on both tariffs and minimum wages, while other factors of production are not organized. The paper shows that product and labor market distortions always move in the same direction, and that their level is not modified by social pacts between capital and labor. It also shows that labor market distortions are second best. Hence, conditionality by foreign organizations should target distortions in product markets but not in labor markets.

This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed with distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem on the size of local tax bases and/or as moral hazard problem on local tax enforcement. Moral hazard alone does not affect the first best redistribution rule, which is a lump sum transfer from the rich to the poor region. In all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions, with the transfer falling short of the first-best level. In the equilibrium with moral hazard and adverse selection, tax evasion occurs only in the poor region, even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution.