This article discusses the implications for fiscal policy effectiveness of persistent budget deficits combined with tight monetary targets. Such asymmetry in the fiscal/monetary policy mix can lead to government debt accumulation and higher debt service costs. Furthermore, when such accumulation is used to finance consumption and causes growing imbalances between government bonds andother financialassets in private portfolios, this asymmetry can cause upward pressure on interest rates. Thus the impact of fiscal policy may tend to diminish over the medium term.
The OECD Secretariat's world economic model determines exchange rates and capital flows using a modern "portfolio balance" approach which makes capital flows dependent on interest rate differentials and exchange rate expectations. By accounting in a consistent though aggregative manner for the financial flows among all OECD countries and with the rest of the world, the model determines seventeen exchange rates simultaneously. This paper reports estimation results for the system. Simultaneous-equation estimation techniques with cross-country parameter restrictions are employed, and a significant "risk premium" is identified whereby exchange rates depend on countries' net foreign asset positions.
Philip Turner and Jean-Pierre Tuveri
This article reviews the implications of recent measures restraining Japanese exports. Examining aggregate export volumes, exports by commodity, and by area, it finds that such measures, unlike other forms of trade restriction, have tended to increase export prices. As these prices have been adjusted to partly offset exchange rate changes, the macroeconomic implications of changes in the yen exchange rate are altered. It also appears that avoiding "trade frictions" is becoming an important motive for Japanese direct investment overseas.
James H. Chan-Lee and Hiromi Kato
This paper compares the current simulation properties of sixteen national econometric models in active use. The analysis confronts policy-relevant theoretical issues with available empirical evidence. Issues surveyed include: "crowding out", neutrality of money, price/output splits, inflation/unemployment trade-offs and the comparative influences of monetary and fiscal policies under alternative exchange-rate regimes. At the risk of oversimplification, the behavioural properties of these models are mainly eclectic-Keynesian in inspiration. Monetary transmission mechanisms and expectations processes are relatively simp/e and not dominating. Few embody fully-specified stock or wealth effects; and none, the latest thinking on expectations or supply-side effects.
Peter Hill
Income measurement in economic accounts is based on actual or imputed transactions and disregards real holding gains and losses on monetary assets and liabilities, even though these occur with predictable regularity in an inflationary environment. In practice, economic agents are well aware of these gains and losses and may be systematkally taking them into account when making decisions about consumption and saving. Thus the picture of consumer behaviour provided by national accounts may be distorted, especially when inflation is accelerating or decelerating, thus leading to overstatement of the extent to which a fall in inflation is liable to stimulate personal consumption.
Economic Policy Reforms: Going for Growth 2008
