Design Of Stabilization Policies Research Articles

Domestic and foreign sales: Complements or substitutes?

How and why are the dynamics of foreign and domestic sales correlated at the firm level? The empirical answers to the question, which have bearings on the transmission of shocks and on the design of stabilization policies, are rather mixed. Some papers argue for a positive correlation, based on the impact of liquidity constraints in financing exports; others conclude for a negative correlation induced by capacity constraints. Taking advantage of a sample of Italian manufacturing firms over 2001–2012, we show that the sign of the average correlation varies over the business cycle, depending on changes in the relative severity of liquidity, credit and capacity constraints.

Budget deficits and inflation feedback

This paper reinterprets the mixed evidence of the relationship between budget deficits and inflation in high inflation economies. The main finding is that recurrent outbursts of extreme inflation in these economies can be explained by a certain hysteresis effect associated with public finance. This interpretation meets the evidence that dramatic shifts between regimes of moderately high and extremely high (hyper-) inflation often occur without visible deterioration in public finance or abrupt shifts in fiscal or monetary policies. The existence of this hysteresis effect is explicitly explained by the action of two mechanisms: the arithmetic associated with the wrong side of the inflation tax Laffer curve and the Patinkin effect (the reverse of the much oftener cited Olivera–Tanzi effect). It is also shown that the division of the operational budget deficit into the part that is subject to negative inflation feedback and the part that is inflation-proof has implications for both the discussion of the inflationary consequences of budget deficits and the design of stabilization policy.

The potency of stabilization policy in developing economies: Kenya, Tanzania, and Uganda

In this paper we investigate the comparative potency of stabilization policy instruments in Kenya, Tanzania, and Uganda. We draw on a small, eclectic macroeconomic model that includes features distinctive to developing economies and is sufficiently flexible to be capable of yielding either “Structuralist” or “Orthodox” outcomes. The model is estimated jointly on Kenya, Tanzania, and Uganda in a novel application of Zellner's estimation procedure. Among the findings of interest are that data are able to accept a number of common cross-country elasticity restrictions, suggesting that these three countries share some elements of a common economic structure. However, system-wide multipliers, generated by simulation experiments, uncover different properties of the model across the three countries. This implies that there are important cross-country differences that must be taken into account in the design of stabilization policy. On the structuralist-Orthodox controversy we find that the parameters of all three countries' aggregate demand schedules are broadly good news for the Orthodox position, whereas the aggregate supply schedules are generally bad news for Orthodox policies, as all three economies appear vulnerable to supply-side inflation generated by policies such as monetary contraction, an interest rate reform, or a competitive depreciation of the exchange rate. Overall, the results imply that Orthodox policies can only be applied to these economies with considerable caution.