The Macroeconomic Controversy Over Price Rigidity — How to Resolve it and How Bayesian Estimation has Led us Astray

Price rigidity plays a central role in macroeconomic models but remains controversial. Those espousing it look to Bayesian estimated models in support, while those assuming price flexibility largely impose it on their models. So controversy continues unresolved by testing on the data. In a Monte Carlo experiment we ask how different estimation methods could help to resolve this controversy. We find Bayesian estimation creates a large potential estimation bias compared with standard estimation techniques. Indirect estimation where the bias is found to be low appears to do best, and offers the best way forward for settling the price rigidity controversy.

Exchange Rate Pass-Through, Monetary Policy, and Real Exchange Rates: Iceland and the 2008 Crisis

We use detailed data for Iceland to examine two often-neglected aspects of the exchange rate pass-through problem. First, we investigate whether the pass-through coefficient varies with the degree of international tradability of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003–2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its flexible inflation targeting, and that the coefficients are significantly higher for tradable than for nontradables.

African Asylum Seekers in Europe: The Interplay between Foreign Aid and Governance in Origin Countries

This paper empirically investigates the effects of governance quality on the number of African asylum seekers in Europe over the period 1996–2018 and evaluates the extent to which official development aid acts as a catalyst. With this purpose in mind, different gravity model specifications and estimation approaches have been employed. The obtained results suggest that the asylum flows are strongly determined by governance quality in the country of origin and that this effect does depend on the amount of foreign aid received from developed countries. Moreover, it is also found that development aid is only effective in reducing asylum applications coming from countries with good governance. Moreover, we find no differences in the estimated elasticity of foreign aid on asylum claims for the beneficiaries of the European Union Emergency Trust Fund (EUTF) for Africa, the main aim of which has been to improve living conditions of potential migrants in their countries of origin.

50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle

This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Precisely, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so evident in the peripheral, where the financial and sovereign crises have had a more substantial impact. In addition, our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some flaws that remain unsolved.

The Aftermath of Anti-Dumping: Are Temporary Trade Barriers Really Temporary?

A consistent finding in the literature is that anti-dumping (AD) acts as a significant barrier to bilateral trade, in particular, during the time such measures are in force. Adding to a relatively scarce empirical literature, however, we identify adverse impacts of AD which survive well beyond its revocation. More specifically, while we cannot rule out a slight post-revocation recovery, we find empirical evidence that once affected bilateral trade does not fully recover on average following revocation. We use panel data at the Harmonized System four-digit (HS4) level of aggregation to produce these results and show that they are robust to the duration of AD cases, the time of their imposition and revocation, differentiation by economic sector and the nature of imposing countries. Several explanations for our observed empirical results seem plausible, and we provide a theoretical framework which suggests our results could be driven by market exit or underinvestment of targeted firms.