Professor Levine's general research area is in open economy macroeconomics with a particular focus on policy rules, international policy coordination and the credibility problem. Other research interests include the economics of immigration, defence economics and the economics of radio spectrum. He has numerous publications in leading economics journals including the Economic Journal, Economic Letters, the Journal of Economic Theory , the European Economic Review , the Journal of Economic Dynamics and Control , the Journal of Monetary Economics and Oxford Economic Papers. He is co-author with Professor David Currie of a book, Rules Reputation and Macroeconomic Policy Co-ordination (CUP). Other activities include: consultancy for Ofcom, visiting researcher at the IMF and the ECB, and visiting Professor at Autỏnoma University, Barcelona.
"The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott", 2006, (with J. Pearlman and B. Yang).
Keynote Lecture given at the European Economics and Finance Society 2006 Conference in Heraklion, Crete, June 2006
The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with “normal shocks”, perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds – under commitment – the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.
A New-Keynesian model with deep habits and optimal monetary policy delivers a larger-than-1 fiscal multiplier and consumption crowding in. Optimized Taylor-type rules dominate a conventional Taylor rule. Consumption is crowded out if the Taylor rule is suboptimal or if commitment is absent. © 2012 Elsevier B.V.
We estimate an alternative type of monetary policy rule according to which the central bank targets a discounted infinite sum of expected inflation and output gaps. Empirical results suggest that the Fed has a mean forward horizon of 4 to 8 quarters. © 2009 Elsevier B.V. All rights reserved.
We analyse the effects of a government spending expansion in a DSGE model with Mortensen-Pissarides labour market frictions, deep habits in private and public consumption, investment adjustment costs, a constant-elasticity-of-substitution (CES) production function, and adjustments in employment both at the intensive as well as the extensive margin. The combination of deep habits and CES technology is crucial. The presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus, while an elasticity of substitution between capital and labour in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery.\
We contribute to a recent literature on the normalization, calibration and estimation of CES production functions. The problem arises because CES ‘share’ parameters are not in fact shares, but depend on underlying dimensions - they are ‘dimensional constants’ in other words. It follows that such parameters cannot be calibrated, nor estimated unless the choice of units is made explicit. We use an RBC model to demonstrate two equivalent solutions. The standard one expresses the production function in deviation form about some reference point, usually the steady state of the model. Our alternative, ‘re-parametrization’, expresses dimensional constants in terms of a new dimensionless (share) parameter and all remaining dimensionless ones. We show that our ‘re-parametrization’ method is equivalent and arguably more straightforward than the standard normalization in deviation form. We then examine a similar problem of dimensional constants for CES utility functions in a two-sector model and in a small open economy model; then re-parametrization is the only solution to the problem, showing that our approach is in fact more general.
Gonzalez (2007), JET, 137(1), 127-139, sets out a growth model with con- flict in which households allocate their resources across consumption, and investment in both productive and unproductive capital. A striking result is obtained: there are circumstances where increasing property rights in society can actually reduce social welfare and hence incremental changes are not nec- essarily in peoples’ interests. This note reassesses this claim in a generalized form of his model with a CRRA utility function (with a risk aversion param- eter, sigma > 1 rather than his logarithmic form) and we assume a less than full depreciation of capital. Both these generalizations prove to be critical ones that significantly change the result.
[eng] Transportation costs and monopoly location in presence of regional disparities. . This article aims at analysing the impact of the level of transportation costs on the location choice of a monopolist. We consider two asymmetric regions. The heterogeneity of space lies in both regional incomes and population sizes: the first region is endowed with wide income spreads allocated among few consumers whereas the second one is highly populated however not as wealthy. Among the results, we show that a low transportation costs induces the firm to exploit size effects through locating in the most populated region. Moreover, a small transport cost decrease may induce a net welfare loss, thus allowing for regional development policies which do not rely on inter-regional transportation infrastructures. cost decrease may induce a net welfare loss, thus allowing for regional development policies which do not rely on inter-regional transportation infrastructures. [fre] Cet article d�veloppe une statique comparative de l’impact de diff�rents sc�narios d’investissement (projet d’infrastructure conduisant � une baisse mod�r�e ou � une forte baisse du co�t de transport inter-r�gional) sur le choix de localisation d’une entreprise en situation de monopole, au sein d’un espace int�gr� compos� de deux r�gions aux populations et revenus h�t�rog�nes. La premi�re r�gion, faiblement peupl�e, pr�sente de fortes disparit�s de revenus, tandis que la seconde, plus homog�ne en termes de revenu, repr�sente un march� potentiel plus �tendu. On montre que l’h�t�rog�n�it� des revenus constitue la force dominante du mod�le lorsque le sc�nario d’investissement privil�gi� par les politiques publiques conduit � des gains substantiels du point de vue du co�t de transport entre les deux r�gions. L’effet de richesse, lorsqu’il est associ� � une forte disparit� des revenus, n’incite pas l’entreprise � exploiter son pouvoir de march� au d�triment de la r�gion l
Emerging economies are largely influenced by their vulnerability to domestic and external shocks with the effect on economic prosperity usually more pronounced when driven by volatile factors. Given country specifics, macroeconomists in emerging economies implement policies to alleviate the impact of these disturbances on the economy, considering the ensuing implications of supply side constraints that may hamper the transmission and efficacy of monetary policy initiatives. This task is however compounded when the economy is highly dependent on resource exports. Therefore, central banks in such jurisdictions require comprehensive and reliable tools to conduct monetary policy. In view of the foregoing, this thesis makes distinct contributions building on existing research on monetary policy rules in resource-rich emerging economies developing a non-zero growth and inflation two-bloc open economy Smets-Wouters type Dynamic Stochastic General Equilibrium (DSGE) model suitable for optimal policy analysis. The DSGE model incorporates liquidity-constrained consumers, incomplete exchange rate pass-through (ERPT) to import and export prices as well as Oil revenue for a nonindustrial Oil-producer economy. Undertaking optimal monetary policy simulations, we propose alternative monetary policy rules for the effective management of competing and sometimes conflicting macroeconomic policy objectives in resource-rich emerging economies. Following the thesis introduction, the second chapter assesses from a general perspective a common challenge confronted by central banks in the conduct of monetary policy. Estimating Taylor-type monetary policy rules a test of robustness is undertaken by applying different measures of potential output to highlight signal extraction issues faced by policy makers when considering business cycle dynamics. This is important when there are considerable data challenges and issues of identification and indeterminacy. The DSGE model developed to fit the dynamics of an oil-producer emerging economy is presented in the third chapter following which we carry out optimal monetary policy simulations in the fourth chapter.
This thesis investigates the interaction of monetary policy and banking regulation and supervision and what it may imply for the design of their institutional setup. Reforms implemented all over the world in the aftermath of the financial crisis aimed not only at revising the institutional arrangements of banking supervision that were in place, but also at introducing a macroprudential oversight of the financial system, as a complement to the microprudential approach, mainly empowering central banks with new financial stability objectives and instruments. Despite the research effort undertaken, it is still unclear whether central banks, which main role is to ensure the price stability, should engage in banking supervisory responsibilities and extend their mandates to embrace financial stability goals. This thesis contributes to this literature by: • Surveying the empirical and theoretical literature concerning the implications of the interactions between these policies for the design of their institutional framework. • Assessing the conflicting goals of price and banking stability. Acknowledging that central banks in charge of banking regulation may be less aggressive in their inflation mandate, in cases in which tight monetary policy conditions could have a negative effect on the stability of the banking system, it has been argued that banking supervisory powers should be assigned to an independent authority to avoid inflation bias. • Revisiting the role of monetary policy in 'leaning against the financial imbalances' and its interaction with macroprudential regulation. • Investigating the transmission mechanisms of different macroprudential policy instruments and their interactions with monetary policy-controlled interest rates, under a New Keynesian (NK) model with two types of financial frictions. For this topic, preliminary findings are shown. We start by showing the lack of both analytical and empirical studies focused on the trade-offs between expected benefits (‘sharing of information’ and ‘expertise’) and expected costs (‘conflict of interests’, ‘reputation risks’, ‘organizational costs’ and ‘balance of powers’) of central bank involvement in banking supervision. The main conclusions from the remaining research work conducted in this thesis are: • Empirically, there is no evidence of an inflationary bias arising from institutional frameworks in which central banks have banking supervisory mandates. • Theoretically, based on a NK framework
We analyze the choice often faced by countries of whether to directly intervene to counter an external terrorist threat or to subsidize a foreign government to do it. We present a model which analyzes this policy choice where two countries, home and foreign, face a terrorist threat based in the foreign country. The home country chooses how much to invest in defending itself and in reducing terrorist resources either indirectly by subsidising the foreign country or by directly by intervening itself and risking destabilizing the foreign country. We use backward induction to solve a multiple stage game where the home country first commits to its policy decisions, then the foreign country chooses the effort it expends on reducing terrorist capability and finally, the terrorists decide their effort in attacking in the home or foreign country. Using a calibrated model, we are able to show that, for the chosen parameter values, direct intervention is only an equilibrium if foreign and home efforts are not good substitutes in the technology used to reduce the resources of the terrorist group. A higher relative military efficiency by the home country makes intervention more likely.
Agent-based computational economics (ACE) has been used for tackling major research questions in macroeconomics for at least two decades. This growing field positions itself as an alternative to dynamic stochastic general equilibrium (DSGE) models. In this paper we first review the arguments raised against DSGE in the ACE literature. We then review existing ACE models, and their empirical performance. We then turn to a literature on behavioural New Keynesian models that attempts to synthesise these two approaches to macroeconomic modelling by incorporating some of the insights of ACE into DSGE modelling. We highlight the individually rational New Keynesian model following Deak et al. (2015) and discuss how this line of research can progress.
In the aftermath of the nancial crisis, the role of monetary policy and macro-prudential regulation in promoting nancial stability is under discussion. The old debate concerning whether monetary policy should respond to credit and asset price bubbles was revived, whereas macro-prudential regulation is being assessed as an alternative macroeconomic tool to deal with nancial imbalances. The paper explores both sides of the debate in a New Keynesian framework with nancial frictions by comparing the welfare and stabilisation impacts of distinct policy regimes. First, we investigate whether there is a welfare benet from monetary policy leaning against nancial instability. We show that monetary policy rules of this type perform better than conventional monetary rules. Second, by introducing macro-prudential regulation in the model, results from optimal policy analysis suggest also that there are welfare gains, even in the case in which monetary and macro-prudential authorities are independent and react to their own policy goal.
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