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Interest rates and price levels in a small open economy

100%

Vincze J.

Kozgazdasagi Szemle (Economic Review)

2004

vol. 51

issue 7/8

625-637

The study examines what effects various interest rates have on the price level and nominal prices in an open (primarily small) economy with free flows of capital. A closed economy calls for a distinction only between nominal and real rates of interest, but in an open economy, questions of interest-rate parity have to be considered as well. It is necessary to clarify the factors behind the real interest rate important for price-level pass-through and for the scale of risk premium. Analysis of interest-rate effects begins with the mechanism whereby the interest rate influences the cost of fixed assets (explicit or implicit rents). Secondly, the mechanism behind the relation of export-sector production decisions and domestic interest rates is examined. It emerges that decisions of the export sector are independent of domestic interest rates. Thirdly, certain types of pricing behaviour are studied. It is shown that a rise in the interest rate that does not alter the present exchange rate is a price-raising factor for the importing country. It can be assumed that if the interest rate has a demand effect in a closed economy, this will presumably be much weaker in a small open economy.

The budgetary effects of the minimum wage

51%

Halpern L., Koren M., Korosi G., Vincze J.

Kozgazdasagi Szemle (Economic Review)

2004

vol. 51

issue 4

325-345

Raising the minimum wage on the labour market has direct effects on supply and demand. But its indirect effects extend beyond the labour market. They are analysed here with a macro model that distinguishes three types of work and ten industries, whose firms differ in their price structures and the degrees to which tax and social-insurance payments are avoided. Raising the minimum wage generates tension on the labour market and reduces employment of the unskilled. Since the price level rises faster than average pay and aggregate employment falls, so does real consumption. The firms' profits and investment decline, but the former can be offset even by a small increase in tax avoidance. Although the rise in the minimum wage boosts tax revenues, budgetary expenditures rise more and the balance deteriorates. Advocates of a higher minimum wage need to consider these consequences if they are to reach a responsible decision.

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2 Kozgazdasagi Szemle (Economic Review)

2 Vincze J.

1 Halpern L.

1 Koren M.

1 Korosi G.

2 2004

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Interest rates and price levels in a small open economy

The budgetary effects of the minimum wage