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This chapter discusses the dynamic properties of the estimated UK model. It presents generalized and orthogonalized impulse response analyses of the effects of shocks to the UK economy, and considers in detail the dynamic effect of identified monetary policy shocks. It also presents a decomposition of the variables in the UK model into trends and cycles.

This chapter describes a framework for macroeconometric modelling, which draws out the links with economic theory relating to the long run and with theory relating to the short run. It elaborates a modelling strategy that can be employed to accommodate directly the theory of the long run, and notes the ways in which short-run theory can also be accommodated in national and global models. Recent literature on modelling short-run dynamics is reviewed, highlighting the difficulties in obtaining consensus on appropriate short-run restrictions and commenting on the approaches taken in the literature in examining policy shocks in general, and monetary policy in particular.

This chapter explores a set of identifying restrictions on the short-run dynamics that might be used to supplement the long-run restrictions if the model is to be used to investigate the effect of economically-meaningful shocks. Particular attention is paid to modelling monetary policy decisions, inflation targeting, the derivation of a base rate reaction function, and the identification of monetary policy shocks.

The empirical variation between the political trajectories of Poland, Hungary, and the Czech Republic, on the one hand, and Romania, Bulgaria, and Slovakia, on the other, is striking in the early 1990s. The presence or absence of an opposition to communism strong enough to take and hold power in 1989 put the first group of states on the road to liberal democracy, and the second group on the road to illiberal democracy. This chapter compares the two groups of states in three areas: the nature of the opposition to communism and of the regime change in 1989; the political, economic, and national policies of the first post-communist governments; and the quality of the left alternative available to voters after1989.

This chapter examines some of the other outstanding debates on capital market liberalization (CML). In particular, it focuses on when a country is sufficiently developed to risk capital market liberalization, whether all countries should make liberalization their long-term goal, and whether capital market liberalization is reversible; even if it was a mistake in the first place, should countries that have already liberalized now stick with it? For example, proponents of liberalization often argue that the issue is not whether countries should liberalize their capital markets, but rather that liberalization should occur within the ‘proper’ sequence of reforms. Critics, however, argue that CML should not necessarily be the long run goal of all countries and that there are better ways for developing countries to integrate into the global economy. The chapter also contains a section that examines the appropriateness of different techniques of capital market liberalization for countries in various stages of development.

For nearly a quarter of a century, the US has persistently run significant current account deficits that transformed it from the world’s largest net creditor to its largest debtor. The stochastic optimal control/dynamic programming approach provides a framework to derive the optimal debt ratio, based upon both objective variables and preferences. The following set of questions are answered: What is a sustainable ratio of external debt/GDP? What are the consequences of an “excessive” debt? By how much does the dollar need to decline in order to achieve a sustainable current account position for the US and rest of world? The deviation of the actual debt ratio from the derived optimum increases the vulnerability of the economy to external shocks.

Financial security in retirement has traditionally meant having a steady flow of annuity income as long as one lives — a definition enshrined in the Social Security system. Earlier research has stressed a more holistic approach, which focuses on the match between resources and spending needs. Using this formulation this chapter estimates annuity values given long-term care concerns and bequest motives, where these estimated values are consistent with low observed demand for standard annuities. The chapter extends this model to value non-standard annuities with various security-enhancing features that may be of value to retirees.

This chapter argues, based on Aghino-Angeletos-Banerjee-Manova (AABM), that the presence of credit constraints can help us understand why volatility is so costly for growth. The basic idea behind this explanation is rather obvious: The long-term productivity-enhancing investment in the model developed in the previous chapter creates a need for liquidity; with perfect credit markets the necessary liquidity is always supplied. Not so with imperfect credit markets: The liquidity shock is only financed when the firm has enough profits, because only profitable firms can borrow a lot. A negative productivity shock, by making firms less profitable, makes it less likely that the liquidity need would not be met. As a result, a fraction of the potentially productivity-enhancing long-term investments will go to waste, with obvious consequences for growth.

The introduction discusses the idea of a mature welfare state, and shows that the welfare state of the 1970s can be regarded as mature basically because few, if any, major changes have occurred since then. Not only did the welfare state stabilize but so also did the embracing welfare regime. Looks at the welfare state crisis and the paradoxes within this, noting (as at the beginning of the book) that the shocks come principally from the labour market and declining family stability, thus bringing growing pressures on the welfare state itself, and implying that it needs to be examined. Suggests that it would be much more fruitful to analyse the crisis as pertaining to welfare regimes. Argues that the essence of the problem lies in the growing disjuncture between existing institutional arrangements and emerging risk profiles: the bottom‐line analytical question is how and under what conditions welfare regimes are being recast to respond to the new—post‐industrial—economic realities. The first two sections look at the public attitudes to the welfare state, and the welfare state as a Trojan horse. The following sections discuss new risks and new equalities of welfare regimes—how they deal with the Trojan horse—under the following headings: Managing the Labour Market; Labour Market Risks and Welfare Regimes; Family Risks and Welfare Regimes; and Welfare State Adaptation to Exogenous Shocks and New Risks.

This chapter explores whether governments in different varieties of capitalism respond differently to common economic shocks. It is often assumed that such shocks have a homogenizing effect on government policies, but I find the opposite to be the case (using OECD data and non-linear regression techniques). In economies with training systems that emphasize specific skills (CMEs), demand for social insurance is more sensitive to adverse economic shocks than in LMEs. In turn, polities with proportional representation (PR) are more sensitive to such demands, suggesting that PR is a complement to coordinated capitalism. The chapter also includes an analysis of the conditioning effects of wage bargaining institutions on shocks to the wage distribution, and concludes with a discussion of whether an increasingly bifurcated income and risk structure may change the politics of compensation.

This chapter asks how well Baby Boomers are protected against later-life health shocks. While exposure to such shocks is relatively high, the realization of risk appears unlikely and relatively little wealth is at risk. Almost one-quarter of the original Health and Retirement Study cohort was uninsured at some point in the six-year window before Medicare eligibility, but only 2% had an uninsured hospitalization in this window. Moreover, the amount at stake for the median uninsured person is relatively low. Since many in this age bracket approach old age in poor financial shape, lack of assets may be a larger problem than lack of health insurance. Policies aimed at preventing poverty among the elderly may be more important than policies to expand health insurance coverage among those on the verge of retirement.

The macroeconomic effects of agricultural shocks are investigated. A decline in the price of agricultural exports can cause an income shock to the household, locality, and the nation. Positive price shocks may cause a temporary increase in the demand for financial assets. Output shocks, represented as variations in national agricultural value-added, did not affect output in other sectors of the economy.