nep-bec New Economics Papers
on Business Economics
Issue of 2009‒10‒10
24 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Effect of Adversity on Process Innovations and Managerial Incentives By Benoit Dostie; Rajshri Jayaraman
  2. Who Is Claiming For Fixed-Term Contracts? By Dany Jaimovich
  3. Banking Crises and Crisis Dating: Theory and Evidence By Gianni De Nicoló; John H. Boyd; Elena Loukoianova
  4. Bank Competition, Risk and Asset Allocations By Gianni De Nicoló; John H. Boyd; Abu M. Jalal
  5. Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model By James M. Malcomson
  6. Banking Crises and the Rules of the Game By Charles Calomiris
  7. Capital Requirements and Business Cycles with Credit Market Imperfections By Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
  8. Earnings Losses of Displaced Workers: Canadian Evidence from a Large Administrative Database on Firm Closures and Mass Layoffs By Frenette, Marc; Morissette, René; Zhang, Xuelin
  9. The Life-Cycle and the Business-Cycle of Wage Risk: A Cross-Country Comparison By Bayer, Christian; Juessen, Falko
  10. Why Do Firms Use Fixed-Term Contracts? By Portugal, Pedro; Varejão, José
  11. Tenure, Wage Profiles and Monitoring By Nikolaos Theodoropoulos; John G. Sessions
  12. Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry By Raff, Horst; Wagner, Joachim
  13. Who Pulls the Plug? Theory and Evidence on Corporate Bankruptcy Decisions By Zhang, Zhipeng
  14. Internal Finance and Patents - evidence from firm-level data By Martinsson, Gustav; Lööf, Hans
  15. Employment, Wages, and the Economic Cycle: Differences between Immigrants and Natives By Dustmann, Christian; Glitz, Albrecht; Vogel, Thorsten
  16. Disasters Risk and Business Cycles By François Gourio
  17. They Are Even Larger! More (on) Puzzling Labor Market Volatilities By Gartner, Hermann; Merkl, Christian; Rothe, Thomas
  18. Peer Effects, Social Networks, and Intergroup Competition in the Workplace By Kato, Takao; Shu, Pian
  19. Search in the Labor Market Under Imperfectly Insurable Income Risk By Mauro Roca
  20. Beyond Technological Diversification: The Impact of Employee Diversity on Innovation By Christian R. Østergaard; Bram Timmermans; Kari Kristinsson
  21. On the Behaviour and Determinants of Risk-Based Capital Ratios: Revisiting the Evidence from UK Banking Institutions By William Francis; Matthew Osborne
  22. On the Determinants of Corporate Cash Holdings in Japan: Evidence from Panel Analysis of Listed Companies [in Japanese] By Koichi Ando; Keiichi Hori; Makoto Saito
  23. Investment Timing, Liquidity, and Agency Costs of Debt By Hirth, Stefan; Uhrig-Homburg, Marliese
  24. Identification of Macroeconomic Factors in Large Panels By Lasse Bork; Hans Dewachter; Romain Houssa

  1. By: Benoit Dostie (IEA, HEC Montréal); Rajshri Jayaraman
    Abstract: This paper asks whether adversity spurs the introduction of process innovations and increases the use of managerial incentives by firms. Using a large panel data set of workplaces in Canada, our identification strategy relies on exogenous variation in adversity arising from increased border security along the 49th parallel following 9/11. Our longitudinal difference-in-differences estimates indicate that firms responded to adversity by introducing new or improved processes, but did not change their use of managerial incentives. These results suggest that the threat of bankruptcy may provide impetus for improving efficiency.
    JEL: L20 O31 M52 J33
    Date: 2009–09
  2. By: Dany Jaimovich (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The present study aims to contribute to the debate concerning the effects on economic performance and the structure of the labor market of regulations that combine high Employment Protection Legislations (EPL) with consent for the use of fixed-term contracts (FTC). Using a Rajan and Zingales (1998) difference-in-difference empirical technique in a panel of 45 countries, we explore the response of industries that differ in their "intrinsic need" of worker turnover when they face different levels of EPL and how the possibility of using FTC might change the outcome. Our approach suggests an original demand side explanation of the claiming of FTC.
    Keywords: Employment protection legislation, labor turnover, fixed term contracts
    JEL: J21 J33 J63
    Date: 2009–09
  3. By: Gianni De Nicoló; John H. Boyd; Elena Loukoianova
    Abstract: Many empirical studies of banking crises have employed "banking crisis" (BC) indicators constructedusing primarily information on government actions undertaken in response to bank distress. Weformulate a simple theoretical model of a banking industry which we use to identify and constructtheory-based measures of systemic bank shocks (SBS). Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BCseries that have appeared in the literature. Therefore, BC indicatorsactually measure lagged government responses to systemic bank shocks, rather than the occurrence of crises per se. We re-examine the separate impact of macroeconomic factors, bank market structure, deposit insurance, andexternal shocks on the probability of a systemic bank shocks and on the probability of governmentresponses to bank distress. The impact of these variables on the likelihood of a government responseto bank distress is totally different from that on the likelihood of a systemic bank shock.Disentangling the effects of systemic bank shocks and government responses turns out to be crucial inunderstanding the roots of bank fragility. Many findings of a large empirical literature need to be re-assessed and/or re-interpreted.
    Keywords: Banking crisis , Banking sector , Banks , Cross country analysis , Deposit insurance , Economic models , External shocks , Financial crisis ,
    Date: 2009–07–10
  4. By: Gianni De Nicoló; John H. Boyd; Abu M. Jalal
    Abstract: We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.
    Keywords: Asset management , Banking , Bankruptcy , Banks , Competition , Credit risk , Cross country analysis , Depositories , Economic models , Financial crisis , Time series , United States ,
    Date: 2009–07–10
  5. By: James M. Malcomson
    Abstract: Risk-neutral individuals take more risky decisions when they have limited liability. Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire informatin before taking decisions. Limited liability makes it optimal to increase the reward for outcomes relatively more likely to arise from desirable than from undesirable actions. The resulting decisions may be less, rather than more, risky. Making a decision after acquiring information provides an additional reason to those in the classic principal-agent literature for using contracts with pay increasing in the return. Further results on the form of contracts are also derived.
    Keywords: Managers, Risky decisions, Limited liability, Principal-agent contracts, Asymmetric information
    JEL: D82 D86 J33 M52
    Date: 2009
  6. By: Charles Calomiris
    Abstract: When and why do banking crises occur? Banking crises properly defined consist either of panics or waves of costly bank failures. These phenomena were rare historically compared to the present. A historical analysis of the two phenomena (panics and waves of failures) reveals that they do not always coincide, are not random events, cannot be seen as the inevitable result of human nature or the liquidity transforming structure of bank balance sheets, and do not typically accompany business cycles or monetary policy errors. Rather, risk-inviting microeconomic rules of the banking game that are established by government have always been the key additional necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures. Some risk-inviting rules took the form of visible subsidies for risk taking, as in the historical state-level deposit insurance systems in the U.S., Argentina’s government guarantees for mortgages in the 1880s, Australia’s government subsidization of real estate development prior to 1893, the Bank of England’s discounting of paper at low interest rates prior to 1858, and the expansion of government-sponsored deposit insurance and other bank safety net programs throughout the world in the past three decades, including the generous government subsidization of subprime mortgage risk taking in the U.S. leading up to the recent crisis. Other risk-inviting rules historically have involved government-imposed structural constraints on banks, which include entry restrictions like unit banking laws that constrain competition, prevent diversification of risk, and limit the ability to deal with shocks. Another destabilizing rule of the banking game is the absence of a properly structured central bank to act as a lender of last resort to reduce liquidity risk without spurring moral hazard. Regulatory policy often responds to banking crises, but not always wisely. The British response to the Panic of 1857 is an example of effective learning, which put an end to the subsidization of risk through reforms to Bank of England policies in the bills market. Counterproductive responses to crises include the decision in the U.S. not to retain its early central banks, which reflected misunderstandings about their contributions to financial instability in 1819 and 1825, and the adoption of deposit insurance in 1933, which reflected the political capture of regulatory reform.
    JEL: E5 E58 G2 N2
    Date: 2009–10
  7. By: Pierre-Richard Agénor; Koray Alper; Luiz Pereira da Silva
    Abstract: The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. A key feature of the model is that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default. Basel I- and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Numerical simulations show that, depending on the elasticities that relate the repayment probability to its micro and macro determinants, and the elasticity of the risk weight (under Basel II) with respect to the repayment probability, Basel I may be more procyclical than Basel II in response to adverse supply and demand shocks.
    Date: 2009
  8. By: Frenette, Marc; Morissette, René; Zhang, Xuelin
    Abstract: Using Statistics Canada’s Longitudinal Worker File, we document short-term and long-term earnings losses for a large (10%) sample of Canadian workers who lost their job through firm closures or mass layoffs during the late 1980s and the 1990s. Our use of a nationally representative sample allows us to examine how earnings losses vary across age groups, gender, industries and firms of different sizes. Furthermore, we conduct separate analyses for workers displaced only through firm closures and for a broader sample displaced either through firm closures or mass layoffs. Our main finding is that while the long-term earnings losses experienced on average by workers who are displaced through firm closures or mass layoffs are important, those experienced by displaced workers with considerable seniority appear to be even more substantial. Consistent with findings from the United States by Jacobson, Lalonde and Sullivan (1993), high-seniority displaced men experience long-term earnings losses that represent between 18% and 35% of their pre-displacement earnings. For their female counterparts, the corresponding estimates vary between 24% and 35%.
    Keywords: Layoffs; Job Losses; Employment; Worker Displacement; Earnings Losses
    JEL: J61 J31
    Date: 2009–09–25
  9. By: Bayer, Christian (Bocconi University); Juessen, Falko (University of Dortmund)
    Abstract: This paper provides a cross-country comparison of life-cycle and business-cycle fluctuations in the dispersion of household-level wage innovations. We draw our inference from household panel data sets for the US, the UK, and Germany. First, we find that household characteristics explain about 25% of the dispersion in wages within an age group in all three countries. Second, the cross-sectional variance of wages is almost linearly increasing in household age in all three countries, but with increments being smaller in the European data. Third, we find that wage risk is procyclical in Germany while it is countercyclical in the US and acyclical in the UK, pointing towards labor market institutions being pivotal in determining the cyclical properties of labor market risk.
    Keywords: business cycle, uncertainty fluctuations, life-cycle risk, heterogeneity, wages
    JEL: E20 D31 D91 J31
    Date: 2009–09
  10. By: Portugal, Pedro (Universidade Nova de Lisboa); Varejão, José (University of Porto)
    Abstract: Temporary forms of employment account for a variable but never trivial share of total employment in both the U.S. and in Europe. In this article we look at how one specific form of temporary employment − employment with fixed-term contracts − fits into employers' hiring policies. We find that human capital variables (schooling, skills and employer-provided training) as measured at the levels of the worker and the workplace are important determinants of the employers’ decisions to hire with fixed-term contracts and to promote temporary workers to permanent positions. Those employers that hire more with fixed-term contracts are also those that are more likely to offer a permanent position to their newly-hired temporary employees. Our results indicate that fixed-term contracts are used as mechanisms for screening workers for permanent positions.
    Keywords: fixed-term contracts, adjustment costs, labor demand
    JEL: J23 J41
    Date: 2009–08
  11. By: Nikolaos Theodoropoulos; John G. Sessions
    Abstract: Efficiency wage theory predicts that firms can induce worker effort by the carrot of high wages and or the stick of monitoring worker performance. Another option available to firms is to tilt the remuneration package over time such that the lure of high future earnings acts as a deterrent to current shirking. I n this paper we undertake the first empirical investigation of this relationship between the slope of the wage-tenure profile and the level of monitoring. On the assumption that firms strive for the optimal trade-off between these various instruments, we hypothesise that increased monitoring leads to a decline in the slope of the wage-tenure profile. Our empirical analysis, using two cross sections of matched employer-employee British data, provides robust support for this prediction.
    Keywords: Monitoring, Tenure, Efficiency, Wages.
    Date: 2009–09
  12. By: Raff, Horst (Kiel Institute for the World Economy); Wagner, Joachim (Leuphana University Lüneburg)
    Abstract: This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry.
    Keywords: international trade, firm heterogeneity, productivity, clothing industry
    JEL: F12 F15
    Date: 2009–09
  13. By: Zhang, Zhipeng
    Abstract: We offer a model and evidence on firms' optimal bankruptcy decisions. In the model, both the borrower and bank lenders can trigger a bankruptcy filing. We show that debt composition has significant influence on corporate bankruptcy decisions. For example, firms with a small share of bank debt as a fraction of total debt tend to voluntarily file for bankruptcy. When a firm depends heavily on bank debt, the bankruptcy boundary is more likely to be determined by the bank. Our results highlight the control rights of large private creditors in distressed firms.
    Keywords: Voluntary bankruptcy; Forced bankruptcy; Bankruptcy boundary; Debt structure; Creditor control.
    JEL: G32 G33 G21
    Date: 2009–06–01
  14. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: We find that internal finance resources at the firm-level, measured by cash flow, play a non-trivial role for the number of patent applications, even after controlling for the standard variables of a patent study. The results are based on estimating panel count-data models on a sample of 2,700 Swedish manufacturing firms, with observations from the period 1997-2005. The cash-flow effect is larger during the aftermath of the bursting IT-bubble and for firms that are more likely to be financially constrained. Our results suggest that some firms reduce or stop applying for patents during periods of declining economic activity.
    Keywords: Financing constraints; Innovation; Corporate ownership; Intellectual property rights; Firm level panel data
    JEL: G32 O31 O34
    Date: 2009–09–28
  15. By: Dustmann, Christian (University College London); Glitz, Albrecht (Universitat Pompeu Fabra); Vogel, Thorsten (Humboldt University, Berlin)
    Abstract: In this paper, we analyse differences in the cyclical pattern of employment and wages of immigrants and natives for two large immigrant receiving countries, Germany and the UK. We show that, despite large differences in their immigrant populations, there are similar and significant differences in cyclical responses between immigrants and natives in both countries, even conditional on education, age, and location. We decompose changes in outcomes into a secular trend and a business cycle component. We find significantly larger unemployment responses to economic shocks for low-skilled workers relative to high-skilled workers and for immigrants relative to natives within the same skill group. There is little evidence for differential wage responses to economic shocks. We offer three explanations for these findings: an equilibrium search model, where immigrants experience higher job separation rates, a model of dual labour markets, and differences in the complementarity of immigrants and natives to capital.
    Keywords: immigration, unemployment, business cycle
    JEL: E32 F22 J31
    Date: 2009–09
  16. By: François Gourio
    Abstract: To construct a business cycle model consistent with the observed behavior of asset prices, and study the effect of shocks to aggregate uncertainty, I introduce a small, time-varying risk of economic disaster in a standard real business cycle model. The paper establishes two simple theoretical results: first, when the probability of disaster is constant, the risk of disaster does not affect the path of macroeconomic aggregates - a "separation theorem" between macroeconomic quantities and asset prices in the spirit of Tallarini (2000). Second, shocks to the probability of disaster, which generate variation in risk premia over time, are observationally equivalent to preference shocks. An increase in the perceived probability of disaster leads to a collapse of investment and a recession, an increase in risk spreads, and a decrease in the yield on safe assets. To assess the empirical validity of the model, I infer the probability of disaster from observed asset prices and feed it into the model. The variation over time in this probability appears to account for a significant fraction of business cycle dynamics, especially sharp downturns in investment and output such as 2008-IV.
    JEL: E32 E44 G12
    Date: 2009–10
  17. By: Gartner, Hermann (IAB, Nürnberg); Merkl, Christian (Kiel Institute for the World Economy); Rothe, Thomas (IAB, Nürnberg)
    Abstract: This paper shows that the German labor market is more volatile than the US labor market. Specifically, the volatility of the cyclical component of several labor market variables (e.g., the job-finding rate, labor market tightness, and job vacancies) divided by the volatility of labor productivity is roughly twice as large as in the United States. We derive and simulate a simple dynamic labor market model with heterogeneous worker productivity. This model is able to explain the higher German labor market volatilities by a longer expected job duration.
    Keywords: labor market volatilities, unemployment, worker flows, vacancies, job-finding rate, market tightness
    JEL: J6 E24 E32
    Date: 2009–09
  18. By: Kato, Takao (Department of Economics, Aarhus School of Business); Shu, Pian (Department of Economics, Aarhus School of Business)
    Abstract: Using weekly data for defect rates (proportion of defective output) for all weavers in a Chinese textile firm during a 12 months (April 2003 - March 2004) period, we provide some of the first rigorous evidence on the presence and nature of peer effects in the manufacturing workplace. First, a worker is found to put in more effort and improve her performance when she is working with more able teammates. Second, by exploiting the well-documented fact that an exogenouslyformed strong divide between urban resident workers and rural migrant workers exists in firms in Chinese cities, we provide novel evidence on the interplay between social networks (urban resident group and rural migrant group) and peer effects. Specifically, we find that a worker puts in more effort when she is working with more able outgroup teammates but not when working with more able ingroup teammates, pointing to intergroup competition as a powerful source of the peer effects. Such peer effects across the social network, combined with the presence of incentive to outperform teammates at this firm, are largely consistent with recent experimental evidence on the important role that group identities play in facilitating altruistic behaviors.
    Keywords: peer effects in the workplace; social networks; intergroup competition
    JEL: J24
    Date: 2009–08–07
  19. By: Mauro Roca
    Abstract: This paper develops a general equilibrium model with unemployment and noncooperative wage determination to analyze the importance of incomplete markets when risk-averse agents are subject to idiosyncratic employment shocks. A version of the model calibrated to the U.S. shows that market incompleteness affects individual behavior and aggregate conditions: it reduces wages and unemployment but increases vacancies. Additionally, the model explains the average level of unemployment insurance observed in the U.S. A key mechanism is the joint influence of imperfect insurance and risk aversion in the wage bargaining. The paper also proposes a novel solution to solve this heterogeneous-agent model.
    Keywords: Consumption , Economic models , Employment , Financial risk , Income , Income distribution , Insurance , Labor markets , Private savings , Private sector , Unemployment , Wage bargaining , Wages ,
    Date: 2009–09–02
  20. By: Christian R. Østergaard; Bram Timmermans; Kari Kristinsson
    Abstract: This paper investigates the effect of employee diversity in terms of gender, age, ethnicity and education on the firm’s likelihood of introducing an innovation. The analysis draws on data from a recent innovation survey. This data is merged with a linked employer-employee dataset that allow us to identify the employee composition of each firm. We test the hypothesis that employee diversity is associated with better innovative performance. The econometric analysis reveals positive, negative and non-significant effects of the different employee characteristics on the likelihood of introducing an innovation.
    Keywords: Diversity, Innovation, Education, Gender, Cultural Backgrund
    JEL: A
    Date: 2009
  21. By: William Francis (Financial Services Authority); Matthew Osborne (Financial Services Authority)
    Abstract: Using bank-level panel data from the United Kingdom, this paper investigates the factors that influence banking institutions' choice of risk-based capital ratios. Special focus is placed on evaluating whether and how institutions respond to changes in regulatory capital requirements and if these responses vary across the economic cycle. This issue is of particular interest to policymakers that rely on capital regulation in conjunction with other supervisory tools to affect bank behaviours and maintain market confidence and financial stability more broadly. The paper also explores the extent to which UK banks’ capital management practices were procyclical under Basel I. Understanding whether such practices existed under this less risk-sensitive (and potentially, less procyclical) regulatory capital regime is a useful first step towards determining if banks, in their capital management practices, consider swings in economic conditions on their capital positions and lending capacities, which may, in turn, impact on the severity and duration of such economic cycles. We find a statistically significant association between banks' risk-based capital ratios and individual capital requirements set by regulators in the UK. We also find that the rate at which banks respond to changing capital requirements depends significantly on certain characteristics of the bank (e.g., size, exposure to market discipline, nearness to regulatory threshold) as well as the direction of the economic cycle. We find a (marginally statistically significant) negative association between capital ratios and the economic cycle, but no association when we focus only on the largest banks in the UK, suggesting that systemically important banks tend to maintain risk-based capital ratios over the cycle (although we note that this finding is based on a sample period which does not contain a significant downturn). Further, we note a positive association between capital ratios and capital quality, suggesting that reliance on capital with relatively higher adjustment costs (e.g., tier 1 capital) may raise the profile of that consideration in capital management practices and lead cost-minimizing banks to maintain higher total risk-based capital ratios overall. Finally, we find a positive marginal effect of market discipline on total risk-based capital ratios held by UK banks. We interpret this result as suggesting that banks mitigate expected market reactions (e.g., on their funding costs or ability to access certain capital markets activities) to their business decisions by holding higher capital ratios.
    Keywords: bank, capital, financial regulation, prudential policy
    Date: 2009–03
  22. By: Koichi Ando; Keiichi Hori; Makoto Saito
    Abstract: Exploiting dramatic changes in individual corporate behavior as well as macroeconomic environment for the period between 1982 and 2005, this paper empirically investigates the determinants of corporate cash holdings using the panel data of the companies listed at the three major stock exchanges. We find that like in Pinkowitz and Williamson (2001), the rent extraction by banks over industry firms promoted corporate cash holdings in the early 1980s. However, the weakened bank power was not responsible for a drastic decrease in the cash/asset ratio observed during the first half of the 1990s. Instead, the ratio declined as a consequence of the contraction of investment opportunities, the buildup of business credits as an alternative financial instrument, less needs for dividend payments, and higher costs of cash holdings.
    Date: 2009–08
  23. By: Hirth, Stefan (Department of Business Studies, Aarhus School of Business); Uhrig-Homburg, Marliese (Chair of Financial Engineering and Derivatives)
    Abstract: This paper examines the effect of debt and liquidity on corporate investment in a continuous- time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt
    Keywords: investment timing; liquidity; agency costs of debt; capital structure; real options
    Date: 2009–05–05
  24. By: Lasse Bork (Finance Research Group, Aarhus School of Business, University of Aarhus and CREATES); Hans Dewachter (CES, University of Leuven, RSM Rotterdam and CESIFO.); Romain Houssa (CRED and CEREFIM, University of Namur, CES, University of Leuven)
    Abstract: This paper presents a dynamic factor model in which the extracted factors and shocks are given a clear economic interpretation. The eco- nomic interpretation of the factors is obtained by means of a set of over- identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developped. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify nine macroeconomic factors and discuss the economic impact of monetary pol- icy stocks. The results are theoretically plausible and in line with other findings in the literature.
    Keywords: Monetary policy, Business Cycles, Factor Models, EM Algorithm
    JEL: E3 E43 C51 E52 C33
    Date: 2009–09–01

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