nep-cba New Economics Papers
on Central Banking
Issue of 2007‒11‒24
37 papers chosen by
Alexander Mihailov
University of Reading

  1. Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Models By Robert J Shiller
  2. Estimating DSGE Models under Partial Information By Paul Levine; Joseph Pearlman; George Perendia
  3. Inertia in Taylor Rules By Driffill, John; Rotondi, Zeno
  4. Unconditionally Optimal Monetary Policy By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  5. The timeless perspective vs. discretion : theory and monetary policy implications for an open economy By Guender, Alfred V.
  6. Communicating Policy Options at the Zero Bound By Burkhart, Lucas; Fischer, Andreas M
  7. Universality of Bayesian Predictions By Sancetta, A.
  8. Empirical Significance of Learning in a New Keynesian Model with Firm-Specific Capital By James Murray
  9. Examining the bond premium puzzle with a DSGE model By Glenn D. Rudebusch; Eric T. Swanson
  10. Fiscal Reform, Growth and Current Account Dynamics By Creina Day; Garth Day
  11. Fiscal rules, public investment, and growth By Serven, Luis
  12. Who Prices Locally? Survey Evidence of Swiss Exporters By Andreas M. Fischer; Matthias Lutz; Manueal Wälti
  13. Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts By Sellin, Peter
  14. Pricing-to-market and the failure of absolute PPP By George Alessandria; Joseph Kaboski
  15. The timing and magnitude of exchange rate overshooting By Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
  16. When countries do not do what they say: Systematic discrepancies between exchange rate regime announcements and de facto policies By Bersch, Julia; Klüh, Ulrich H.
  17. Behavioural equilibrium exchange rate estimates and implied exchange rate adjustments for ten countries. By Ronald MacDonald; Preethike Dias
  18. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  19. Fear of appreciation By Sturzenegger, Federico; Levy-Yeyati, Eduardo
  20. Liability Dollarization and Fear of Floating By Quoc Hung Nguyen
  21. Cointegration in the Foreign Exchange Market and Market Efficiency since the ntroduction of the Euro: Evidence based on bivariate Cointegration Analyses By Michael Kühl
  22. Tax Policy in Emerging Countries By Richard Bird; Eric Zolt
  23. Resurrecting Keynes to Revamp the International Monetary System By Pietro Alessandrini; Michele Fratianni
  24. Labor Market Policies and Outcomes: Cross Country Evidence for the EU-27 By Riccardo Rovelli; Randolph Bruno
  25. Imperfect monitoring and the discounting of inside money By David C. Mills, Jr.
  26. The Costs of Paying – Private and Social Costs of Cash and Card Payments By Bergman, Mats; Guibourg, Gabriela; Segendorf, Björn
  27. Counterfeiting as private money in mechanism design By Ricardo Cavalcanti; Ed Nosal
  28. Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations By Arie Kapteyn; Kristin J. Kleinjans; Arthur Van Soest
  29. Welfare Theory: History and Modern Results By Aronsson, Thomas; Löfgren, Karl-Gustaf
  30. On Non-welfarist Social Ordering Functions By Naoki Yoshihara
  31. Why Should Happiness Have a Role in Welfare Economics? Happiness versus Orthodoxy and Capabilities By Gabriel Leite Mota
  32. Noise and Bias in Eliciting Preferences By John D. Hey; Andrea Morone; Ulrich Schmidt
  33. Multiple paper monies in Sweden, 1789-1903: Substitution or complementarity? By Engdahl, Torbjörn; Ögren, Anders
  34. The growing role of the euro in emerging market finance By Masson, Paul R.
  35. The Euro, a blessing for Africa? Consequences of the peg of the African Franc CFA to the Euro By Kohnert, Dirk
  36. Forecasting the South African Economy: A DSGE-VAR Approach By Samrat Goswami; Rangan Gupta; Eric Scaling
  37. Pass-through of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalisation By Sushanta Mallick; Helena Marques

  1. By: Robert J Shiller
    Date: 2007–11–15
  2. By: Paul Levine; Joseph Pearlman; George Perendia
    Abstract: Most DSGE models and methods make inappropriate asymmetric information assumptions. They assume that all economic agents have full access to measurement of all variables and past shocks, whereas the econometricians have no access to this. An alternative assumption is that there is symmetry, in that the information set available to both agents and econometricians is incomplete. The reality lies somewhere between the two, because agents are likely to be subject to idiosyncratic shocks which they can observe, but are unable to observe other agents’ idiosyncratic shocks, as well as being unable to observe certain economy-wide shocks; however such assumptions generally lead to models that have no closed-form solution. This research aims to compare the two alternatives - the asymmetric case,as commonly used in the literature, and the symmetric case, which uses the partial information solution of Pearlman et al. (1986) using standard EU datasets. We use Bayesian MCMC methods, with log-likelihoods accounting for partial information.The work then extends the data to allow for a greater variety of measurements, and evaluates the effect on estimates, along the lines of work by Boivin and Giannoni (2005).
    Keywords: partial information, DSGE models, Bayesian maximum likelihood.
    JEL: C11 C13 D58 D82
    Date: 2007–11
  3. By: Driffill, John; Rotondi, Zeno
    Abstract: The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modelled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons.
    Keywords: expectations hypothesis; Interest Rate Rules; Interest Rate Smoothing; Monetary Policy; Monetary Policy Inertia; Predictability of interest rates; Taylor rule; term structure
    JEL: E52 E58
    Date: 2007–11
  4. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: We develop a simple and intuitive approach for analytically deriving unconditionally optimal (UO) policies, a topic of enduring interest in optimal monetary policy analysis. The approach can be employed to both general linear-quadratic problems and to the underlying non-linear environments. We provide a detailed example using a canonical New Keynesian framework.
    Keywords: Unconditional expectations, optimal monetary policy.
    JEL: E20 E32 F32 F41
    Date: 2007–10
  5. By: Guender, Alfred V.
    Abstract: This paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability.
    Keywords: Timeless Perspective, Discretion, Price Level Targeting, Exchange Rate Channel
    JEL: E52 F41
    Date: 2007
  6. By: Burkhart, Lucas; Fischer, Andreas M
    Abstract: This paper examines a special episode in communication practices of the Swiss National Bank (SNB) when short-term interest rates reached the zero bound. A particular feature of SNB communication policy at the time was to talk openly about alternative policy instruments despite the fact that they were never implemented. Non-sterilized FX interventions were frequently mentioned as a potential instrument. We ask how did financial markets respond to the SNB's repeated references of non-sterilized interventions? The empirical results with high frequency data provide strong evidence that SNB intervention references depreciated the domestic currency for several hours. The case study supports the view that communication is an effective tool for monetary policy.
    Keywords: Central Bank Communication; Exchange Rate; zero bound
    JEL: E58 F31
    Date: 2007–11
  7. By: Sancetta, A.
    Abstract: Given the sequential update nature of Bayes rule, Bayesian methods find natural application to prediction problems. Advances in computational methods allow to routinely use Bayesian methods in econometrics. Hence, there is a strong case for feasible predictions in a Bayesian framework. This paper studies the theoretical properties of Bayesian predictions and shows that under minimal conditions we can derive finite sample bounds for the loss incurred using Bayesian predictions under the Kullback-Leibler divergence. In particular, the concept of universality of predictions is discussed and universality is established for Bayesian predictions in a variety of settings. These include predictions under almost arbitrary loss functions, model averaging, predictions in a non stationary environment and under model miss-specification. Given the possibility of regime switches and multiple breaks in economic series, as well as the need to choose among different forecasting models, which may inevitably be miss-specified, the finite sample results derived here are of interest to economic and financial forecasting. Key words: Bayesian prediction, model averaging, universal prediction.
    JEL: C11 C44 C53
    Date: 2007–11
  8. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines the empirical significance of learning, a type of adaptive, boundedly rational expectations, in the U.S. economy within the framework of the New Keynesian model. Two popular specifications of the model are estimated: the standard three equation model that does not include capital, and an extended model that allows for endogenous capital accumulation. Estimation results for learning models can be sensitive to the choice for the initial conditions for agents expectations, so four different methods for choosing initial conditions are examined, including jointly estimating the initial conditions with the other parameters of the model. Maximum likelihood results show that learning under all methods for initial conditions lead to very similar predictions as rational expectations, and do not significantly improve the fit the model. The evolution of forecast errors show that the learning models do not out perform the rational expectations model during the run-up of inflation in the 1970s and the subsequent decline in the 1980s, a period of U.S. history which others have suggested learning may play a role. Despite the failure of learning models to better explain the data, analysis of the paths of expectations and structural shocks during the sample show that allowing for learning in the models can lead to different explanations for the data.
    Keywords: Learning, firm-specific capital, New Keynesian model, maximum likelihood
    JEL: C13 E22 E31 E50
    Date: 2007–11
  9. By: Glenn D. Rudebusch; Eric T. Swanson
    Abstract: The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on long-term bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to the data. We find that introducing long-memory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains.
    Keywords: Interest rates ; Econometric models
    Date: 2007
  10. By: Creina Day; Garth Day
    Abstract: This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We extend the small open economy Solow-Swan model by introducing a government sector that maintains both a balanced budget and expenditure at a constant proportion of domestic income. Switching to lower income taxes promotes economic growth and improves the current account balance, despite an instantaneous drop.
    JEL: E62 F41 F43 H20 H60 O41
    Date: 2007–09
  11. By: Serven, Luis
    Abstract: Solvency is an intertemporal concept, relating to the present value of revenues and expenditures, and encompassing both assets and liabilities. But the standard practice among policy makers, financial market participants and international financial institutions is to assess the strength of the fiscal accounts solely on the basis of the cash deficit. Short-term cash flows matter, but a preponderant focus on them can encourage governments to invest too little, especially during episodes of fiscal tightening. This has potentially adverse consequences for growth and, paradoxically, even for fiscal solvency itself. The paper offers an overview of the links between fiscal targets, public investment, and public sector solvency. After reviewing the international experience with public investment under fiscal adjustment, the paper lays out an analytical framework to illustrate the consequences of using the public deficit as a guide to solvency. The paper then discusses some alternatives to conventional cash deficit rules and their implications for investment and fiscal solvency.
    Keywords: Debt Markets,Public Sector Expenditure Analysis & Management,Access to Finance,,Public Sector Economics & Finance
    Date: 2007–11–01
  12. By: Andreas M. Fischer; Matthias Lutz; Manueal Wälti
    Abstract: Survey information on Swiss exporters is used to test the hypothesis that firm-specific factors, in particular firm size, are important determinants of pricing--to-market (PTM). The survey asked exporters whether they set different prices across markets and, if so, whether price segmentation occurred because of pricing conditions in the local market or other factors. The empirical analysis is based on a probit model that regresses a binary-choice variable of PTM on firm size and other control variables. The main empirical finding is that firm size and PTM are positively and significantly correlated. A further result is that while firms whose main export market is in the Euro area are less likely to engage in PTM, firm size plays a bigger role for them. These results are robust across different PTM classifications, regression specifications, export destinations, and industrial sectors.
    Keywords: Pricing to markets, local currency pricing, firm size
    JEL: F10 F14
    Date: 2007–10
  13. By: Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.
    Keywords: New Open Economy Macroeconomics; real exchange rate; nominal exchange rate; forecasting
    JEL: C52 C53 F31
    Date: 2007–10–01
  14. By: George Alessandria; Joseph Kaboski
    Abstract: The authors show that deviations from the law of one price in tradable goods are an important source of violations of absolute PPP across countries. Using highly disaggregated export data, they document systematic international price discrimination: at the U.S. dock, U.S. exporters ship the same good to low-income countries at lower prices. This pricing-to-market is about twice as important as any local non-traded inputs, such as distribution costs, in explaining the differences in tradable prices across countries. The authors propose a model of consumer search that generates pricing-to-market. In this model, consumers in low-income countries have a comparative advantage in producing non-traded, non-market search activities and therefore are more price sensitive than consumers in high-income countries. They present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model.
    Date: 2007
  15. By: Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy's sensitivity to exchange rate dynamic affect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting Phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning
    JEL: E31 F31 F41
    Date: 2007
  16. By: Bersch, Julia; Klüh, Ulrich H.
    Abstract: We study the apparent disconnect between what countries announce to be their exchange rate regime and what they de facto implement. Even though discrepancies between announcements and de facto polices are frequent, there is a lack of understanding of actual patterns and underlying reasons. We contribute to the literature by identifying a number of robust stylized facts by means of an in-depth analysis of a large cross-country dataset. A key insight is that countries that operate under intermediate de facto regimes tend to announce fixed or flexible exchange rate regimes. The exact nature of deviations is related to country characteristics such as trade structure, financial development, and financial openness. Furthermore, regime discrepancies have followed secular trends, which are most likely related to financial globalization and changes in monetary policy design.
    Keywords: Exchange rate regimes; de facto versus de jure; exchange rate policy
    JEL: F31 F33 F41
    Date: 2007–11–19
  17. By: Ronald MacDonald; Preethike Dias
    Abstract: In this paper we estimate the behaviour equilibrium exchange rates (BEERs) of Clark and MacDonald (1999) for the effective exchange rates of ten industrialised and emerging market economies that rank within the top 15 contributory economies to global imbalances. The sample period is 1988, quarter 1 to 2006 quarter 1. The conditioning variables used in the estimation of the BEER are: net exports as a proportion of GDP, a real interest differential, a terms of trade differential and GDP per capita differential. The ‘foreign’ magnitudes in the differentials were constructed using the trade weights used to construct the effective exchange rates. Using both single country and panel econometric methods, plausible BEER estimates were reported. These estimates were then used to back out the required exchange rate adjustments necessary to fulfil the three scenarios of Williamson (2006). The ball park currency adjustments required are in the range of 27.3 to 46.6 per cent devaluations for the Chinese renminbi, 5 to 11 per cent for the US dollar, approximately 6 per cent for the Japanese yen and no adjustment for the euro or Sterling.
    Date: 2007–06
  18. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of simple sum monetary aggregates and the Divisia indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although the traditional comparison of the series may suggest that they share similar dynamics, there are important differences during certain times and around turning points that can not be evaluated by their average behavior. We use a factor model with regime switching that offers several ways in which these differences can be analyzed. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each one series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors represent exactly where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We also find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginning and end of economic recessions, and during some high interest rate phases.
    Keywords: Measurement Error; Divisia Index; Aggregation; State Space; Markov Switching; Monetary Policy
    JEL: E4
    Date: 2007–06
  19. By: Sturzenegger, Federico; Levy-Yeyati, Eduardo
    Abstract: In recent years the term " fear of floating " has been used to describe exchange rate regimes that, while officially flexible, in practice intervene heavily to avoid sudden or large depreciations. However, the data reveals that in most cases (and increasingly so in the 2000s) intervention has been aimed at limiting appreciations rather than depreciations, often motivated by the neo-mercantilist view of a depreciated real exchange rate as protection for domestic industries. As a first step to address the broader question of whether this view delivers on its promise, the authors examine whether this " fear of appreciation " has a positive impact on growth performance in developing economies. The authors show that depreciated exchange rates appear to induce higher growth, but that the effect, rather than through import substitution or export booms as argued by the mercantilist view, works largely through the deepening of domestic savings and capital accumulation.
    Keywords: Currencies and Exchange Rates,Emerging Markets,Debt Markets,Economic Theory & Research,Macroeconomic Management
    Date: 2007–11–01
  20. By: Quoc Hung Nguyen (University of British Columbia)
    Abstract: This paper addresses the question of whether "fear of floating" in developing countries can be justified as optimal discretionary monetary policy in a dollarized economy with Bernanke-type credit constraints in the import sector and nominal rigidities. Balance sheet effects magnify the macroeconomic consequences of the economy that experiences external and techolonogy shocks. It can be shown that the fixed exchange rate regime dominates the inflation targeting regime in both the role of cushioning shocks and in welfare terms.
    Keywords: Liability Dollarizaion, Fear of Floating, Imported Goods
    JEL: F0 F4
    Date: 2007–10
  21. By: Michael Kühl
    Abstract: The aim of this paper is to investigate the market efficiency on the foreign exchange market since the introduction of the Euro by applying the cointegration analysis to exchange rates. The introduction of the Euro has changed the structure of the global foreign exchange market to the extent that the second most important currency in the world with the highest credibility in the foreign exchange market, namely the Deutsche Mark, has been assimilated into the Euro. In order to evaluate if the introduction of a new currency has resulted in inefficient markets, a bivariate cointegration analysis should be applied to the seven most important exchange rates. The empirical analysis predominantly draws on the Johansen (1988, 1991) approach and the Gregory-Hansen (1996) approach whereas the latter takes endogenous structural breaks into account. We show that the foreign exchange market is broadly consistent with the market efficiency hypothesis. A very important result is that we can find a longrun relationship between the exchange rate pairs EUR/USD and GBP/USD whereas the no-arbitrage condition is satisfied. Since the EUR/USD exchange rate is weakly exogenous the GBP/USD exchange rate takes the burden of adjustment to the long-run equilibrium.
    Keywords: Foreign Exchange Market, Market Efficiency, Cointegration
    JEL: C32 F31 F33 G14 G15
    Date: 2007–10–31
  22. By: Richard Bird; Eric Zolt (Eric Zolt, UCLA Richard Bird, Professor Emeritus of Economics and Senior Fellow, Institute of Municipal Finance and Governance.)
    Abstract: We consider in this paper how emerging countries may in practice best design and develop tax policies, given the complex economic and political environments they face. After an overview of what tax systems look like around the world, we discuss the principal objectives that countries may attempt to achieve through tax policy. We conclude by considering the broad political economy context within which tax policy and development issues must be designed and implemented. Our aim is to set out some of the basic issues facing tax policy in emerging countries and to outline some key elements that should be considered in designing the best feasible tax structure for any particular country at a particular time.
    Date: 2007
  23. By: Pietro Alessandrini (Department of Economics, Università Politecnica delle Marche, Ancona); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: There is a broad consensus that the current, large U.S. current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem.
    Keywords: Keynes Plan, external imbalances, exchange rates, international monetary system, key currency, supranational bank money
    JEL: E42 E52 F33 F36
    Date: 2007–11
  24. By: Riccardo Rovelli (University of Bologna, DARRT and IZA); Randolph Bruno (University of Bologna, DARRT and IZA)
    Abstract: We conduct a comparative analysis of Labor Market Policies and outcomes for the EU member states, for the period 2000-2005. We document the main differences in Labor Market Policies across EU members, including new member states after 2004. We focus on indicators of policy generosity (expenditures relative to GDP) and relate these and other policy indicators to indicators of labor market outcomes and performance. Our results show that, on a cross-country basis, higher rates of employment are in general associated with: (i) higher expenditures on labor market policies, especially on active policies; (ii) a lower degree of rigidity in labor market institutions and in product market regulation.
    Keywords: labor market policies, labor market outcomes, European social models
    JEL: J08 J38 J68
    Date: 2007–11
  25. By: David C. Mills, Jr.
    Abstract: One of the fundamental questions concerning inside money is whether its issuers should be regulated and how. This paper evaluates the efficiency of one prevalent regulatory recommendation -- a requirement that private issuers redeem inside money on demand at par -- in a random-matching model of money where the issuers of inside money are only imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the paper is that if inside money and outside money are not perfect substitutes for one another, as is the case if there is sufficiently imperfect monitoring, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are. Such an outcome is a version of Gresham's law that bad money drives out good money.
    Date: 2007
  26. By: Bergman, Mats (Department of Economics); Guibourg, Gabriela (Research Department, Central Bank of Sweden); Segendorf, Björn (International Secretariat)
    Abstract: Despite the central role of payments in theoretical and policy oriented economics, there is surprisingly little known about the costs of different payment instruments. We estimate social and private costs of cash, debit and credit card payments in Sweden in 2002. The combined social cost of providing these payment services is approximately 0.4 per cent of GDP. Debit and credit cards are socially less costly than cash for payments above EURO 8 and EURO 18, respectively. Corresponding thresholds for consumers’ private costs are somewhat higher. Data indicate a too extensive use of cash relative to card payments in terms of both private and social costs.
    Keywords: Cash payments; Card payments; Social costs; Private costs
    JEL: D12 D23 D24
    Date: 2007–09–01
  27. By: Ricardo Cavalcanti; Ed Nosal
    Abstract: We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to eliminate counterfeiting activity completely. We do not appeal to lottery devices, and we argue that this is consistent with imperfect monitoring.
    Keywords: Counterfeits and counterfeiting ; Money
    Date: 2007
  28. By: Arie Kapteyn; Kristin J. Kleinjans; Arthur Van Soest
    Abstract: Euler equation estimation of intertemporal consumption models imposes heavy demands on data and identifiability conditions. For example, one typically needs panel data on consumption, assumptions on expectations, and a parameterization of preferences. The authors aim at reducing some of these requirements, by using additional information on respondentsÕ preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature.
    Keywords: Expectations, consumption, Euler equations
    JEL: D91 D84 D12
    Date: 2007–11
  29. By: Aronsson, Thomas (Department of Economics, Umeå University); Löfgren, Karl-Gustaf (Department of Economics, Umeå University)
    Abstract: This paper contains a fairly brief, but self-contained, version of the history of welfare economics, as well as the more modern welfare results. We introduce public goods and asymmetric information, and we hint at some of the modern mechanism design results. The paper also contains a section on welfare measures in a dynamic economy.
    Keywords: Welfare Theory;
    JEL: D60
    Date: 2007–11–20
  30. By: Naoki Yoshihara
    Abstract: In this paper, criticizing the welfaristfs framework in traditional welfare economics which provides a rather limited perspective for social evaluation, we propose a more comprehensive framework in which extended social ordering functions (ESOFs) are introduced. In this framework, not only welfaristic values, but also non-welfaristic values can be treated appropriately. Then, we examine the possibility of non-welfarist ESOFs which meet a value of Individual Autonomy, a criterion of non-welfairst distributive justice, and the welfarist Pareto principle. First, there is no first best ESOF in the sense that the above three axioms are satisfied simultaneously. Second, however, we can show the existence of some second best ESOFs, using a weaker lexicographic application method.
    Keywords: Extended alternative; Extended constitution function; Uniformly rational choice; Liberal game form; Non-consequentialist evaluation of rightssystem
    JEL: D63 I31 I38
    Date: 2007–09
  31. By: Gabriel Leite Mota (Porto University, Faculty of Economics)
    Abstract: In this paper we try to understand how the Happiness Literature (HL) approach to Welfare Economics (WE) enriches it by enlarging its scope and power of analysis. To do so, we contrast the HL approach not only with Mainstream Welfare Economics (MWE) but also with the already established Sen’s Capabilities (SC) approach. We demonstrate (particularly for the cases of Income and Freedom) that these different theoretical approaches can imply different policy conclusions even when facing the same problems (mostly when switching from MWE to SC or HL) and that these different approaches have different domains of application (SC and HL with a wider domain than MWE). We also claim that the choice between MWE, SC and HL, even when the policy conclusions are similar, is connected with different axiomatic and philosophic foundations. We then conclude that HL stands out as an autonomous approach to WE with particular assumptions, techniques and policy conclusions.
    Keywords: Happiness, Capabilities, Welfare Economics, Welfrae Policies
    JEL: D63 D60 I31 I38
  32. By: John D. Hey; Andrea Morone; Ulrich Schmidt
    Abstract: In the context of eliciting preferences for decision making under risk, we ask the question: “which might be the ‘best’ method for eliciting such preferences?”. It is well known that different methods differ in terms of the bias in the elicitation; it is rather less well-known that different methods differ in terms of their noisiness. The optimal trade-off depends upon the relative magnitudes of these two effects. We examine four different elicitation mechanisms (pairwise choice, willingness-to-pay, willingness-to-accept, and certainty equivalents) and estimate both effects. Our results suggest that economists might be better advised to use what appears to be a relatively inefficient elicitation technique (i.e. pairwise choice) in order to avoid the bias in better-known and more widely-used techniques.
    Keywords: pairwise choice, WTP, WTA, errors, noise, biases
    JEL: C91 C81
    Date: 2007–11
  33. By: Engdahl, Torbjörn (Department of Economic History Stockholm University); Ögren, Anders (EHFF - Institute for Economic and Business History at the Stockholm School of Economics and HTE EconomiX (UMR 7166) CNRS Université de Paris X - Nanterre)
    Abstract: Complementarity of money mean that two or more kinds of monies together fulfil the demand of the users better than they would without the existence of the other(-s). In this paper we study complementarity between paper monies in Sweden. We address four questions: 1) What was used as money on a macro level (money supply) and on a micro level (monetary remittances)? 2) What was the relative value of different monies in parallel circulation? 3) Was there seasonal variations in use and/or value? 4) Was there geographical variations in use and value? What we find is that the complementarity helped to solve the problem of providing sufficient liquidity domestically over time and space and thus and to keep a stable value of the currency.
    Keywords: Complementarity; Liquidity; Money Supply; Money Remittances; Paper Money; Parallel Circulation of Money; Variations in Money Demand
    JEL: E50 G21 N13 N23
    Date: 2007–11–12
  34. By: Masson, Paul R.
    Abstract: More than eight years after the introduction of the euro, impacts on developing countries have been relatively modest. Overall, the euro has become much more important in debt issuance than in official foreign exchange reserve holdings. The former has benefited from the creation of a large set of investors for which the euro is the home currency, while demand for euro reserves has been held back by the dominance of the dollar as a vehicle and intervention currency, and the greater liquidity of the market for US treasury securities. Fears of further dollar decline may fuel some shifts out of dollars into euros, however, with the potential for a period of financial instability.
    Keywords: Debt Markets,Emerging Markets,Fiscal & Monetary Policy,Currencies and Exchange Rates,
    Date: 2007–11–01
  35. By: Kohnert, Dirk
    Abstract: About five decades the Franc CFA-Zone in Western and Central Africa was praised as incarnation of economic and political stability in Africa, backed by France. But free convertibility and fixed parity, guaranteed by the French Treasury, mainly served the interest of a small elite of the Messieurs Afrique, both in France and in Africa. Generations of French entrepreneurs and of their African counterparts maintained a profitable self-service shop on expense of the African poor and the French taxpayer. In the aftermath of the devaluation of the Franc CFA in 1994, and of the peg of the currency to the Euro in 1998, the socio-economic divide between rich and poor, urban and rural regions, the formal and the informal sector even widened. However, the perpetuation of the established monetary structure of the CFA-Zone became increasingly anachronistic. As far as the political stability, previously guaranteed by the neo-colonial French Africa policy, becomes obsolete, the base for economic stability of the traditional arrangement of the currency union is threatened as well. The more so, as the CFA-Zone never fulfilled the most crucial preconditions of an optimal currency area. The peg to the EMU, orientated at the interests of highly industrialized European countries, led to an overvaluation of the real exchange rate of the CFA, and will increasingly constitute an obstacle to sustainable indigenous development in francophone Africa.
    Keywords: Monetary Union; regional integration; Optimum Currency Areas; Franc CFA-Zone; Francophone Africa; Euro; EMU
    JEL: F15 F35 E42 E52 F33 F31 F54 F36
    Date: 1998
  36. By: Samrat Goswami (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Eric Scaling (Department of Economics, University of Pretoria)
    Abstract: This paper develops an estimable hybrid model that combines the theoretical rigor of a micro-founded DSGE model with the flexibility of an atheoretical VAR model. The model is estimated via maximum likelihood technique based on quarterly data on real Gross National Product (GNP), consumption, investment and hours worked, for the South African economy, over the period of 1970:1 to 2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out-of-sample forecasts from the hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1-2005:4. The results indicate that, in general, the estimated hybrid DSGE model outperforms the Classical VAR, but not the Bayesian VARs in terms of out-of-sample forecasting performances.
    Keywords: DSGE Model, VAR and BVAR Model, New-Keynesian-Macroeconomic Model, Forecast Accuracy, DSGE Forecasts, VAR Forecasts, BVAR Forecasts.
    JEL: E17 E27 E32 E37 E47
    Date: 2007–07
  37. By: Sushanta Mallick; Helena Marques
    Abstract: This paper examines the extent of pass-through of exchange rate and tariff changes into import prices using sectoral panel data (at the 2-digit SITC level) for the post-reform period in India (1990-2001). After having controlled for unobserved effects that might have an impact on the import prices by using sector dummies, we find that on average exchange rate pass-through (ERPT) is a dominant effect compared to tariff rate pass-through (TRPT) in explaining changes in India’s import prices. The sectoral panel results suggest that the pass-through of exchange rates and tariff rates varies across products. ERPT into import prices is significant in 12 industries, whereas TRPT is significant only in 6 industries, with full pass-through. However, ERPT is incomplete only in 4 industries, but TRPT is incomplete in 36 industries, which means that firms exporting to India more frequently adopt strategies to maintain their market share against tariffs than against exchange rate changes. The sectoral differences in pass-through seem to be related to the sector’s share in total imports and the sector’s effective protection rate. Hence India’s relatively high levels of protection have an impact on the behaviour of foreign exporters.
    Date: 2007–09

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