nep-cba New Economics Papers
on Central Banking
Issue of 2008‒03‒15
33 papers chosen by
Alexander Mihailov
University of Reading

  1. Risk Management in Action. Robust monetary policy rules under structured uncertainty. By Paul Levine; Peter McAdam; Joseph Pearlman; Richard Pierse
  2. Reference Prices and Nominal Rigidities By Martin Eichenbaum; Nir Jaimovich; Sergio Rebelo
  3. Econometric Analysis of Structural Systems with Permanent and Transitory Shocks By Adrian R. Pagan; M. Hashem Pesaran
  4. Price Adjustment to News with Uncertain Precision By Nikolaus Hautsch; Dieter Hess; Christoph Müller
  5. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  6. Fiscal Insurance and Debt Management in OECD Economies By Albert Marcet; Elisa Faraglia; Andrew Scott
  7. Capital Inflows and Reserve Accumulation: The Recent Evidence By Carmen M. Reinhart; Vincent R. Reinhart
  8. Does it Matter How to Measure Aggregates? The Case of Monetary Transmission Mechanisms in the Euro Area By Andreas Beyer; Katarina Juselius
  9. Global Rebalancing with Gravity: Measuring the Burden of Adjustment By Robert Dekle; Jonathan Eaton; Samuel Kortum
  10. Noise vs. News In Equity Returns By Robert S. Chirinko; Hisham Foad
  11. Debt and Deficit Fluctuations and the Structure of Bond Markets By Albert Marcet; Andrew Scott
  12. Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach By Pelin Ilbas
  13. International Evidence on Well-being By Blanchflower, David G.
  14. International Evidence On Sticky Consumption Growth By Christopher D. Carroll; Jiri Slacalek; Martin Sommer
  15. Productivity Growth and the Phillips Curve: A Reassessment of the US Experience By Marika Karanassou; Hector Sala
  16. Endogenous Money in the Age of Financial Liberalization By Gökçer Özgür; Korkut A. Ertürk
  17. Modelling bank lending in the euro area: A non-linear approach By Leonardo Gambacorta; Carlotta Rossi
  18. Cointegration implications of linear rational expectation models By Juselius, Mikael
  19. Exchange Rate Forecasting: Evidence from the Emerging Central and Eastern European Economies By Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
  20. Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks By Robert Lavigne
  21. Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates? By Anna Naszódi
  22. Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity across the Colonies versus across the States, 1748-1811 By Farley Grubb
  23. A Maximum Principle for Control Problems with Monotonicity Constraints By Martin Hellwig
  24. Simplicity and Likelihood: An Axiomatic Approach By Itzhak Gilboa; David Schmeidler
  25. Stochastic Volatility: Origins and Overview By Neil Shephard; Torben G. Andersen
  26. Probabilities in Economic Modelling By Itzhak Gilboa; Andrew Postlewaite; David Schmeidler
  27. Do People Make Decisions Under Risk Based on Ignorance? An Empirical Test of the Priority Heuristic against Cumulative Prospect Theory By Andreas Glöckner; Tilmann Betsch
  28. Is the veil of ignorance only a concept about risk? An experiment By Hannah Hörisch
  29. "Can Robbery and Other Theft Help Explain the Textbook Currency-demand Puzzle? Two Dreadful Models of Money Demand with an Endogenous Probability of Crime" By Greg Hannsgen
  30. A (Un)Pleasant Arithmetic of Fiscal Policy: the Case of Italian Public Debt By L. Marattin; M. Marzo
  31. China's Exchange Rate Policy: A Survey of the Literature By Robert Lafrance
  32. Adopting the Euro in Post-Communist Countries: An Analysis of the Attitudes toward the Single Currency By Allam, Miriam S.,; Achim Goerres
  33. Analyzing the Present Sustainability of Turkey’s Current Account Position By Ayla Ogus; Niloufer Sohrabji

  1. By: Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, U.K.); Richard Pierse (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.)
    Abstract: Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary-policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policymaker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast-based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58.
    Keywords: Interest-rate rules, robustness, structured uncertainty.
    Date: 2008–02
  2. By: Martin Eichenbaum; Nir Jaimovich; Sergio Rebelo
    Abstract: We assess the importance of nominal rigidities using a new weekly scanner data set from a major U.S. retailer, that contains information on prices, quantities, and costs for over 1,000 stores. We find that nominal rigidities are important but do not take the form of sticky prices. Instead, nominal rigidities take the form of inertia in reference prices and costs, defined as the most common prices and costs within a given quarter. Weekly prices and costs fluctuate around reference values which tend to remain constant over extended periods of time. Reference prices are particularly inertial and have an average duration of roughly one year. So, nominal rigidities are present in our data, even though weekly prices change very frequently, roughly once every two weeks. We argue that the retailer chooses the frequency with which it resets references prices so as to keep the realized markups within plus/minus twenty percent of the desired markup over reference cost.
    JEL: E30
    Date: 2008–03
  3. By: Adrian R. Pagan (School of Economics, The University of New South Wales); M. Hashem Pesaran (Faculty of Economics, University of Cambridge)
    Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations with known permanent shocks can not contain error correction terms, thereby freeing up the latter to be used as instruments in estimating their parameters. The approach is illustrated by a re-examination of the identification schemes used by Wickens and Motto (2001), Shapiro and Watson (1988), King, Plosser, Stock, Watson (1991), Gali (1992, 1999) and Fisher (2006).
    Keywords: Permanent shocks; structural identification; error correction models; IS-LM models
    JEL: C30 C32 E10
    Date: 2008–03
  4. By: Nikolaus Hautsch; Dieter Hess; Christoph Müller
    Abstract: Bayesian learning provides a core concept of information processing in financial markets. Typically it is assumed that market participants perfectly know the quality of released news. However, in practice, news’ precision is rarely disclosed. Therefore, we extend standard Bayesian learning allowing traders to infer news’ precision from two different sources. If information is perceived to be imprecise, prices react stronger. Moreover, interactions of the different precision signals affect price responses nonlinearly. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and reveal statistically and economically significant effects of news’ precision.
    Keywords: Bayesian learning, information quality, precision signals, macroeconomic announcements
    JEL: E44 G14
    Date: 2008–03
  5. By: Daunfeldt, Sven-Olov (Högskolan i Gävle); Hellström, Jörgen (Department of Economics, Umeå University); Landström, Mats (Högskolan i Gävle)
    Abstract: It is something of a puzzle that politicians around the world have chosen to give up power to independent central banks, thereby reducing their possibilities to fine-tune the economy. In this paper the determinants of central bank independence (CBI) reforms are studied using a new data set on the possible event of such reforms in 119 countries. According to the data, as much as 81 countries had implemented CBI-reforms during the study period. The results indicate, moreover, that policymakers are more likely to delegate power to independent central banks when the foreign debt is relatively high. In non-OECD countries, the likelihood of a CBI-reform also seems to increase when policymakers face a high probability of getting replaced.
    Keywords: Institutional reforms; inflation; time-inconsistency; political stability; probit
    JEL: E31 E42 E52 E58
    Date: 2008–03–10
  6. By: Albert Marcet; Elisa Faraglia; Andrew Scott
    Abstract: Assuming the role of debt management is to provide hedging against fiscal shocks we consider three questions: i) what indicators can be used to assess the performance of debt management? ii) how well have historical debt management policies performed? and iii) how is that performance affected by variations in debt issuance? We consider these questions using OECD data on the market value of government debt between 1970 and 2000. Motivated by both the optimal taxation literature and broad considerations of debt stability we propose a range of performance indicators for debt management. We evaluate these using Monte Carlo analysis and find that those based on the relative persistence of debt perform best. Calculating these measures for OECD data provides only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks. We also find that the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns. Given the limited volatility observed in the yield curve the relatively small dispersion of debt management practices across countries makes little difference to the realised degree of fiscal insurance.
    Date: 2007–10–09
  7. By: Carmen M. Reinhart; Vincent R. Reinhart
    Abstract: Over the past decade, policymakers in many emerging market economies have opted to limit fluctuations of the value of their domestic currencies relative to the U.S. dollar. A simple interest-parity relationship is used to identify the potential sources of upward pressure on the value of a foreign exchange rate and to explain the policy options to damp them. The paper then documents the extent to which the accumulation of foreign exchange reserves has been sterilized and provides a comprehensive list of major policy initiatives related to stemming forces that would otherwise appreciate the exchange rate in over one hundred countries. This examination of policy efforts shows that a wide variety of tools are used in the attempt to stem the tide of capital flows.
    JEL: E0 F0 F3
    Date: 2008–03
  8. By: Andreas Beyer (European Central Bank); Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: Beyer, Doornik and Hendry (2000, 2001) show analytically that three out of four aggregation methods yield problematic results when exchange rate shifts induce relative-price changes between individual countries and found the least problematic method to be the variable weight method of growth rates. This papers shows, however, that the latter is sensitive to the choice of base year when based on real GDP weights whereas not on nominal GDP weights. A comparison of aggregates calculated with different methods shows that the differences are tiny in absolute value but highly persistent. To investigate the impact on the cointegration properties in empirical modelling, the monetary model in Coenen & Vega (2001) based on fixed weights was re-estimated using flexible real and nominal GDP weights. In general, the results remained reasonably robust to the choice of aggregation method.
    Keywords: aggregation; flexible weights; Eurowide money demand; cointegration
    JEL: C32 C42 E41
    Date: 2008–03
  9. By: Robert Dekle; Jonathan Eaton; Samuel Kortum
    Abstract: We use a forty-two country model of production and trade to assess the implications of eliminating current account imbalances for relative wages, relative GDP's, real wages, and real absorption. How much relative GDP's need to change depends on flexibility of two forms: factor mobility and the adjustment in sourcing of imports, with more flexibility requiring less change. At the extreme, US GDP falls by 30 percent relative to the world's. Because of the pervasiveness of nontraded goods, however, most domestic prices move in parallel with relative GDP, so that changes in real GDP are small.
    JEL: F10 F32 F41
    Date: 2008–03
  10. By: Robert S. Chirinko (University of Illinois at Chicago and CESifo); Hisham Foad (Department of Economics, San Diego State University)
    Abstract: What role does noise play in equity markets? Answering this question usually leads immediately to specifying a model of fundamentals and hence the pervasive joint hypothesis quagmire. We avoid this dilemma by measuring noise volatility directly by focusing on the behavior of country closed-end funds (CCEF’s) during foreign (i.e., non-U.S.) holidays – for example, the last days of Ramadan in Islamic countries. These holiday periods are times when the flow of fundamental information relevant to foreign equity markets is substantially reduced and hence trading of CCEF’s in U.S. markets can be responding only weakly, if at all, to fundamental information. We find that, controlling for the effects of industry and global shocks and of the overall U.S. market, there remains a substantial amount of noise in the equity returns of U.S. CCEF’s. In the absence of noise, the noise ratio statistic would be near zero. However, our results indicate statistically significant departures from zero, with values averaged over all U.S. CCEF’s ranging from 76-84%xx depending on assumptions about the leakage of information during holiday periods and kurtosis. Noise is negatively related to institutional ownership of U.S. CCEF's and is much less important for U.K. CCEF's. The lower levels of noise for matched U.K. and U.S. CCEF’s provide some initial evidence that the U.K. securities transaction tax is effective in reducing stock market noise.
    Date: 2007–08
  11. By: Albert Marcet; Andrew Scott
    Abstract: We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness.
    Keywords: Complete vs incomplete markets, Debt Management, Fiscal
    JEL: E62 H62 H63
    Date: 2007–09–23
  12. By: Pelin Ilbas (Center for Economic Studies, Catholic University of Leuven)
    Abstract: In this paper we adopt a Bayesian approach towards the estimation of the monetary policy preference parameters in a general equilibrium framework. We start from the model presented by Smets and Wouters (2003) for the euro area where, in the original set up, monetary policy behaviour is described by an empirical Taylor rule. We abandon this way of representing monetary policy behaviour and assume, instead, that monetary policy authorities optimize an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialize our estimates by considering a presample period of 40 quarters. This allows us to approach, empirically, the timeless perspective framework.
    Keywords: optimal monetary policy, commitment, central bank preferences, euro area monetary policy
    JEL: E42 E52 E58 E61
    Date: 2008–03
  13. By: Blanchflower, David G. (Bank of England)
    Abstract: National Time Accounting is a way of measuring society's well-being, based on time use. Its explicit form is the U-index, for “unpleasant” or “undesirable”, which measures the proportion of time an individual spends in an unpleasant state. In this paper I review cross-country evidence on happiness and life satisfaction and consider whether these data will likely be replaced by the U-index. I find that first, that there are many similarities. According to both measures happiness is higher for the more educated, for married people, for those with higher income and for whites and lower for the unemployed; is U-shaped in age and un-trended over time in the USA although they are trended up in a number of EU countries and especially so in developing countries. Equivalent results are found using self-reported unhappiness data. Second, there is a large body of data on happiness that is unavailable on the U-index. For example, according to happiness research well-being across nations is lower the higher is the unemployment rate, the current inflation rate and the highest inflation rate in a person's adult life. Higher inequality also lowers happiness. Third, we know little about the predictive power of the U-index. Happiness and life satisfaction data seem able to forecast migration flows. Fourth, happy people are particularly optimistic about the future. Fifth, according to the happiness data the US ranks above France but the U-index suggests the reverse.
    Keywords: happiness, unhappiness, pain, life satisfaction
    JEL: J22
    Date: 2008–02
  14. By: Christopher D. Carroll; Jiri Slacalek; Martin Sommer
    Abstract: We estimate the degree of 'stickiness' in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.
    Date: 2008–03
  15. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA)
    Abstract: In this paper we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e. the interplay of wage-staggering and money growth, generates a nonvertical NPC in the long-run, and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macrolabour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the US from 1970 to 2006. Since our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions (VARs). We find that the PC is downward-sloping with a slope of -3.58 in the long-run. Furthermore, during the stagflating 70s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, while the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 90s were both responsible for the significant lowering of the unemployment rate.
    Keywords: New Phillips curve, Frictional growth, Productivity growth, Stagflating seventies, Roaring nineties, Impulse response functions
    JEL: E24 E31
    Date: 2008–03
  16. By: Gökçer Özgür; Korkut A. Ertürk
    Abstract: The paper reports results that show a much weakened statistical relationship between total bank credit, total deposits and the broad money supply for the period after 1995 for the US, where no statistical causation can be discerned in either direction. This has been the result of the changing nature of the credit creation process where banks have acquired almost total independence from required reserves and core deposits in extending credit, and even an ability to circumvent the constraint posed by capital requirements through asset securitization, giving rise to an explosive increase in nonbank intermediation. As a result, the expansion of bank credit did not result in a commensurate increase of bank deposits because financial intermediation spilled over to nondepository institutions, and with the growing importance of nonbank deposits in M3, broad money supply became broader than banks’ total deposits.
    Keywords: Endogenous Supply of Money, Broad Money, Financial Intermediation, Asset Securitization
    JEL: B22 E12 E51
    Date: 2008–06
  17. By: Leonardo Gambacorta (Banca d'Italia); Carlotta Rossi (Banca d'Italia)
    Abstract: This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modelled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money market rate). The main features of the model are the existence of two co-integrating equations representing the long-run credit demand and supply and the possibility for loading and lagged-term coefficients to assume different values depending on the monetary policy regime (easing or tightening). The paper finds that the effect on credit, GDP, and prices of a monetary policy tightening is larger than the effect of a monetary policy easing. This result supports the existence of an asymmetric broad credit channel in the euro area.
    Keywords: monetary policy transmission, credit market, credit view, asymmetries
    JEL: C32 C51 E44 E52
    Date: 2007–11
  18. By: Juselius, Mikael (University of Helsinki, Department of Economics)
    Abstract: This paper derives the cointegration spaces that are implied by linear rational expectations models when data are I(1). The cointegration implications are easy to calculate and can be readily applied to test if the models are consistent with the long-run properties of the data. However, the restrictions on cointegration only form a subset of all the cross-equation restrictions that the models place on data. The approach is particularly useful in separating potentially data-consistent models from the remaining models within a large model family. Moreover, the approach provides useful information on the empirical shock structure of the data.
    Keywords: rational expectations; cointegration
    JEL: C52
    Date: 2008–03–11
  19. By: Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
    Abstract: There is a vast literature on exchange rate forecasting focusing on developed economies. Since the early 1990s, many developing economies have liberalized their financial accounts, and become an integral part of the international financial system. A series of financial crises experienced by these emerging market economies ed them to switch to some form of a flexible exchange rate regime, coupled with inflation targeting. These developments, in turn, accentuate the need for exchange rate forecasting in such economies. This paper is a first attempt to compile data from the emerging Central and Eastern European (CEE) economies, to evaluate the performance of versions of the monetary model of exchange rate determination, and time series models for forecasting exchange rates. Forecast performance of these models at various horizons are evaluated against that of a random walk, which, overwhelmingly, was found to be the best exchange rate predictor for developed economies in the previous literature. Following Clark and West (2006, 2007) for forecast performance analysis, we report that in short horizons, structural models and time series models outperform the random walk for the six CEE countries in the data set.
    Keywords: Exchange rate forecasting; Out-of-sample forecast performance
    JEL: C53 F31
    Date: 2008–03–06
  20. By: Robert Lavigne
    Abstract: The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.
    Keywords: Financial stability; Exchange rate regimes; International topics
    JEL: F31 E52 O24
    Date: 2008
  21. By: Anna Naszódi (Magyar Nemzeti Bank)
    Abstract: This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.
    Keywords: Monetary union, eurozone entry, factor model, Kalman filter, exchange rate stabilization, asset-pricing exchange rate model.
    JEL: F31 F36 G13
    Date: 2008
  22. By: Farley Grubb
    Abstract: Exchange rates and price indices are constructed to test purchasing power parity between eight British North American colonial locations, five of whom issued their own fiat paper money. Purchasing power parity is then tested between these same locations after six became states politically and monetarily unified under the U.S. Constitution. Purchasing power parity cannot be rejected between all colonial locations or between the six U.S. states, if anything holding with more confidence prior to U.S. political and monetary unification. But it is rejected between U.S. states and nearby British colonies that stayed outside the U.S. union.
    JEL: D02 F15 F54 N11 N21 N41 N71 O24 O51
    Date: 2008–03
  23. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper develops a version of Pontryagin's maximum principle for optimal control problems with monotonicity constraints on control variables. Whereas the literature handles such constraints by imposing an assumption of piecewise smoothness on the control variable and treating the slope of this variable as a new control variable subject to a nonnegativity constraint, the paper obtains the maximum principle without such an additional assumption. The result is useful for studying incentive problems with hidden characteristics when the type set is a continuum and preferences satisfy a single-crossing constraint.
    Keywords: Maximum Principle, Optimal Control, Monotonicity Constraints, Incentive Problems with Hidden Characteristics
    JEL: C61
    Date: 2008–01
  24. By: Itzhak Gilboa; David Schmeidler
    Date: 2008–03–05
  25. By: Neil Shephard; Torben G. Andersen
    Date: 2008
  26. By: Itzhak Gilboa; Andrew Postlewaite; David Schmeidler
    Date: 2008–03–05
  27. By: Andreas Glöckner (Max Planck Institute for Research on Collective Goods, Bonn); Tilmann Betsch (University of Erfurt)
    Abstract: Brandstätter, Gigerenzer and Hertwig (2006) put forward the priority heuristic (PH) as a fast and frugal heuristic for decisions under risk. According to the PH, individuals do not make trade-offs between gains and probabilities, as proposed by expected utility models such as cumulative prospect theory (CPT), but use information in a non-compensatory manner and ignore information. We conducted three studies to test the PH empirically by analyzing individual choice patterns, decision times and information search parameters in diagnostic decision tasks. Results on all three dependent variables conflict with the predictions of the PH and can be better explained by the CPT. The predictive accuracy of the PH was high for decision tasks in which the predic-tions align with the predictions of the CPT but very low for decision tasks in which this was not the case. The findings indicate that earlier results supporting the PH might have been caused by the selection of decision tasks that were not diagnostic for the PH as compared to CPT.
    Keywords: Decision Strategy, Fast and Frugal Heuristics, Bounded Rationality, Decision Latency, Process Tracing, Cumulative Prospect Theory
    Date: 2008–02
  28. By: Hannah Hörisch (University of Munich, Seminar for Economic Theory, Ludwigstraße 28 (Rgb.), 80539 Munich, Germany, email:
    Abstract: We implement the Rawlsian veil of ignorance in the laboratory. Our experimental design allows separating the effects of risk and social preferences behind the veil of ignorance. Subjects prefer more equal distributions behind than in front of the veil of ignorance, but only a minority acts according to maximin preferences. Men prefer more equal allocations mostly for insurance purposes, women also due to social preferences for equality. Our results contrast the Utilitarian's claim that behind the veil of ignorance maximin preferences necessarily imply infinite risk aversion. They are compatible with any degree of risk aversion as long as social preferences for equality are sufficiently strong.
    Keywords: deterrence, law and economics, incentives, crowding out, experiment
    JEL: D64 C99 D63
    Date: 2008–02
  29. By: Greg Hannsgen
    Abstract: This paper attempts to explain one version of an empirical puzzle noted by Mankiw (2003): a Baumol-Tobin inventory-theoretic money demand equation predicts that the average U.S. adult should have held approximately $551.05 in currency and coin in 1995, while data show an average of $100. The models in this paper help explain this discrepancy using two assumptions: (1) the probabilities of being robbed or pick-pocketed, or having a purse snatched, depend on the amount of cash held; and (2) there are costs of being robbed other than loss of cash, such as injury, medical bills, lost time at work, and trauma. Two models are presented: a dynamic, stochastic model with both instantaneous and decaying noncash costs of robbery, and a revised version of the inventory-theoretic model that includes one-period noncash costs. The former model yields an easily interpreted first-order condition for money demand involving various marginal costs and benefits of holding cash. The latter model gives quantitative solutions for money demand that come much closer to matching the 1995 data--$75.98 for one plausible set of parameters. This figure implies that consumers held approximately $96 billion less cash in May 1995 than they would have in a world without crime. The modified Baumol-Tobin model predicts a large increase in household money demand in 2005, mostly due to reduced crime rates.
    Date: 2008–03
  30. By: L. Marattin; M. Marzo
    Date: 2008–01
  31. By: Robert Lafrance
    Abstract: China's integration into the world economy has benefited its people by reducing poverty and raising living standards, and it has benefited the industrialized world by producing manufactured goods at lower cost. It has also raised geopolitical concerns as China's power grows, economic concerns as the manufacturing base in many industrialized countries erodes, and polemics as proposals of protectionist measures to counter China's export growth are put forward. The author reviews the literature on how China's exchange rate regime could evolve and contribute, through greater flexibility, to tempering domestic inflationary pressures and to facilitating an orderly resolution of global imbalances. His main conclusions are that China would benefit from moving towards a more flexible exchange rate regime and allowing the People’s Bank of China greater independence to pursue an inflation-control objective. In a transition phase, a managed float would be useful to limit volatility as firms adapt to the new system and the banking system is put on a sounder footing, a monetary policy framework is put in place, and capital controls are progressively eased. Shock therapy (a quick and pronounced revaluation) would be ill advised.
    Keywords: Exchange rate regimes
    JEL: F33 F36
    Date: 2008
  32. By: Allam, Miriam S.,; Achim Goerres
    Abstract: Abstract Abstract This paper reflects on the literature on courts and politics in Europe and the United States. US-American Political Science has dealt for over fifty years with the role of courts and judges as political actors, whereas this perspective has only recently emerged in Europe. The debates differ not only with regard to the number of articles written, but also with regard to their content. This paper discusses the different research perspectives that are being pursued on both sides of the Atlantic. While a major part of the US-American literature investigates the politics of judicial action and the politicization of the legal system, research on European courts confines itself to analyzing the effects of judicial action, often describing them in terms of juridification. Based on a review of the existing literature, this paper suggests that European scholars ought to take crucial assumptions of the US-American research tradition more seriously. Zusammenfassung Zusammenfassung Abstract The new EU member states in Central and Eastern Europe achieved an economic and political tour de force on their way to EU accession. Their next challenge is the entry to the eurozone. Thus, the dynamics of public opinion toward the euro become crucial for political leaders. We test three perspectives − economic, political, and historical-ideational − with individual-level survey data from eight countries and conclude that the combined model best explains variations in support for the euro. In an environment of volatility in post-communist Europe, macro variables of economic and historicalideational factors have the strongest impact on individual attitudes, while micro-variables of economic self-interest do not further our understanding of euro support. Thus, distributional issues matter less than the aggregate national performance and experience. Political parties that garner support for the euro should therefore concentrate on economic consolidation and political stability rather than politicizing a winner−loser cleavage. Zusammenfassung Unter gewaltigen Anstrengungen haben es die postkommunistischen Regierungen in Ost- und Mitteleuropa geschafft, ihre Länder sicher zum EU-Beitritt zu führen. Als Nächstes sehen sie sich mit der Einführung des Euro als Gemeinschaftswährung konfrontiert. Infolgedessen wird für demokratische Politiker die öffentliche Meinung über die Euro-Einführung enorm wichtig. Wir testen drei theoretische Schulen (ökonomisch, politisch und historisch) in Bezug auf ihre Erklärungskraft für das Verständnis individueller Einstellungen zum Euro. Als empirische Evidenz dienen uns individuelle Umfragedaten aus acht Ländern. Wir stellen fest, dass bei dem kombinierten Modell aller Theorieschulen der Verständnisgewinn am größten ist. Im Kontext postkommunistischer Volatilität haben auf der gesellschaftlichen Ebene die wirtschaftlichen und historischen Faktoren den größten Einfluss. Auf der Individualebene haben die Variablen, die materielles Eigeninteresse messen, nur geringe Aussagekraft. Folglich sind nicht die wirtschaftlichen Verteilungswirkungen der Euro-Einführung und diesbezügliche Erwartungen, sondern die nationale Performanz und historische Erfahrung von Bedeutung. Politische Parteien sollten sich deswegen bei ihren Versuchen, demokratische Unterstützung für die Euro-Einführung zu sammeln, auf wirtschaftliche Konsolidierung und politische Stabilität konzentrieren und nicht eine Konfliktlinie zwischen Gewinnern und Verlierern der Euro-Einführung politisieren
    Keywords: European identity; public opinion; currency; economic integration; EMU; EMU; Euro; East-Central Europe; East-Central Europe; political science; economics
    Date: 2008–03–05
  33. By: Ayla Ogus (Department of Economics, Izmir University of Economics); Niloufer Sohrabji (Department of Economics, Simmons College)
    Abstract: In this paper we assess the present sustainability of Turkey’s current account position using the framework provided by Milesi-Ferretti and Razin (1996) based on the ability-to-pay and willingness-to-lend model. This framework allows us to assess the structural features and macroeconomic policy indicators. We extend this framework by considering global sustainability indicators as well. Using data for three periods, 1991-1993, 1998-2000 and 2004-2006 we evaluate the present sustainability in light of the prior two crises (1994, 2001). Based on our analysis of these factors in the extended framework, we conclude that Turkey’s internal structure and macroeconomic conditions (such as exports and the fiscal position) have improved that are allowing Turkey to continue having large and increasing current account deficits. However, there is vulnerability from global factors namely the impending U.S. recession and a potential global slowdown. This might require some adjustments in policy to continue accumulating large deficits.
    Keywords: Current account sustainability, predictors of crisis, Turkey
    JEL: F32 F41
    Date: 2008–03

This nep-cba issue is ©2008 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.