nep-cba New Economics Papers
on Central Banking
Issue of 2008‒04‒21
forty papers chosen by
Alexander Mihailov
University of Reading

  1. Globalization, Macroeconomic Performance, and Monetary Policy By Frederic S. Mishkin
  2. A Black Swan in the Money Market By John B. Taylor; John C. Williams
  3. Central Bank Design with Heterogeneous Agents By Aleksander Berentsen; Carlo Strub
  4. Did Wages Reflect Growth in Productivity? By Martin S. Feldstein
  5. Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate By Martin S. Feldstein
  6. Will the Renminbi Become a World Currency? By Wendy Dobson; Paul R. Masson
  7. Monetary policy and Swedish unemployment fluctuations By Alexius, Annika; Holmlund, Bertil
  8. Labour market imperfections, "divine coincidence" and the volatility of employment and inflation By Mirko Abbritti; Andrea Boitani; Mirella Damiani
  9. New Open Economy Macroeconomics By Giancarlo Corsetti
  10. Optimal Monetary Policy and the Sources of Local-Currency Price Stability By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  11. Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment By Giancarlo Corsetti; Philippe Martin; Paolo Pesenti
  12. Remittances, Inflation and Exchange Rate Regimes in Small Open Economies By Christopher P. Ball; Martha Cruz-Zuniga; Claude Lopez; Javier Reyes
  13. The Comovement between Monetary and Fiscal Policy Instruments: Post-War Period in US. By Jesús Vázquez
  14. The dynamics of ex-ante risk premia in the foreign exchange market: Evidence from the yen/usd exchange rate Using survey data By Georges Prat; Remzi Uctum
  15. La nouvelle modélisation macroéconomique appliquée à l’analyse de la conjoncture et à l’évaluation des politiques : les modèles dynamiques stochastiques d’équilibre général (DSGE) By Anne Epaulard; Jean-Pierre Laffargue; Pierre Magrange
  16. Term Structure and the Estimated Monetary Policy Rule in the Eurozone. By Ramón María-Dolores; Jesús Vázquez
  17. Les dynamiques de transmission des taux directeurs sur les taux bancaires en Europe By Raphaël Jeudy
  18. Monetary Politics in a Monetary Union: A Note on Common Agency with Rational Expectations By Michele Ruta
  19. Play Money? Contemporary Perspectives on Monetary Sovereignty By Christoph Herrmann
  20. An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence By Wessel Marquering; Marno Verbeek
  21. Circular Aspects of Exchange Rates and Market Structure By Yunus Aksoy; Hanno Lustig
  22. Oil Price Shocks and Exchange Rate Management: The Implications of Consumer Durables for the Small Open Economy By Michael Plante
  23. "Term Structure of Interest Rates under Recursive Preferences in Continuous Time" By Hisashi Nakamura; Keita Nakayama; Akihiko Takahashi
  24. Searching for additional sources of inflation persistence : the micro-price panel data approach By Rafal Raciborski
  25. A challenge to triumphant optimists? A new index for the Paris stock exchange (1854-2007) By David Le Bris; Pierre-Cyrille Hautcoeur
  26. New Evidence on the Dynamic Wage Curve for Western Germany: 1980–2004 By Baltagi, Badi H.; Blien, Uwe; Wolf, Katja
  27. How to Spend It: Sovereign Wealth Funds and the Wealth of Nations By Helmut Reisen
  28. Impact of bank competition on the interest rate pass-through in the euro area By M. van Leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel
  29. The Rehn-Meidner Model in Sweden: Its Rise, Challenges and Survival By Erixon, Lennart
  30. Long Term Effects of Fiscal Policy on the Size and the Distribution of the Pie in the UK By Xavier Ramos; Oriol Roca-Sagales
  31. Monopolistic Competition and the Dependent Economy Model By Romain Restout
  32. Econometric Causality By James J. Heckman
  33. Towards a Characterization of Rational Expectations By Itai Arieli
  34. The Degree of Legal Independence of the Mediterranean Central Banks: International Comparison and Macroeconomic Implications By Enrico Gisolo
  36. Sweden's Monetary Internationalization under the Silver and Gold Standards, 1834–1913 By Anders Ögren
  37. A New-Keynesian DSGE Model for Forecasting the South African Economy By Guangling (Dave) Liu; Rangan Gupta; Eric Scaling
  38. Balance Sheet Effects in Currency Crises: Evidence from Brazil By Marcio M. Janot; Marcio G. P. Garcia; Walter Novaes
  39. Demand for money in Iran: An ARDL approach By Sharifi-Renani, Hosein
  40. Détermination du niveau des prix et finances: le cas du Liban, 1965-2005. By Hassan Ayoub; Jérôme Creel; Etienne Farvaque

  1. By: Frederic S. Mishkin
    Abstract: The paper argues that many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up. Globalization does, however, have the potential to be stabilizing for individual economies and has been a key factor in promoting economic growth. The paper then examines four questions about the impact of globalization on the monetary transmission mechanism and arrives at the following answers: (1) Has globalization led to a decline in the sensitivity of inflation to domestic output gaps and thus to domestic monetary policy? No. (2) Are foreign output gaps playing a more prominent role in the domestic inflation process, so that domestic monetary policy has more difficulty stabilizing inflation? No. (3) Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output? Yes. (4) Are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? Yes.
    JEL: E52 F41
    Date: 2008–04
  2. By: John B. Taylor; John C. Williams
    Abstract: At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions -- including the introduction of a new term auction facility (TAF) --- to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.
    JEL: E43 E44 E52
    Date: 2008–04
  3. By: Aleksander Berentsen; Carlo Strub
    Abstract: We study alternative institutional arrangements for the determination of monetary policy in a general equilibrium model with heterogeneous agents, where monetary policy has redistributive effects. Inflation is determined by a policy board using either simple-majority voting, supermajority voting, or bargaining. We compare the equilibrium inflation rates to the first-best allocation.
    Keywords: Policy board, monetary policy, search
    JEL: E4 E5 D7
    Date: 2008–04
  4. By: Martin S. Feldstein
    Abstract: The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity. Total employee compensation as a share of national income was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s. It rose from an average of 62 percent in the decade of the 1960s to 66 percent in the decades of the 1970s and 1980s and then declined to 65 percent in the decade of the 1990s where it has again been from 2000 until the most recent quarter.
    JEL: E24 J3
    Date: 2008–04
  5. By: Martin S. Feldstein
    Abstract: The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.
    JEL: F1 F3
    Date: 2008–04
  6. By: Wendy Dobson (Rotman School of Management); Paul R. Masson (Rotman School of Management)
    Abstract: China has emerged as a major power in the world economy, so it seems natural to consider whether its currency will also have a major role. However, at present it is not used internationally. We look at the factors that contribute to the international use of currencies, and focus on the aspects of China’s financial system that would have to change before the renminbi emerged as an important regional or world currency. Even with important reforms, two important questions would remain: whether the authorities would want to encourage its international use, and whether an economy with substantial party control could gain international acceptance for its currency.
    Date: 2007–12
  7. By: Alexius, Annika (Department of Economics, Stockholm University); Holmlund, Bertil (Department of Economics, Uppsala University)
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: Unemployment; monetary policy; structural VARs
    JEL: E24 J60
    Date: 2008–02–28
  8. By: Mirko Abbritti (Graduate Institute of International Studies, Geneva); Andrea Boitani (DISCE, Università Cattolica, Milan); Mirella Damiani (Università di Perugia)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring friction introduces externalities that, in turn, entail the breakdown of the "divine coincidence" without assuming real wage rigidity. Our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. The model also allows for an analysis of the volatility of economies, differing in their "degrees of labour market rigidity". It turns out that "rigid" economies exhibit less unemployment volatility and more inflation volatility than "flexible" economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve
    JEL: E24 E31 E32 E52 J64
    Date: 2008–04
  9. By: Giancarlo Corsetti
    Abstract: The New Open Economy Macroeconomics refers to a vast body of literature embracing a new theoretical framework for policy analysis in open economy, with the goal of overcoming the limitations of the Mundell-Fleming model, while preserving the empirical wisdom and policy friendliness of traditional analysis. Starting in the early 1990s, NOEM contributions have developed general equilibrium models with imperfect competition and nominal rigidities, to reconsider conventional views on the transmission of monetary and exchange rate shocks; they have contributed to the design of optimal stabilization policies, identifying international dimensions of optimal monetary policy; they have raised issues in the desirability of international policy coordination.
    Keywords: Open economy models; exchange rates; stabilization policy; Mundell-Fleming
    Date: 2007–11–09
  10. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: We analyze the policy trade-offs generated by local currency price stability of imports in economies where upstream producers strategically interact with downstream firms selling the final goods to consumers. We study the effects of staggered price setting at the downstream level on the optimal price (and markup) chosen by upstream producers and show that downstream price movements affect the desired markup of upstream producers, magnifying their price response to shocks. We revisit the international dimensions of optimal monetary policy, unveiling an argument in favour of consumer price stability as the main prescription for monetary policy. Since stable consumer prices feed back into a low volatility of markups among upstream producers, this contains inefficient deviations from the law of one price at the border. However, efficient stabilization of different CPI components will not generally result into perfect stabilization of headline inflation. National policies optimally respond to the same shocks in a similar way, thus containing volatility of the terms of trade, but not necessarily of the real exchange rate. The latter will be more volatile, among other things, the larger the home bias in expenditure and the content of local inputs in consumer goods.
    Keywords: optimal monetary policy, price discrimination, price dispersion, exchange rate pass through, real exchange rates
    JEL: F31 F33 F41
    Date: 2007–11–09
  11. By: Giancarlo Corsetti; Philippe Martin; Paolo Pesenti
    Abstract: Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms'net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem', using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.
    Keywords: transfer problem, current account, global imbalances, extensive margin
    Date: 2008–01–24
  12. By: Christopher P. Ball; Martha Cruz-Zuniga; Claude Lopez; Javier Reyes
    Abstract: Remittances are private monetary transfers yet the rapidly growing literature on the subject seems to forget their monetary nature and thus ignore the role that exchange rate regimes play in determining the effect remittances have on a recipient economy. This paper uses a theoretical model and panel vector autoregression techniques to explore the role exchange rate regimes play in understanding the effect of remittances. The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should be inflationary and generate an increase in the domestic money supply under a fixed regime but deflationary and generate no change in the money supply under a flexible regime. These differences are borne out in the data. This adds to our understanding of the true effect of remittances on economies and suggests results existent in the literature that do not control for regimes may be biased.
    Date: 2008
  13. By: Jesús Vázquez (The University of the Basque Country)
    Abstract: This paper empirically studies the dynamic relationship between monetary and fiscal policies by analyzing the comovements between the Fed funds rate and the primary deficit/output ratio. Simple economic thinking establishes that a negative correlation between Fed rate and deficit arises whenever the two policy authorities share a common stabilization objective. However, when budget balancing concerns lead to a drastic deficit reduction the Fed may reduce the Fed rate in order to smooth the impact of fiscal policy, which results in a positive correlation between these two policy instruments. The empirical results show (i) a significant negative comovement between Fed rate and deficit and (ii) that deficit and output gap Granger-cause the Fed funds rate during the post-Volcker era, but the opposite is not true.
    Keywords: Fed rate, deficit, comovement, switching regimes
    JEL: C32 E52 E62
    Date: 2008–04–08
  14. By: Georges Prat; Remzi Uctum
    Abstract: Using financial experts’ Yen/USD exchange rate expectations provided by Consensus Forecasts surveys (London), this paper aims to model the 3 and 12-month ahead ex-ante risk premia measured as the difference between the expected and forward exchange rates. According to a two-country portfolio asset pricing model, the risk premium is modeled as the product of three factors: a constant risk aversion coefficient, the expected variance of the rate of change in the real exchange rate, and the spread between domestic agent’s market position in foreign assets and foreign agent’s market position in domestic assets (net market position). When the returns are partially predictable, the expected variance is horizondependent and this is a sufficient condition for agents not to require at any time a unique risk premium for all maturities but a set of premia scaled by the time horizon of the investment. For each horizon the expected variance is assumed to depend on the historical values of the variance and on the unobservable maturity-dependent net market positions which have been estimated through a state space model using the Kalman filter methodology. We find that the model explains satisfactorily both the common and the non-random specific time-patterns of the 3- and 12-month ex-ante premia.
    Keywords: risk premium, foreign exchange market, international asset pricing model
    JEL: D84 E44 G14
    Date: 2008
  15. By: Anne Epaulard (DGTPE - Ministère de l'Economie); Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Pierre Magrange (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales - Ecole Nationale des Ponts et Chaussées - Ecole Normale Supérieure de Paris)
    Abstract: Cet article introduit un numéro spécial présentant la totalité des aspects de la nouvelle macroéconomie dynamique. Il est divisé en trois parties : la spécification des modèles DSGE, les méthodes de simulation, d'estimation et de test des modèles DSGE, les applications des modèles DSGE.
    Keywords: modèles DSGE, économétrie bayesienne
    Date: 2008
  16. By: Ramón María-Dolores (Bank of Spain, Universidad de Murcia); Jesús Vázquez (The University of the Basque Country)
    Abstract: In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a classical structural method based on the indirect inference principle.
    Keywords: NKM model, term structure, policy rule, indirect inference
    JEL: C32 E30 E52
    Date: 2008–04–08
  17. By: Raphaël Jeudy
    Abstract: Analyses of the transmission of money market rates to retail interest rates are a way to appreciate some effects of the monetary policy. The main question since Euro is the convergence of this transmission in the Euro zone. The aim of this study is to find likeness in evolutions and dynamics of transmission to confirm or to reject the convergence hypothesis. In this way, estimates of the pass-through have been conducted with rolling regressions between 1990 and 2004 on 11 countries (Belgium, Germany, France, Spain, Italy, Ireland, Portugal, Austria, Netherlands, Finland and Greece) and on several retail interest rates (N2, N3, N4, N5 and N8). This pass-through approach is a way to study transmission’s dynamics between interest rates. Finally, we made the same approach with threshold models to underline asymmetric dynamics.
    Date: 2008
  18. By: Michele Ruta
    Abstract: Is the politicisation of monetary policy in a currency union desirable? This paper shows that in a setting where political influence by national governments is modeled as a common agency game with rational expectations, the answer to this question crucially depends on whether the common central bank can commit to follow its policy.
    Keywords: Common Agency, Political Pressures, European Monetary Union
    JEL: F33 E58 D78
    Date: 2007–09–28
  19. By: Christoph Herrmann
    Abstract: Money has always been a difficult and complex concept and the views about what money actually is could hardly be more diverse. This is all the more true in the times of completely manipulated irredeemable paper currencies, the functioning of which is based almost completely on the extent to which people believe in its trustworthiness. The final abolition of Gold as a universal standard of currencies in the early 1970s at first glance seems to have strengthened the grip of governments on money. Nevertheless, it is often argued that "national currencies" are under threat. According to this view, "monetary sovereignty" is waning, as is sovereignty as a whole. The present paper takes a different view. It argues that "monetary sovereignty" understood as a legal concept remains intact and is not even significantly limited by obligations under public international law. This leaves governments significant leeway in taking decisions regarding the setup of their monetary regime ("sovereignty games") and empirical evidence shows the large number of different options that are actually chosen.
    Keywords: Sovereignty, Monetary Sovereignty, International Monetary Relations, Monetary Policy, Money
    Date: 2007–11–09
  20. By: Wessel Marquering; Marno Verbeek
    Abstract: In intertemporal asset pricing models, transaction costs are usually neglected. In this paper we explicitly incorporate transaction costs in these models and analyze to what extent this extension is helpful in explaining the cross-section of expected returns. An empirical analysis using CRSP data on size-based portfolios examines the role of the transaction costs and shows that incorporating such costs in the consumption-based model with power utility does not yield satisfactory results. However, the introduction of habit persistence substantially improves the model. We find rather strong evidence of habit persistence in monthly consumption data. The plots of the models' pricing errors indicate that the asset pricing model with transaction costs and habit persistence does explain the cross-sectional variation in the portfolio returns quite accurately.
    Date: 2008–03
  21. By: Yunus Aksoy; Hanno Lustig
    Abstract: This modified version of Salop's (1979) spatial competition model yields clear-cut predictions about the effects of exchange rate shocks on market structure and pass-through. Shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behavior is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks hysteresis result obtains if and only if sunk costs are non-zero.
    Date: 2008–03
  22. By: Michael Plante (Indiana University Bloomington)
    Abstract: This paper examines exchange rate management issues when a small open economy is hit by an exogenous oil price shock. In this model consumer durables play an important role in the demand for oil and oil based products as opposed to the traditional role of oil as a factor of production. When prices are sticky, oil price shocks lead to reduced output, lower inflation, and real exchange rate deprecation. These recessionary effects occur whether or not oil is in the production function because of the close relationship between consumer durables and oil. Tentative results suggest that flexible exchange rates produce smaller output losses and less volatile inflation in the non-tradables sector than fixed exchange rates but at the cost of front-loading real exchange rate movements.
    Keywords: oil, durables, exchange rates
    JEL: E31 F41 E52
    Date: 2008–04
  23. By: Hisashi Nakamura (Faculty of Economics, University of Tokyo); Keita Nakayama (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. Under mean-reverting expectation on real output growth and inflation, this paper finds that, if interest rates tend to be high during economic booms, then a real yield curve slopes up when, and only when, late resolution is preferred strongly enough. Also, even when the real yield curve slopes down, the nominal yield curve may slope up when expected inflation is negatively correlated with the real output growth.
    Date: 2008–01
  24. By: Rafal Raciborski (European Center for Advanced Research in Economics and Statistics)
    Abstract: It is often argued that the baseline New-Keynesian model, which relies solely on the notion of infrequent price adjustment, cannot account for the observed degree of inflation sluggishness. Therefore it is a common practice among macro modellers to introduce an ad hoc additional source of persistence to their models. Yet, the empirical validity of this practice has never been formally tested. This paper attempts to examine whether there is some additional persistence present in the data on micro-prices, beyond that implied by infrequent price adjustment. We consider two distinct sets of assumptions consistent with the existence of an intrinsic or extrinsic source of sluggishness and build and estimate two alternative models based on these assumptions. It is shown that in he case of certain product categories, particularly food, there is evidence of less sluggishness than what the standard assumptions underlying the New-Keynesian model would imply. We find certain support for the existence of an additional source of sluggishness for some industrial goods and services. Importantly however, the results are sensitive to the choice of the model. We conclude that some inconsistencies with the baseline New-Keynesian assumptions may be tracked in the price behavior. Yet, it is too early to assess their strength or the effect on macro aggregates. Therefore, at the current stage it would be premature to discard the baseline version of the New-Keynesian model based on evidence from micro-data. Similarly, the micro support for introducing an extra source of inflation sluggishness to macro-models is still relatively weak
    Keywords: Price stickiness, inflation persistence, gradualism
    JEL: C51 C81 E13 E1 D21 L11
    Date: 2008–04
  25. By: David Le Bris; Pierre-Cyrille Hautcoeur
    Abstract: Most empirical knowledge on the long term performance of financial investments is derived from the behaviour of the most successful markets. Recent research has tried to broaden the sample of markets studied towards European ones, many of which were among the worlds most developed up to World War One and again weight substantially in today's global portfolio. The synthesis by Dimson, Marsh and Staunton (2001) proposes data on the 20th century for 16 countries, and ends up with an optimistic tone, although a less enthusiastic one than most of the American literature. They argue that even in the worst case - Belgium - the stock market long term performance remained positive (2.5% yearly real return on the 20th century), and superior to that of other investments. The results of this paper suggest that most of the continental European results may be wrong, since they may significantly overestimate the performance of investments in stocks during the 20th century. We concentrate on the French case, but we argue that similar calculations on other European countries may well give similar results. This paper describes and analyzes a new homogeneous stock index for the French stock market from 1854 to 1998, and compares it to those of some other countries. The paper first describes the index's methodology (a weighted, yearly adjusted index comparable to Euronext's CAC40). It then provides some major results. First, investment in French stocks provided a positive real return during the 19th century, but a negative one - because of inflation - in the 20th . After 1914, hoarding gold or investing in real estate provided better returns than stocks. The equity premium was low and consistent with standard models of risk aversion. These results contrast no only with those observed on the US market, but also with older studies of the French market, which were based on un-weighted large indices suffering survivor bias. They are more consistent with the history of the French financial markets and economic policy regimes in the 19th and 20th centuries.
    Date: 2008
  26. By: Baltagi, Badi H. (Syracuse University); Blien, Uwe (IAB, Nürnberg); Wolf, Katja (IAB, Nürnberg)
    Abstract: In 1994, Blanchflower and Oswald reported that they have found an ‘empirical law of economics’ – the Wage Curve. According to their empirical results, the elasticity of wages with respect to regional unemployment is -0.1. This holds especially for the Anglo-Saxon countries. Our paper reconsiders the western German Wage Curve using disaggregated regional data and is based on a random sample of 974,179 employees drawn from the employment statistics of the Federal Employment Services of Germany (Bundesagentur für Arbeit) over the period 1980-2004. We find that the wage equation is highly autoregressive but far from unit root. This means that this wage equation is not a pure Phillips curve, nor a static Wage Curve, and one should account for wage dynamics. The unemployment elasticity is significant but relatively small: only between -0.02 and -0.04. We also check the sensitivity of this wage elasticity for different population groups (young versus old, men versus women, less educated versus highly educated, German native versus foreigner). We confirm that the wage elasticity is more flexible the weaker the bargaining power of the particular group.
    Keywords: wage curve, regional labour markets, Phillips curve
    JEL: J30 C23 R10
    Date: 2008–04
  27. By: Helmut Reisen
    Abstract: Development economics can explain both saving sources and motives that have led to the recent SWF boom, thus helping avoid investment restrictions in OECD countries. As the economics underlying funds from oil exporting countries are different from the economics of East Asian funds, so are the appropriate policy answers.
    Date: 2008–02
  28. By: M. van Leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel
    Abstract: This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
    Keywords: Monetary transmission, banks, retail rates, competition, panel data
    JEL: D4 E50 G21 L10
    Date: 2008–03
  29. By: Erixon, Lennart (Dept. of Economics, Stockholm University)
    Abstract: A Swedish economic policy was developed by two trade union economists shortly after the Second World War. The Rehn-Meidner model recommends the use of selective employment policy measures, a tight macroeconomic policy and a wage policy of solidarity to combine full employment and equity with price stability and economic growth. Although never consistently applied in Sweden, it is possible to distinguish a golden age for the Rehn-Meidner model from the late 1950s to the early 1970s. In the 1970s and 1980s, Swedish governments abandoned the restrictive macroeconomic means of the Rehn-Meidner programme and decentralised wage bargaining obstructed the wage policy of solidarity. In the 1990s and 2000s a new economic-policy regime could not meet the strong requirement of full employment in the Rehn-Meidner model but it satisfied the model’s priority of selective employment policy within the framework of a restrictive macroeconomic policy.
    Keywords: Swedish model; Rehn-Meidner model; third way; labour market policy; wage policy; productivity growth; fiscal policy; unemployment; inflation
    JEL: E24 E31 E62 J23 J31 J62 O23
    Date: 2008–02
  30. By: Xavier Ramos; Oriol Roca-Sagales
    Abstract: This paper provides a joint analysis of the output and distributional long term effects of various fiscal policies in the UK, using a Vector Autoregression approach. Our findings suggest that the output effects of fiscal policies are consistent with the Keynesian paradigm for both direct and indirect taxes but not for public spending. The estimated long term impact on GDP of increasing all type of expenditure and taxes analysed is negative and especially strong in the case of current expenditure. We also find significant distributional effects associated to fiscal policies, indicating that an increase in public spending and direct taxes reduces inequality while a raise in indirect taxes increases income inequality. Finally, the relationship between inequality and output is also explored.
    Keywords: Fiscal policy, inequality, UK, VAR models
    JEL: C5 E6 H3
    Date: 2007–12–18
  31. By: Romain Restout
    Abstract: This paper explores the consequences of introducing a monopolistic competition in an intertemporal two-sector small open economy model which produces traded and non traded goods. It is assumed that the non traded sector is the locus of the imperfectly competition. Our analysis shows that markup depends on the composition of aggregate non traded demand and is therefore endogenously determined in the model. Calibrating the model with OECD parameters, the effects of fiscal and technological shocks are simulated. Our findings are as follows. First, the model is consistent with the observed saving-investment correlations found in the data. Second, unlike the perfectly framework and in accordance with empirical studies, fiscal shocks cause real appreciation of the relative price of non traded goods, which in turn enlarges the responses of current account and investment. Third, the model is consistent with the empirical report that technological shocks result in current account deficits and investment rises. Fourth, the strength of the relative price appreciation following sector productivity differentials, i.e. the Balassa-Samuelson effect, is affected by the monopolistic competition hypothesis. Assume perfect competition when it is not, biases upward estimates of the Balassa-Samuelson effect.
    Keywords: Monopolistic Competition, Fiscal Policy, Productivity
    JEL: E20 E62 F31 F41
    Date: 2008
  32. By: James J. Heckman
    Abstract: This paper presents the econometric approach to causal modeling. It is motivated by policy problems. New causal parameters are defined and identified to address specific policy problems. Economists embrace a scientific approach to causality and model the preferences and choices of agents to infer subjective (agent) evaluations as well as objective outcomes. Anticipated and realized subjective and objective outcomes are distinguished. Models for simultaneous causality are developed. The paper contrasts the Neyman-Rubin model of causality with the econometric approach.
    JEL: B41
    Date: 2008–04
  33. By: Itai Arieli
    Abstract: R. J. Aumann and J. H. Drèze (2008) define a rational expectation of a player i in a game G as the expected payo of some type of i in some belief system for G in which common knowledge of rationality and common priors obtain. Our goal is to characterize the set of rational expectations in terms of the game's payoff matrix. We provide such a characterization for a specific class of strategic games, called semi-elementary, which includes Myerson's "elementary" games.
    Date: 2008–01
  34. By: Enrico Gisolo
    Abstract: The aim of the present paper is to assess the degree of central bank legal independence enjoyed by the central banks of the south shore of the Mediterranean Sea, which belong to the Euro-Mediterranean Partnership and to shed some light on the macroeconomic outcomes of different degrees of independence. To this end a methodology used by the International Monetary Fund, here slightly modified to better suit the characteristics of the central banks in the area, is introduced and applied. The main findings of the present work are as follows: i) as regards legal independence, the Mediterranean countries show a diverse picture, sometimes far from the common wisdom; ii) legal independence does not always appear in line with the de facto situation; iii) Cyprus and Malta (that recently joined the European Union), as well as Turkey, that has been recognized a candidate country status, do not always show the best degrees of legal/actual independence and iv) many central banks of the area have recently amended their Statutes with a view to achieving more independence, as the issue has a key role in the modernization of the economies and a priority status in the implementation of a comprehensive and effective set of political and economic reforms.
    Keywords: central bank independence; independence assessment; macroeconomic performance
    Date: 2007–11–19
  35. By: Rod Tyers; Iain Bain
    Abstract: With exports almost half of its GDP and most of these directed to Europe and North America, negative financial shocks in those regions might be expected to retard China’s growth. Yet mitigating factors include the temporary flight of North American and European savings into Chinese investment and some associated real exchange rate realignments. These issues are explored using a dynamic model of the global economy. A rise in American and European financial intermediation costs is shown to retard neither China’s GDP nor its import growth in the short run. Should the Chinese government act to prevent the effects of the investment surge, through tighter inward capital controls or increased reserve accumulation, the associated losses would be compensated by a trade advantage since its real exchange rate would appreciate less against North America than those of other trading partners. The results therefore suggest that, so long as the financial shocks are restricted to North America and Western Europe, China’s growth and the imports on which its trading partners rely are unlikely to be significantly hindered.
    JEL: C68 E17 F21 F17 F43 F47 O5
    Date: 2008–04
  36. By: Anders Ögren
    Abstract: The central bank’s possibility to sustain the specie standard was largely affected by both the financial development and its internationalization. The increased foreign debt denominated in foreign currencies forced the central bank to engage in more disciplinary monetary policy. The developed banking system worked in two ways: 1) increased public wealth in the banking system allowed a more relaxed discipline but 2) the commercial banks’ supply of liquidity through note issuance allowed the central bank to strengthen monetary discipline. The international economy developed as a credit economy and this international credit economy led to more flexible monetary policy. This affected the working of the adjustment mechanism where domestic prices simultaneously followed changes in the domestic money supply and in international prices. Thus the international integration made both prices and money supply grow in harmony over the borders.
    Keywords: Balance of Payments; Central Bank Reserves; Foreign Debt; Gold Standard; Monetary Base; Monetary Discipline; Monetary Policy; Money Supply; Silver Standard
    JEL: E42 E50 F33 N13 N23
    Date: 2008
  37. By: Guangling (Dave) Liu (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 a New-Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) Model for forecasting the growth rate of output, inflation, and the nominal short-term interest rate (91-days Treasury Bills rate) for the South African economy. The model is estimated via maximum likelihood technique for quarterly data over the period of 1970:1-2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out-of-sample forecasts from the NKDSGE model are then compared with the forecasts generated from the Classical and Bayesian variants of the Vector Autoregression (VAR) models for the period 2001:1-2006:4. The results indicate that in terms of out-of-sample forecasting the NKDSGE model outperforms both the Classical and the Bayesian VARs for inflation, but not for output growth and the nominal short-term interest rate. However, the differences in the RMSEs are not significant across the models.
    Keywords: New-Keynesian DSGE Model; VAR and BVAR Model; Forecast Accuracy
    JEL: E17 E27 E32 E37 E47
    Date: 2008–04
  38. By: Marcio M. Janot (Central Bank of Brasil); Marcio G. P. Garcia (Department of Economics, PUC-Rio); Walter Novaes (Department of Economics, PUC-Rio)
    Abstract: In third generation currency crises models, balance sheet losses from currency depreciations propagate the crises into the real sector of the economy. To test these models, we built a firmlevel database that allowed us to measure currency mismatches around the 2002 Brazilian currency crisis. We found that between 2001 and 2003, firms with large currency mismatches just before the crisis reduced their investment rates 8.1 percentage points more than other publicly held firms. We also showed that the currency depreciation increased exporters revenue, but those with currency mismatches reduced investments 12.5 percentage points more than other exporters. These estimated reductions in investment are economically very significant, underscoring the importance of negative balance sheet effects in currency crises. Jel Codes:F32; F34; G31; G32
    Keywords: Investment; Balance sheets; Currency crises; Hedge; Financial constraints.
    Date: 2008–04
  39. By: Sharifi-Renani, Hosein
    Abstract: The objective of this study is to estimate the demand for money in Iran using the autoregressive distributed lag (ARDL) approach to cointegration analysis. The empirical results show that there is a unique cointegrated and stable long-run relationship among M1 monetary aggregate, income, inflation and exchange rate. We find that the income elasticity and exchange rate coefficient are positive while the inflation elasticity is negative. This indicates that depreciation of domestic currency increases the demand for money, supporting the wealth effect argument and people prefer to substitute physical assets for money balances that are supporting our theoretical expectation. Our results also after incorporating the CUSUM and CUSUMSQ tests reveal that the M1 money demand function is stable between 1985 and 2006.
    Keywords: Money demand; ARDL; Stability; Iran
    JEL: E44 E4 E41
    Date: 2007–10–10
  40. By: Hassan Ayoub (Universités de Lille.); Jérôme Creel (OFCE et ESCP- EAP.); Etienne Farvaque (Universités de Lille.)
    Abstract: La théorie budgétaire du niveau des prix distingue deux types de régimes pour les politiques économiques : Ricardien et Non-Ricardien. Nous analysons dans quelle mesure ces deux régimes peuvent s'appliquer à des sous-périodes dans l'histoire économique d'un pays. Le cas du Liban, passé de la prospérité à la guerre puis à la reconstruction, offre une application de cette théorie, et montre sa pertinence empirique.
    Keywords: Niveau général des prix ; inflation ; politiques monétaire et budgétaire ; dette publique ; ancrage nominal ; économie de guerre
    JEL: E60 E63
    Date: 2008–04

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