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on Monetary Economics |
| By: | Maria-Helena A. Dias; Joilson Dias; Charles L. Evans |
| Abstract: | The objective of this paper is to show an alternative technique to smooth time series from Monte Carlo Simulations. The technique considers that time series can contain more than one structural break, coming from movements in coefficients of trend or from intercept. The Hodrick-Prescott Filter (HP) does not provide identification of such possible breaks in order to smooth trend from the series to analyze its cyclical component. If the series are relatively stable, this problem may not have relevant implications. Otherwise, for economies relatively unstable, trend movements may interfere in the specification of the cyclical component, and Hodrick-Prescott smoothing could lead empiricists to achieve simplistic forms to economic cycles. In the context, we present an empirical methodology that allows structural breaks in any point of time, from coefficients or from intercepts. We apply this recursive technique to different models with variations in trend, from coefficients and from intercepts, using series simulated by Monte Carlo. Moreover, we compare the results of both techniques to the Brazilian GDP. |
| JEL: | E32 C22 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:104&r=mon |
| By: | Bennett T. McCallum |
| Abstract: | This paper presents a prototype model for development of the “fiscal theory of the price level.” In this simple setting, the fiscal theory’s distinctiveness relies upon adoption of a bubble solution, rather than the rational-expectations fundamentals solution. The paper then shows that the fiscal solution is not adaptively learnable, by agents who estimate coefficients relevant for forecasting on the basis of available data, whereas the orthodox “monetarist” solution exists and is learnable. Finally, it is argued that similar results should be expected to apply in more complex models. JEL Nos. E5, E6, D8. Keywords: Monetary theory, fiscal theory, price level determination, learning, rational expectations. |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1268904776&r=mon |
| By: | Bennett McCallum |
| Abstract: | This paper discusses four current topics in monetary policy analysis, each of which hinges on the possibility of multiple solutions in rational expectations (RE) models. In three of these cases-involving inflation forecast targeting, the zero-lower bound deflation trap, and the fiscal theory of the price level-analysis based on E-stability and adaptive learnability of the solutions suggests that only one of them is a viable equilibrium candidate. Thus the dangers alleged to prevail, in these cases, are not ones with which actual policymakers need to be concerned. In the case of the Taylor principle, by contrast, policy behavior that violates the principle is genuinely undesirable, since all of the RE equilibria fail to be learnable. |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:1359313521&r=mon |
| By: | Douwe Kingma; Wim Suyker |
| Abstract: | The following frequently asked questions about oil and the world economy are answered (with references): <P> Who are the main oil producers? Where is the oil used? What about oil reserves? How important is oil as an energy carrier? Is oil crucial for the world economy? Has oil become less important? What determines the price of oil? What about the current oil price? Is there only one oil price? How powerful is OPEC? What is the role of speculators? How important are taxes? Is the oil price higher in winter? What implies a higher oil price for the world economy? Are these calculations on oil price shocks without qualification? Are futures good predictors for prices in the near future? What will bring the future? |
| Keywords: | oil; oil price; opec |
| JEL: | Q41 Q43 Q48 E3 E66 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:memodm:104&r=mon |
| By: | Paul Tang; Gerard Verweij |
| Abstract: | The Netherlands wants to reduce the administrative burden for businesses between 2003 and 2007 with a quarter. With the aid of the so called Standard Cost Model, the burden is estimated to amount to 16.4 billion euro in 2002. This is about 3.6 % of the Dutch gross domestic product (GDP). However, a significant part of the administrative burden, over 40% of the total, is the direct result of international, mainly European legislation. This makes the reduction of the administrative burden a European issue. Besides, a reduction in one member state may affect the economies in other member states. <P> This memorandum considers the direct and indirect effects of reducing the administrative burden on firms. Reducing the burden is expected among other things to boost investment, adding to the increase in production and labour productivity. For an individual country a unilateral reduction probably has different effects than a reduction that is part of a co-ordinated, European effort to scale down the administrative burden of government regulations. <P> To assess the indirect effects, within the economy of the European Union and between European economies, we employ the CPB’s general-equilibrium model WorldScan, which simultaneously takes account of the different product and factor markets in the world economy and which models many European economies in detail. The Netherlands is one of the very few countries, which currently has detailed information on the administrative burden of government regulations. Therefore, we assume that the key figures for the Netherlands also hold for the other member states of the European Union. This assumption implies that for the whole European Union an administrative burden exists of 340 billion euro in 2002. Better data for other member states are needed to arrive at a complete assessment of direct and indirect effects. <P> Conclusions <P> Based on Dutch data, reducing the administrative burden with 25% leads to a 1.7% increase in real GDP for the European Union. The long-term effect is higher than the initial impact, since the reduction induces extra capital accumulation and brings spillovers from extra R&D. The production growth is not fully translated into welfare gains. The gap between the two follows from a loss in terms-of-trade, but is generally small. For individual EU-25 member states the effects are broadly similar. <P> The simulations show that the gains from a co-ordinated reduction are somewhat larger than from a unilateral reduction. The main reason is not terms-of-trade effects but rather spillovers from extra R&D investment. The macro-economic results do not change when an alternative, uneven distribution of the administrative burden on sectors is assumed. With this alternative distribution agriculture and services see the largest gains in production. |
| Keywords: | administrative burden; deregulation. europe; european union; international trade |
| JEL: | D58 E6 F4 K20 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:memodm:93&r=mon |
| By: | Elbourne, A.; Salomons, R. (Groningen University) |
| Abstract: | We assess the role of equity markets in the transmission of monetary policy in the EU. We use a structural VAR model based upon the models of Kim and Roubini [2000] and Brischetto and Voss [1999] and we find that there are differences in monetary policy transmission across our sample of countries. The largest output losses following a monetary shock are seen in a core of euro area countries: Austria, Belgium, Finland, France, and Germany. Germany also displays the largest response of prices and is followed by Austria and Finland. Variance decompositions also suggest that the bank based core euro area countries are different from market based countries. As regards the channels of transmission we find no evidence to suggest an equity wealth effect channel in the euro area and only circumstantial evidence for the UK. We do, however, find that those countries that use equity finance (the UK and the Netherlands) suffer smaller output losses following a monetary shock indicating that a bank lending channel is less likely to be present in these countries. |
| Keywords: | monetary policy, equity markets, VAR modelling. JEL Classifications: E44, E52, G15 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:04e15&r=mon |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | This paper studies ECB and Bundesbank communication on monetary policyduring the first years of the European Economic and Monetary Union. We study whether statements by different (groups of) central bankers have been contradictory and whether differences have diminished over time. We find that statements on the interest rate, inflation and economic growth have indeed been contradictory. Fur- thermore, national central banks continue to dominate communication on monetary policy. Finally, only the ECB Executive Board has observed radio silence before ECB Governing Council meetings. A positive conclusion is that, over time, interest rate statements have become less contradictory. |
| JEL: | E32 G21 G28 G31 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:007&r=mon |
| By: | Smets,F.; Wouters,R. (Nationale Bank van Belgie) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:att:belgnw:200461&r=mon |
| By: | Jaap Bos; Mindel van de Laar |
| Abstract: | In this paper, we question whether there is a catch-up effect or announcement effect in Foreign Direct Investment (FDI) from the European Union (EU) to the ten EU accession countries. We study FDI outflows from the Netherlands, a small open economy with few historical ties to Eastern Europe, and compare FDI in the transition countries in Central and Eastern Europe to FDI in other regions - most notably to transition countries in Central Asia. In our analysis we try to impose as little structure as possible on the data and allow for heterogeneity within the different regions. In an effrt to improve on past studies in the same area, we use a very broad sample of countries, we present country-specific results and test how robust regional dummies are, we check for omitted variable bias and we try to correct for possiblenon-linearity in the gravity relationships. We find that many of the differences in results of previous studies can be attributed to these specification! problems. There is no evidence that an overall catch-up effect or announcement effect exists. Rather, economic fundamentals explain differences in inward investment in the region. FDI and trade are mostly complementary and there is no evidence that there is crowding out between regions. |
| JEL: | E32 G21 G28 G31 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:008&r=mon |
| By: | Jaap Bikker; Paul Metzemakers |
| Abstract: | This paper investigates the determinants of commercial banks' own internal capital targets and potential sensitivity of these levels to the business cycle . World-wide results make clear that banks' own risk is only slightly dependent on the business cycle. Banks tend to hold substantial capital buffers on top of minimum requirements, reflecting that they hold capital for other reasons than strictly meeting the capital requirements. These results suggest that actual capital levels may not become substantially more procyclical under the new risk-sensitive Basel II regime. However, a number of banks, especially smaller ones, combine a relatively risky portfolio with limited buffer capital. A more risk-sensitive capital regulation regime could force these banks to obtain higher capital levels, which would make them more procyclical. |
| JEL: | E32 G21 G28 G31 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:009&r=mon |
| By: | Philipp Maier |
| Abstract: | Inflation differentials resulting from EMU enlargement have so far mostly been discussed within the Balassa-Samuelson framework, i.e. resulting from inflation in nontradable goods. We analyse the inflationary consequences of convergenceof tradable goods' prices. Using disaggregated price level data, simulations show that inflation in the new EU member states might on average be 1.5-3.5 percentage points higher than in the current euro area (with considerable variation between the new EU members). These inflationary effects even exceed most simulations of the Balassa-Samuelson effect. The `burden of adjustment' rests mainly on the shoulders of the new EU members if the European Central Bank sets monetary policy in response to inflation developments in the entire currency area. In contrast the impact of EMU enlargement on the current euro area is limited, due to the small economic weight of the new EU member states. |
| Keywords: | Price level differences; convergence; EMU enlargement |
| JEL: | E30 E31 E50 F40 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:010&r=mon |
| By: | Karel-Jan Alsem; Steven Brakman; Lex Hoogduin; Gerard Kuper |
| Abstract: | Mullainathan and Shleifer (2002) argue that there are two types of media bias. One bias, called ideology, reflects a news outlet's desire to affect reader opinions in a particular direction. The second bias, referred to as spin, reflects the outlet's attempt to simply create a memorable story. Competition between outlets can eliminate the effect of ideologicalbias, but increases the incentive to spin stories. We examine whether spin exists in Dutch newspaper reporting on the state of the economy. If so, we assume that in their reports on the state of the economy newspapers exaggerate. Consumers reading such reports may be influenced by these reports. As a result, consumer confidence may be affected not only by economic fundamentals, but also by the way they are reported. We construct a variable that reflects the way consumers perceive economic news reported in newspapers. We find that this variable indeed has a significant, but small, impact on consumer confidence,! which is short- lived. |
| JEL: | E20 E21 E30 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:011&r=mon |
| By: | Robert S. Chirinko; Leo de Haan; Elmer Sterken |
| Abstract: | This paper examines the response of the economies of 11 EU countries, Japan, and the United States to shocks in housing and equity prices. The effects are assessed with a Structural Vector Auto Regressive (SVAR) model, and four key findings emerge. First, the impacts of asset price shocks are heterogeneous across countries. Second, these heterogeneous responses are systematically related to cross-country variation in financial structure, and we are thus able to document the importance of a wealth/balance sheet channel for consumption and an equity finance channel forinvestment. Third, for a given country, housing shocks have a much greater impact than equity shocks. Fourth, variance decompositions indicate that monetary policy reacts to equity price shocks but not to housing price shocks. These results highlight the important role played by asset prices on real activity, and fuel the debate about the inclusion of asset prices in the formulation of monetary policy. |
| Keywords: | Monetary policy; Asset prices; structural VAR. JEL codes: E44; E52; E2 |
| JEL: | E44 E52 E2 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:014&r=mon |
| By: | Pedro Martins; Andy Snell; Jonathan Thomas |
| Abstract: | This paper re-examines a problem first studied by Beaudry and DiNardo (1991), who derived testable implications of three models of wage formation and found support for an implicit contract model in which workers are perfectly mobile. We analyse a model in which firms cannot pay discriminate based on year of entry to the firm, and argue that the wage dynamics are similar to the Beaudry and DiNardo model. Since in the latter model worker (under a hiring condition) mobility/commitment does not affect the optimal contract, it is argued that existing empirical research does not discriminate between different models of worker commitment. |
| JEL: | E32 J41 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:130&r=mon |
| By: | Alexander Sotskov |
| Abstract: | The project provides a characterization of optimal non-stationary financial policies in the Sidrausky model with initial debt and threshold consumption which specifies the Phelps relation. The range of the nominal interest rate, and the gain from the difference between internal and external interest rates are also investigated. Finally, the project also supposes an exploration of behavior of trajectories, which are the same as in a cash-in-advance model, and a study of the time-consistency problem. |
| JEL: | E00 G00 G1 |
| Date: | 2004–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:01-166e&r=mon |
| By: | Sergey Verstyuk |
| Abstract: | This empirical research aims to test for the presence of opportunistic electoral business cycles in Ukraine. National and regional-level data on budget revenues and expenditures, output, unemployment rate, wages, and wage arrears (and prices, subject to the availability of data) will be employed. We will try to evaluate the magnitudes of electoral cycles, and check whether magnitude decreases with rationality of voters. |
| JEL: | D72 E32 E62 H71 H72 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:02-209e&r=mon |
| By: | Anna Vdovichenko; Victoria Voronina |
| Abstract: | This paper examines the Bank of Russia behaviour in post crisis period. Special attention is devoted to econometric modelling of monetary policy rules of various types. Standard model is modified in a number of ways and estimated with the use of alternative econometric techniques (GMM, OLS and TSLS methodology). One of the modifications is set in the form of a system of two simultaneous equations, describing dynamics of intervention on foreign currency market and sterilisation of excess liquidity by the Bank of Russia. Empirical results support preliminary assumptions made on the basis of qualitative analysis of terms and principles of monetary and exchange rate policy in 1999-2003. Thus, interest rate policy of the Central Bank has had rather adaptive format, while management of base money dynamics possessed pronounced stabilising pattern. Another major finding lie in the fact that despite officially declared priority of anti-inflation policy major efforts of the Bank of Russia were turned to the regulation of the exchange rate. There are some reasons to suggest that the Central Bank intervened in the exchange market with the aim to affect not only the smoothness of the exchange rate but also its level. |
| Keywords: | Russia, monetary and exchange rate policy, monetary policy rule, intervention, sterilisation |
| JEL: | E52 |
| Date: | 2004–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:04-09e&r=mon |
| By: | Alexander Varshavsky |
| Abstract: | This project will focus on creating an aggregate model for analyzing processes of inflation and stabilization of the Russian economy based on monthly statistical data anaysis. This includes specification of linear and nonlinear multifactor and lag equations, choosing adequate factors, estimation of parameters, and adjustment of the model. The author will also investigate the model’s response to different shocks and make recommendations for stabilizing the Russian economy. |
| Date: | 1999–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:97-109e&r=mon |
| By: | Nelson H. Barbosa Filho |
| Abstract: | This paper presents a one-sector demand-led model where capital and non-capital expenditures determine income growth and distribution. The basic idea is to build a simple dynamical accounting model for the growth rate of the capital stock, the ratio of non-capital expenditures to the capital stock, and the labor share of income. By inserting some stylized behavioral functions in the identities, the paper analyzes the implications of alternative theoretical closures of income determination (effective demand) and distribution (social conflict). On the demand side, two behavioral functions define the growth rates of capital and non-capital expenditures as functions of capacity utilization (measured by the output-capital ratio) and income distribution (measured by the labor share of income). On the distribution side, another two behavioral functions describe the growth rates of the real wage and labor productivity also as functions of capacity utilization and income distribution. The growth rates of total factor productivity and employment follow residually from the accounting identities and, in this way, the demand-led model can encompass supply-driven models as a special case. |
| JEL: | E25 O40 E32 O41 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:038&r=mon |
| By: | Arantza Gorostiage (Unversidad del País Vasco); Juan F. Rubio-Ramírez (Federal Reserve Bank of Atlanta) |
| Keywords: | redistribution policy, minimum wage, Ramsey Problem |
| JEL: | E62 H21 |
| Date: | 2004–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200407&r=mon |
| By: | Andrew Rennison |
| Abstract: | The author evaluates the ability of a variety of output-gap estimators to accurately measure the output gap in a model economy. A small estimated model of the Canadian economy is used to generate artificial data. Using output and inflation data generated by this model, the author uses each output-gap estimation methodology to construct an estimate of the true output gap. He then evaluates the methodologies by comparing their respective estimates of the output gap with the true gap. The estimators are evaluated on the basis of correlations between the actual and estimated output gap, as well as the root-mean-squared estimation error. The author also varies the properties of potential output and the output gap in the data-generating process to test the robustness of his results. His findings indicate that an estimator that combines the Hodrick-Prescott filter with a Blanchard-Quah structural vector autoregression (SVAR) yields an estimate that is accurate compared with competing methods at the end-of-sample. He also finds that the performance of the SVAR relative to that of other methodologies is quite robust to violations in the identifying assumptions of the SVAR. |
| Keywords: | Business fluctuations and cycles; Econometric and statistical methods; Potential output |
| JEL: | C15 E32 |
| Date: | 2003 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:03-8&r=mon |
| By: | Brigitte Desroches |
| Abstract: | The first step in designing effective policies to stabilize an economy is to understand business cycles. No country is isolated from the world economy and external shocks are becoming increasingly important. The author documents the sources of macroeconomic fluctuations in 22 emerging-market countries, and measures two specific shocks that could be transmitted from one country to another: a world real output shock and a world real interest rate shock. Her analysis shows that there are major differences in the transmission mechanism across emerging-market countries. To assess whether they are due to different economic structures or to the exchange rate regime, she divides the sample into groups of countries. The results indicate that the exchange rate regime is a critical factor, although restrictions on capital flows also play a crucial role. The author also shows that regional groups and trade openness do not play as important a role as the exchange rate regime and capital flows in determining the transmission of business cycles. |
| Keywords: | International topics; Exchange rate regimes; Transmission of monetary policy |
| JEL: | E32 F02 E61 E30 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:04-44&r=mon |
| By: | Carlos Hamilton Vasconcelos Araujo; Marta Baltar Moreira Areosa; Osmani Teixera de Carvalho Guillén |
| Abstract: | This paper aims to estimate output gap for Brazilian economy through di.erents methodolies. We use traditional univariate techniques and propose a new semi-estructural methodology that combines HP filtering and the production function approach. In order to compare the di.erent potential output estimates, we use a Phillips curve to predict free price inflation and a rolling forecast experiment as a test of forecast accuracy. Our results shows that the forecasts produced by the Local level and Watson models are even more inaccurate than those generated by the simplest univariate models. The main evidence is that the Beveridge-Nelson methodology outperforms all the models at all forecast horizons. |
| JEL: | C32 E52 E31 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:041&r=mon |
| By: | Gerhard Reitschuler; Ludger J. Löning |
| Abstract: | The defense-growth nexus is investigated empirically using longitudinal data for Guatemala and allowing the effect of defense spending on growth to be nonlinear. Using recently developed econometric methods involving threshold regressions, evidence of a level-dependent effect of military expenditure on GDP growth is found: a positive and significant externality effect of defense spending prevails for relatively low levels of defense spending and becomes negative, albeit insignificant, for higher levels. |
| Keywords: | Guatemala, defense expenditures, nonlinearity, economic growth, externality effect |
| JEL: | E13 C22 H56 |
| Date: | 2004–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:got:iaidps:097&r=mon |
| By: | M. Gaspar, Raquel (Dept. of Finance, Stockholm School of Economics) |
| Abstract: | <p> In this paper we study a fairly general Wiener driven model for the term structure of forward prices. <p> The model, under a fixed martingale measure, Q, consists of two infinite dimensional stochastic differential equations (SDEs). The first system is a standard HJM model for (forward) interest rates, driven by a multidimensional Wiener process W. The second system is an infinite SDE for the term structure of forward prices on some specified underlying asset driven by the same W. <p> We are primarily interested in the forward prices. However, since for any fixed maturity, T, the forward price process is a martingale under the T-forward neutral measure, the zero coupon bond volatilities will enter into the drift part of the SDE for these forward prices. The interest rate system is, thus, needed as input into the forward price system. Given this setup we use the Lie algebra methodology of Björk et al. to investigate under what conditions on the volatility structure of the forward prices and/or interest rates, the inherently (doubly) infinite dimensional SDE for forward prices can be realized by a finite dimensional Markovian state space model. |
| Keywords: | Forward prices; term structures; state space models; Markovian realizations; HJM models |
| JEL: | E43 G13 |
| Date: | 2004–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0569&r=mon |
| By: | Jönsson, Kristian (Department of Economics, Lund University) |
| Abstract: | In this paper, we elaborate on the notion of effective consumption and its role in determining the outcome of fiscal changes. More specifically, we investigate whether government consumption, by acting either as a complement or a substitute to private consumption, can help explain the non-Keynesian effects of fiscal policy that have been previously documented. We let the periods, where government consumption has acted as a complement or a substitute to private consumption, constitute different regimes. By using econometric methodologies that allow the these regimes to be determined both exogenously and endogenously, we find that the notion of effective consumption can assist in understanding the non-Keynesian effects of fiscal policy that have been documented in Denmark, Ireland and Sweden. |
| Keywords: | Private Consumption; Fiscal Policy; Government Consumption |
| JEL: | E21 E62 |
| Date: | 2004–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2004_026&r=mon |
| By: | Moen, Espen R.; Rosén, Åsa (Swedish Institute for Social Research, Stockholm University) |
| Abstract: | We study a labour market in which firms can observe workers’ output but not their effort, and in which a worker’s productivity in a given firm depends on a worker-firm specific component, unobservable for the firm. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the incentive power of the equilibrium wage contract is constrained socially efficient in the absence of unemployment benefits. We then apply the model to explain the recent increase in performance-pay contracts. Within our model, this can be explained by three different factors: (i) increased importance of non-observable effort, (ii) a fall in the marginal tax rate, (iii) a reduction in the heterogeneity of workers performing the same task. The likely effect of all three factors is an increase in the equilibrium unemployment rate. |
| Keywords: | Incentives; Contracts; Unemployment; efficiency |
| JEL: | E24 J30 J41 |
| Date: | 2003–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sofiwp:2003_003&r=mon |
| By: | Fábio Augusto Reis Gomes; Leandro Gonçalves do Nascimento |
| Abstract: | How large are welfare costs associated with economic aggregate fluctuations is a topic of great concern among economists at least since Robert Lucas' well-known and thought-provoking exercise in the late 1980s. Our analysis assesses the magnitude of such costs for nine countries in South America by means of three alternative trend-cycle decomposition methods. The results suggest South American countries have welfare costs of economic fluctuations notably higher than the U. S. economy. |
| JEL: | C32 E32 C51 E60 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:045&r=mon |
| By: | Kai Leitemo; Ulf Soderstrom |
| Abstract: | We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analyzing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy). |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:273&r=mon |
| By: | Gianfranco Domenighetti; Jacqueline Quaglia; Annamaria Fahrlaender; Michele Tomamichel; Alain Kiener |
| Abstract: | This study measures, on a representative sample of employees in the banking sector (N=428), the prevalence of 18 work condition factors which may have an influence on the levels of stress and insecurity. The analysis then points out the relationship between these two latter factors and 16 health indicators of subjective morbidity and medical consumption. The main results show a significant increase in the prevalence of subjective morbidity and medical consumption with the increase in exposure to a "medium to high" level of fear of dismissal and to a continuous level of stress in the previous 12 months. The comparative analysis carried out on a representative sample of employees in other economic sectors (N=859) shows that employees in the banking sector declare higher levels of stress and insecurity and show evidence of significantly worse health indicators with respect to those of employees working in other sectors. |
| Keywords: | economic development; labour market; unemployment; job insecurity; deprivation; health; public health; health impact assessment |
| JEL: | A13 E24 E60 H10 I12 I30 J20 J6 K2 L20 O11 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:04.14&r=mon |
| By: | Rubens P. Cysne |
| Abstract: | This paper investigates the income inequality generated by a job-search process when di¤erent cohorts of homogeneous workers are allowed to have di¤erent degrees of impatience. Using the fact the average wage under the invariant Markovian distribution is a decreasing function of the time preference (Cysne, 2004), I show that the Lorenz curve and the between-cohort Gini coe¢ cient of income inequality can be easily derived in this case. An example with arbitrary measures regarding the wage o¤ers and the distribution of time preferences among cohorts provides some quantitative insights into how much income inequality can be generated, and into how it varies as a function of the probability of unemployment and of the probability that the worker does not find a job offer each period. |
| JEL: | E40 D60 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:051&r=mon |
| By: | Enrique G. Mendoza; Katherine A. Smith |
| Abstract: | This paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with the large consumption and current-account reversals and asset-price collapses observed in the "Sudden Stops" of emerging markets crises. Margin requirements set a collateral constraint on foreign borrowing by domestic agents. Foreign traders incur costs in trading assets with domestic agents. Margin constraints bind occasionally depending on equilibrium portfolios and asset prices. When the constraints do not bind, productivity shocks cause standard real-business-cycle effects. When the constraints bind, shocks of the same magnitude cause strikingly different effects that vary with the leverage ratio and the liquidity of asset markets. With high leverage and liquid markets, the shocks trigger margin calls forcing "fire sales" of assets. Fisher's debt-deflation mechanism causes subsequent rounds of margin calls, a fall in asset prices and large consumption and current account reversals. The size of the price decline depends on trading costs parameters because these parameters determine the price elasticity of the foreign traders' asset demand function. Price declines of the magnitude observed in the data require a less-than-unitary price elasticity. Precautionary saving makes Sudden Stops infrequent in the long run so that the model can explain both regular business cycles and the unusually large reversals of consumption and current accounts associated with Sudden Stops. |
| JEL: | F41 F32 E44 D52 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10940&r=mon |
| By: | William Nordhaus |
| Abstract: | The present study analyzes the "productivity slowdown" of the 1970s. The study also develops a new data set -- industrial data available back to 1948 -- as well as a new set of tools for decomposing changes in productivity growth. The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy. |
| JEL: | O4 E1 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10950&r=mon |
| By: | Charles W. Calomiris; Joseph R. Mason |
| Abstract: | The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a %u201Cpure arbitrage%u201D strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope between note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements. |
| JEL: | E5 E42 G21 G28 N11 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10951&r=mon |
| By: | Assaf Razin |
| Abstract: | The note analyzes how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. |
| JEL: | E5 F3 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10954&r=mon |
| By: | Petra M. Geraats |
| Abstract: | Stochastic relative preferences are prevalent in the literature, but it appears that modeling them is not trivial. This paper establishes that common stochastic specifications alter average relative preferences, which could induce spurious effects. A simple solution is presented that provides an unbiased specification that parameterizes pure white noise shocks to relative preferences. The importance of the results is illustrated by some instructive examples from consumer choice, monetary policy and micro- founded business cycle models. |
| Keywords: | stochastic preferences, preference uncertainty |
| JEL: | D1 D8 E2 E5 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0468&r=mon |
| By: | Ellis Connolly (Reserve Bank of Australia); Marion Kohler (Reserve Bank of Australia) |
| Abstract: | In this paper we analyse the effect of news relating to the expected path of monetary policy on interest rate futures. Central banks’ transparency is in most respects much greater than it was a decade ago, and so central bank communication needs to be included as a potential source of news. We therefore consider four types of news: macroeconomic news, overseas news, monetary policy surprises and central bank communication. The effect of these types of news on daily changes in interest rate futures is estimated using an EGARCH model for a panel of six economies. We find that interest rate expectations respond to both macroeconomic and policy news, although the response to macroeconomic news is larger, especially once we include foreign news. Overall, the results suggest that the impact of the RBA’s communication policy is in line with other major central banks, and significantly influences (and informs) expectations of future monetary policy. |
| Keywords: | central bank communication, news, interest rate futures |
| JEL: | E58 E52 G14 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2004-10&r=mon |
| By: | G. MALENGIER; L. POZZI |
| Abstract: | We examine the Ricardian Equivalence proposition for a panel of OECD countries in the 80s and 90s by estimating a nonlinear dynamic consumption function. We estimate this function with the Generalized Method of Moments (GMM) using moment conditions that allow us to use information from the levels of the variables included in the consumption function. To examine the performance of this nonlinear GMM estimator and to obtain small sample critical values for the test statistics we apply both one-level and two-level bootstraps. Ricardian Equivalence is rejected since we find a significant number of current income consumers and since permanent income consumers seem to consume less in each period than what would be expected under certainty equivalence. |
| Keywords: | Ricardian Equivalence, rule-of-thumb, precaution, panel data, GMM, bootstrap |
| JEL: | E21 E62 C33 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:04/274&r=mon |
| By: | T. DHONT; F. HEYLEN |
| Abstract: | In this paper we analyse the impact of distortionary taxes, transfers related to structural nonemployment and productive government expenditures on employment and long-run growth. Our theoretical model builds on Barro (JPE, 1990) which we extend by endogenizing the decision to work and by allowing two kinds of government expenditures. The model explains what we basically observe in the data: (i) higher growth and employment in the US (low taxes and low transfers related to structural non-employment), (ii) higher growth and employment in Scandinavia (high taxes, but high productive expenditures and low transfers related to structural non-employment) and (iii) lower growth and poor employment in continental Europe (high taxes, high transfers, lower productive government expenditures). |
| Keywords: | fiscal policy, taxes, transfers, government spending, employment, unemployment, endogenous growth, welfare state |
| JEL: | E24 E62 J22 O41 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:04/275&r=mon |
| By: | Jagjit S. Chadha; Charles Nolan |
| Abstract: | Stabilization policy involves joint monetary and fiscal rules. We develop a model enabling us to characterize systematic simple monetary and fiscal policy over the business cycle. We principally focus on the following question: what are the key properties of the joint simple rule governing the conduct of systematic stabilization policy? We find that conducting stabilization policy incorporates not only a set of monetary policy choices governed by the so-called ‘Taylor principle’ but also fiscal policy that gives considerable force to automatic stabilizers. Recent US and UK monetary and fiscal choices seem broadly consistent with this model. This result is found to be robust to a number of alternate modeling strategies. |
| Keywords: | Optimal simple rules, monetary and fiscal policy, finite lives. |
| JEL: | E21 E32 E52 E63 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0406&r=mon |
| By: | Bernhard Herz; Werner Roeger |
| Abstract: | The issue of the backward-looking versus the forward-looking Phillips curve is still an open question in the macroeconomics profession. We identify a crucial difference between the two hypotheses concerning the real output effects of monetary policy shocks. The backward-looking Phillips curve predicts a strict intertemporal trade-off in the case of monetary shocks: a positive short run response of output is followed by a period where output is below the baseline. The resulting cumulative output effect is exactly zero. In contrast, the forward-looking model implies that the cumulative output effect of temporary monetary shocks is positive. The empirical evidence on the cumulated output effects of money are consistent with the forward-looking model. |
| Keywords: | Phillips curve, monetary neutrality, monetary policy |
| JEL: | E31 E32 E40 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:uba:hadfwe:trad_2004-10&r=mon |
| By: | Marcela Eslava; John Haltiwanger; Adriana Kugler; Maurice Kugler |
| Abstract: | Estimates for the U.S. suggest that at least in some sectors productivity enhancing reallocation is the dominant factor in accounting for producitivity growth. An open question, particularly relevant for developing countries, is whether reallocation is always productivity enhancing. It may be that imperfect competition or other barriers to competitive environments imply that the reallocation process is not fully e?cient in these countries. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998, we explore these issues by examining the interaction between market allocation, and productivity and profitability. Moreover, given the important trade, labor and financial market reforms in Colombia during the early 1990's, we explore whether and how the contribution of reallocation changed over the period of study. Our data permit measurement of plant-level quantities and prices. Taking advantage of the rich structure of our price data, we propose a sequential mehodology to estimate productivity and demand shocks at the plant level. First, we estimate total factor productivity (TFP) with plant-level physical output data, where we use downstream demand to instrument inputs. We then turn to estimating demand shocks and mark-ups with plant-level price data, using TFP to instrument for output in the inversedemand equation. We examine the evolution of the distributions of TFP and demand shocks in response to the market reforms in the 1990's. We find that market reforms are associated with rising overall productivity that is largely driven by reallocation away from low- and towards highproductivity businesses. In addition, we find that the allocation of activity across businesses is less driven by demand factors after reforms. We find that the increase in aggregate productivity post-reform is entirely accounted for by the improved allocation of activity. |
| Keywords: | TFP measurement, productivity and demand decompositions, structural reforms |
| JEL: | E23 L16 L60 O14 O24 O54 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:763&r=mon |
| By: | Xavier Freixas; Dimitrios P. Tsomocos |
| Abstract: | The aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale(1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency. |
| Keywords: | Banking, shocks, insurance, intertemporal, Overlapping Generations Equilibrium |
| JEL: | E44 G21 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:771&r=mon |
| By: | Tommy Sveen; Lutz Weinke |
| Abstract: | The present paper makes progress in explaining the role of capital for inflation and output dynamics. We followWoodford (2003, Ch. 5) in assuming Calvo pricing combined with a convex capital adjustment cost at the firm level. Our main result is that capital accumulation affects inflation dynamics primarily through its impact on the marginal cost. This mechanism is much simpler than the one implied by the analysis in Woodford's text. The reason is that his analysis suffers from a conceptual mistake, as we show. The latter obscures the economic mechanism through which capital affects inflation and output dynamics in the Calvo model, as discussed in Woodford (2004). |
| Keywords: | Sticky prices, investments |
| JEL: | E22 E31 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:773&r=mon |
| By: | Tommy Sveen; Lutz Weinke |
| Abstract: | According to the Taylor principle a central bank should adjust the nominal interest rate by more than one-for-one in response to changes in current inflation. Most of the existing literature supports the view that by following this simple recommendation a central bank can avoid being a source of unnecessary fluctuations in economic activity. The present paper shows that this conclusion is not robust with respect to the modelling of capital accumulation. We use our insights to discuss the desirability of alternative interest rate rules. Our results suggest a reinterpretation of monetary policy under Volcker and Greenspan: The empirically plausible characterization of monetary policy can explain the stabilization of macroeconomic outcomes observed in the early eighties for the US economy. The Taylor principle in itself cannot. |
| Keywords: | Sticky prices, aggregate investment, monetary policy |
| JEL: | E22 E31 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:780&r=mon |
| By: | Karel-Jan Alsem; Steven Brakman; Lex Hoogduin; Gerard Kuper |
| Abstract: | It is sometimes argued that news reports in the media suffer from biased reporting. Mullainathan and Shleifer (2002) argue that there are two types of media bias. One bias, called ideology, reflects a news outlet’s desire to affect reader opinions in a particular direction. The second bias, referred to as spin, reflects the outlet’s attempt to simply create a memorable story. Competition between outlets can eliminate the effect of ideological bias, but increases the incentive to spin stories. We examine whether we find some evidence of spin in Dutch newspaper reporting on the state of the economy. If newspapers are indeed able to create memorable stories this should, according to our hypothesis, affect the opinion of readers with respect to the state of the economy. Sentiments about the actual state of the economy could be magnified by spin. As a result, consumer confidence – a variable that routinely measures the opinion on the state of the economy – can be expected to be affected not only by economic fundamentals, but also by the way these fundamentals are reported. We construct a variable that reflects the way consumers perceive economic news reported in newspapers. We find that this variable indeed has a significant impact on consumer confidence, which is short-lived. |
| JEL: | E20 E21 E30 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1328&r=mon |
| By: | Chiona Balfoussia; Michael Wickens |
| Abstract: | In this paper we develop a new way of modelling time variation in term premia. This is based on the stochastic discount factor model of asset pricing with observable macroeconomic factors. The joint distribution of excess holding period US bond returns of different maturity and the fundamental macroeconomic factors is modelled using multivariate GARCH with conditional covariances in the mean to capture the term premia. We show how by testing the assumption of no arbitrage we can derive a specification test of our model. We estimate the contribution made to the term premia at different maturities by real and nominal macroeconomic sources of risk. From the estimated term premia we recover the term structure of interest rates and examine how it varies through time. Finally, we examine whether the large number of reported failures of the rational expectations hypothesis of the term structure can be attributed to an omitted time-varying term premium. |
| Keywords: | term structure, the stochastic discount factor model, term premia, GARCH |
| JEL: | C50 E40 G10 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1329&r=mon |
| By: | Carlos Fernando Lagrota R. Lopes |
| Abstract: | This paper analyses monetary policy in Brazil, investigating why interest rates were so high and volatile from 1995 to 1998. We identify in monetary policy an overreaction to external shocks, where exogenous changes in international liquidity triggered sharp movements on domestic interest rates. We also show that the Brazilian policy response to these shocks was far more intense than in Argentina and Mexico. We argue that Brazil was caught in a high interest rates trap, which culminated in a currency crisis in January 1999. |
| JEL: | F41 C52 E52 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:071&r=mon |
| By: | Robert Woods |
| Abstract: | This paper builds on the discussion paper published by HM Treasury in 2003 alongside the UK Government’s assessment of the case for EMU entry. The paper considers the potential for fiscal policy to play a greater role in stabilisation policy if the UK were inside EMU. The paper considers: the scope for strengthening the automatic stabilisers and the possible trade-offs; how institutional changes could increase the effectiveness of discretionary fiscal policy; which fiscal instruments might be the most effective; and to what extent stabilisation might be promoted in other ways, such as through enhanced risk sharing by financial markets. |
| JEL: | E62 E63 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1338&r=mon |
| By: | Gilberto Tadeu Lima; Antonio J. A. Meirelles |
| Abstract: | It is developed a dynamic macromodel of utilization and growth of productive capacity, in which the supply of credit-money is endogenous and firms' debt position - and thus the financial fragility of the economy à la Hyman Minsky - is explicitly modeled. The rate of interest is set as a markup over the base rate, which is exogenously determined by the monetary authority. Banking markup varies with changes in economic activity, which is measured by capacity utilization, while firms' debt position varies with the rates of interest, profit and capital accumulation. Regarding dynamics, it is shown the possibility of relating the stability properties of a system with the interest rate and the debt ratio as state variables to the type of minskyan regime - hedge, speculative, Ponzi - which prevails. |
| JEL: | E12 E22 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:074&r=mon |
| By: | Stanley C. W. Salvary (Canisius College) |
| Abstract: | The business cycle spreads from one country to the next to the extent that there is international trade, international investment, and international financial linkages. Since the Latin American countries are closely linked to the US economy, there should be a close parallel between the performance of the US economy and the economies of Latin America. Under consideration is the extent to which these countries were vulnerable or somewhat less than expected vulnerable to the forces at work in the US economy. The period 1972-1989 is the historical time frame under investigation. Given a changing world economy by the end of the 1980s, generalizations resulting from this study are limited to the study period. |
| Keywords: | Economic Systems, Business Cycle Factors, A System-Dependence Model of Cyclic Behavior, Structural and Pholosophical Types of Economic Systems. |
| JEL: | E |
| Date: | 2004–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411014&r=mon |
| By: | Rose Cunningham (Bank of Canada) |
| Abstract: | The author empirically tests two aspects of the interaction between financial variables and inventory investment: negative cash flow and finance constraints due to asymmetric information. This is one of the first studies of inventory investment and finance constraints using Canadian data. A sample of Canadian manufacturing firms over the period 1992Q2-1999Q4 is split into subsamples based on age, bond rating, and size to reflect expected differences in degrees of asymmetric information problems. The findings are consistent with a model in which inventory investment is a U-shaped function of cash flow. Higher degrees of information asymmetry do no appear to generate differences in the sensitivity of inventory investment to cash flow during the sample period. |
| Keywords: | information asymmetries, finance constraints, liquidity constraints, inventories, inventory investment, Povel and Raith model, negative cash flow, |
| JEL: | E22 G14 |
| Date: | 2004–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411015&r=mon |
| By: | George Bitros (Athens University of Economics & Business); Elias Flytzanis (Athens University of Econmics & Business) |
| Abstract: | We draw on three strands of literature dealing with utilization, maintenance, and scrapping in order to analyze the properties of the respective policies and their interac-tions. We do so by focusing on the last period of the received multi-period service life model and extending it in three directions: first, by associating the physical deteriora-tion of equipment to the intensity of its utilization and maintenance; second, by ex-panding on the range of explainable operating policies to allow for idling, mothballing, capacity depleting, capacity preserving, full capacity, upgrading, and downgrading; and, third, by linking the operating policies to the capital policy of scrapping. Owing to these enhancements, the analysis leads to several important findings. One among them is that optimal operating policies behave usually in opposite directions, proceed-ing in time from harder to softer or vice versa, depending on the net revenue earning capability of the equipment under consideration. Another is that profit (loss) making equipment is scrappable iff on the average the operating capital deteriorates faster (slower), or equivalently improves slower (faster), than the scrapping capital. And still an-other result is that operating policies are determined jointly with scrapping policy capi-tal policies, thus suggesting that empirical investigations of their determinants should allow for this simultaneity |
| Keywords: | Utilization, maintenance, idling, mothballing, capacity depleting, capacity pre-serving, upgrading, downgrading, scrapping |
| JEL: | E22 E32 O16 |
| Date: | 2004–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411016&r=mon |
| By: | Heikki Kauppi; Erkki Koskela; Rune Stenbacka |
| Abstract: | We study the implications of product and labor market imperfections for equilibrium unemployment under both exogenous and endogenous capital intensity. With endogenous capital intensity, stronger labor market imperfections always increase equilibrium unemployment. The relationship between the long-run unemployment and the intensity of product market competition is not necessarily monotonic, but there is an elasticity of substitution between capital and labor below one such that the long-run equilibrium unemployment is an increasing function of product market imperfections when the elasticity exceeds this threshold. Higher interest rates increase (decrease) the long-run equilibrium unemployment when the elasticity of substitution is below (above) one. |
| Keywords: | equilibrium unemployment, product market imperfections, capital intensity, wage bargaining |
| JEL: | E22 E24 J51 L11 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1343&r=mon |
| By: | Christian Bayer (European University Institute) |
| Abstract: | This paper analyzes a model of investment with fixed investment costs and capital market imperfections. In this model finance influences the level of capital firms hold, as well as the frequency at which they invest. In consequence investment reacts nonlinearly with respect to shocks to productivity and liquidity. Liquidity and productivity shocks are complements and the influence of finance is strongest if a firm wishes to significantly adjust capital for fundamental reasons. This theoretical model is confronted with UK company data in a two-step estimation that first identifies the long-run relationship of productivity, capital and liquidity. Here we find no significant influence of finance on the capital decision of a firm. However, when the short-run investment function is estimated, liquidity has a significant impact, which is also strongest for strong fundamental investment incentives. Moreover, the investment function is strongly convex in the fundamentals themselves, indicating fixed costs of capital adjustment. |
| Keywords: | Investment, non-convex adjustment cost, imperfect capital markets, nonlinear error-correction, panel data |
| JEL: | E22 E44 G31 C32 C33 |
| Date: | 2004–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411018&r=mon |
| By: | Kolver Hernandez (Boston College) |
| Abstract: | This paper extends Calvo's (1983) time-dependent pricing model to incorporate state-dependent features in pricing, while preserving tractability. The pricing scheme delivers a generalized New Keynesian Phillips curve with an explicit role for the frequency of price revisions. The novel feature shows that inflation responds to movements of relative prices and to endogenous fluctuations in the average frequency of price adjustment. The model offers, therefore, a microfounded rationale for systematic deviations in the inflation- marginal cost relation predicted by the new Keynesian Phillips curve. As a byproduct, the model determines endogenously the short-run slope of the Phillips curve. Simulations predict weaker responses of output and stronger responses of inflation to technology, preference and monetary shocks than those of a close time-dependent model. |
| JEL: | E |
| Date: | 2004–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411020&r=mon |
| By: | Kolver Hernandez (Boston College) |
| Abstract: | Empirical regularities from high-inflation economies, especially in Latin America, suggest that exchange rate-based (ERB) disinflations and money-based (MB) disinflations induce sharply different dynamics in consumption and GDP. I study the role of nominal rigidities to explain business cycle fluctuations associated to ERB and MB disinflations within a single framework. By building on Calvo's (1983) pricing theory, this paper introduces elements of state-dependent pricing at the firm level into an otherwise standard small open economy model. This new feature allows for endogenous variations in the aggregate degree of nominal rigidities. The model contains as a special case a time- dependent pricing model discussed in the literature. Nonlinear simulations show that the model with state-dependent nominal rigidities generates a dynamic behavior that is more consistent with the empirical evidence, compared to the model with time-dependent pricing. |
| JEL: | E |
| Date: | 2004–11–28 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0411021&r=mon |
| By: | Stanley C. W. Salvary (Canisius College) |
| Abstract: | Historically, generalization about economic fluctuations in an economic system over extended periods of time has proved to be difficult. Yet, it has been even more difficult to generalize across economic systems. In a historical setting, there are many theories offered to explain the creation of business cycles. In this study it is argued that the business cycle is not caused by a single factor but by a multiplicity of factors, therefore, such competing theories constitute special cases of the business cycle. This study maintains that there are families of business cycles, with each family representing a related set of economic systems. Given a family approach to economic systems, then it is conceivable that a general theory can be developed for each family of economic systems by grouping factors identifiable with particular sets of economic systems. Data from the United Nations for 137 countries were used to establish a classification scheme for families of economic systems. US time series data were examined to assess the plausibility of the general theory for one family of economic systems as advanced in this study. |
| Keywords: | cycle creation theories, families of cycles, money shocks, investment cycle, credit cycle, monetary dislocation, systems philosophies. |
| JEL: | E |
| Date: | 2004–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412002&r=mon |
| By: | Stanley C. W. Salvary (Canisius College) |
| Abstract: | The Quantity Theory of Money is implicitly embedded in the arguments for price level adjusted financial statements - inflation accounting. Historically, the instability of commodity prices, which is due to changes in relative prices, is considered by one school of economic thought (monetarism) as a reflection of the instability of the value of nominal money. Monetarists maintain that it is the level of the money supply which accounts for the instability of commodity prices. Hence, (1) all changes in the level of the money supply is deemed responsible for changes in the general level of prices, and (2) with each increase in the general level of prices, paper money is said to lose value. In a money economy, nominal money prices reflect the underlying exchange ratios of the various commodities that are produced and exchanged for nominal money. In the absence of monetary dislocation (monetary revaluation or devaluation), any change in the nominal price of a commodity reflects a change in its purchasing power (a change in its exchange ratio vis-a-vis other commodities). Since the physical form of a commodity is relatively constant while the price varies, the simultaneity of these two conditions produces a sensory illusion that leads the monetarists to argue that the measuring device (money) is defective. This paper attempts to demonstrate (in the absence of monetary dislocation): (1) the stability of paper money, which makes it a valid measuring device; and (2) that the quantity theory of money, which is the basis of constant dollar accounting, is a flawed theory. |
| Keywords: | price level changes, level of money supply, instability of commodity prices, monetarism, price level adjusted, financial statements, general purchasing power. |
| JEL: | E |
| Date: | 2004–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412003&r=mon |
| By: | Indra de Soysa; Jennifer Bailey; Eric Neumayer |
| Abstract: | While democracy’s effect on economic growth has come under intense empirical scrutiny, its effect on economic sustainability has been noticeably neglected. We assess the effects of regime type and democratic institutional design on economic, or “weak” sustainability. Sustainability requires that stocks of capital do not depreciate in value over time. The World Bank gauges the rate of net investment in manufactured, human, and natural capital, a unified indicator of weak sustainability (the genuine savings rate). All four indicators of democracy we examine show that freer societies have higher genuine savings rates because they invest more in human capital, create less CO2 damage, and extract fewer natural resources per economic unit produced, even if they show lower net investment in manufactured capital. Democracies may trade off immediate material welfare gains for future pay-offs. This finding justifies why scholars should assess the effects of regime type on more than just immediate growth or the rate of change of manufactured capital. Among democracies, we find that pure parliamentary systems spend more on education than do presidential ones, but exhibit no statistically significant difference for the overall genuine savings rate. Proportional representation electoral systems fare worse than plurality when it comes to genuine and net national savings, even though they do better on education spending. The results taken together show that differences in regime type and democratic institutional design allow for different trade-offs. The results are robust to a range of specifications and a developing country only sub- sample. |
| JEL: | E |
| Date: | 2004–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0412004&r=mon |
| By: | Helge Berger; Till Mueller |
| Abstract: | The likely extension of the euro area has triggered a debate on the organization of the ECB, in particular on the apparent mismatch between relative economic size and voting rights in the Council. We present a simple model of optimal representation in a federal central bank addressing this question. Optimal voting weights reflect two opposing forces: the wish to insulate common monetary policy from changing preferences at the national level, and the attempt to avoid an overly active or passive reaction to idiosyncratic national economic shocks. A perfect match between economic size and voting rights is rarely optimal, and neither is the “one country, one vote principle”. Empirically, there are indications that the pattern of over- and under-representation of member countries in the ECB Council might be extreme by the standards of the US Fed and German Bundesbank and not always optimal. |
| Keywords: | Central Bank, Federal Central Bank, Currency Union, optimal representation, voting, ECB |
| JEL: | D72 E52 E58 F33 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1344&r=mon |
| By: | Antonio J. Alves Jr.; Gary A. Dymski; Luiz Fernando de Paula |
| Abstract: | This paper aims at clarifying the relationship between individual bank and banking industry behavior in credit expansion. We argue that the balance sheet structure of an individual bank is only partially determined by its management decision about how aggressively to expand credit; it is also determined by the balance sheet positions of other banks. This relationship is explicitly shown by a disaggregation of the variable that enters into the simple money multiplier. The approach developed here opens a way to integrating the micro and macro levels in a Keynesian banking-system analysis. |
| JEL: | E12 E44 E32 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:077&r=mon |
| By: | Pierre-Pascal Gendron (The Business School, Humber Institute of Technology & Advanced Learning and International Tax Program, Rotman School of Management, University of Toronto); Gordon Anderson (Department of Economics, University of Toronto); Jack M. Mintz (Rotman School of Management, University of Toronto) |
| Abstract: | An empirical model is developed to estimate the probability of a given tax status based on firm characteristics. A structural switching regression model of the firm’s demand for capital goods is next specified and incorporates expressions for the user cost of capital which account for tax asymmetries. The switching model, which incorporates the estimated tax status probabilities, is used to investigate the potential endogeneity of the cost of capital using a balanced panel of Canadian companies over the period 1976-94. Empirical results suggest that tax status affects capital acquisition behaviour. |
| Keywords: | Corporation Tax, Losses, Investment, Regime Switching |
| JEL: | H25 E22 |
| Date: | 2003–10 |
| URL: | http://d.repec.org/n?u=RePEc:ttp:itpwps:0303&r=mon |
| By: | Kevin Dowd (Nottingham University Business School) |
| Abstract: | This paper evaluates the inflation density forecasts published by the Swedish central bank, the Sveriges Riksbank. Realized inflation outcomes are mapped to their forecasted percentiles, which are then transformed to be standard normal under the null that the forecasting model is good. Results suggest that the Riksbank’s inflation density forecasts have a skewness problem, and their longer term forecasts have a kurtosis problem as well. |
| Keywords: | Inflation density forecasting, Sveriges Riksbank, forecast evaluation |
| JEL: | C53 E31 E52 |
| Date: | 2004–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:nub:occpap:10&r=mon |
| By: | Kevin Dowd (Nottingham University Business School) |
| Abstract: | This paper presents some simple methods to estimate the probability that realized inflation will breach a given inflation target range over a specified period, based on the Bank of England’s RPIX inflation forecasting model and the Monetary Policy Committee’s forecasts of the parameters on which this model is built. Illustrative results for plausible target ranges over the period up to 04Q1 indicate that these probabilities are low, if not very low, and strongly suggest that the Bank’s model over-estimates inflation risk. |
| Keywords: | Inflation, inflation risk, fan charts |
| JEL: | C53 E47 E52 |
| Date: | 2004–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:nub:occpap:11&r=mon |
| By: | Kevin Dowd (Nottingham University Business School) |
| Abstract: | This paper presents a new approach to the evaluation of FOMC macroeconomic forecasts. Its distinctive feature is the interpretation, under reasonable conditions, of the minimum and maximum forecasts reported in FOMC meetings as indicative of probability density forecasts for these variables. This leads to some straightforward binomial tests of the performance of the FOMC forecasts as forecasts of macroeconomic risks. Empirical results suggest that there are serious problems with the FOMC forecasts. Most particularly, there are problems with the FOMC forecasts of the tails of the macroeconomic density functions, including a tendency to under-estimate the tails of macroeconomic risks. |
| Keywords: | Macroeconomic risks, FOMC forecasts, density forecasting |
| JEL: | C53 E47 E52 |
| Date: | 2004–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:nub:occpap:12&r=mon |
| By: | Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results obtained show that the optimal combination of central bank conservatism and independence that minimizes government losses is not unique and that there is substitutability between these institutional characteristics. Consequently, partial central bank independence can be optimal. The framework I employ provides a theoretical basis for interpreting the results obtained in empirical studies of the relationship between inflation and central bank independence. |
| Keywords: | Central bank independence, inflation bias |
| JEL: | E52 |
| Date: | 2000–12 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0102&r=mon |
| By: | Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence. |
| Keywords: | Central bank independence, central bank conservatism, monetary policy delegation, transparency, policy coherence |
| JEL: | E52 |
| Date: | 2002–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0202&r=mon |
| By: | Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy has a social equality component, there is a natural conflict between optimally configured monetary policies and equality. As a result, governments interested in social redistribution, when faced with an independent central bank, will have an incentive to limit their use of fiscal policy. |
| Keywords: | Monetary independence, central bank conservatism, income redistribution |
| JEL: | E52 |
| Date: | 2003–04 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0307&r=mon |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Date: | 2004–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000000710&r=mon |
| By: | Maria Demertzis (De Nederlandsche Bank); Andrew Hughes Hallett (Vanderbilt University and CEPR) |
| Abstract: | In this paper we examine the consequences of having a Central Bank whose preferences are state contingent. This has variously been identified in the literature as a Central Bank that is "rationally inattentive", "risk averse", or "constructively ambiguous". The new feature in this paper is that we show how the private sector is likely to react. There are two possibilities: the public can form rational expectations and internalize the uncertainty about the Bank's preferences in full. Alternatively, and particularly if the process of internalization is costly, it can form a best guess regarding those preferences. This latter case implies a strategy of certainty equivalence. We examine the magnitude of the resulting error in inflation and output if the certainty equivalence approximation is used. Under all reasonable levels of uncertainty, the error turns out to be small. In that case, the certainty equivalence strategy would be "rational". But it involves trading off accepting a deflation bias against the cost of gathering the information needed to calculate the full rational expectations solution. |
| Keywords: | Central Bank Transparency, Certainty Equivalence, Rational Expectatatins, Ambiguity and Rational Inattention |
| JEL: | E52 E58 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0404&r=mon |
| By: | Fabio Hideki Ono; José Luis Oreiro |
| Abstract: | The paper presents a post-keynesian growth model in which (i) the mark-up rate varies in the long-term due to a misalignment between the actual rate and the 'desired' profit rate; and (ii) the capital-output ratio is not necessarily constant, on the contrary it may shift as a result of the technological progress, which according the Harrod's typology can be neutral, capital saving or capital intensive. We demonstrate that the economic stability is only reached if the technological progress is neutral or capital intensive and the investiment is susceptible to fluctuations in the mark-up rate. After undergoing computer simulations, we noticed that an endogenous transition from a wage-led to a profit-led accumulation regime is feasible. Furthermore, we identified a tendency to the stabilization of the profit rate, conditioned to a high savings out of profits ratio. |
| JEL: | E12 O49 C62 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:085&r=mon |
| By: | Andrew Hughes Hallett (Department of Economics, Vanderbilt University and CEPR); Gert Peersman (Department of Financial Economics, Ghent University, Gent, Belgium and Bank of England); Laura Piscitelli (Bank of England) |
| Abstract: | There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of "irreversible" investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets; and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry, and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price "misalignments" away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for 9 OECD countries over the period 1970-2000. We find the impact of price uncertainty is negative or insignificant in all but one case. But the impact of (nominal) exchange rate uncertainty is negative in only 6 cases. It is positive in 4 cases, and insignificant in 3 others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets. |
| Keywords: | invetment expenditures, price and exchange rate uncertainty, PMGE estimators |
| JEL: | E22 F21 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0406&r=mon |
| By: | Jérôme Héricourt (TEAM) |
| Abstract: | How did European Central Bank (ECB) fit the disparate macroeconomic needs of euro zone members ? The purpose of this paper consists in providing quantitative answers to this question using an original methodology. Using simple specifications of monetary transmission mechanisms, we simulate the national evolutions of GDP growth and inflation since 1999, in a fictitious context where the euro was never launched. Our major result is that the ECB did a far better stabilisation job for euro zone countries than national central banks would have done. |
| Keywords: | Taylor rules, monetary policy transmission, alternative world, simulations, stabilisation |
| JEL: | E52 E58 F47 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:bla04004&r=mon |
| By: | José Manuel Guttiérrez (Universidad de Salamanca et CERMSEM) |
| Abstract: | We consider an aggregative consumption economy, where there are a market for commodities and four financial markets : for bonds, deposits, credits and a speculative asset. The decision analytic ideas of decentralization and price aggregation are applied to discuss the existence of equilibrium. |
| Keywords: | Partial equilibrium, decentralization, price aggregation, consumption economy, aggregative models |
| JEL: | C60 E10 E21 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b04081&r=mon |
| By: | Tom Kompas; Omar Abdel-Razeq |
| Abstract: | This paper constructs a simple optimal monetary growth model in which an endogenous and variable rate of time preference provides a rational foundation for a Tobin-effect in a system where otherwise strong neoclassical assumptions (e.g., perfect foresight, an infinite planning horizon, and continuous marketclearing) are maintained. Changes in the proportional rate of growth of the nominal money supply affect both the rate of time preference (ñ) and the equilibrium capital—labour ratio. The impact effect of a fall in ñ (less impatience), and the induced capital accumulation that goes with it, drives the result. Proper transformation rules for two-state variable control problems and curvature and simulation results for the rate of time preference function are also established. The latter in particular provides a reasonable and easily understood foundation for simple systems in which the rate of time preference depends on an index of future consumption, and provides a counter-argument to well-known criticisms (e.g., Blanchard and Fischer (1989) and Barro and Sali-i-Martin (1995)) of Epstein—Uzawa rate of time preference functions. All results are obtained in an analytically simple way, using standard techniques. |
| JEL: | C61 D91 E1 E4 O42 |
| Date: | 2001 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec01-10&r=mon |
| By: | Antonio J. A. Meirelles; Gilberto Tadeu Lima |
| Abstract: | It is developed a mathematical post-keynesian macromodel of capacity utilization and growth in which the supply of credit-money is endogenous and firms' debt position - and thus the financial fragility of the economy - is explicitly modeled. Both the influence of interest rate and indebtedness on capacity utilization and the rates of profit and growth, on the one hand, and the effect of the parameters of the saving and investment functions on financial fragility, on the other hand, are carefully analyzed. |
| JEL: | E12 E22 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:094&r=mon |
| By: | Satish Chand |
| Abstract: | This paper uses quarterly data from September 1981 to December 2000 to quantify the extent to which the Australian real exchange rate is misaligned relative to its long-run equilibrium value. Our modelling suggest, that as of December 2000, the real exchange rate was seven percent below its equilibrium value; this figure is modest in comparison to purchasing power parity indicators that suggest considerably greater misalignment. Furthermore, once short-run dynamics are accounted for, even this anomaly disappears. |
| JEL: | E52 Z00 |
| Date: | 2001 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec01-2&r=mon |
| By: | Kem Reat Viseth |
| Abstract: | The tendency to substitute domestic for foreign currency (as a way of holding wealth and a means of transaction for goods and services) is common throughout the world, and particularly so in countries attempting to overcome thin financial institutions or errant monetary policy. This paper uses monthly data to analyze the phenomenon of currency substitution in Cambodia during the recent economic and financial reform process, 1993-2001. Results show that there is a significant long run relationship between the expected rate of depreciation in market exchange rates and holdings of US dollars. The implications of this result for macroeconomic policy and broader financial sector developments in Cambodia are also examined. |
| JEL: | E52 |
| Date: | 2001 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec01-4&r=mon |
| By: | Ming Lin |
| Abstract: | In this paper, we will first establish a business cycle model with monopolistically competitive firms. To keep up with the development of business cycle theory, we also introduce both variable capital and labor utilization rates into the model. Then, we explore its implications for monetary policy in such an economic structure. Following the concepts of "operationality" and "robustness" emphasized by McCallum(1999), the conclusion is, firstly, the robustness of the optimal monetary policy rule may resort to that of the business cycle model, which is supposed to be robust enough after its decades of developments; secondly, as revealed through using the decision rules of this specific business cycle model, when the interest rate is the primary instrument for the monetary authority to implement monetary policy, the monetary policy rule can be more "operational" in the sense that, the optimal interest rate adjustment can be expressed as a function of inflation and output deviation, or, a function of inflation and variable capital utilization deviation, or a function of inflation and variable labor utilization deviation. |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:-1192579122&r=mon |