nep-mac New Economics Papers
on macroeconomics
Issue of 2004‒12‒20
thirty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Institutions and Cyclical Properties of Macroeconomic Policies By César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
  2. Has Monetary Policy Become More Efficient? A Cross Country Analysis By Stephen G. Cecchetti; Alfonso Flores-Lagunes; Stefan Krause
  3. Taylor Rules and the Deutschmark-Dollar Real Exchange Rate By Charles Engel; Kenneth D. West
  4. An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates By David J. Bolder; Grahame Johnson; Adam Metzler
  5. Asset Prices and Exchange Rates By Pavlova, Anna; Rigobon, Roberto
  6. Wage trends and deflation risks in Germany and Europe By Eckhard Hein; Thorsten Schulten; Achim Truger
  7. Interest rate, debt, distribution and capital accumulation in a post-Kaleckian model By Eckhard Hein
  8. Structural reforms, macroeconomic policies and the future of Kazakhstan economy By Gilles Dufrenot; Alain Sand-Zantman
  9. Aging, pension reform, and capital flows: A multi-country simulation model By Axel Börsch-Supan, Alexander Ludwig, Joachim Winter
  10. Growth vs. Margins: Destabilizing Consequences of Giving the Stock Market What it Wants By Philippe Aghion; Jeremy C. Stein
  11. Bank Capital and Lending Behaviour: Empirical Evidence for Italy By Leonardo Gambacorta; Paolo Emilio Mistrulli
  12. Macroeconomic co-ordination as an economic policy concept – opportunities and obstacles in the EMU By Eckhard Hein; Achim Truger
  13. Productivity and the Natural Rate of Unemployment By Jiri Slacalek
  14. Monetary Policy and the Transition to Rational Expectations By Giuseppe Ferrero
  15. A Comparison of Multi-step GDP Forecasts for South Africa By Guillaume Chevillon
  16. Estimating the effects of fiscal policy in OECD countries By Roberto Perotti
  17. Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability By Christian Broda; David E. Weinstein
  18. Aging and the Welfare State: The Role of Young and Old Voting Pivots By Assaf Razin; Efraim Sadka
  19. Consumption Commitments: Neoclassical Foundations for Habit Formation By Raj Chetty; Adam Szeidl
  20. Life After Crisis For Labor And Capital in the Era of Neoliberal Globalization By Ozlem Onaran
  21. Report on Productivity Trends in Selected Natural Resource Industries in Canada By Centre for the Study of Living Standards
  22. Money, Debt and Prices in the UK 1705-1996 By Norbert Janssen; Charles Nolan; Ryland Thomas
  23. Economic Structure, Policy Objectives, and Optimal Interest Rate Policy at Low Inflation Rates By Diana N. Weymark
  24. Measuring the Economic Impact of Monetary Union: The Case of Okinawa By Shinji Takagi; Mototsugu Shintani; Tetsuro Okamoto
  25. Semiparametric Causality Tests Using the Policy Propensity Score By Joshua D. Angrist; Guido M. Kuersteiner
  26. A New Asymptotically Non-Scale Endogenous Growth Model By Taiji Harashima
  27. Improving the SGP: Taxes and Delegation rather than Fines By Lindbeck, Assar; Niepelt, Dirk
  28. The relationship between stock prices, house prices and consumption in OECD countries By Alexander Ludwig and Torsten Sløk
  29. Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms By Eugenio Gaiotti; Alessandro Secchi
  30. Optimal Monetary Policy in a Small Open Economy Under Segmented Asset Markets and Sticky Prices By Ruy Lama; Juan Pablo Medina
  31. A Framework for Macroeconomic Stability in Emerging Market Economies By Javier Gómez Pineda
  32. Price Rigidity and Price Dispersion: Evidence from Micro Data By Eyal Baharad; Benjamin Eden
  33. Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries By William A. Barnett
  34. Dynamic Scoring: A Back-of-the-Envelope Guide By N. Gergory Mankiw; Matthew Weinzierl
  35. Unemployment, wages and collective bargaining in the European Union By Eckhard Hein; Thorsten Schulten
  36. The McKinsey Global Institute Productivity Studies: Lessons for Canada By Matt Kellison

  1. By: César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
    Abstract: Strong swings in business cycle conditions in industrial and emerging market economies (EMEs) alike have renewed the debate on effectiveness of stabilization policies. Traditionally it has been argued that EMEs are unable to pursue counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy equilibriums. However, we claim that EMEs with institutional features similar to those of industrial countries may be able to conduct counter-cyclical policies. Using a sample of 20 EMEs and annual data for the 1990-2003 period, we find that the level of institutional quality plays a key role in the ability of these economies to conduct stabilizing macroeconomic policies. We show that EMEs with strong institutions are able to implement counter-cyclical macroeconomic policies —reflected in extended monetary-policy (Taylor) and fiscal-policy rules.
    Date: 2004–12
  2. By: Stephen G. Cecchetti; Alfonso Flores-Lagunes; Stefan Krause
    Abstract: Over the past twenty years, macroeconomic performance has improved in industrialized and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to either: 1) more efficient policy-making by the monetary authority, 2) a reduction in the variability of the aggregate supply shocks, or 3) changes in the structure of the economy. In this paper we develop a method for measuring changes in performance, and allocate the source of performance changes to these two factors. Our technique involves estimating movements toward an inflation and output variability efficiency frontier, and shifts in the frontier itself. We study the change from the 1980s to the 1990s in the macroeconomic performance of 24 countries and find that, for most of the analyzed countries, more efficient policy has been the driving force behind improved macroeconomic performance.
    JEL: E52 E58
    Date: 2004–12
  3. By: Charles Engel; Kenneth D. West
    Abstract: We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.
    JEL: F41 E52
    Date: 2004–12
  4. By: David J. Bolder; Grahame Johnson; Adam Metzler
    Abstract: Zero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics. The risk-free government zero-coupon term structure is, however, not directly observable and needs to be generated from the prices of marketable, coupon-bearing bonds. The authors introduce the first public-domain database of constant-maturity zero-coupon yield curves for the Government of Canada bond market. They first outline the mechanics of the curve-fitting algorithm that underlie the model, and then perform some preliminary statistical analysis on the resulting yield curves. The full sample period extends from January 1986 to May 2003; it is broken down into two subsamples, reflecting the structural and macroeconomic changes that impacted the Canadian fixed-income markets over that time. The authors examine the evolution of a number of key interest rates and yield-curve measures over the period, perform a principal-components analysis of the common factors that have influenced yield changes over time, and compare holding-period returns over the sample for assets of various maturities.
    Keywords: Financial markets; Interest rates; Econometric and statistical methods
    JEL: C0 C6 E4 G1
    Date: 2004
  5. By: Pavlova, Anna; Rigobon, Roberto
    Abstract: This paper develops a simple two-country, two-good model, in which the real exchange rate, stock and bond prices are jointly determined. The model predicts that stock market prices are correlated internationally even though their dividend processes are independent, providing a theoretical argument in favor of financial contagion. The foreign exchange market serves as a propagation channel from one stock market to the other. The model identifies interconnections among stock, bond and foreign exchange markets and characterizes their joint dynamics as a three-factor model. Contemporaneous responses of each market to changes in the factors are shown to have unambiguous signs. These implications enjoy strong empirical support. Estimation of various versions of the model reveals that most of the signs predicted by the model indeed obtain in the data, and the point estimates are in line with the implications of our theory. Moreover, the factors we extract from daily data on stock indexes and exchange rates explain a sizable fraction of the variation in a number of macroeconomic variables, and the estimated signs on the factors are consistent with our model's implications. We also derive agents' portfolio holdings and identify economic environments under which they exhibit a home bias, and demonstrate that an international CAPM obtaining in our model has two additional factors.
    Keywords: Asset Pricing, Exchange Rate, Contagion, International Finance, Open Economy Macroeconomics,
    Date: 2004–11–30
  6. By: Eckhard Hein (WSI in der Hans Boeckler Stiftung); Thorsten Schulten (WSI in der Hans Boeckler Stiftung); Achim Truger (WSI in der Hans Boeckler Stiftung)
    Abstract: Based on a post-Keynesian model of the relationship between wages, prices and employment, this paper begins by studying the extent to which unit labour cost trends have been responsible for disinflation and deflationary tendencies in Germany and Europe. Thereafter, the reasons for the deflationary development of unit labour costs in recent years, in particular in Germany, are analysed. Finally, the impact of deflationary wage policies on German and European stagnation are discussed and it is concluded that the excessive wage restraint in Germany not only exacerbates stagnation and deflationary tendencies in Germany but might also have a deflationary impact on the other EMU countries.
    Keywords: Wage trends, deflation, collective bargaining
    JEL: E31 E50
    Date: 2004–12–10
  7. By: Eckhard Hein (WSI in der Hans Boeckler Stiftung)
    Abstract: The introduction of monetary variables into post-Keynesian models of distribution and growth is an ongoing process. Lavoie (1995) has proposed a Kaleckian ‘Minsky-Steindl-model’ of distribution and growth, incorporating the effects debt and debt services have on short and long run capital accumulation. This attempt, however, can be extended because neither has the rate of capacity utilisation been endogenously determined, nor have the potential effects of interest rate variations on distribution between wages and gross profits explicitly been incorporated in the model. In the present paper we therefore augment Lavoie’s ‘Minsky-Steindl-model’, building our analysis on a Kaleckian distribution and growth model which has already taken into account distribution effects of interest rate variations on the short run equilibrium. Into this model the effects of debt and debt services are explicitly introduced, the effects of interest rate variations on the short and the long run equilibrium are derived, and the results are compared to those of Lavoie’s ‘Minsky-Steindl-model’. It is shown, that the effects of interest variations on the endogenously determined equilibrium values of the model do not only depend on the parameter values in the savings and investment functions but also on initial conditions with respect to the interest rate and the debt-capital-ratio.
    Keywords: Interest rate, debt, distribution, capital accumulation
    JEL: E12 E22 E25 E44 O42
    Date: 2004–12–10
  8. By: Gilles Dufrenot (ERUDITE, Université de Paris 12 and GREQAM, Marseille); Alain Sand-Zantman (GATE-CNRS, ENS-LSH, Université de Lyon 2 and OFCE, Paris)
    Date: 2004
  9. By: Axel Börsch-Supan, Alexander Ludwig, Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: We present a quantitative analysis of international capital flows induced by differ-ential population aging and pension reform. It is well known that within each country, demo-graphic change alters the time path of aggregate savings. This process may be amplified if pension reform shifts old-age provision towards more pre-funding. While the patterns of population aging are similar in most countries, timing and initial conditions differ substan-tially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. In order to quantify these effects, we develop a multi-country overlapping generations model and use long-term demographic projections for several world regions to project international capital flows in the course of population aging. Our simula-tions suggest that capital flows from fast-aging industrial countries such as Germany, Italy or Japan to the rest of the world will be substantial. We also conclude that closed-economy mod-els of pension reform miss quantitatively important effects of international capital mobility.
    Date: 2003–04–09
  10. By: Philippe Aghion; Jeremy C. Stein
    Abstract: We develop a multi-tasking model in which a firm can devote its efforts either to increasing sales growth, or to improving per-unit profit margins by, e.g., cutting costs. If the firm%u2019s manager is concerned with the current stock price, she will tend to favor the growth strategy at those times when the stock market is paying more attention to performance on the growth dimension. Conversely, it can be rational for the stock market to weight observed growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms%u2019 business strategies and the market%u2019s pricing rule can lead to purely intrinsic fluctuations in sales and output, creating excess volatility in these real variables even in the absence of any external source of shocks.
    JEL: E32 E44 G30
    Date: 2004–12
  11. By: Leonardo Gambacorta (Bank of Italy, Economic Research Department); Paolo Emilio Mistrulli (Bank of Italy, Economic Research Department)
    Abstract: This paper investigates the existence of cross-sectional differences in the response of lending to monetary policy and GDP shocks owing to a different degree of bank capitalization. The effects on lending of shocks to bank capital that are caused by a specific (higher than 8 per cent) solvency ratio for highly risky banks are also analyzed. The paper adds to the existing literature in three ways. First, it considers a measure of capitalization (the excess capital) that is better able to control for the riskiness of banks’ portfolios than the well-known capital-to-asset ratio. Second, it disentangles the effects of the "bank lending channel" from those of the "bank capital channel" in the case of a monetary shock; it also provides an explanation for asymmetric effects of GDP shocks on lending based on the link between bank capital and risk aversion. Third, it uses a unique dataset of quarterly data for Italian banks over the period 1992-2001; the full coverage of banks and the long sample period helps to overcome some distributional bias detected for other available public datasets. The results indicate that well-capitalized banks can better shield their lending from monetary policy shocks as they have easier access to non-deposit fund-raising consistently with the "bank lending channel" hypothesis. A "bank capital channel" is also detected, with stronger effects for cooperative banks that have a larger maturity mismatch. Capitalization also influences the way banks react to GDP shocks. Again, the credit supply of well-capitalized banks is less pro-cyclical. The introduction of a specific solvency ratio for highly risky banks determines an overall reduction in lending.
    Keywords: Basel standards; monetary transmission mechanisms; bank lending; bank capital
    JEL: E44 E51 E52
    Date: 2003–09
  12. By: Eckhard Hein (WSI in der Hans Boeckler Stiftung); Achim Truger (WSI in der Hans Boeckler Stiftung)
    Abstract: This paper traces the euro zone’s inadequate macroeconomic performance in recent years back to the predominance of a restrictive macroeconomic policy mix based on a ‘new monetarist’ approach to economic policy. An approach based on a (post-)Keynesian analysis is presented as a growth and employment-oriented alternative to this restrictive policy mix. Contrary to the strict assignment of macroeconomic goals to the macroeconomic policy actors and their instruments in the ‘new monetarist’ approach, the alternative requires the co-ordination of monetary, fiscal and wage policies in order to achieve growth, high employment and price stability. The paper examines the opportunities for and the obstacles to macroeconomic co-ordination given by the institutional framework of the European Monetary Union.
    Keywords: Macroeconomic policy co-ordination, European Monetary Union, monetary policy, fiscal policy, wages policy
    JEL: E61 E63 E64 E65
    Date: 2004–12–10
  13. By: Jiri Slacalek
  14. By: Giuseppe Ferrero (Bank of Italy, Economic Research Department)
    Abstract: Under the assumption of bounded rationality, economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs. The purpose of this paper is to examine how the policy-maker, by affecting private agents' learning process, determines the speed at which the economy converges to the rational expectation equilibrium. I find that by reacting strongly to private agents' expected inflation, a central bank would increase the speed of convergence. I assess the relevance of the transition period when looking at a criterion for evaluating monetary policy decisions and suggest that a fast convergence is not always suitable.
    Keywords: Interest Rate Setting, Adaptive Learning, Rational Expectations, Speed of Convergence
    JEL: E52 C62 D83
    Date: 2004–06
  15. By: Guillaume Chevillon (Observatoire Français des Conjonctures Économiques)
    Date: 2004
  16. By: Roberto Perotti
    Abstract: This paper studies the effects of fiscal policy on GDP, inflation and interest rates in 5 OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The effects of fiscal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more effectively than spending increases. 3) The effects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these effects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive effects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small effects on inflation. 6) Both the decline in the variance of the fiscal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980.
  17. By: Christian Broda; David E. Weinstein
    Abstract: We analyze fiscal policy and fiscal sustainability in Japan using a variant of the methodology developed in Blanchard (1990). We find that Japan can achieve fiscal sustainability over a 100-year horizon with relatively small changes in the tax-to-GDP ratio. Our analysis differs from more pessimistic analyses in several dimensions. First, since Japanese net debt is only half that of gross debt, we demonstrate that the current debt burden is much lower than is typically reported. This means that monetization of the debt will have little impact on Japan's fiscal sustainability because Japan's problem is the level of future liabilities not current ones. Second, we argue that one obtains very different projections of social security burdens based on the standard assumption that Japan's population is on a trend towards extinction rather than transitioning to a new lower level. Third, we demonstrate that some modest cost containment of the growth rate of real per capita benefits, such as cutting expenditures for shrinking demographic categories, can dramatically lower the necessary tax burden. In sum, no scenario involves Japanese taxes rising above those in Europe today and many result in tax-to-GDP ratios comparable to those in the United States.
    JEL: E6 H5 H6
    Date: 2004–12
  18. By: Assaf Razin; Efraim Sadka
    Abstract: An income tax is generally levied on both capital and labor income. The working young bears mostly the burden of the tax on labor income, whereas the retired old, who already acummulated her savings, bears the brunt of the capital income tax. Therefore, there arise two types of conflict in the determination of the income tax: the standard intragenerational conflict between the poor and the rich, and an ntergenerational conflict between the young and the old. The paper studies how aging affects the resolution of these conflicts, and the politico-economic forces that are at play: the changes in the voting pivots and the fiscal leakage from tax payers to transfer recipients.
    JEL: E6 H2
    Date: 2004–12
  19. By: Raj Chetty; Adam Szeidl
    Abstract: This paper studies consumption and portfolio choice in a model where agents have neoclassical preferences over two consumption goods, one of which involves a commitment in that its consumption can only be adjusted infrequently. Aggregating over a population of such agents implies dynamics identical to those of a representative consumer economy with habit formation utility. In particular, aggregate consumption is a slow-moving average of past consumption levels, and risk aversion is amplified because the marginal utility of wealth is determined by excess consumption over the prior commitment level. We test the model's prediction that commitments amplify risk aversion by using home tenure (years spent in current house) as a proxy for commitment: Recent home purchasers are unlikely to move in the near future, and are therefore more constrained by their housing commitment. We use a set of control groups to establish that the timing of marital shocks such as marriage and divorce can be used to create exogenous variation in home tenure conditional on age and wealth. Using these marital shocks as instruments, we find that the average investor reallocates $1,500 from safe assets to stocks per year in a house. Hence, recent home purchasers have highly amplified risk aversion, suggesting that real commitments are a quantitatively powerful source of habit-like behavior.
    JEL: D8 E21 G11 G12
    Date: 2004–12
  20. By: Ozlem Onaran (Vienna University of Economics & B.A.)
    Abstract: The aim of this paper is to discuss the outcomes of neoliberal globalization from the perspective of labor in the developing countries, with a particular emphasis on the crises that followed the substantial liberalization in capital accounts in the 1990s. Although a lot has been said about the effects of capital account liberalization on the macroeconomic performance of the economies, less attention is paid to the different effects on labor vs. capital. This paper analyses the outcomes of neoliberal globalization for labor in nine developing countries, and focuses on the episodes of crisis as part of the general class struggle where the question on who will carry the burden of adjustment is a part of the struggle. The paper describes the corner stones of the regime of growth in the neoliberal era, by analyzing the trends in growth, investment, unemployment, and labor’s share in income, and discusses the effects of the shocks generated by crises on these variables. We empirically test whether the lower wage share has had any effect on unemployment, as the neoclassical theory claims, or whether unemployment is primarily driven by the goods market conditions a la Keynes. An empirical analysis about the cyclical behaviour of labor’s share is carried on to understand whether the crises episodes change the effect of demand on distribution. Since the source of growth can also be important on how the generated output is distributed, we also discuss the effects of investment performance on labor’s share. Then we proceed with an analysis of the specific consequences of economic policy choices on distribution, in terms of exchange rate and fiscal policies. Finally we discuss the core stones of an alternative policy framework.
    Keywords: Labor’s share, developing countries, crisis, neoliberal policies, globalization
    JEL: E24 O15 O19 J23 J30 F02
    Date: 2004–12
  21. By: Centre for the Study of Living Standards
    Abstract: The purpose of this report is to shed light on the dynamics and determinants of productivity growth in nine selected natural resource industries and in the overall natural resource sector in Canada. This report provides a concise review of the findings of a detailed analysis undertaken by the Centre for the Study of Living Standards for Natural Resources Canada. The importance of productivity growth is reviewed, and observations are made on the contribution of natural resource industries to aggregate productivity growth; brief summaries on productivity and its determinants are presented for each of the nine industries; and the findings are synthesized into lessons for the natural resource sector as a whole. Some of the main findings are that: natural resource industries contribute disproportionately to aggregate productivity growth in Canada, with labour productivity levels twice as high as the total economy on average, and labour productivity growth one and one half times as rapid as total economy labour productivity growth; capital deepening is a key driver of labour productivity growth in natural resource industries, and high levels of capital intensity explain the high levels of labour productivity in natural resource industries; technological advance is another important driver of labour productivity growth in natural resource industries, and has also increased the importance of human capital; the earth sciences industries make a significant contribution to productivity growth in natural resource industries by providing innovative exploration and development services; and price trends play a large role in the productivity performance of many natural resource industries by determining the quality of deposit that is profitable to be exploited.
    Keywords: Forestry, Mining, Electricity, Oil and Gas, Oil, Gas, Paper Products, Wood Products, Coal Mining, Gold Mining, Diamond Mining, Forest Products, Earth Sciences, Geomatics, Productivity, Human Capital, Capital Intensity, Natural Resources, Exploration
    JEL: L71 L72 L73 O47 O51 J24 D24 O30 E62
    Date: 2004–10
  22. By: Norbert Janssen (Bank of England); Charles Nolan; Ryland Thomas (Bank of England)
    Abstract: This paper constructs a consistent series for the market value of UK Government debt over almost 300 years. We analyse how monetary and fiscal policy affect the path of the price level in the UK. Specifically, the paper examines the interactions between debts, deficits, the monetary base and the price level. Overall, the price level has been closely related to the evolution of the base money supply. Across different sample periods, there is little econometric evidence that fiscal policy has affected the course of the price level (or of the exchange rate under the Gold Standard). Government debt has not significantly affected the base money stock either.
    Keywords: Fiscal policy, debt, monetary policy, price level determination.
    Date: 2004–12
  23. By: Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: In this article, the optimal interest rate rule generated by Svennson's (1997) dynamic model is used to determine the impact that a number of key structural characteristics have on the downward flexibility of interest rates at low rates of inflation. The potential impact of preferences for inflation stability, relative to output stability, on the monetary authority's ability to use expansionary interest rate policy is also considered. Estimates of the model for six countries provide evidence of the quantitative significance of the theoretical results. The empirical results are used to identify which monetary authorities are likely to be the most severely constrained in the event of an economic downturn. The size of the contraction that would be required for the interest rate constraint to bind is estimated for each country in the sample.
    Keywords: Interest rate rule, low inflation, monetary policy rule, Taylor rule
    JEL: E52
    Date: 2003–05
  24. By: Shinji Takagi (Independent Evaluation Office, International Monetary Fund, Washington, D.C.); Mototsugu Shintani (Department of Economics, Vanderbilt University); Tetsuro Okamoto (Faculty of Economics, Osaka Sangyo University)
    Abstract: Data from Okinawa's monetary union with the United States in 1958 and with Japan in 1972 are used to obtain a quantitative indication of how monetary union might affect the behavior of nominal and real shocks across two economies. With monetary union, the variance of the real exchange rate between two economies declines, and their business cycle linkage becomes stronger. A VAR analysis of output and price data for Okinawa and Japan further indicates that the contribution of asymmetric nominal shocks in business cycles becomes smaller. Monetary union thus seems to facilitate both nominal and real convergence.
    Keywords: Currency union, foreign exchange rates, Japanese economy, price convergence, San Francisco Peace Treaty, vector autoregressions
    JEL: E42 F15 F33 F36
    Date: 2003–07
  25. By: Joshua D. Angrist; Guido M. Kuersteiner
    Abstract: Time series data are widely used to explore causal relationships, typically in a regression framework with lagged dependent variables. Regression-based causality tests rely on an array of functional form and distributional assumptions for valid causal inference. This paper develops a semi-parametric test for causality in models linking a binary treatment or policy variable with unobserved potential outcomes. The procedure is semiparametric in the sense that we model the process determining treatment -- the policy propensity score -- but leave the model for outcomes unspecified. This general approach is motivated by the notion that we typically have better prior information about the policy determination process than about the macro-economy. A conceptual innovation is that we adapt the cross-sectional potential outcomes framework to a time series setting. This leads to a generalized definition of Sims (1980) causality. We also develop a test for full conditional independence, in contrast with the usual focus on mean independence. Our approach is illustrated using data from the Romer and Romer (1989) study of the relationship between the Federal reserve's monetary policy and output.
    JEL: C14 C22 E52
    Date: 2004–12
  26. By: Taiji Harashima (University of Tsukuba & Cabinet Office of Japan)
    Abstract: The paper explores a new endogenous growth model in which scale effects asymptotically evaporate and an economy grows without population growth. The key mechanism behind these features is substitution between investing in capital and in knowledge when firms face growing uncompensated knowledge spillovers. Both MAR and Jacobs externalities predict that uncompensated knowledge spillovers become more active if the number of firms increases. The model shows that firms invest more in capital than in knowledge and thus scale effects asymptotically evaporate as the number of population and thus uncompensated knowledge spillovers increase, and an economy grows without population growth.
    Keywords: Endogenous growth; Scale effects; Non scale model; Uncompensated knowledge spillover
    JEL: O40 E10
    Date: 2004–12–10
  27. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Niepelt, Dirk (Institute for International Economic Studies)
    Abstract: We analyze motivations for, and possible alternatives to, the Stability and Growth Pact (SGP). With regard to the former, we identify domestic policy failures and various cross-country spillover effects; with regard to the latter, we contrast an "economic-theory" perspective on optimal corrective measures with the "legalistic" perspective adopted in the SGP. We discuss the advantages of replacing the Pact's rigid rules backed by fines with corrective taxes (as far as spillover effects are concerned) and procedural rules and limited delegation of fiscal powers (as far as domestic policy failures are concerned). This would not only enhance the efficiency of the Pact, but also render it easier to enforce.
    Keywords: Stability and Growth Pact; Spillover Effects; Policy Failures; Pigouvian Taxes; Policy Delegation
    JEL: E63 F33 F42 H60
    Date: 2004–12–14
  28. By: Alexander Ludwig and Torsten Sløk (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems.
    Date: 2004–03–24
  29. By: Eugenio Gaiotti (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases(the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.
    Keywords: monetary transmission, cost channel, working capital
    JEL: E52 E31
    Date: 2004–12–11
  30. By: Ruy Lama; Juan Pablo Medina
    Abstract: This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a version of the model calibrated to the Chilean economy. The contributions of the paper are twofold. First, under the optimal policy the volatility of nontradable inflation is near zero. Second, stabilizing non-tradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other instruments in order to correct financial imperfections.
    Date: 2004–12
  31. By: Javier Gómez Pineda
    Abstract: In this paper, sectoral balance sheets and sectoral stock and flow consistency are embedded into a new open economy model based on the financial accelerator. The framework has nominal inertia, real rigidities and market frictions, and it is designed to evaluate exchange rate risk in the economy and across sectors. The model is perturbed by a shock to investor sentiment and a sudden stop to capital inflow. It is used to evaluate the claims that usually back the fear of floating strategy: the effect of the exchange rate on foreign debt, and the pass-through of exchange rate depreciation to inflation. We conclude that fear of floating, the policy that intends to stabilize foreign debt, is precisely the policy that leads to a higher increase in the government debt to GDP ratio. The reason is that, in order to control the exchange rate, the authorities have to increase interest rates. While a lower depreciation does contain the level of debt, it increases the cost of interest on the debt, and this increases the change in the debt to GDP ratio. The pass-through does not seem an important argument for fear of floating either. We also find that under fear of floating the transfer problem is solved by the private sector alone in the midst of a recession; and that under floating, the government balance is in surplus thereby contributing to the transfer..
    JEL: E F H
  32. By: Eyal Baharad (University of Haifa); Benjamin Eden (Department of Economics, Vanderbilt University and the University of Haifa)
    Abstract: We use large unpublished data set about the prices by store of 381 products collected by the Israeli bureau of statistics during 1991-92 in the process of computing the CPI. On average 24% of the stores changed their price where the average is over products and months. Using the standard calculation this would imply that on average prices remain unchanged for 4.1 months. We argue that the standard calculation suffers from a large aggregation bias due to Jensen's inequality and our best estimate suggests that prices remain unchanged on average for more than 7.5 months. We then assess the importance of price rigidity in generating price dispersion. We find no evidence that price rigidity as measured by the frequency of nominal price changes is related to price dispersion. We also find no evidence that a shock to the inflation rate increases price dispersion. These findings are not consistent with standard versions of the staggered price setting model but are roughly consistent with a simple version of the uncertain and sequential trade model.
    Keywords: Micro data, price dispersion, sticky prices
    JEL: E30 L00
    Date: 2003–08
  33. By: William A. Barnett (University of Kansas)
    Abstract: We derive fundamental new theory for measuring monetary service flows aggregated over countries within a multicountry economic union. We develop three increasingly restrictive approaches: (1) the heterogeneous agents approach, (2) the multilateral representative agent approach, and (3) the unilateral representative agent approach. Our heterogeneous agents approach contains our multilateral representative agent approach as a special case. These results are being used by the European Central Bank in the construction of its Divisia monetary aggregates database, with convergence from the most general to the more restrictive approaches expected as economic convergence within the euro area proceeds. Our theory is equally as relevant to other economic unions, with or without a common currency. We use a stochastic approach to aggregation across countries over heterogeneous representative agents. Our theory permits monitoring the effects of policy at the aggregate level over a multicountry economic union, while also monitoring the distribution effects of policy among the countries of the multicountry area. The resulting index number theory assures internal consistency of the data construction methodology with the theory used in applications of the data in modeling and policy.
    Keywords: multilateral aggregation, Divisia monetary aggregates, ECB, EMU, Euro area, aggregation over countries, heterogeneous agents, distribution effects
    JEL: E41 G12 C43 C22
    Date: 2004–12–10
  34. By: N. Gergory Mankiw; Matthew Weinzierl
    Abstract: This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.
    JEL: E1 H3 H6
    Date: 2004–12
  35. By: Eckhard Hein (WSI in der Hans Boeckler Stiftung); Thorsten Schulten (WSI in der Hans Boeckler Stiftung)
    Abstract: The paper questions the predominant view on unemployment and wages in the European Un-ion according to which high unemployment is primarily caused by labour market rigidities, i.e. social institutions and regulations which prevent “market-clearing” real wage levels and structures. It is shown that the foundations of that view coming either from neo-classical or new-Keynesian theory are not convincing, neither theoretically nor empirically. Analysing the developments in the EU during the last four decades, no strictly inverse relationship between real wage growth and unemployment can be found. On the contrary, persistently high unem-ployment has had strong adverse effects on nominal wage growth and on the labour income share. Weakened labour union bargaining power and changing collective bargaining strategies have contributed to this result. It is therefore concluded that the current EU economic and employment policies aiming at further wage restraint, wage differentiation and decentralisa-tion of collective bargaining are deeply misguided and have to be replaced by an alternative wage policy in Europe as part of a growth and employment oriented coordination of macro-economic policies.
    Keywords: European employment policy, wage theory, wage trends, collective bargaining
    JEL: E24 J50
    Date: 2004–12–10
  36. By: Matt Kellison
    Abstract: The McKinsey Global Institute (MGI) is a think tank based in Washington, D.C. founded in 1990 with the objective of analyzing international productivity levels from both economic and management perspectives. MGI uses microeconomic analysis on a sectorby- sector level to study the effects that industry decisions ultimately have on national productivity. For the most part the productivity drivers identified by MGI can be grouped into three broad areas: competitive factors (concentration, trade protection, deregulation, minimum wages, work rules, and zoning laws); managerial factors (best practice, human capital, capital intensity, and information technology); and demand factors (average income, cyclical factors, and consumer preferences). This paper examines these factors in an attempt to shed light on the causes of Canada-U.S. productivity differences at the industry level. Competitive factors may explain the poor productivity performance of the Canadian financial and cultural service industries relative to their U.S. counterparts, and likewise may explain the high productivity levels of some natural resource industries in Canada relative to the United States. Managerial factors, especially the implementation of new technologies and related processes, may be important in explaining the poor productivity growth in Canada relative to the United States in service industries such as retail trade. Given the similarities between Canada and the United States, the findings of the MGI studies cannot be indiscriminately applied to Canada-U.S. productivity differences at the industry level. However, the MGI studies do put forward a number of useful working hypotheses for analyzing these differences.
    Keywords: Productivity, Productivity Growth, Industry, Industry Studies, McKinsey Global Institute, MGI, Concentration, Competition, Retail Trade, Wal-Mart, Regulation, Banking, Airlines, Best Practice, Deregulation
    JEL: O47 O57 J24 D24 E62 L80 L60 P12
    Date: 2004–11

This nep-mac issue is ©2004 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.