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on macroeconomics |
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Issue of 2005‒01‒23
33 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Peter N. Ireland (Boston College) |
| Abstract: | This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target. |
| Keywords: | inflation target, new Keynesian model, supply shocks, inflation |
| JEL: | E31 E32 E52 |
| Date: | 2005–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:607&r=mac |
| By: | 300 |
| Abstract: | In a general equilibrium model, this paper investigates the importance of the exchange rate and the interpretation of the observed inertia in the policy interest rate. We derive an optimizing macroeconomic model that features habit formation in the consumer's utility function and uses a hybrid New Keynesian Phillips curve with inflation inertia. As a consequence, aggregate demand and supply shocks will have a persistent effect on output and inflation. In this framework, we assess the performance of simple, and perhaps non-optimal, interest rate rules under different degrees of habit formation and inflation persistence. We conclude that a policy rule that responds to expected inflation, as well as to output and the exchange rate, is able to reduce output and inflation volatility in the face of aggregate demand and foreign inflation shocks. This result must be interpreted with caution, because, as is found in other studies, i) the reduction in volatility is marginal and ii) the Taylor-type policy rule assessed here may be a restrictive one and, as mentioned before, non-optimal. On the other hand, the gains from adopting an inertial interest rate rule are directly related to the degree of inflation persistence in the model. In particular, when the degree of inflation persistence is high, an inertial policy rule attenuates the impacts that supply shocks have on inflation and the interest rate. |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:300&r=mac |
| By: | Julien Garnier |
| Abstract: | We use a structural model estimated by the Kalman filter in order to extract the common cycle for different groups of OECD countries. We try to evaluate to what extent the Euro zone common cycle is affected by the inclusion of the UK into the group. An important result of this work is that adding the UK to the Euro group does not lead to a greater heterogeneity of the group as a whole. Besides, the UK business cycle is not much different from Euro zone cycles. Another point is that the influence of the UK on the `Euro plus UK' common cycle is less obvious for output than for consumption, public expenditures or investment series. This suggests the importance of taking into account the components of output when analysing business cycles. |
| Keywords: | common business cycles; UK/Euro zone; optimal currency areas; Kalman filter |
| JEL: | E32 F02 F4 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2004-17&r=mac |
| By: | Jesús Fernández-Villaverde; Juan F. Rubio-Ramirez |
| Date: | 2005–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000000849&r=mac |
| By: | Wasmer, Etienne (Université du Quebec à Montreal, CIRPEE, CEPR and IZA Bonn); Zenou, Yves (IUI, GAINS, CEPR and IZA Bonn) |
| Abstract: | Assuming that job search efficiency decreases with distance to jobs, workers’ location in a city depends on spatial elements such as commuting costs and land prices and on labour elements such as wages and the matching technology. In the absence of moving costs, we show that there exists a unique equilibrium in which employed and unemployed workers are perfectly segregated but move at each employment transition. We investigate the interactions between the land and the labour market equilibrium and show under which condition they are interdependent. When relocation costs become positive, a new zone appears in which both the employed and the unemployed co-exist and are not mobile. We demonstrate that the size of this area goes continuously to zero when moving costs vanish. Finally, we endogeneize search effort, show that it negatively depends on distance to jobs and that long and shortterm unemployed workers coexist and locate in different areas of the city. |
| Keywords: | local labour markets, relocation costs, search effort, job matching |
| JEL: | E24 J41 R14 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1465&r=mac |
| By: | D R Osborn; M Sensier |
| Abstract: | This paper studies monthly RPIX inflation in the UK in the context of the change to inflation targeting in 1992. Our empirical models take account of the strong and changing seasonal pattern of inflation, while also focusing on inflation persistence and Phillips curve explanations. In both univariate and Phillips curve models, we find strong evidence of a change in parameters around the end of 1992, at the time of the introduction of inflation targeting. All models point to a substantial decline in inflation persistence after this date. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:46&r=mac |
| By: | Peter J. Klenow; Oleksiy Kryvtsov |
| Abstract: | Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those price changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S. Bureau of Labor Statistics to decompose the variance of consumer price inflation from 1988 through 2003. We find that around 95% of the variance of monthly inflation stems from fluctuations in the average size of price changes, i.e., the intensive margin. When we calibrate a prominent state-dependent pricing model to match this empirical variance decomposition, the model's shock responses are very close to those in time-dependent pricing models. |
| JEL: | E31 E32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11043&r=mac |
| By: | Juan Carlos Conesa; Dirk Krueger |
| Abstract: | This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. |
| JEL: | E62 H21 H24 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11044&r=mac |
| By: | Claudio Michelacci; Vincenzo Quadrini |
| Abstract: | We study a labor market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: They pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data. |
| JEL: | G31 J31 E24 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11050&r=mac |
| By: | Dongchul Cho |
| Abstract: | This paper discusses the relationship between interest rate and inflation rate on one part and the house price relative to chonsei price (up-front lump-sum deposit from the tenant to the owner for the use of the property with no additional requirement for periodic rent payments) on the other. The key point of the paper is that the relative price of sales to chonsei depends on the ratio of inflation to real interest rate, and thus even when the monetary authority maintains a pre-announced target level of inflation rate, the relative price of sales to chonsei rises if the real interest rate is lowered. This finding seems to help understand the recent hikes of the house prices despite the stabilizing chonsei prices. Recognizing this relationship, it may be sensible to lower the target inflation rate in an economy where real interest rates permanently decline, if the society wishes to reduce its adverse effect on the wealth distribution between house owners and chonsei tenants. |
| JEL: | R2 E4 E1 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11054&r=mac |
| By: | Matthew B. Canzoneri; Robert E. Cumby; Behzad T. Diba |
| Abstract: | Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model%u2019s variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added). |
| JEL: | E63 F33 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11055&r=mac |
| By: | Bennett T. McCallum |
| Abstract: | In analyses of "liquidity trap" problems associated with the zero lower bound (ZLB) on nominal interest rates, it is important to emphasize the difference between policy rule changes, intended to help escape an existing ZLB situation, and maintained policy rules designed so as to avoid ZLB situations. Analysis assuming that rule changes would lead to a new RE equilibrium immediately seems implausible. Accordingly, the paper focuses on the design of a rule that should retain stabilization effectiveness even if the economy is temporarily shocked into a ZLB situation. The rule considered is one that uses as its instrument variable a weighted average of an interest rate and the rate of depreciation of the nominal exchange rate. With a small weight attached to the depreciation term, it will be nearly irrelevant in normal situations but call for strong adjustments when the ZLB condition prevails. Stabilizing properties of this "MC" rule are studied within a small open economy model developed by McCallum and Nelson. Results indicate that under ZLB conditions the MC rule will provide strong stabilizing policy actions yet, under conditions such that the ZLB constraint is not relevant, the MC rule need not hinder monetary policy. |
| JEL: | E52 E3 F41 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11056&r=mac |
| By: | Andrew Burns; Przemyslaw Kowalski |
| Abstract: | With almost 50 per cent of the working age population not working, improving labour market performance represents an essential and daunting challenge for Poland. While some of today’s joblessness is cyclical in nature, most of it appears to be structural. This paper argues that to increase employment levels policy will need to focus on reducing significantly the inactivity traps inherent in the Polish personal transfer system, while improving the efficiency and targeting of social transfers to ensure resources flow to those truly in need. Simultaneously, efforts must be extended to increase firms' propensity to hire the outofwork, by lowering the costs of low-skill labour, reducing associated administrative and regulatory costs and in the longer term by providing graduates with more relevant skills. This paper outlines reforms in each of these areas which, if implemented, would serve to reverse the recent decline in employment and improve the fairness of income distribution, thereby reducing poverty, raising the rate of growth of incomes, and speeding economic convergence with the rest of the OECD.This Working Paper relates to the 2004 OECD Economic Survey of Poland (www.oecd.org/eco/surveys/poland). <P> Le défi de l’emploi en Pologne: politiques en faveur de l’emploi <P> Alors que près de 50 pour cent de la population d’âge actif est sans emploi, améliorer les performances du marché du travail représente pour la Pologne un formidable défi. Une partie du non-emploi est certes conjoncturelle mais, pour l’essentiel, c’est un phénomène structurel. L’idée développée dans cette étude est que, pour élever le niveau de l’emploi, il faudra s’attacher à réduire notablement les pièges à l’inactivité liés au système des transferts sociaux en Pologne, tout en améliorant l’efficience et le ciblage des transferts de façon que les flux de ressources aillent vers ceux qui en ont véritablement besoin. Parallèlement, il faudra redoubler d’efforts pour inciter davantage les entreprises à embaucher les personnes sans emploi, en abaissant le coût de la main-d’œuvre peu qualifiée, en réduisant les coûts administratifs et réglementaires connexes et, à plus long terme, en orientant les étudiants vers des qualifications plus pertinentes. Cette étude présente des réformes dans chacun de ces domaines qui, si elles étaient mises en œuvre, aideraient à enrayer le récent déclin de l’emploi et amélioreraient l’équité de la distribution des revenus, contribuant, par là même, à réduire la pauvreté, intensifier la progression des revenus et accélérer la convergence économique avec le reste de la zone de l’OCDE. Ce Document de travail se rapporte à l'Etude économique de l'OCDE de la Pologne, 2004 (www.oecd.org/eco/etudes/pologne). |
| Keywords: | Poland; labour market policies; personal transfer system;labour costs; active labour market;policies; flexibility of working rules; education |
| JEL: | E24 H52 J20 J21 J22 J23 J24 J26 J31 J32 J65 O52 O57 |
| Date: | 2004–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:oed:oecdec:414&r=mac |
| By: | Roberto Reno' |
| Abstract: | In this paper a new fully nonparametric estimator of the diffusion coefficient is introduced, based on Fourier analysis of the observed trajectory. The proposed estimator is proved to be consistent and asymptotically normally distributed. After testing the estimator on Monte Carlo simulations, we use it to estimate an univariate model of the short rate with available interest rate data. Data analysis helps shedding new light on the functional form of the diffusion coefficient. |
| JEL: | C14 C6 E43 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:440&r=mac |
| By: | Roberto Reno'; Antonio Roma; Stephen Schaefer |
| Abstract: | In this paper we discuss the estimation of the diffusion coefficient of one-factor models for the short rate via non-parametric methods. We test the estimators proposed by Ait Sahalia (1996a), Stanton (1997) and Bandi and Phillips (2003) on Monte Carlo simulation of the Vasicek and CIR model and show that all estimators, especially that proposed by Ait-Sahalia (1996a), are problematic for values of the mean reversion coefficient typically displayed by interest rate data. Moreover all estimators depend crucially on the choice of the bandwith parameter. Data analysis shows that the estimators lead to different estimates on the data set analyzed by Ait-Sahalia (1996a) and Stanton (1997); moreover we show that the two data set are inherently different. |
| JEL: | C14 E43 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:445&r=mac |
| By: | Jesús Crespo Cuaresma; Maria Antoinette Silgoner |
| Abstract: | This paper reassesses the impact of in°ation on long-term growth for a panel of 14 EU countries. While previous research focuses on a linear nexus or allows for a piecewise linear relationship with one single threshold, we take account of a more complex relationship. We use a theoretical framework that allows for an explicit distinction between level and growth e®ects of in°ation. The empirical estimates for the full EU sample con¯rm the hypothesis that the relationship between in°ation and growth is positive for very low in°ation rates (i.e. below an estimate of 1.6%), insigni¯cant thereafter and negative for high, two-digit in°ation levels. The estimate of the in°ation level that divides the insigni¯cant from the negative e®ect is found to be higher in the group of traditional cohesion countries than for the rest of the sample. |
| JEL: | E31 O40 O52 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0411&r=mac |
| By: | David Eagle (Eastern Washington University) |
| Abstract: | Pareto-efficient consumption in a pure-exchange, one good economy varies over states of nature with respect to only two factors: real aggregate supply and individual utility shocks. One’s optimal contract receipts vary with respect to only these two factors and the ratio of one’s endowment to real aggregate supply. How one’s Pareto-efficient consumption varies with real aggregate supply depends solely on how one’s relative risk aversion compares to the average. Complete markets can be approximately achieved by four contracts dealing with these factors. This has implications concerning central banking, efficient insurance contract design, and a possible new financial innovation. |
| Keywords: | complete markets, inflation indexing, nominal-income targeting, inflation targeting, price-level targeting, monetary policy |
| JEL: | E |
| Date: | 2005–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0501009&r=mac |
| By: | David Eagle (Eastern Washington University); Elizabeth Murff (Eastern Washington University) |
| Abstract: | The precedent for solving expectational difference equations has been to solve converging equations backwards and diverging equations forward by assuming the solution is bounded. This precedent often leads to incorrect solutions and has less than rigorous foundations. More rigorous procedures would be to determine the terminal condition in a finite model and take the limit of that terminal condition as the horizon goes to infinity. Also, whether one solves forward or backwards depends on the context of the difference equation, not on convergence or divergence. These new procedures reveal Woodford’s (2003) model of a cashless economy to be incomplete. |
| Keywords: | expectational difference equations, infinite horizons, Woodford's cashless economy, price indeterminacy, pegging interest rates |
| JEL: | E10 |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpge:0501002&r=mac |
| By: | Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane) |
| Abstract: | This paper sketches the general picture of foreign direct investment (FDI) flows to European transition economies during the 1990s. In reviewing trends, we shall highlight the experience of Hungary and Poland relative to other transition economies over the decade. In a third section, we shall look more closely at the qualitative factors that seem to explain relative success in the two cases, looking first at Hungary, where the experience is richer, and then more briefly at Poland. We shall then undertake a quantitative analysis of the causal factors in the case of the two countries relative to others in the CEE region. Finally, we shall attempt to draw some implications of the FDI experience of the two leading countries for the prospects of others in the second transitional decade. |
| Keywords: | international investment and capital budgeting; European transition economies; |
| JEL: | E E0 F1 F2 F3 O |
| Date: | 2005–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0501004&r=mac |
| By: | Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane) |
| Abstract: | This study identifies patterns of Turkish direct investment (TDI) into 19 of the former centrally planned economies during the period of 1995 - 2001. The countries covered are the former Soviet Republics of Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, and the nine Central and Eastern European countries including Albania, Bulgaria, Bosnia, the Czech Republic, the Slovak Republic, Macedonia, Hungary, Poland, and Romania. The opening-up of Central Eastern Europe (CEE) and Commonwealth of Independent States (CIS) markets since 1989 has created new opportunities for investors. The common characteristic of these countries is that they are all still in a state of transition, moving from a centrally planned economy to an open market economy. Nevertheless, this has given an ample opportunity to Turkish companies to invest in these countries to which Turkey has geographical proximity and with some of those it has even cultural proximity. In the past, like many other developing countries, a limited number of Turkish companies had invested abroad and the total amount of TDI was negligible. The purpose is to explore the TDI in the CEE and C1S countries, which has not been studied previously. Because of unavailability of relevant data, this study is a pioneering work for ground building for further empirical studies. Nevertheless, it provides a systematic picture of investments by Turkish firms in a conceptual framework to understand their internalization process. |
| Keywords: | Turkey; international investment; |
| JEL: | E E0 F1 F2 O |
| Date: | 2005–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0501005&r=mac |
| By: | Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane) |
| Abstract: | The purpose of this analysis is to determine whether Poland’s integration with the world economy has kept pace with the general rate of globalization during the last decade and where it currently stands. Investigation is confined to two dimensions of such integration - world trade and foreign direct investment. These two dimensions are of critical importance as far as Poland’s participation in the global economy is concerned. In a wider context, the role of foreign capital and the country’s share in international trade have always been the key development issues for all the transition economies of Central and Eastern Europe (CEE). The analysis first focuses on the evolution of world trade over the decade of 1990 - 2000. Then, Poland’s share in world trade over the same period is assessed, using both per capita and total trade volume data, as well as trade to GDP ratios. Thereafter, the analysis moves to foreign direct investment. FDI trends are investigated in the context of different country groups and Poland itself. One of the analytical instruments used in that context is the transnationality index developed by UNCTAD. The subsequent section investigates Poland’s external equilibrium. Economic policy implications stemming from the observed trends in foreign trade and FDI constitute the last section of the paper. |
| Keywords: | Poland; international investment and capital budgeting; European integration |
| JEL: | E E0 F1 F2 O |
| Date: | 2005–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0501006&r=mac |
| By: | Yan Jun |
| Abstract: | The enterprise where work sharing is carried out can achieve corresponding unemployment benefits. The ¡°efficiency wage theory¡± considers that unemployment rate may increase productivity, But after the productivity reaches 100%, the productivity is still 100%when the unemployment rate arises again. Therefore, dropping the unemployment rate to the point a [vide fig(1)] will not lose the productivity through the work sharing. The unemployment benefits achieved by the unemployed men set time limit. The part which exceeds time-limit can be taken as ¡°reduction of enterprise¡¯s taxes¡±. Staff and works of work sharing may do second job but the enterprise where second work be done can¡¯t achieve the unemployment benefits ,so unemployment insurance ( system )will be changed primary income ensure(system). |
| JEL: | E |
| Date: | 2005–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501017&r=mac |
| By: | Joseph DeJuan (University of Waterloo); Maria J. Luengo-Prado (Northeastern University) |
| Abstract: | This paper documents that region-level consumption exhibits excess sensitivity to lagged income in Italy, Japan, Spain, the United Kingdom and West Germany. However, region-specific idiosyncratic) consumption exhibits substantially less sensitivity to lagged region-specific income. Also, excess sensitivity is inversely related to standard measures of openness and credit market integration and for most countries, it has decreased over time. These findings are consistent with those reported in Ostergaard, Sorensen & Yosha (2002) for U.S. state-level and Canadian province-level data, and provide empirical support for the hypothesis that closed-economy constraints may partly be responsible for the excess sensitivity phenomenon in aggregate data. |
| Keywords: | Permanent Income Hypothesis, Consumption, Regional Data, Openness |
| JEL: | E21 F41 |
| Date: | 2005–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501018&r=mac |
| By: | Kirby Adam J.R. Faciane (Kirby Faciane / KAJR Faciane) |
| Abstract: | Theoretically, FDI and international trade can be regarded as substitutes or complements. This paper examines the relationships between the inflows of foreign direct investment (FDI) into Ukraine, as well as the level of imports to and exports from the country. Empirically, the paper reveals that FDI from the European Union (EU) into Ukraine in extractive industries is mostly export-oriented and consequently complements trade, whereas FDI into manufacturing industries tends to substitute for imports. It is argued that primary- industry FDI from the EU is motivated by Ukraine’s comparatively abundant and cheap natural resources, whereas secondary-industry FDI is motivated by cost factors in Ukraine such as low labor cost and on the revenue side by its large and relatively untapped substitution, although tests of this hypothesis at aggregate levels were inconclusive. |
| Keywords: | European Union; investment; capital budgeting; Ukraine |
| JEL: | E E0 F1 F2 O |
| Date: | 2005–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501019&r=mac |
| By: | jerome henry (European Central Bank); sandro momigliano (Banca d'Italia); pablo hernandez de cos (Banco d'Espana) |
| Abstract: | This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers’ social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock. |
| Keywords: | euro area, model simulations, fiscal policy, prices |
| JEL: | E17 E31 E62 |
| Date: | 2005–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501020&r=mac |
| By: | Edgar L. Feige (University of Wisconsin-Madison) |
| Abstract: | This paper examines alternative specifications of a general currency ratio (GCR)model used to obtain macroeconomic estimates of the size and growth of the 'underground economy'. Tanzi's approach to estimating the underground economy is shown to be a variation of the GCR model. However both his conceptual specification and his empirical implementation of the model are shown to flawed, leading to significant underestimation of the size and growth of unreported income in the US economy. The paper appears in the International Monetary Fund Staff Papers, Vol. 33 No. 4 December, 1986 |
| Keywords: | Underground economy, unreported income, currency demand, tax evasion. |
| JEL: | E41 C51 H26 |
| Date: | 2005–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501021&r=mac |
| By: | Edgar L. Feige (University of Wisconson-Madison) |
| Abstract: | Many public policy decisions require analytical and empirical knowledge concerning the size, growth, causes and consequences of the ‘underground economy”. This paper seeks to clarify the meaning of underground activity, updates various discrepancy and fiscal estimates of its size and growth, and examines the empirical implications of new evidence concerning the growing use of US currency (dollarization) throughout the world for indirect estimates of the underground economy in the U.S. The paper examines all indirect and direct methods of estimating the amount of US currency held abroad and concludes that between 40% -45% of US currency is held abroad. This result stands in sharp contrast to the estimates presented by Porter and Judson (1996) who claim that as much as 55% -70% of US currency is held abroad. The new estimates of overseas currency are used to derive a domestic currency series which is the appropriate variable for use in currency demand models that purport to provide estimates of the size of the underground economy. This paper appears in Exploring the Underground Economy: Studies of Illegal and Unreported Activity. Susan Pozo (ed.) W.E Upjohn Institute for Employment Research, Kalamazoo, MI, 1996 |
| Keywords: | currency abroad, underground economy, unreported income, unrecorded income, non-observed income, currency demand, demand for money, money supply. |
| JEL: | E41 H26 E52 F3 O17 |
| Date: | 2005–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501022&r=mac |
| By: | Edgar L. Feige (University of Wisconsin-Madison); Robert T. McGee (Florida State University) |
| Abstract: | Recent research on the unobserved economy suggests that the phenomenon has important implications for both macroeconomic policy and public finance. Attention is focused on the public finance implications by developing a simple macro model from which it is possible to derive a Laffer curve. The model reveals that the shape and position of the Laffer curve depend upon the strength of supply side effects, the progressivity of the tax system and the size of the unobserved economy. Using alternative parameterizations of each of these effects, it is possible to obtain rough empirical estimates of the Laffer curve for Sweden. |
| Keywords: | Laffer curve, supply side, unobserved economy, underground economy, tax evasion,tax revenues |
| JEL: | E31 E6 H26 H2 O17 |
| Date: | 2005–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501023&r=mac |
| By: | Edgar L. Feige (University of Wisconsin-Madison) |
| Abstract: | One of the more intractable problems in the area of monetary economics is the measurement of cash payments. Whereas the stock of currency in circulation [C] is well defined and readily measured, the transactions velocity of currency [Vc] (the average number of times currency turns over in any given period) is difficult to measure. This paper examines alternative methods for estimating the average velocity of currency and the denomination specific velocity of cash employing data for the Netherlands. Estimates of the volume of cash payments are necessary to meaningfully measure the volume of total payments [MV] in an economy and hence, the total volume of transactions [PT]. Once the volume of cash payments is known, it is possible to employ Fisher’s equation of exchange [MV=PT] as a more general conceptual and empirical alternative to Keynes’ more limited income-expenditure [Y= C+I+G] identity. |
| Keywords: | Cash payments, Velocity of currency, Equation of exchange, total transactions, underground economy. |
| JEL: | E1 E4 E5 B4 |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501025&r=mac |
| By: | Edgar L. Feige (University of Wisconsin-Madison); Robert R. Alford (University of California-Santa Cruz) |
| Abstract: | A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and universality, these measures are used as a basis for both scientific investigations and in the formulation of public policy. These critical ‘facts” are often subject to what we call observer-subject- policy feedback, an interactive mechanism that can seriously distort and bias the economic, social and political indicators that are typically treated as exogenous observations on our complex systems. In fact, information is often endogenous to the system being studied, and a failure to recognize the observer-subject-policymaker feedback mechanism can result in “rational” decisions being based on ‘irrational” information systems. Indeed, we argue that the information content of social indicators is likely to become distorted by the very operation of the economic, social and political institutions they seek to describe. The unobserved economy is an exemplar of this interactive process. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989. |
| Keywords: | Underground Economy, Unobserved Economy,observer-subject- policymaker feedback, information bias, policy distortion. |
| JEL: | C8 D78 E61 |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501026&r=mac |
| By: | Edgar L. Feige (University of Wisconsin-Madison); Robert T. McGee (Federal Reserve Bank of New York) |
| Abstract: | During the decade of the 1970’s the US economy unexpectedly suffered from “stagflation” namely, high unemployment, slowed economic growth and high rates of inflation. During the 1980’s the major macroeconomic problem became high interest rates and massive government deficits. Macroeconomists employed ad hoc supply shocks, rational expectations and natural rate of unemployment theories in an effort to account for these anomalous observed economic events. Our paper puts forth an alternative explanation of these events, namely that they were at least partially the result of the growth of the underground economy during this period. The macroeconomic model developed in the paper demonstrates that when monetary policy is committed to a full employment target, growth of the underground economy will give rise to a continuous stagflation which can only be abetted by the monetary authority shifting to a price stability target. Such a shift took place in October 1979 when the Federal Reserve adopted a price stability target and the fiscal authorities assumed the burden of counter cyclical policy. We show that in the presence of an unrecorded economy, such a policy shift will lead to high interest rates and increasing government deficits. In short, the paper demonstrates how the mere illusion of economic malaise can be translated into the reality of economic chaos. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989. |
| Keywords: | Underground economy, unrecorded income, stagflation, deficits, policy illusion, observer-subjectfeedback, rational expectations, Phillips curve. |
| JEL: | E1 E3 E4 E6 |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501027&r=mac |
| By: | David Eagle (Eastern Washington University) |
| Abstract: | Contrary to Sargent and Wallace (1975), a central bank’s use of an interest-rate instrument does determine prices when the central bank pursues either a short-term or long-term price target. However, in order for a central bank’s pursuit of a long-term price target to be credible, the public still needs something like a Taylor or McCallum-Woodford rule. The use of an interest-rate instrument also determines prices when the central bank targets nominal income in either the short-term or long-term. However, if the central bank targets interest rates in the short term with a long-term inflation target, then prices are indeterminate. |
| Keywords: | price indeterminancy, pegging interest rates, inflation targeting, nominal-income targeting, nominal-aggregate-demand targeting, price-level targeting |
| JEL: | E |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501028&r=mac |
| By: | Eugenio Gaiotti (Banca d'Italia); Francesco Lippi (Banca d'Italia) |
| Abstract: | This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behavior, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the center of the public discussion. First, the paper analyzes the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms which may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10 and 9 per cent, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40 per cent). The changeover might have focussed the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavorable developments on the costs side (strong increases in unit labor costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a “menu-cost” hypothesis for pricing behavior: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones. |
| Keywords: | euro cash changeover; menu cost |
| JEL: | E |
| Date: | 2005–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0501029&r=mac |