nep-mac New Economics Papers
on macroeconomics
Issue of 2005‒02‒06
twenty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Central Bank independence: Taylor Rule and Fiscal policy By Luis Alberto Alonso González; Pilar García Martínez
  2. Liquidity and growth traps: a framework for the analysis of macroeconomic policy in the 'age' of Central Banks By Alfonso Palacio-Vera
  3. Bank Loan Supply and Monetary Policy Transmission in Germany: An Assessment Based on Matching Impulse Responses By Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
  4. Testing Sustainability of German Fiscal Policy. Evidence for the Period 1960 – 2003 By Alfred Greiner; Uwe Koeller; Willi Semmler
  5. Managing Debt Stability By Emanuele Bacchiocchi; Alessandro Missale
  6. Improving the SGP: Taxes and Delegation rather than Fines By Assar Lindbeck; Dirk Niepelt
  7. Sustainability and Determinants of Italian Public Deficits before and after Maastricht By Emma Galli; Fabio Padovano
  8. Optimal Response to a Demographic Shock By Juan C. Conesa; Carlos Garriga
  10. Markovian Equilibrium in Infinite Horizon Economies with Incomplete Markets and Public Policy By Manjira Datta; Leonard J. Mirman; Olivier F. Morand; Kevin L. Reffett
  11. The autocatalytic character of the growth of production knowledge: What role does human labor play? By Thomas Brenner; Christian Cordes
  12. Economic Development under Alternative Trade Regimes By CASTRO, Rui
  13. An Interview with Thomas J. Sargent By George W. Evans; Seppo Honkapohja
  14. Monetary and Exchange Rate Stability at the EU Mediterranean Borders By Christian Bauer; Bernhard Herz
  15. An Intertemporally-Consistent and Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models By Leo Krippner
  16. Investigating the Relationships between the Yield Curve, Output and Inflation using an Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models By Leo Krippner
  17. A Macroeconomic Framework for Quantifying Growth and Poverty Reduction Strategies in Niger By Emmanuel Pinto Moreira; Nihal Bayraktar
  18. Core Inflation and Inflation Targeting in a Developing Economy By Luis A. Rivas
  19. Government Leadership and Central Bank Design By Andrew Hughes Hallett; Diana N. Weymark
  20. Propagation Through Endogenous Investment-Specific Technological Change By Gregory W. Huffman

  1. By: Luis Alberto Alonso González (Universidad Complutense, Madrid); Pilar García Martínez (Universidad de Salamanca)
    Abstract: In this article we will show that independence is not enough to impose a given inflation target when the Central Bank is following a Taylor rule, moreover in such a case, the fiscal authority will be able to set a different objective from the one sought by the monetary authority. On the other hand, if the fiscal authority is acting in accordance with a rule in which there is a estimated equilibrium expenditure G* similar to the estimated real interest rate r* in the Taylor rule, neither the government will be able to establish its inflation target value. In this sense, the type of rule that the economic authorities implement is essential for stabilization purposes. The different periods of implementation in fiscal and monetary policy are taken into account although they did not change the main conclusions.
    Date: 2004
  2. By: Alfonso Palacio-Vera (Universidad Complutense de Madrid.)
    Abstract: Conventional explanations of how a growing potential output generates an equi-proportional increase in aggregate demand in the long run usually rely on the real balance effect. Yet this mechanism has a negligible size and an uncertain sign. We present a theoretical framework for the analysis of the power of conventional monetary policy to take the economy down its potential output path. We develop a simple model that predicts the behavior of the ‘neutral’ interest rate and the ‘pseudo-warranted’ interest rate in the wake of different types of shocks. We identify several different scenarios according to whether the behavior of the ‘neutral’ real interest rate enhances or weakens the power of conventional monetary policy. Likewise, we identify several regimes depending on whether a rise in the target rate of inflation in steady growth yields faster or slower output growth when the ‘natural’ rate is not (fully) exogenous. In addition, we provide a formal definition of the concept of the ‘growth trap’ which complements the notion of the ‘liquidity trap’. Finally, we propose a taxonomy of monetary policy regimes.
    Date: 2005
  3. By: Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
    Abstract: This paper addresses the credit channel in Germany by using aggregate data. We present a stylized model of the banking firm in which banks decide on their loan supply in light of uncertainty about the future course of monetary policy. Applying a vector error correction model (VECM), we estimate the response of bank loans after a monetary policy shock taking into account the reaction of the output level and the loan rate. We estimate our model to characterize the response of bank loans by matching the theoretical impulse responses with the empirical impulse responses to a monetary policy shock. Evidence in support of the credit channel can be reported.
    Keywords: monetary policy transmission, credit channel, loan supply, loan demand, minimum distance estimation
    JEL: E44 E51
    Date: 2005
  4. By: Alfred Greiner; Uwe Koeller; Willi Semmler
    Abstract: In this paper we test whether German public debt has been sustainable by resorting to a test proposed by Bohn (1998). We apply non-parametric and semi-parametric regressions with time depending coefficients. This test shows that the mean of the coefficient relevant for sustainability has been significantly positive over the time period considered. However, there is a negative trend in that coefficient which seems to have ceased to decline only in the middle to late 1990s. Further, we find evidence that the response of the primary deficit is a U-shaped function of the debt ratio which first declines and then rises after a certain threshold of the debt ratio is exceeded.
    Keywords: public debt, intertemporal budget constraint, varying coefficient model, non-parametric estimation
    JEL: E62 H63
    Date: 2005
  5. By: Emanuele Bacchiocchi; Alessandro Missale
    Abstract: This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sustainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternative debt instruments on the cost of missing the stabilization target. The optimal debt structure is a function of the expected return differentials between debt instruments, of the conditional variance of their returns and of the conditional covariances of their returns with output growth and inflation. We then explore how the relevant covariances and thus the optimal choice of debt instruments depend on the monetary regime and on Central Bank preferences for output stabilization, inflation control and interest-rate smoothing. Finally, we estimate the composition of public debt that would have supported debt stabilization in OECD countries over the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it should be indexed to the price level.
    Keywords: debt management, debt structure, debt stabilization, inflation indexation, interest rates
    JEL: E63 H63
    Date: 2005
  6. By: Assar Lindbeck; Dirk Niepelt
    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: 2005
  7. By: Emma Galli; Fabio Padovano
    Abstract: This paper has two goals. 1) To evaluate the sustainability of Italian public deficits according to the methodology developed by Trehan and Walsh (1988, 1991) and Bohn (2004); 2) To analyze how the determinants of debt creation evolved in the years following the Maastricht Treaty and how this evolution shaped the development of the Italian public finances. The analysis is carried out in three steps; first we estimate and compare the stochastic properties of the main indicators of the Italian budget performance to test for sustainability; second, we confront the results of a cointegration-vector error correction model on two sample periods: a “pre Maastricht” (1950-1991) and a “post Maastricht” (1950-2002), to identify the main determinants of public deficits, according to the theoretical literature and the dynamic relationship between each of them and the dependent variable; third, we use the results of these estimates to specify a dummy variable model that evaluates how Italian fiscal policy reacted to changes in these determinants in the 1950-2002 sample. We conclude that a) In this period Italian public finances failed the sustainability test; b) Debt creation is much more sensitive now than before 1991 to external constraints, chiefly the numerical rules imposed by the Maastricht Treaty itself, institutional factors, such as the budget approval rules and the relative political power of the Minister for the Economy.
    Keywords: public deficits, Maastricht Treaty, comparative test, cointegration
    JEL: E62 H62
    Date: 2005
  8. By: Juan C. Conesa; Carlos Garriga
    Abstract: We examine the optimal policy response to an exogenously given demographic shock. Such a shock affects negatively the financing of retirement pensions, and we use optimal fiscal policy in order to determine the optimal strategy of the social security administration. Our approach provides specific policy responses in an environment that guarantees the financial sustainability of existing retirement pensions. At the same time, pensions will be financed in a way that by construction generates no welfare losses for any of the cohorts in our economy. In contrast to existing literature we endogenously determine optimal policies rather than exploring implications of exogenously given policies. Our results show that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.
    JEL: E60 H00
    Date: 2005
  9. By: Vicenzo Quadrini; Claudio Michelacci (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze how the financial conditions of the firm affect the compensation structure of workers, the size of the firm, and its dynamics. Firms that are financially constrained offer long-term wage contracts characterized by an increasing wage profile, that is,they pay lower wages today in exchange of higher future wages, effectively borrowing form their employees. Because constrained firms also operate at a suboptimal scale, which then increases gradually over time, we have that younger and smaller firms grow faster and pay lower wages.
    Keywords: Investment financing, long-term contracts, wages.
    JEL: G31 J31 E24
    Date: 2005–01
  10. By: Manjira Datta (Arizona State University); Leonard J. Mirman (University of Virginia); Olivier F. Morand (University of Connecticut); Kevin L. Reffett (Arizona State University)
    Abstract: We develop an isotone recursive approach to the problem of existence, computation, and characterization of nonsymmetric locally Lipschitz continuous (and, therefore, Clarke-differentiable) Markovian equilibrium for a class of infinite horizon multiagent competitive equilibrium models with capital, aggregate risk, public policy, externalities, one sector production, and incomplete markets. The class of models we consider is large, and examples have been studied extensively in the applied literature in public economics, macroeconomics, and financial economics. We provide sufficient conditions that distinguish between economies with isotone Lipschitizian Markov equilibrium decision processes (MEDPs) and those that have only locally Lipschitzian (but not necessarily isotone) MEDPs. As our fixed point operators are based upon order continuous and compact non-linear operators, we are able to provide sufficient conditions under which isotone iterative fixed point constructions converge to extremal MEDPs via successive approximation. We develop a first application of a new method for computing MEDPs in a system of Euler inequalities using isotone fixed point theory even when MEDPs are not necessarily isotone. The method is a special case of a more general mixed monotone recursive approach. We show MEDPs are unique only under very restrictive conditions. Finally, we prove monotone comparison theorems in Veinott's strong set order on the space of public policy parameters and distorted production functions.
    Keywords: Markovian equilibrium; isotone iterative fixed point constructions
    JEL: C E
    Date: 2005–01–27
  11. By: Thomas Brenner; Christian Cordes
    Abstract: This paper analyzes how the qualitative change in human labor occurs in mutual dependence with the advancement of the epistemic base of technology. Historically, a recurrent pattern can be identified: humans learned to successively transfer labor qualities to machines. The subsequent release of parts of the workforce from performing this labor enabled them to spend this spare time in the search for further technical innovations, i.e., the generation and application of ever-more knowledge. A model examines the autocatalytic relationship between the production of commodities and knowledge. The driving forces of these processes and the mechanisms that limit them are analyzed.
    Keywords: technological change; long-term economic development; production; productivity growth; labor market
    JEL: E23 J24 N30 O30 O40
  12. By: CASTRO, Rui
    Abstract: How does openness affect economic development? This question is answered in the context of a dynamic general equilibrium model of the world economy, where countries have technological differences that are both sector-neutral and specific to the investment goods sector. Relative to a benchmark case of trade in credit markets only, consider (i) a complete restriction of trade, and (ii) a full liberalization of trade. The first change decreases the cross-sectional dispersion of incomes only slightly, and produces a relatively small welfare loss. The second change, instead, decreases dispersion by a significant amount, and produces a very large welfare gain.
    Keywords: Economic Develoent, International Trade, Investment-Scific Technology, Quantitative Dynamic General Equilibrium, Incomete Markets.
    JEL: E13 F43 O11 O30
    Date: 2005
  13. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge)
    Abstract: This is the text of an interview with Thomas J. Sargent. The interview will be published in Macroeconomic Dynamics.
    Keywords: rational expectations
    JEL: E00
    Date: 2005–01–11
  14. By: Christian Bauer; Bernhard Herz
    Abstract: Stabilizing the exchange rate is a major monetary policy goal in a number of Mediterranean countries.We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize de facto exchange rate regimes and to derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of seven non European Mediterranean countries, Algeria, Egypt, Israel, Libya, Morocco, Turkey and Tunisia, with the benchmark of four European non EU countries namely Albania, Bulgaria, Croatia, and Romania. Our results indicate that the fundamental volatility of the market based ex- change rates is quite moderate and that markets assign a moderate degree of credibility to the exchange rate management of most of the countries.
    Keywords: monetary policy, exchange rate policy, credibility, Mediterranean, Eastern Europe, technical trading
    JEL: D84 E42 F31
    Date: 2004–12
  15. By: Leo Krippner (AMP Capital Investors)
    Abstract: This article derives a generic, intertemporally-consistent, and arbitrage-free version of the popular class of yield curve models originally introduced by Nelson and Siegel (1987). The derived model has a theoretical foundation (conferred via the Heath, Jarrow and Morton (1992) framework) that allows it to be used in applications that involve an implicit or explicit time-series context. As an example of the potentialapplication of the model, the intertemporal consistency is exploited to derive a theoretical time-series process that may be used to forecast the yield curve. The empirical application of the forecasting framework to United States data results in out-of-sample forecasts that outperform the random walk over a sample period of almost 50 years, for forecast horizons ranging from six months to three years.
    Keywords: yield curve; term structure of interest rates; Nelson and Siegel model; Heath-Jarrow-Morton framework
    JEL: E43 C22 G12
    Date: 2005–01–31
  16. By: Leo Krippner (AMP Capital Investors)
    Abstract: This article provides a theoretical economic foundation for the popular Nelson and Siegel (1987) class of yield curve models (which has been absent up to now). This foundation also offers a new framework for investigating and interpreting the relationships between the yield curve, output and inflation that have already been well-established empirically in the literature. Specifically, the level of the yield curve as measured by the VAO model is predicted to have a cointegrating relationship with inflation, and the shape of the yield curve as measured by the VAO model is predicted to correspond to the profile (that is, timing and magnitude) of future changes in the output gap (that is, output growth less the growth in potential output). These relationships are confirmed in the empirical analysis on 50 years of United States data.
    Keywords: yield curve; term structure of interest rates; Nelson and Siegel model; inflation, output
    JEL: E43 E31 E32
    Date: 2005–02–01
  17. By: Emmanuel Pinto Moreira; Nihal Bayraktar
    Abstract: The authors apply the dynamic macroeconomic framework developed by Agénor, Bayraktar, and El Aynaoui (2004) to Niger. As in the original model, linkages between foreign aid, public investment (disaggregated into education, infrastructure, and health), and growth are explicitly captured. Although the nominal exchange rate is fixed, the relative price of domestic goods is endogenous, thereby allowing for potential Dutch disease effects associated with increases in aid. The authors assess the impact of policy shocks on poverty by using partial growth elasticities. They perform various policy experiments, including an increase in the level of foreign aid, a reallocation of public nvestment toward infrastructure, and neutral and non-neutral cuts in tariffs. The simulations show the dynamic tradeoffs that these policies entail with respect to growth and poverty reduction in Niger. This paper—a product of Poverty Reduction and Economic Management 3, Africa Technical Families—is part of a larger effort in the region to formulate country-specific growth strategies.
    Keywords: Macroecon & Growth
    Date: 2005–01–31
  18. By: Luis A. Rivas (Department of Economics, Vanderbilt University and Banco Central de Nicaragua)
    Abstract: This paper is concerned with inflation targeting as a potential monetary policy objective in a developing economy. Using data from Nicaragua, it first studies the extent to which the Consumer Price Index (CPI) could be used to formulate short-run inflation targets. It is found that due to the particular cross-sectional properties of the relative-price distributions, the rate of change in the CPI may not be the best index for this purpose. As a consequence, the paper is also concerned with the choice of alternative indicators of inflation and their statistical properties. These alternative measures are ranked according to their ability to forecast the rate of change in the price level. Finally, the relationship between the dispersion and skewness of the relative-price distribution and generalized inflation is studied using time series analysis.
    Keywords: Core inflation, developing economies, forecasting, monetary policy, price index, tiem-series
    JEL: C22 C43 E31 E37 E52 O23 O54
    Date: 2003–05
  19. By: Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.
    Keywords: Central bank independence, monetary policy delegation, policy coordination, policy game, policy leadership
    JEL: E52 E61 F42
    Date: 2002–05
  20. By: Gregory W. Huffman (Department of Economics, Vanderbilt University)
    Abstract: Many real business cycle models lack a significant propagation mechanism. Consequently most of the serial correlation in output is inherited from the serial correlation in the exogenous shocks. A simple model is presented to show there need not be any relationship between the serial correlation of the exogenous shocks, and that of output. This is accomplished by incorporating the well-documented fact that research spending has generated changes in the real price of capital.
    Keywords: Fluctuations, propagation, correlation, investment
    JEL: E1 E32
    Date: 2002–12

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