nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒02‒13
ninety-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Unemployment dynamics and NAIRU estimates for CEECs: A univariate approach By Camarero, M.; Carrión, J.Ll.; Tamarit, C.
  2. Permanent vs Transitory Components and Economic Fundamentals By Anthony Garratt; Donald Robertson; Stephen Wright
  3. UK Real-Time Macro Data Characteristics By Anthony Garratt; Shaun P Vahey
  4. Consumption and population age structure By Solveig K. Erlandsen; Ragnar Nymoen
  5. Oil and the Macroeconomy Since the 1970s By Barsky, Robert; Kilian, Lutz
  6. Efficiency Wages Revisited: The Internal Reference Perspective By Danthine, Jean-Pierre; Kurmann, Andre
  7. Interest Rate Determination in the Interbank Market By Gaspar, Vítor; Pérez-Quirós, Gabriel; Rodriguez, Hugo
  8. The Term Structure of Real Rates and Expected Inflation By Ang, Andrew; Bekaert, Geert
  9. Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data? By Galí, Jordi; Rabanal, Pau
  10. Social Networks and Labour Market Transitions By Bramoullé, Yann; Saint-Paul, Gilles
  11. Deflationary Bubbles By Buiter, Willem H; Sibert, Anne
  12. Price Clustering in the FX Market: A Disaggregate Analysis Using Central Bank Intervention By Fischer, Andreas M
  13. Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through By Lindé, Jesper; Nessen, Marianne; Söderström, Ulf
  14. Similarities and Convergence in G7 Cycles By Canova, Fabio; Ciccarelli, Matteo; Ortega, Eva
  15. Has the Transmission Mechanism of European Monetary Policy Changed in the Run-Up to EMU? By Ciccarelli, Matteo; Rebucci, Alessandro
  16. What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions By Dedola, Luca; Neri, Stefano
  17. Endogenous Fertility Policy By Booth, Alison L; Sepulveda, Facundo
  18. Time Consistent Public Expenditures By Klein, Paul; Krusell, Per; Ríos-Rull, José-Víctor
  19. Exchange Rates and Inflation Under EMU: An Update By Honohan, Patrick; Lane, Philip R.
  20. Forecasting (and Explaining) US Business Cycles By Muellbauer, John; Nunziata, Luca
  21. Optimal Monetary Policy Under Discretion with a Zero Bound on Nominal Interest Rates By Adam, Klaus; Billi, Roberto M
  22. Federal Funds Rate Prediction By Sarno, Lucio; Thornton, Daniel L; Valente, Giorgio
  23. The 3-Equation New Keynesian Model: A Graphical Exposition By Carlin, Wendy; Soskice, David
  24. Optimal Monetary Policy with Imperfect Common Knowledge By Adam, Klaus
  25. Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank By Jeanne, Olivier; Svensson, Lars E O
  26. The Employment Effects of Severance Payments with Wage Rigidities By Garibaldi, Pietro; Violante, Giovanni L
  27. Sequential Information Flow and Real-Time Diagnosis of Swiss Inflation: Intra-Monthly DCF Estimates for a Low-Inflation Environment By Amstad, Marlene; Fischer, Andreas M
  28. When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings? By Beaudry, Paul; Portier, Franck
  29. Population Ageing and International Capital Flows By Domeij, David; Flodén, Martin
  30. Estimates of Personal Sector Wealth for South Africa By Aron, Janine; Muellbauer, John
  31. Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU By Eijffinger, Sylvester C W; Governatori, Matteo
  32. Model-based Clustering of Multiple Time Series By Frühwirth-Schnatter, Sylvia; Kaufmann, Sylvia
  33. Money Market Pressure and the Determinants of Banking Crises By Ho, Tai-Kuang; von Hagen, Jürgen
  34. The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7 By Artis, Michael J; Osborn, Denise; Perez-Vazquez, Pedro
  35. Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the US Business Cycle By Schmitt-Grohé, Stephanie; Uribe, Martin
  36. Optimal Expectation By Brunnermeier, Markus K; Parker, Jonathan A
  37. Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries By Ardagna, Silvia; Caselli, Francesco; Lane, Timothy
  38. Political Institutions, Environmental Policy and Growth By Marsiliani, Laura; Renström, Thomas I
  39. Indeterminacy in a Finance Constrained Unionized Economy By Lloyd-Braga, Teresa; Modesto, Leonor
  40. Competition, Globalization and the Decline of Inflation By Chen, Natalie; Imbs, Jean; Scott, Andrew
  41. Monetary Magic? How the Fed Improved the Flexibility of the Economy By Bayoumi, Tamim; Sgherri, Silvia
  42. Financial Globalization, International Business Cycles and Consumption Risk Sharing By Artis, Michael J; Hoffmann, Mathias
  43. Accounting for Cross-Country Income Differences By Caselli, Francesco
  44. Bank Loan Components and the Time-Varying Effects of Monetary Policy Shocks By Den Haan, Wouter; Sumner, Steven; Yamashiro, Guy
  45. Banks' Loan Portfolio and the Monetary Transmission Mechanism By Den Haan, Wouter; Sumner, Steven; Yamashiro, Guy
  46. Policies for Banking Crises: A Theoretical Framework By Repullo, Rafael
  47. The Elusive Welfare Economics of Price Stability As A Monetary Policy Objective: Should New Keynesian Central Bankers Persue Price Stability By Buiter, Willem H
  48. Financial Intermediation with Contingent Contracts and Macroeconomic Risks By Gersbach, Hans
  49. Optimal Stabilization Policy When Wages and Prices are Sticky: The Case of a Distorted Steady State By Benigno, Pierpaolo; Woodford, Michael
  50. Complementarities and Games: New Developments By Vives, Xavier
  51. Equilibrium Search Unemployment With Explicit Spatial Frictions By Wasmer, Etienne; Zenou, Yves
  52. Does it Cost to be Virtuous? The Macroeconomic Effect of Fiscal Constraints By Canova, Fabio; Pappa, Evi
  53. Forecasting with a Bayesian DSGE Model: An Application to the Euro Area By Smets, Frank; Wouters, Rafael
  54. Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach By Smets, Frank; Wouters, Rafael
  55. Self-Employment Dynamics Across the Business Cycle: Migrants vs Natives By Constant, Amelie; Zimmermann, Klaus F
  56. What Do Deficits Tell us About Debts? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU By von Hagen, Jürgen; Wolff, Guntram
  57. Strong Contagion with Weak Spillovers By Ellison, Martin; Graham, Liam; Vilmunen, Jouko
  58. Optimal Taxation in an RBC Model: A Linear-Quadratic Approach By Benigno, Pierpaolo; Woodford, Michael
  59. Turbulence and Unemployment in a Job Matching Model By Den Haan, Wouter; Haefke, Christian; Ramey, Gary
  60. Caution or Activism? Monetary Policy Strategies in an Open Economy By Ellison, Martin; Sarno, Lucio; Vilmunen, Jouko
  61. Involuntary Unemployment : the Elusive Quest for a Theory By Michel, DE VROEY
  62. Business Cycle Turning Points : Mixed-Frequency Data with Structural Breaks By Konstantin A., KHOLODILIN; Wension Vincent, YAO
  63. Low-Skilled Unemployment, Capital-Skill Complementarity and Embodied Technical Progress By Eva, MORENO-GALBIS; Henri R., SNEESSENS
  64. Endogenous Growth and Regional Dynamics in an OLG Model with Land By Lionel, ARTIGE
  65. Impact of Selective Reductions in Labor Taxation By Olivier, PIERARD
  66. Real Determinacy with Nominal Assets By Pradeep Dubey; John Geanakoplos
  67. Policy Effects in the Post Boom U.S. Economy By Ray C. Fair
  68. On the Optimality of Decisions made by Hub-and-Spokes Monetary Policy Committees By Jan Marc Berk; Beata K. Bierut
  69. Labor Discipline, Reputation and Underemployment Traps By Peter Hans Matthews
  70. Stability and Growth Pact: An Index to Trigger an Early Warning Earlier? By Thierry Warin
  71. Managing debt stability By Alessandro MISSALE; Emanuele BACCHIOCCHI
  72. The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement By Michael Hurd; Susann Rohwedder
  73. Money Growth and Interest Rates By Seok-Kyun Hur
  74. Monetary Policy, Asset-Price Bubbles and the Zero Lower Bound By Tim Robinson; Andrew Stone
  75. The Architecture of the System of National Accounts: A Three Country Comparison, Canada, Australia, and United Kingdom By Karen Wilson
  76. The Integration of the Canadian Productivity Accounts within the System of National Accounts: Current Status and Challenges Ahead By John R. Baldwin; Tarek Harchaoui
  77. Inflation Persistence and Exchange Rate Regimes: Evidence from Developing Countries By Manuela Francisco; Michael Bleaney
  78. Understanding the Impact of Oil Shocks By Luís Francisco Aguiar-Conraria; Yi Wen
  79. Understanding the Stock Market's Response to Monetary Policy Shocks By Johann Scharler
  80. Is the exchange rate a shock absorber or a source of shocks? New empirical evidence By K. FARRANT; G. PEERSMAN
  81. The relative importance of symmetric and asymmetric shocks and the determination of the exchange rate By G. PEERSMAN
  82. Technology Shocks and Robust Sign Restrictions in a Euro Area SVAR By G. PEERSMAN; R. STRAUB
  83. The public investment rule in a simple endogenous endogenous growth model with public capital: active or pasive? By Gustavo A. Marrero
  84. The Welfare Cost of Business Cycles in an Economy with Nonclearing Markets By Frank Portier; Luis A. Puch
  85. Macroeconomic and policy uncertainty and Exchange rate risk Premium By Juan Ángel Jiménez Martín; Rodrigo Peruga Urrea
  86. Policy Mix, Public Debt Management, and Fiscal Rules: Lessons from the 2002 Brazilian Crisis By Santiago Herrera
  87. Optimal Monetary Policy in the Presence of Pricing-to-Market By Jochen Michaelis
  88. Thresholds for Employment and Unemployment. A Spatial Analysis of German Regional Labour Markets 1992-2000 By Reinhold Kosfeld; Christian Dreger
  89. Employment- and Growth Effects of Tax Reforms By Jochen Michaelis; Angela Birk
  90. Optimal Monetary Policy in the Presence of Pricing-to-Market By Jochen Michaelis
  91. Market Efficiency and Rational Expectations By Kaie Kerem; Enn Listra; Katrin Rahu

  1. By: Camarero, M.; Carrión, J.Ll.; Tamarit, C. (Universitat de Barcelona)
    Abstract: In this paper we test for the hysteresis versus the natural rate hypothesis on the unemployment rates of the EU new members using unit root tests that account for the presence of level shifts. As a by product, the analysis proceeds to the estimation of a NAIRU measure from a univariate point of view. The paper also focuses on the precision of these NAIRU estimates studying the two sources of inaccuracy that derive from the break points estimation and the autoregressive parameters estimation. The results point to the associated with institucional changes implementing market-oriented reforms. Moreover, the degree of persistence in unemployment varies dramatically among the individual countries depending on the stage reached in the transition process.
    JEL: C22 C23 E24
    Date: 2005
  2. By: Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck College); Donald Robertson; Stephen Wright (School of Economics, Mathematics & Statistics, Birkbeck College)
    Abstract: Any non-stationary series can be decomposed into permanent (or "trend") and transitory (or "cycle") components. Typically some atheoretic pre-filtering procedure is applied to extract the permanent component. This paper argues that analysis of the fundamental underlying stationary economic processes should instead be central to this process. We present a new derivation of multivariate Beveridge-Nelson permanent and transitory components, whereby the latter can be derived explicitly as a weighting of observable stationary processes. This allows far clearer economic interpretations. Different assumptions on the fundamental stationary processes result in distinctly different results; but this reflects deep economic uncertainty. We illustrate with an example using Garratt et al's (2003a) small VECM model of the UK economy. Any non-stationary series can be decomposed into permanent (or "trend") and transitory (or "cycle") components. Typically some atheoretic pre-filtering procedure is applied to extract the permanent component. This paper argues that analysis of the fundamental underlying stationary economic processes should instead be central to this process. We present a new derivation of multivariate Beveridge-Nelson permanent and transitory components, whereby the latter can be derived explicitly as a weighting of observable stationary processes. This allows far clearer economic interpretations. Different assumptions on the fundamental stationary processes result in distinctly different results; but this reflects deep economic uncertainty. We illustrate with an example using Garratt et al's (2003a) small VECM model of the UK economy.
    Keywords: Multivariate Beveridge-Nelson, VECM, Economic Fundamentals, Decomposition.
    JEL: C1 C32 E0 E32 E37
    Date: 2005–02
  3. By: Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck College); Shaun P Vahey
    Abstract: We characterise the relationships between preliminary and subsequent measurements for 16 commonly-used UK macroeconomic indicators drawn from two existing real-time data sets and a new nominal variable database. Most preliminary measurements are biased predictors of subsequent measurements, with some revision series affected by multiple structural breaks. To illustrate how these findings facilitate real-time forecasting, we use a vector autoregression to generate real-time one-step-ahead probability event forecasts for 1990Q1 to 1999Q2. Ignoring the predictability in initial measurements understates considerably the probability of above trend output growth.
    Keywords: real-time data, structural breaks, probability event forecasts
    JEL: C22 C82 E00
    Date: 2005–02
  4. By: Solveig K. Erlandsen (Norges Bank); Ragnar Nymoen (University of Oslo)
    Abstract: In this paper the e ects on aggregate consumption of changes in the age distribution of the population are analysed empirically. Economic theories predict that age influences individuals’ saving and consumption behaviour. Despite this, age structure e ects are rarely controlled for in empirical consumption functions. Our findings suggest that they should. By analysing Norwegian quarterly time series data we find that changes in the age distribution of the population have significant and life cycle consistent e ects on aggregate consumption. Furthermore, controlling for age structure effects stabilizes the other parameters of the consumption function and reveals significant real interest rate effects. Simulation experiments show that the numerical effect on the savings rate of age structure changes is substantial when the indirect effects via wealth and income are accounted for.
    Keywords: Consumption, demography, savings, time series models, cointegration
    JEL: C51 C53 E21 J10
    Date: 2004–11–26
  5. By: Barsky, Robert; Kilian, Lutz
    Abstract: Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth. In this Paper, we review the arguments supporting such views. First, we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining macroeconomic fluctuations, and we trace how the arguments of proponents of the oil view have evolved in response to these difficulties. Second, we challenge the notion that at least the major oil price movements can be viewed as exogenous with respect to the US macroeconomy. We examine critically the evidence that has led many economists to ascribe a central role to exogenous political events in modelling the oil market, and we provide arguments in favour of ‘reverse causality’ from macroeconomic variables to oil prices. Third, although none of the more recent oil price shocks has been associated with stagflation in the US economy, a major reason for the continued popularity of the oil shock hypothesis has been the perception that only oil price shocks are able to explain the US stagflation of the 1970s. We show that this is not the case.
    Keywords: oil shock; OPEC; recession; stagflation
    JEL: E31 E32
    Date: 2004–07
  6. By: Danthine, Jean-Pierre; Kurmann, Andre
    Abstract: The missing wage rigidity in general equilibrium models of efficiency wages is an artifact of the external wage reference perspective conventionally adopted by the literature. Efficiency wage models based on an internal wage reference perspective are capable of generating strong wage rigidity. We propose a structural model of efficiency wages that is broadly consistent with the reported evidence on fairness in labour relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behaviour by workers and the observation that firm productivity is a significant predictor of wage setting.
    Keywords: efficiency wages; reciprocity; rent-sharing; wage rigidity
    JEL: E24 E32 J50
    Date: 2004–08
  7. By: Gaspar, Vítor; Pérez-Quirós, Gabriel; Rodriguez, Hugo
    Abstract: The purpose of this Paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross-section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities is also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.
    Keywords: Eonia panel; monetary policy instruments; overnight interest rate
    JEL: E52 E58
    Date: 2004–08
  8. By: Ang, Andrew; Bekaert, Geert
    Abstract: Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve is fairly flat at 1.44%, but slightly humped. In one regime, the real term structure is steeply downward sloping. Real rates (nominal rates) are pro-cyclical (counter-cyclical) and inflation is negatively correlated with real rates. An inflation risk premium that increases with the horizon fully accounts for the generally upward sloping nominal term structure. We find that expected inflation drives about 80% of the variation of nominal yields at both short and long maturities, but during normal times, all of the variation of nominal term spreads is due to expected inflation and inflation risk.
    Date: 2004–08
  9. By: Galí, Jordi; Rabanal, Pau
    Abstract: Our answer: not so well. We reach that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive co-movement between output and labor input measures.
    Keywords: nominal rigidities; real business cycles; real frictions; technology shocks
    JEL: E32
    Date: 2004–08
  10. By: Bramoullé, Yann; Saint-Paul, Gilles
    Abstract: We study the influence of social networks on labour market transitions. We develop the first model where social ties and job status co-evolve through time. Our key assumption is that the probability of formation of a new tie is greater between two employed individuals than between an employed and an unemployed individual. We show that this assumption generates negative duration dependence of exit rates from unemployment. Our model has a number of novel testable implications. For instance, we show that a higher connectivity among unemployed individuals reduces duration dependence and that exit rates depend positively on the duration of the last job held by the unemployed worker.
    Keywords: duration dependence; economic inbreeding; social capital; social networks; unemployment; z13
    JEL: E24 J6
    Date: 2004–08
  11. By: Buiter, Willem H; Sibert, Anne
    Abstract: We analyse deflationary bubbles in a model where money is the only financial asset. We show that such bubbles are consistent with the household’s transversality condition if and only if the nominal money stock is falling. Our results are in sharp contrast to those in several prominent contributions to the literature, where deflationary bubbles are ruled out by appealing to a non-standard transversality condition, originally due to Brock ([4], [5]). This condition, which we dub the GABOR condition, states that the consumer must be indifferent between reducing his money holdings by one unit and leaving them unchanged and enjoying the discounted present value of the marginal utility of that unit of money forever. We show that the GABOR condition is not part of the necessary and sufficient conditions for household optimality nor is it sufficient to rule out deflationary bubbles. Moreover, it rules out Friedman’s optimal quantity of money equilibrium and, when the nominal money stock is falling, it rules out deflationary bubbles that are consistent with household optimality. We also consider economies with real and nominal government debt and small open economies where private agents can lend to and borrow from abroad. In these cases, deflationary bubbles may be possible, even when the nominal money stock is rising. Their existence is shown to depend on the rules governing the issuance of government debt.
    Keywords: fiscal rules; government solvency; optimal quantity of money; transversality condition
    JEL: D90 E31 E63
    Date: 2004–08
  12. By: Fischer, Andreas M
    Abstract: Price clustering is a well-documented regularity of foreign exchange transactions. In this Paper, I present new empirical evidence of price clustering for central bank interventions. A feature of the price clustering in Swiss National Bank (SNB) transactions is market dependency. Evidence of clustering in the broker market is considerably smaller than in the dealer market. The empirical analysis for Swiss interventions uses a disaggregate approach to test the hypothesis whether intervention strategy matters. The most important determinants of price clustering are bank size and transaction volume. While the regression evidence for customer transactions is consistent with the efficiency hypothesis, the clustering results for intervention trades are not influenced by the SNB’s intervention tactics.
    Keywords: Central Bank Interventions; Clustering; E33; Intervention Strategy
    JEL: E31
    Date: 2004–08
  13. By: Lindé, Jesper; Nessen, Marianne; Söderström, Ulf
    Abstract: We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. In order to account for the observed persistence in the real exchange rate and the large deviations from UIP, however, we need a large and volatile premium on foreign exchange.
    Keywords: calibration; estimation; new open-economy macroeconomics; structural open-economy model
    JEL: E52 F31 F41
    Date: 2004–08
  14. By: Canova, Fabio; Ciccarelli, Matteo; Ortega, Eva
    Abstract: This Paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of a euro area specific cycle or of its emergence in the 1990s.
    Keywords: Bayesian methods; business cycle; G7; indicators; panel data
    JEL: C11 E32
    Date: 2004–09
  15. By: Ciccarelli, Matteo; Rebucci, Alessandro
    Abstract: This Paper studies empirically the transmission mechanism of European monetary policy by means of time-varying, heterogenous coefficient models estimated in a numerical Bayesian fashion. Based on pre-EMU evidence from Germany, France, Italy, and Spain, we find that (i) the long-run cumulative impact on output of a common, homoskedastic monetary policy shock has decreased in all countries after 1991. These declines are statistically significant and accompanied by some changes in the conduct of monetary policy over the same period. At the same time, we also find that (ii) cross-country differences in the effects of the shock analysed have not decreased over time.
    Keywords: Bayesian estimation; european monetary policy; Gibbs sampling; time-varying coefficient model; transmission mechanism
    JEL: C11 C33 E52
    Date: 2004–09
  16. By: Dedola, Luca; Neri, Stefano
    Abstract: This Paper estimates the effects of technology shocks in VAR models of the United States, Japan and Germany, identified imposing restrictions on the sign of impulse responses. These restrictions are motivated with priors on the parameters of a class of DSGE models with both real and nominal frictions. Estimated technology shocks lead to substantial and persistent increases in labour productivity, real wages, consumption, investment and output. In contrast with most results in the VAR literature, hours worked are much more likely to increase, displaying a hump-shaped pattern. These results are shown to stem primarily from the identification strategy proposed in the Paper, which substitutes theoretical restrictions for the atheoretical assumptions on the time series properties of the data, that are the hallmark of long-run restrictions.
    Keywords: Bayesian VAR methods; DSGE models; impulse responses; technology shocks
    JEL: C30 E30
    Date: 2004–09
  17. By: Booth, Alison L; Sepulveda, Facundo
    Abstract: In this Paper, we study the role of subsidies to fertility in ensuring the political viability of unfunded social security (SS). In our model, agents are heterogeneous in age and income. Young generations confront promises made previously by older generations, and in turn choose current levels of fertility subsidies, and future levels of social security benefits. We find that subsidies to the costs of children expand the set of equilibria, making social security viable where it would otherwise have to be abandoned. Moreover, the model successfully captures the observed evolution of social security and family support systems during the demographic transition. Our results indicate that the seemingly explosive evolution of SS taxes will be curbed once the underlying demographic transition is completed, after which the SS system will converge to a steady state lower than simple extrapolation of current trends would imply, and fertility will rebound with the aid of higher subsidy levels.
    Keywords: endogenous fertility; OLG models; political economy; redistribution; social security
    JEL: E62 H20 H30 H55 J13 J14
    Date: 2004–08
  18. By: Klein, Paul; Krusell, Per; Ríos-Rull, José-Víctor
    Abstract: How should aggregate public expenditures be traded off against their financing costs? We incorporate public expenditures into a standard neoclassical growth setup with model policy choice as made by a government choosing tax rates and spending so that the resulting competitive equilibrium allocation maximizes consumer welfare. An additional key restriction that the government faces in our model is that it cannot commit to future policy. This restriction binds: current income taxes influence past savings decisions as well as past work decisions, and these effects are ignored by governments without access to commitment. We solve for equilibria where ‘reputational’ mechanisms are not operative: we characterize Markov-perfect equilibria of the dynamic game between successive governments. We characterize equilibria in terms of an intertemporal first-order condition (a ‘generalized Euler equation’, GEE) for the government and we use this condition both to gain insight into the nature of the equilibrium and as a basis for computation. The GEE reveals how the government optimally trades off tax wedges over time. For a calibrated economy, we find that when the tax base available to the government is capital income – an inelastic source of funds at any moment in time – the government still refrains from taxing at confiscatory rates. As a result, the economy is far from the mix of public and private goods that would be optimal in a static context; in return, steady-state savings are less distorted.
    Keywords: Markov-perfect equilibrium; optimal taxation; time-consistency
    JEL: E62 H21
    Date: 2004–08
  19. By: Honohan, Patrick; Lane, Philip R.
    Abstract: In our recent Economic Policy article (Honohan and Lane, 2003), we argued that the strength of the US dollar 1999-2001 had an important impact on inflation divergence within the EMU and in particular the surge in Ireland’s inflation to over 7%. This hypothesis has been subjected to a grueling out-of-sample test: would the dollar’s subsequent weakness contribute to inflation convergence and in particular to a fall in Irish inflation? Fortunately for us, the theory has passed the test with flying colours. Irish inflation stopped dead in its tracks: consumer prices were unchanged between May and November of 2003. Regression analysis on quarterly inflation data across EMU members 1999.1-2004.1 confirms the importance of the exchange rate channel, although pinning down the exact dynamic specification will require a further span of data.
    Keywords: EMU; exchange rates; inflation
    JEL: E31 E42 F41
    Date: 2004–08
  20. By: Muellbauer, John; Nunziata, Luca
    Abstract: This Paper uses multi-step forecasting models at horizons of 4 and 8 quarters to forecast and explain the growth of real per capita US GDP. In the modeling strategy, a priori sign restrictions play an important role. They are imposed not on impulse response functions but directly on the reduced form single or multi-step equations, unlike in recent work by Uhlig and Canova. This is possible because in this context, the reduced form inherits important structural sign properties; basically, that autonomous expenditure has positive effects on near future GDP. We consider an economically large class of variables, including effects from interest rates, the credit channel and asset prices, the real exchange rate, yield spreads, inflation and interest rate volatility, oil prices (including asymmetries), structural breaks in fiscal and monetary policy, the recent behaviour of consumption, investment and profitability, and the evolutionary effect of globalization on the balance of payments constraint. We follow a general to specific methodology, including the help of PCGETS (Hendry and Krolzig, 2001) to reduce general models to more parsimonious ones. Relative to conventional VARs, our models imply longer lag structures than ever considered in VARs, as well as non-linearities, and so could never have been found with conventional VAR restrictions. Our results thus contradict the suggestion of Sims (1980) that VARs can resolve the problem of ‘incredible restrictions’ embodied in large macro econometric models. Our exercise of learning from the data through general to specific modeling is likely, in many cases, also to contradict the lag structures of such models. We present a range of models with remarkable recursive forecasting performance since 1982 and show that similar models could have been selected with 1982 data by applying similar methods then. Out of sample forecasts with such models since March 2001, when we forecast that 2001 would be a recession year, have also been successful.
    Keywords: business cycles; fiscal policy; monetary policy; multi-step forecasting; oil shocks
    JEL: E32 E37 E52 E63
    Date: 2004–08
  21. By: Adam, Klaus; Billi, Roberto M
    Abstract: We determine optimal discretionary monetary policy in a New Keynesian model when nominal interest rates are bounded below by zero. Nominal interest rates should be lowered faster in response to adverse shocks than in the case without bound. Such ‘pre-emptive easing’ is optimal because expectations of a possibly binding bound in the future amplify the effects of adverse shocks. Calibrating the model to the US economy we find the easing effect to be quantitatively important. Moreover, the lower bound binds rather frequently and imposes significant welfare losses. Losses increase further when inflation is partly determined by lagged inflation in the Phillips curve. Targeting positive inflation rates reduces the frequency of a binding lower bound, but tends to reduce welfare compared to a target rate of zero. The welfare gains from policy commitment, however, appear significant and are much larger than in the case without lower bound.
    Keywords: C63; liquidity trap; nonlinear policy; zero lower bound
    JEL: E31 E52
    Date: 2004–08
  22. By: Sarno, Lucio; Thornton, Daniel L; Valente, Giorgio
    Abstract: We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.
    Keywords: E47; federal fund rate; forecasting; nonlinearity; term structure
    JEL: E43
    Date: 2004–09
  23. By: Carlin, Wendy; Soskice, David
    Abstract: We develop a graphical 3-equation New Keynesian model for macroeconomic analysis to replace the traditional IS-LM-AS model. The new graphical IS-PC-MR model is a simple version of the one commonly used in central banks and captures the forward-looking thinking engaged in by the policy-maker. We show how it can be modified to include a forward-looking IS curve and how it relates to current debates in monetary macroeconomics, including the New Keynesian Phillips Curve and the Sticky Information Phillips Curve models.
    Keywords: A22 A23; monetary policy rules; New Keynesian macroeconomics; New Keynesian Phillips curve; sticky information Phillips curve; Taylor rules
    JEL: E52
    Date: 2004–09
  24. By: Adam, Klaus
    Abstract: This Paper studies optimal nominal demand policy in a flexible price economy with monopolistic competition and inattentive firms (Shannon). Inattentiveness gives rise to idiosyncratic information errors and imperfect common knowledge about the shocks hitting the economy. Strategic complementarities in the price-setting game between firms then strongly amplify the effects of information frictions and the real effects of monetary policy. Therefore, strategic complementarities make it optimal to stabilize the output gap by nominally accommodating shocks to firms’ desired mark-up. As mark-up shocks become more persistent, however, optimal policy is again increasingly characterized by price level stabilization. Shocks to the natural rate of output are found not to generate a policy trade-off.
    Keywords: information imperfections; nominal demand management; Private information; rational inattention; Shannon capacity
    JEL: D82 E31 E52
    Date: 2004–09
  25. By: Jeanne, Olivier; Svensson, Lars E O
    Abstract: An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange-rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson’s Foolproof Way to escape from a liquidity trap.
    Keywords: deflation; zero lower bound for interest rates
    JEL: E52 F31 F41
    Date: 2004–09
  26. By: Garibaldi, Pietro; Violante, Giovanni L
    Abstract: Firing costs due to employment protection legislation have two separate dimensions: a transfer from the firm to the worker to be laid off and a tax paid outside the firm-worker pair. We document that quantitatively transfers are a much larger component than taxes. Nevertheless, to avoid the ‘bonding critique’ most of the existing literature overlooks the transfer component by making the implicit assumption that, in the presence of wage rigidity, mandatory severance payments have the same real effects as firing taxes. This Paper shows, in the context of a search model with insider and outsider workers, that this presumption is in general misplaced: the impact of severance payments on unemployment is qualitatively different from that of firing taxes, and it varies according to the bite of the wage rigidity. When the wage rigidity is endogenously determined by a centralized monopoly union of insiders, severance payments are either neutral or they increase unemployment, depending on the union’s coverage of outsiders’ contracts. This prediction finds empirical support in a panel dataset of OECD countries.
    Keywords: firing tax; severance payment; unemployment; wage rigidity
    JEL: E24 J64 J65
    Date: 2004–09
  27. By: Amstad, Marlene; Fischer, Andreas M
    Abstract: The timely release of macroeconomic data imposes a distinct structure on the panel: the clustering and sequential ordering of real and nominal variables. We call this orderly release of economic data sequential information flow. The ordered panel generates a new class of restrictions that are helpful in interpreting the real-time estimates of monthly core inflation through the identification of turning points and structural shocks. After establishing the sought-after properties (of smoothness, stability, and forecasting) for core inflation, we turn to the discussion of real-time diagnosis for a low inflation environment. This is done in the context of weekly estimates of Swiss inflation. The intra-monthly estimates for core inflation find that it is worthwhile to update this measure at least twice a month.
    Keywords: common factors; inflation; sequential information flow
    JEL: E52 E58
    Date: 2004–09
  28. By: Beaudry, Paul; Portier, Franck
    Abstract: It is often argued that changes in expectation are an important driving force of the business cycle. It is well known, however, that changes in expectations cannot generate positive co-movement between consumption, investment and employment in the most standard neo-classical business cycle models. This gives rise to the question of whether changes in expectation can cause business cycle fluctuations in any neo-classical setting or whether such a phenomenon is inherently related to market imperfections. This Paper offers a systematic exploration of this issue. Our finding is that expectation driven business cycle fluctuations can arise in neo-classical models when one allows for a sufficiently rich description of the inter-sectorial production technology; however, such a structure is rarely allowed or explored in macro-models. In particular, the key characteristic which we isolate as giving rise to the possibility of expectation driven business cycles is that intermediate good producers exhibit cost complementarities (i.e., economies of scope) when supplying goods to different sectors of the economy.
    Keywords: business cycles; expectations; multi-sectoral models
    JEL: E30
    Date: 2004–09
  29. By: Domeij, David; Flodén, Martin
    Abstract: We use the neoclassical growth framework to model international capital flows in a world with exogenous demographic change. We compare model implications and actual current account data and find that the model explains a small but significant fraction of capital flows between OECD countries, in particular after 1985.
    Keywords: current account; demographics; Feldstein-Horioka puzzle; international capital mobility
    JEL: E22 F21 F41 F47
    Date: 2004–09
  30. By: Aron, Janine; Muellbauer, John
    Abstract: In common with many emerging market countries, South Africa’s government does not publish balance sheet wealth estimates on a market value basis, as produced in the US, UK, Japan, and elsewhere. Yet without information on the market values of liquid and illiquid personal sector wealth, it is difficult to explain aggregate consumer spending and saving, consumers’ demand for credit, and the broad money holdings of households. Behavioural equations for these variables are key components of central banks’ macro-econometric models, used in forecasting and policy-making. Understanding the domestic asset value channel of the monetary policy transmission mechanism is especially important for inflation targeting countries. We construct the first coherent set of aggregate, personal sector wealth estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and various other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and rates of return, throws light on the changing composition of personal sector wealth. Most striking are the rise in pension wealth - overtaking gross housing assets in the late 1980s; the rise in household debt; and the relative decline of liquid and housing assets, from the early and mid-1980s, respectively.
    Keywords: C84; national balance sheets; personal sector wealth; saving
    JEL: E44 G11
    Date: 2004–09
  31. By: Eijffinger, Sylvester C W; Governatori, Matteo
    Abstract: The Paper builds a simplified model describing the economy of a currency union with decentralized national fiscal policy, where the main features characterizing the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules of the Stability and Growth Pact on public finance. Unlike previous literature the asymmetric working of those rules is explicitly modeled in order to identify its impact on the Nash equilibrium of deficits arising from a game of strategic interaction between fiscal authorities in the union.
    Keywords: asymmetric fiscal rules; decentralized fiscal policy; EMU; stability and growth pact
    JEL: E61 H30 H60 H70
    Date: 2004–09
  32. By: Frühwirth-Schnatter, Sylvia; Kaufmann, Sylvia
    Abstract: We propose to use the attractiveness of pooling relatively short time series that display similar dynamics, but without restricting to pooling all into one group. We suggest estimating the appropriate grouping of time series simultaneously along with the group-specific model parameters. We cast estimation into the Bayesian framework and use Markov chain Monte Carlo simulation methods. We discuss model identification and base model selection on marginal likelihoods. A simulation study documents the efficiency gains in estimation and forecasting that are realized when appropriately grouping the time series of a panel. Two economic applications illustrate the usefulness of the method in analysing also extensions to Markov switching within clusters and heterogeneity within clusters, respectively.
    Keywords: clustering; Markov chain Monte Carlo; Markov Switching; mixture modelling; panel data
    JEL: C11 C33 E32
    Date: 2004–09
  33. By: Ho, Tai-Kuang; von Hagen, Jürgen
    Abstract: Identifying banking crises is the first step in the research on determinants of banking crises. The prevailing practice is to employ market events to identify a banking crisis. Researchers justify the usage of this method on the grounds that either direct and reliable indicators of banks’ assets quality are not available, or that withdrawals of bank deposits are no longer a part of financial crises in a modern financial system with deposits insurance. Meanwhile, most researchers also admit that there are inherent inconsistency and arbitrariness associated with the events method. This paper develops an index of money market pressure to identify banking crises. We define banking crises as periods in which there is excessive demand for liquidity in the money market. We begin with the theoretical foundation of this new method and show that it is desirable, and also possible, to depend on a more objective index of money market pressure rather than market events to identify banking crises. This approach allows one to employ high frequency data in regression, and avoid the ambiguity problem in interpreting the direction of causality that most banking literature suffers. Comparing the crises dates with existing research indicates that the new method is able to identify banking crises more accurately than the events method. The two components of the index, changes in central bank funds to bank deposits ratio and changes in short-term real interest rate, are equally important in the identification of banking crises. Bank deposits, combined with central bank funds, provide valuable information on banking distress. With the newly defined crisis episodes, we examine the determinants of banking crises using data complied from 47 countries. We estimate conditional logit models that include macroeconomic, financial, and institutional variables in the explanatory variables. The results display similarities to and differences with existing research. We find that slowdown of real GDP, lower real interest rates, extremely high inflation, large fiscal deficits, and over-valued exchange rates tend to precede banking crises. The effects of monetary base growth on the probability of banking crises are negligible.
    Keywords: conditional logit model; events method; identification of banking crises; index of money market pressure
    JEL: C43 E44 G21
    Date: 2004–10
  34. By: Artis, Michael J; Osborn, Denise; Perez-Vazquez, Pedro
    Abstract: This Paper examines the changing relationships between the G7 countries through VAR models for the quarterly growth rates, estimated both over sub-periods and using a rolling data window. Six trivariate models are estimated, all of which include the US and a European (E15) aggregate. In relative terms, the conditional volatility of E15 growth has declined more since 1980 than the well-documented decline for the US. The propagation of shocks has also changed, with the volatility and propagation effects separated by applying shocks of pre-1980 magnitude to VARs estimated over various periods. Rolling estimation reveals that E15 has a steadily increasing impact on the US economy over time, while the effects of the US on Europe have been largest during the 1970s and the late 1990s.
    Keywords: european integration; international business cycles; time variation; volatility
    JEL: E32 F02 F43
    Date: 2004–10
  35. By: Schmitt-Grohé, Stephanie; Uribe, Martin
    Abstract: This Paper identifies optimal interest-rate rules within a rich, dynamic, general equilibrium model that has been shown to account well for observed aggregate dynamics in the post-war United States. We perform policy evaluations based on second-order accurate approximations to conditional and unconditional expected welfare. We require that interest-rate rules be operational, in the sense that they include as arguments only a few readily observable macroeconomic indicators and respect the zero bound on nominal interest rates. We find that the optimal operational monetary policy is a real-interest-rate targeting rule. That is, an interest-rate feedback rule featuring a unit inflation coefficient, a mute response to output, and no interest-rate smoothing. Contrary to existing studies, we find a significant degree of optimal inflation volatility. A key factor driving this result is the assumption of indexation to past inflation. Under indexation to long-run inflation the optimal inflation volatility is close to zero. Finally, we show that initial conditions matter for welfare rankings of policies.
    Keywords: business cycles; inflation stabilization; monetary policy evaluation
    JEL: E52 E61 E63
    Date: 2004–10
  36. By: Brunnermeier, Markus K; Parker, Jonathan A
    Abstract: This Paper introduces a tractable, structural model of subjective beliefs. Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they believe that better outcomes are more likely. On the other hand, biased expectations lead to poorer decisions and worse realized outcomes on average. Optimal expectations balance these forces by maximizing average felicity. A small bias in beliefs typically leads to first-order gains due to increased anticipatory utility and only to second-order costs due to distorted behaviour. We show that in a portfolio choice problem, agents overestimate the return on their investment and exhibit a preference for skewness. In general equilibrium, agents’ prior beliefs are endogenously heterogeneous. Finally, in a consumption-saving problem with stochastic income, agents are both overconfident and overoptimistic.
    Keywords: belief biases; consumption; expectation; gambling; heterogenous beliefs; overconfidence; portfolio choice; saving
    JEL: D10 D80 E21 G11 G12
    Date: 2004–10
  37. By: Ardagna, Silvia; Caselli, Francesco; Lane, Timothy
    Abstract: We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country’s interest rates. Domestic fiscal policy continues to affect domestic interest rates, however, even after controlling for worldwide debts and deficits.
    Keywords: government deficit; long-term interest rates; public debt
    JEL: E44 E62 H62
    Date: 2004–10
  38. By: Marsiliani, Laura; Renström, Thomas I
    Abstract: We analyse the impact of micro-founded political institutions on environmental policy and economic growth. We model an overlapping-generations economy, where individuals differ in preferences over the environment (as well as in age). Labour taxation and capital taxation is used to finance a public good and a public production factor, period by period. The underlying political institution is a parliament. Party entry, parliamentary composition, coalition formation, and bargaining are endogenous. The benchmark is when all decisions are taken in parliament. We compare this constitution with an independent regulator, elected in parliament. The regulatory regime causes lower pollution, but production inefficiency.
    Keywords: bargaining; comparative politics; endogenous growth; environmental policy; overlapping generations; taxation; voting
    JEL: D62 D72 E20 E62 H20 H55 O41 Q58
    Date: 2004–10
  39. By: Lloyd-Braga, Teresa; Modesto, Leonor
    Abstract: We introduce labour market imperfections (i.e. unions and the existence of a wage floor) in a finance-constrained monetary economy with heterogenous agents and increasing returns to scale due to labour and capital productive externalities. We find that indeterminacy emerges for empirically plausible values of the parameters, compatible with a downward-sloping marginal productivity of labour curve. Moreover, we show that indeterminacy and Hopf bifurcations are possible with an (arbitrarily) small degree of (total) externalities provided that the share of labour externalities exceed a lower bound, which decreases with union power. We also find that unions increase simultaneously steady-state employment, capital accumulation and welfare if the marginal productivity of labour is decreasing in employment.
    Keywords: bifurcations; externalities; indeterminacy; unions
    JEL: D60 D62 E32 J51
    Date: 2004–10
  40. By: Chen, Natalie; Imbs, Jean; Scott, Andrew
    Abstract: We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.
    Keywords: competition; globalization; inflation; markups; openness; prices; productivity; trade
    JEL: E31 F12 F14 F15 L16
    Date: 2004–10
  41. By: Bayoumi, Tamim; Sgherri, Silvia
    Abstract: Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary policy uncertainty helps determine the sluggish adjustment of expectations to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in US monetary policy and the Phillips curve, we find strong evidence that this link exists. These results question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the US and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the economy.
    Keywords: inflation dynamics; Kalman filter; monetary policy
    JEL: C51 E31 E52
    Date: 2004–10
  42. By: Artis, Michael J; Hoffmann, Mathias
    Abstract: Consumption based measures of international risk sharing seem to defy the effects of more than two decades of ongoing financial globalization. We put forward an explanation of this puzzle: under incomplete risk sharing and if there are several sources of risk, consumption based measures of risk sharing will also be a function of the structure of business cycles, i.e. their degree of synchronization and persistence. We argue that permanent and transitory shocks to output constitute such qualitatively different sources of risk. Using OECD data, we then illustrate that countries have indeed become more insured against permanent shocks, in line with the ever better integration of financial markets. Basic measures of risk sharing have however not picked up this change because globalization has also affected the structure of business cycles. In particular, our results are consistent with the observation recently made by several authors that the globalization period has seen the emergence of less volatile and internationally more synchronized business cycles among industrialized countries.
    Keywords: capital flows; consumption risk sharing; home bias; international and regional business cycles
    JEL: C23 E21 F36
    Date: 2004–10
  43. By: Caselli, Francesco
    Abstract: Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question ‘how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?’ Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.
    Keywords: development; factor supplies; technology
    JEL: E20 O10 O20 O30 O40 O50
    Date: 2004–10
  44. By: Den Haan, Wouter; Sumner, Steven; Yamashiro, Guy
    Abstract: A robust finding for both small and large banks is that in response to a monetary tightening, real estate and consumer loans decrease while C&I loans increase. We also show that in a standard log-linear VAR the impulse response function of an aggregate variable is time varying. The finding that loan components move in opposite directions and the property that the impulse response of total loans is time-varying explain why studies that use total loans have had such a hard time finding a robust response of bank loans to a monetary tightening.
    Keywords: impulse response functions; small and large banks; VAR
    JEL: E40
    Date: 2004–11
  45. By: Den Haan, Wouter; Sumner, Steven; Yamashiro, Guy
    Abstract: This Paper compares the responses of bank loan components to a monetary tightening with the responses to negative output shocks. Real estate and consumer loans sharply decrease during a monetary tightening but not after a negative output shock. In contrast, C&I loans (and commercial paper) sharply decrease in response to output shocks, but not in response to a monetary tightening. These results are difficult to reconcile with a bank-lending channel of monetary transmission, in which the supply of commercial and industrial (C&I) loans is constrained. Hedging and bank capital regulation provide reasons why banks may want to substitute out of real estate and consumer loans, and into C&I loans during periods of high interest rates.
    Keywords: bank capital regulation; hedging; interest rates
    JEL: E40
    Date: 2004–11
  46. By: Repullo, Rafael
    Abstract: This Paper analyses the effects on ex ante risk-shifting incentives and ex post fiscal costs of three policies that are frequently used in dealing with banking crises, namely, forbearance from prudential regulations, extension of blanket deposit guarantees, and provision of unrestricted liquidity support. In the context of a simple model of information-based bank runs, where banks are funded with both insured and uninsured deposits, the paper shows that the expectation of implementation of any of these policies leads to a reduction in the interest rate of uninsured deposits and in the bank’s incentives to take risk, but increases the expected fiscal costs of the crises.
    Keywords: bank runs; bank supervision; banking crises; deposit insurance; forbearance; lender of last resort; risk-shifting incentives
    JEL: E58 G21 G28
    Date: 2004–11
  47. By: Buiter, Willem H
    Abstract: The Paper studies the inflation rate associated with optimal monetary policy in a standard suite of DSGE models, when fiscal policy is either unrestricted optimal or restricted but supportive of monetary policy. Full nominal price flexibility, nominal prices set one period in advance and Calvo-style staggered overlapping price contracts with a variety of indexation rules for constrained price setters are considered. For all price setting models, optimal monetary policy implements the Bailey-Friedman Optimal Quantity of Money (OQM) rule: the pecuniary opportunity cost of holding money is equal to zero. There is an optimal inflation rate for producer prices in the Calvo model, given by the 'core inflation' process generated by the indexation rule of the constrained price setters. It is constant only if core inflation is constant. A zero rate of producer price inflation is necessary for optimality in the Calvo model, only if all of the following conditions hold. (1) There is no money or the nominal interest rate on money can be set freely. (2) The constrained price setters of the Calvo model implement an ill-posed, arbitrary price indexation rule, such as the lagged partial indexation rule used by Woodford to make a case for price stability. (3) The authorities use neither their tax instruments nor the nominal interest rate to validate the core inflation process. These results are global – they do not depend on linear approximations at a deterministic, zero-inflation steady state.
    Keywords: dsge; inflation targeting; monetary and fiscal stabilization policy; New Keynesian macroeconomics; nominal price rigidities
    JEL: E30 E40 E50 E60
    Date: 2004–11
  48. By: Gersbach, Hans
    Abstract: We examine financial intermediation when banks can offer deposit or loan contracts contingent on macroeconomic shocks. We show that the risk allocation is efficient provided there is no workout of banking crises. In this case, banks will shift part of the risk to depositors. In contrast, under a workout of banking crises, depositors receive non-contingent contracts with high interest rates while entrepreneurs obtain loan contracts that demand a high repayment in good times and little in bad times. As a result, the present generation overinvests and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.
    Keywords: banking regulation; financial intermediation; macroeconomic risks; state contingent contracts
    JEL: D41 E40 G20
    Date: 2004–11
  49. By: Benigno, Pierpaolo; Woodford, Michael
    Abstract: Erceg et al. (2000) show that when both wages and prices are sticky, maximization of expected utility is equivalent to minimizing a loss function with three terms, involving measures of the variability of wage inflation, price inflation and the output gap respectively. Here we generalize their analysis, most importantly by not assuming the existence of output and employment subsidies that eliminate the distortions resulting from market power in goods and labour markets, so that the equilibrium level of output under flexible wages and prices would not necessarily be optimal. We show that a quadratic loss function can still be justified that involves the same three terms, albeit with different relative weights and a different definition of the output gap. Many conclusions of Erceg et al. are thus found to apply more generally. We argue, however, that in the presence of significant steady-state distortions, simple rules of the kind that they examine are likely to approximate optimal policy less closely than is suggested by their numerical results.
    Keywords: optimal monetary policy; sticky prices; sticky wages
    JEL: E52 E61
    Date: 2004–11
  50. By: Vives, Xavier
    Abstract: The theory of monotone comparative statics and supermodular games is presented as the appropriate tool to model complementarities. The approach, which has not yet been fully incorporated into the standard toolbox of researchers, makes the analysis intuitive and simple, helps in deriving new results and in casting new light on old ones. The paper takes stock of recent contributions and develops applications to industrial organization (oligopoly, R&D, and dynamics), finance (currency and banking crisis) and macroeconomics (adjustment and menu costs). Particular attention is devoted to Markov games and to games of incomplete information (including global games).
    JEL: C61 C62 C72 C73 D83 E22 F32 G21 L13 O31
    Date: 2004–11
  51. By: Wasmer, Etienne; Zenou, Yves
    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 endogenize search effort, show that it negatively depends on distance to jobs and that long and short-term unemployed workers coexist and locate in different areas of the city.
    Keywords: job matching; local labour markets; relocation costs; search effort
    JEL: E24 J41 R14
    Date: 2004–11
  52. By: Canova, Fabio; Pappa, Evi
    Abstract: We study whether and how fiscal restrictions alter the business cycle features macrovariables for a sample of 48 US states. We also examine the ‘typical’ transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.
    Keywords: budget restrictions; dynamic panels; fiscal policy transmission; policy rules
    JEL: E30 E50 H70
    Date: 2004–11
  53. By: Smets, Frank; Wouters, Rafael
    Abstract: In monetary policy strategies geared towards maintaining price stability, conditional and unconditional forecasts of inflation and output play an important role. In this Paper we illustrate how modern sticky-price dynamic stochastic general equilibrium (DSGE) models, estimated using Bayesian techniques, can become an additional useful tool in the forecasting kit of central banks. First, we show that the forecasting performance of such models compares well with atheoretical vector autoregressions. Moreover, we illustrate how the posterior distribution of the model can be used to calculate the complete distribution of the forecast, as well as various inflation risk measures that have been proposed in the literature. Finally, the structural nature of the model allows computing forecasts conditional on a policy path. It also allows examining the structural sources of the forecast errors and their implications for monetary policy. Using those tools, we analyse macroeconomic developments in the euro area since the start of EMU.
    Keywords: DSGE models; euro area; forecasting; monetary policy
    JEL: E40 E50
    Date: 2004–11
  54. By: Smets, Frank; Wouters, Rafael
    Abstract: This Paper estimates a DSGE model with many types of shocks and frictions for both the US and the euro area economy over a common sample period (1974-2002). The structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies, differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments. Our main conclusion is that each of those characteristics is remarkably similar across both currency areas.
    Keywords: business cycle fluctuations; DSGE models
    JEL: E10 E30
    Date: 2004–11
  55. By: Constant, Amelie; Zimmermann, Klaus F
    Abstract: Economically active people are either in gainful employment, are unemployed or self-employed. We are interested in the dynamics of the transitions between these states across the business cycle. It is generally perceived that employment or self-employment are absorbing states. However, innovations, structural changes and business cycles generate strong adjustment processes that lead to fluctuations between employment and self-employment, directly or through the unemployment state. Migrants are more likely to be sensitive to adjustment pressures than natives, since they have less stable jobs and choose more often self-employment to avoid periods of unemployment. These issues are investigated using a huge micro data set generated from 19 waves of the German Socioeconomic Panel. The findings suggest that the conditional probabilities of entry into self-employment are more than twice as high from the status of unemployment as from the status of employment. Self-employment is also an important channel back to regular employment. Business cycle effects strongly impact the employment transition matrix, and migrants take a larger part in the adjustment process. They use self-employment as a mechanism to circumvent and escape unemployment and to integrate into the host country's labour market.
    Keywords: business cycle; entrepreneurship; Markov chain analysis; migration; self-employment
    JEL: E32 J23 J61 M13
    Date: 2004–11
  56. By: von Hagen, Jürgen; Wolff, Guntram
    Abstract: Fiscal rules, such as the excessive deficit procedure and the stability and growth pact (SGP), aim at constraining government behaviour. Milesi-Ferretti (2003) develops a model in which governments circumvent such rules by reverting to creative accounting. The amount of this creative accounting depends on the reputation cost for the government and the economic cost of sticking to the rule. In this Paper, we provide empirical evidence of creative accounting in the European Union. We find that the SGP rules have induced governments to use stock-flow adjustments, a form of creative accounting, to hide deficits. This tendency to substitute stock-flow adjustments for budget deficits is especially strong for the cyclical component of the deficit, as in times of recession the cost of reducing the deficit is particularly large.
    Keywords: debt-deficit adjustments; ESA 95; excessive deficit procedures; fiscal rules; stability and growth pact; stock-flow adjustments
    JEL: E62 H61 H62 H63 H70
    Date: 2004–11
  57. By: Ellison, Martin; Graham, Liam; Vilmunen, Jouko
    Abstract: In this Paper, we develop a model which explains why events in one market may trigger similar events in other markets, even though at first sight the markets appear to be only weakly related. We allow for multiple equilibria and learning dynamics in each market, and show that a jump between equilibria in one market is contagious because it more than doubles the probability of a similar jump in another market. We claim that contagion is strong since equilibrium jumps become highly synchronized across markets. Spillovers are weak because the instantaneous spillover of events from one market to another is small. To illustrate our result, we demonstrate how a currency crisis may be contagious with only weak links between countries. Other examples where weak spillovers would create strong contagion are various models of monetary policy, imperfect competition and endogenous growth.
    Keywords: contagion; escape dynamics; learning; spillovers
    JEL: E50 F40
    Date: 2004–11
  58. By: Benigno, Pierpaolo; Woodford, Michael
    Abstract: We reconsider the optimal taxation of income from labour and capital in the stochastic growth model analysed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate ‘naïve’ LQ approximation - in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household - can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method.
    Keywords: LQ solution; optimal taxation
    JEL: C61 E62
    Date: 2004–11
  59. By: Den Haan, Wouter; Haefke, Christian; Ramey, Gary
    Abstract: According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this Paper we reassess the turbulence unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.
    Keywords: european unemployment puzzle; skill loss
    JEL: E24 J64
    Date: 2004–11
  60. By: Ellison, Martin; Sarno, Lucio; Vilmunen, Jouko
    Abstract: We examine optimal policy in a two-country model with uncertainty and learning, where monetary policy actions affect the real economy through the real exchange rate channel. Our results show that whether policy should be cautious or activist depends on the size of one country relative to another. If one country is small relative to the other then activism is optimal. In contrast, if the two countries are equal sized then caution prevails. Caution is induced in the latter case because of the interaction between the home and foreign central banks. In a two-country symmetric equilibrium, learning is shown to be detrimental to welfare, implying that optimal policy is cautious.
    Keywords: learning; monetary policy; open economy
    JEL: E52 E58 F41
    Date: 2004–11
  61. By: Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper addresses the issue of why Keynesian economists have had such a hard time in giving the concept of involuntary unemployment a place in economic theory. Is the gradual demise of this concept a manifestation of some inner defect in economic theory or is it due to some intrinsic weakness in the concept itself, which limits its usefulness when it comes to economic theorising? I have recently published a book which attempts to answer this question, and my aim in this paper is to present its main results. I start by characteristing Keynes’s programme as consisting of the following four elements : 1) demonstrating the existence of involuntary unemployment; 2) demonstrating that wage rigidity can be exonerated as its cause; 3) giving a general equilibrium or interdependency explanation of the phenomenon; 4) demonstrating that demand stimulation is the proper remedy for the problem. Next, I bring out four conceptual ambiguities that have plagued discussions about involuntary unemployment : the confusion between involuntary unemployment and underemployment; the confusion between involuntary unemployment in the individual disiquilibrium sense and involuntary unemployment in the frustration sense; a loose understanding of the notion of full emplyment; and, finally, a less than rigorous definition of the notion of rigidity. The paper continues by presenting my arguments on whether different types of New Keynesian modesls (implicit contracts, efficiency wages, coordination failures and imperfect competition) have succeeded in achieving Keynes’s programme. My conclusion is that they all fail on at least one of its items. In the final section of this paper, I speculate on whether it is still worthwhile for economists with a Keynesian inclination to keep fighting in defence of involuntary unemployment.
    Keywords: Keynes; Involuntary Unemployment; New keynesian Theory
    JEL: B22 E12 E24 J64
    Date: 2005–02–09
  62. By: Konstantin A., KHOLODILIN; Wension Vincent, YAO
    Abstract: This papers develops a dynamic factor models with regime switching to account for the decreasing volatility of the U.S. economy observed since the mid-1980s. Apart from the Markov switching capturing the cyclical fluctuations, an additional type of regime switching is introduced to allow variances to switch between distinct regimes. The resulting four-regime models extend univariate analysis currently used in the literature on the structural break in conditional volatility to the multivariate time series. Besides the dynamic factor model using the data with a single (monthly) frequency, we employ the additonal information incorporating the mixed-frequency data, which include not only the monthly component series but also such an important quarterly series as the real GDP. The evaluation of six different nonlinear models suggests that the probabilities derived from all the models comply with NBER business cycle dating and detect a one-time shifting from high variance to low-variance states in February 1984. In addition, we find that: mixed-frequency models outperform single-frequency models; restricted models outperform unrestricted models; four-regime switching models outperform two-regime switching models.
    Keywords: Volatility; Structural break; Composite coincident indicator; Dynamic factor model; Markov switching; Mixed-frequency data
    JEL: E32 C10
    Date: 2004–09–15
  63. By: Eva, MORENO-GALBIS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Henri R., SNEESSENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) (Belgium) and Université Catholique de Lille (France))
    Abstract: We construct an intertemporal general equilibrium model with two types of jobs and two types of workers. We allow for job competition between high- and low-skilled segment of the labour market and for on-the-job search. Matching processes are represented by matching functions à la Pissarides. Workers search intensities are endogenous. Biased technological change is introduced via embodied technical progress and a capital-skill complementarity. The model is calibrated and simulated to evaluate the impact of various types of shocks. The model reproduces quite well the unemployment rate changes and the relative wage stability observed over the last two decades. It suggests strong interactions between biased technological change, discouragement effects and job competition.
    Keywords: Skill mismatch; equilibrium unemployment; ladder effect; macro dynamics
    JEL: E24 J21 J23
    Date: 2004–09–15
  64. By: Lionel, ARTIGE (Universitat Autonoma de Barcelona (Spain))
    Abstract: This paper examines the existence condition of a balanced growth path in an overlapping generations model in which production uses three inputs, physical capital, human capital and land, with increasing returns to scale. Human capital is the engine of economic growth. It is shown that, unlike standard economic geography models, increasing returns verifying balanced growth always lead to regional convergence. Physical capital mobility turns out to be an overwhelming convergence force.
    Keywords: Endogenous growth; human capital; land; overlapping generations; regional dynamics
    JEL: E13 O41 R11
    Date: 2004–10–14
  65. By: Olivier, PIERARD (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: To study the impacts of reductions in employer’s social security contributions, we construct an intertemporal general equilibrium model with different types of workers (and wages), search unemployment and endogenous job destruction rates. Our model reproduces the empirical evidence that the impacts on employment, of reductions in contributions at the minimum wage level, go through a decrease in job destructions rather than an increase in job creations. We moreover find that, although it is prejudical to average productivity, reductions targeted at the minimum wage create much more net employment than reductions targeted at other wages.
    Keywords: Labor taxation; Job destruction rate; Employment
    JEL: E24 E62 H25 J38
    Date: 2004–10–26
  66. By: Pradeep Dubey (SUNY, Stony Brook); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We build a finite horizon model with inside and outside money, in which interest rates, price levels and commodity allocations are determinate, even though asset markets are incomplete and asset deliveries are purely nominal.
    Keywords: Central bank, Inside money, Outside money, Incomplete assets, Monetary equilibrium, Real determinacy
    JEL: D50 E40 E50 E58
    Date: 2003–06
  67. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: The paper analyzes the question why the U.S. economy in the 2000:4-2004:3 period was sluggish in light of the large expansionary fiscal and monetary policies that took place. The answer does not appear to be that there were large structural changes in the economy or systematic bad shocks. This paper tests for such changes and shocks, and the results are generally negative. Instead, the main culprits seem to be large negative effects from declines in the stock market and exports. Although not tested in this paper, some of the decline in exports may be the result of the stock market decline, in which case most of the explanation is simply the stock market decline itself.
    Keywords: Fiscal policy, Monetary policy
    JEL: E00
    Date: 2005–01
  68. By: Jan Marc Berk; Beata K. Bierut
    Abstract: Most monetary policy committees decide on interest rates using a simple majority voting rule. Given the inherent heterogeneity of committee members, this voting rule is suboptimal in terms of the quality of the interest rate decision, but popular for other (political) reasons. We show that a clustering of committee members into two subgroups, as is the case in hub-and-spokes systems of central banks (e.g. the Fed or the ESCB), can eliminate this inefficiency whilst retaining the simple majority voting rule.
    JEL: D71 D78 E58
    Date: 2005–02
  69. By: Peter Hans Matthews
    Abstract: The introduction of "effort inducible" and non-effort" workers into an otherwise standard model of labor discipline produces a paradox of sorts: when firms cannot tell the difference, the predictable reductions in both output and real wages are sometimes accompanied by an increase in profits. The resolution of this paradox is found in the difference in expected productities of workers with and without jobs, the source of a reputation effect that alters the balance of labor market power. When, as a consequence of the acquisition and depreciation of productive skills, the relative proportions of such workers are then endogenized, the model exhibits multiple equilibria for plausible parameter values. One of these equilibria can be understood as a new sort of "underemployment trap" with an atrophied primary sector.
    Keywords: labor discipline, reputation effect, positive feedback, underemployment trap
    JEL: J41 E24
    Date: 2005–01
  70. By: Thierry Warin
    Abstract: This paper addresses the question of a technical change in one the components of the Stability and Grown Pact (SGP). Indeed, the SGP is composed of (1) a political commitment, (2) a preventive element, and (3) a dissuasive element, and an improvement of the SGP efficacy can come from any of these three components. In this paper the author proposes a new early warning procedure, part of the preventive element. The ideal situation would be for the European Commission to be able to identify countries at risk as soon as they vote their national budgets. Although this is not possible, as the measures of the deficit are based on GDP forecasts, the conclusion this paper makes is that the EC should avoid relying on GDP forecasts by calculating a reference index.
    Keywords: europe, fiscal rule, stability and growth pact, political economics
    JEL: E61 E62 E63 F02 F42
    Date: 2005–02
  71. By: Alessandro MISSALE; Emanuele BACCHIOCCHI
    Abstract: This paper presents a simple model in which debt management stabi lizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sus tainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternati ve debt instruments on the cost of missing the stabilization targ et. The optimal debt structure is a function of the expected retu rn differentials between debt instruments, of the conditional var iance of their returns and of the conditional covariances of thei r returns with output growth and inflation. We then explore how t he relevant covariances and thus the optimal choice of debt instr uments depend on the monetary regime and on Central Bank preferen ces for output stabilization, inflation control and interest-rate smoothing. Finally, we estimate the composition of public debt t hat would have supported debt stabilization in OECD countries ove r the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it s hould be indexed to the price level
    Keywords: Debt management, debt structure, debt stabilization, inflation indexation, interest rates
  72. By: Michael Hurd (RAND); Susann Rohwedder (RAND)
    Abstract: The simple one-good model of life-cycle consumption requires “consumption smoothing.” However, British and U.S. households apparently reduce consumption at retirement and the reduction cannot be explained by the life-cycle model. An interpretation is that retirees are surprised by the inadequacy of resources. This interpretation challenges the life-cycle model where consumers are forward looking. However, data on anticipated consumption changes at retirement and on realized consumption changes following retirement show that the reductions are fully anticipated. Apparently the decline is due to the cessation of workrelated expenses and the substitution of home production for market-purchased goods and services.
    Date: 2004–01
  73. By: Seok-Kyun Hur
    Abstract: Our paper explores a transmission mechanism of monetary policy through bond market. Based on the assumption of delayed responses of economic agents to monetary shocks, we derive a system of equations relating the term structure of interest rates with the past history of money growth rates and test the equations with the US data. Our results confirm that the higher ordered moments of money growth rate(converted from the past history of money growth rates) influence the yields of bonds with various maturities in different timing as well as in different magnitudes and monetary policy targeting a certain shape of the term structure of interest rates could be implemented with certain time lags due to path-dependency of interest rates.
    JEL: E43 E44 E52
    Date: 2005–02
  74. By: Tim Robinson; Andrew Stone
    Abstract: We use a simple model of a closed economy to study the recommendations of monetary policy-makers, attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of `insurance' which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to say whether the ZLB should cause policy-makers to operate policy more tightly or loosely than they would otherwise do, while a bubble is growing -- even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers' preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target -- especially if the neutral real interest rate is low.
    JEL: E32 E52 E60
    Date: 2005–02
  75. By: Karen Wilson
    Abstract: This paper summarizes the characteristics of the System of National Accounts as outlined in SNA93. It outlines the elements of infrastructure used to build the accounts and then describes the flow of accounts and supply and use framework used to construct integrated macro economic statistics. Three countries are then compared in the use of this standard; Australia, Canada and the United Kingdom. Each of the three countries uses the Supply and Use framework (variant of Input Output tables) as the key integrating tool for building the system of accounts and GDP benchmarks are determined using the "production" approach inherent in the Supply and Use framework. In Australia and United Kingdom, the supply and use framework is used to balance and benchmark the flow of accounts up to and including the measures of net lending/borrowing across the institutional sectors of the economy. In Canada the supply and use framework is used to determine the level of GDP but not all of the components of the flow of accounts are benchmarked to it, leaving statistical discrepancies between incomes and final expenditures and net lending/borrowing across sectors. This allows Canada to track the statistical system which provides independent estimates form establishment or kind of activity unit data (industry statistics) and institutional unit (savings and investment decision unit -- enterprise in the case of businesses) data used to build accounts by institutional sector. In particular, it allows coherence and coverage analysis of the data system. In all three countries, the financial accounts and balance sheets are integrated with the flow of accounts. Statistical discrepancies are shown in all countries between net lending/borrowing and net financial investment by institutional sector. None of the three countries publishes regular "other volume changes in assets" accounts although all recognize it as a part of the system which is more and more important to explaining wealth changes. Finally the paper ends with some summary comparisons of the three countries' systems of accounts and recognizes that while they all follow international standards to high degree, differences still exist which may or may not effect international comparability. International coordination is the key to making the standard meet this purpose. The United Kingdom system, as an example of the European system, best meets the standard for international comparison purposes.
    JEL: C82 E20
    Date: 2005–02
  76. By: John R. Baldwin; Tarek Harchaoui
    Abstract: A statistical agency faces several challenges in building Productivity Accounts. What started out as a request for simple ratios of output to employment has moved to a demand for multifactor (total factor) productivity measures that take into account both labor and capital inputs, the compositional changes in both, and price corrections for the changing quality of outputs. The challenge that faces users of productivity measures is that many series often exist within statistical agencies that can be used on an ad hoc basis by outsiders to generate productivity estimates; however, these series often generate conflicting estimates. Only by pulling together data into one coherent consistent framework can the statistical agency solve the problem of %u2018multiple%u2019 stories. This can be done by developing a set of Productivity Accounts that are part of an integrated system of National Accounts. This paper discusses the challenges that a statistical agency faces in this area%u2014as illustrated by the Canadian experience. First, it examines the progress that has been made in developing a system that integrates the Productivity Accounts into the overall System of National Accounts. It also discusses deficiencies that still need to be overcome. The paper notes that integration provides not only benefits when it comes to the construction of productivity estimates, but also a means of quality control for the National Accounts. Productivity accounts bring together data on outputs, materials inputs, labor and capital. By confronting one series with another, the process of constructing productivity accounts provides a valuable means of quality assessment. It also helps to identify and fill data gaps. An integrated set of productivity accounts enhances the quality of the SNA through improvements in accuracy, coherence, relevance, and interpretability. Finally, the paper focuses on the need to consider whether the SNA manual should be extended into the area of productivity measurement. International comparisons of GDP have benefited immensely by the development of international standards over the last half-century. But productivity is not a central focus of the 1993 SNA. The paper argues that the advantage of integrating productivity accounts into the general accounts is sufficiently great that it is time to include more detail on the nature of productivity accounts in the general SNA framework.
    JEL: C67 E22 O47
    Date: 2005–02
  77. By: Manuela Francisco (Universidade do Minho); Michael Bleaney (University of Nottingham)
    Abstract: Using data for 102 developing countries, it is shown that inflation persistence is particularly high in countries with severe inflationary problems, and particularly low in countries on hard pegs. Inflation persistence is similar under floating and soft pegs.
    Keywords: Inflation, persistence, exchange rates
    JEL: E31 F41
    Date: 2005
  78. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Yi Wen (Department of Economics - Cornell University)
    Abstract: This paper provides new empirical evidence on and theoretical support for the close link between oil prices and aggregate macroeconomic performence in the 1970s. Although this link has been well documented in the empirical literature and is further confirmed in this paper, standard economic models are not able to replicate this link when actual oil prices are used to stimulate the models. In particular, standard models cannot explain the depht of the recession in 1974-75 and the strong revival in 1976-78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key. This multipliplier-accelerator mechanism not only exacerbated the impact of the oil schocks in 1973-74 but also helped create the temporary recovery in 1976-1978. This paper derives the missing multiplier-accelarator mechanism from externalities in general equilibrium. Our calibrated model can explain both the recession in 1974-75 and revival in 1976-78.
    Keywords: Oil price shocks, Real business cycle, indeterminacy, capacity utilization, externalities, monopolistic competition.
    JEL: E32 E37 E22
    Date: 2005
  79. By: Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: This paper explores whether a limited participation model of the monetary transmission mechanism can account for the observed re- sponse of stock market returns to monetary policy shocks. It is found that the model generates responses that broadly match the empiri- cal counterparts, although the magnitudes are somewhat too small. Moreover, the results suggest that the increased exposure of bank- dependent ¯rms to liquidity shocks cannot fully account for the het- erogenous responses of returns that are observed across ¯rms.
    Keywords: limited participation, asset pricing, stock market
    JEL: E4 E5 G1
    Date: 2004–12–29
    Abstract: This paper analyses the role of the real exchange rate in a structural vector autoregression (sVAR) framework for the United Kingdom, Euro area, Japan and Canada vis-á-vis the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali (1994) based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly di??erent. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found. Hence, the exchange rate can rather be considered as a source of shocks instead of a shock absorber.
    Keywords: exchange rates, vector autoregressions
    JEL: C32 E42 F31 F33
    Date: 2005–01
  81. By: G. PEERSMAN
    Abstract: This paper shows how sign restrictions can be used to identify symmetric and asymmetric shocks in a simple two-country structural VAR. Specifically, the e??ects of symmetric and asymmetric supply, demand and monetary policy shocks as well as pure exchange rate shocks are estimated. The results can be used to deal with two issues. First, it is possible to estimate the relative importance of symmetric, asymmetric and pure exchange rate shocks across two countries or areas, which provides information about the degree of business cycle synchronization. Second, it is also possible to evaluate the relative importance of these shocks in determining exchange rate fluctuations, which can deliver answers to questions like ’Is the exchange rate a shock absorber or source of shocks?’. Evidence is provided for the UK versus the Euro area and compared with the US as a benchmark.
    Keywords: exchange rates, symmetric and asymmetric shocks, vector autoregressions
    JEL: C32 E42 F31 F33
    Date: 2005–01
    Abstract: We use a model-based identification strategy to estimate the impact of technology, labor supply, monetary policy and aggregate demand shocks on hours worked and employment in the euro area. The restrictions applied in the SVAR analysis are consistent with a large class of DSGE models and are robust given a sensible range of parametrization. In contrast to most of the existing literature for the United States, our results are in line with the conventional real business cycle interpretation that hours worked rise as a result of a positive technology shock. In addition, we also find an important role for technology shocks in explaining business cycle fluctuations.
    Keywords: Technology shocks; Real business cycle models; Sticky price models; Vector autoregressions, DSGE priors
    JEL: E32 E24
    Date: 2005–01
  83. By: Gustavo A. Marrero (Universidad Complutense de Madrid. Facultad de Ciencias Económicas y Empresariales. Dpto. de Economía Cuantitativa)
    Abstract: In dynamic settings with public capital, it is common to assume that the government claims a constant fraction of public investment to total output each period, which is clearly a restrictive assumption. The goal of the paper is twofold: first, to find out a more reasonable rule for public investment, consistent with US data, than the constant-ratio rule; second, to analyze the impact of that rule on welfare and judge the public investment downsizing process held in US since the end of the sixties. Calibrating for US, the model simulation captures the public investment downsizing process held during 1960-2001, as well as the post-1970 slowdown in private factors productivity. Downsizing would be optimal whenever the public capital elasticity is approximately smaller than 0.09, a lower level than the general consensus in the literature. Thus, it is more likely that our result be consistent to Aschauer (1989) and Munnell (1990), which put forth that policymakers would have reduced the stock of public capital below its optimum level along this time.
    Date: 2004
  84. By: Frank Portier (Université de Toulouse); Luis A. Puch (Universidad Complutense de Madrid. Facultad de Ciencias Económicas y Empresariales)
    Abstract: In this paper we measure the welfare cost of fluctuations in a simple representative agent economy with nonclearing markets. The market friction we consider involves price rigidities and a voluntary exchange rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations much bigger than in a frictionless environment.
    Date: 2004
  85. By: Juan Ángel Jiménez Martín (niversidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. de Fundamentos de Análisis Económico II.); Rodrigo Peruga Urrea (niversidad Complutense de Madrid. Facultad de CC. Económicas y Empresariales. Dpto. de Fundamentos de Análisis Económico II.)
    Abstract: The goal of this paper is to identify the main determinants of the risk premium in some European currency markets just before the EMU. To that extent, we start from Lucas (1982) exchange rate model and derive an analytical expression for the forward premium. This expression includes money and production variables and it is quite standard, except for the inclusion of macroeconomic policy risk. Under some standard assumptions, this formula simplifies substantially and becomes amenable to regression analysis. Then, using standard measures of money and production, as well as interest rate swap spreads as indicators of macroeconomic policy risk, the theoretical expression is estimated. We provide evidence suggesting that it is policy uncertainty, much more than fundamental macroeconomic uncertainty, which determined risk premium over the convergence process to the euro. Whether these results can be extended to similar experiences for other currency unions remains open for future research.
    Date: 2004
  86. By: Santiago Herrera
    Abstract: Despite significant progress in economic reform throughout the 1990s and an exemplary development of the policymaking framework in the second part of the decade, Brazil suffered a major public debt and currency crisis in 2002. Though the political origin of the uncertainty cannot be ignored, Herrera identifies other sources of uncertainty emanating from the policymaking framework: fiscal policy was not responsive to the shocks, public debt instruments were used with several objectives (to stabilize the currency and to lengthen maturity) and there was inadequate supervision of agents holding public debt. Most of the flaws have been fixed following the crisis: • The primary fiscal balance has been increased, sending the signal that it is a flexible instrument that will be used to ensure commitment of the sovereign to honor its obligations. • The central bank formally transferred to the Treasury the remaining debt-issuance functions, facilitating a more adequate balancing of different risks involved in debt management. • Mutual funds’ public debt holdings are better regulated, ensuring that end-investors have the proper information to assess the risk of the institutions in which they invest. This paper—a product of the Economic Policy Division, Poverty Reduction and Economic Management Network—is part of a larger effort in the network to disseminate country experiences in the design of policymaking frameworks that facilitate adjustment of the economy to external shocks.
    Keywords: Domestic Finance; Macroecon & Growth
    Date: 2005–02–04
  87. By: Jochen Michaelis (Author-Workplace-Name: Department of Economics, University of Kassel)
    Abstract: This paper presents a general-equilibrium framework to revisit the issues of optimal monetary policies and international policy coordination in a two-country model, focusing on the role of a pricing-to-market (PTM) policy by firms. Both countries may be different with respect to PTM. Using the set-up developed by Corsetti and Pesenti (2001a) and Betts and Devereux (2000a,b), we show that (i) for a given Foreign monetary stance, a Home monetary expansion is beneficial for both countries only if Home PTM is at an intermediate range; (ii) in a world Nash equilibrium Home and Foreign welfare are bell-shaped in the degrees of PTM; (iii) relative welfare crucially depends on the degrees of PTM; (iv) there is a welfare gain from cooperation even in the cases of no and full PTM.
    Keywords: pricing to market, terms of trade, international coordination of monetary policies
    JEL: E40 F41 F42
    Date: 2004–11
  88. By: Reinhold Kosfeld (Author-Workplace-Name: Department of Economics, University of Kassel); Christian Dreger (Author-Workplace-Name: Institute for Economic Research Halle (IWH))
    Abstract: Changes in production, employment and unemployment are closely related over the course of the business cycle. However, as exemplified by the laws of Verdoorn (1949, 1993) and Okun (1962, 1970), thresholds seem to be present in the relationship. Due to capacity reserves of the firms, output growth must exceed certain levels for the creation of new jobs or a fall in the unemployment rate. In order to get efficient estimates of these bounds, we take a wide range of information into account. In particular, thresholds for employment and unemployment are determined on the grounds of 180 German regional labour markets. To capture cross section dependencies, a spatial SUR model is built up utilizing the eigenfunction decomposition approach suggested by Griffith (1996, 2000). The results indicate, that minimum output growth sufficient for a rise in employment is below the level which is needed for a simultaneous drop in the unemployment rate. Especially, the thresholds turn out to be about 1.2 and 2.2 percent, respectively. The ordering is related both to demographic changes and institutional settings on the labour market, such as the working of the unemployment benefit system. If spatial effects are not controlled for, the thresholds seem to be overrated.
    Keywords: Threshold employment and unemployment, regional labour markets, spatial filtering techniques, spatial SUR analysis
    JEL: C21 C23 E24 E32
    Date: 2004–01
  89. By: Jochen Michaelis (Author-Workplace-Name: Department of Economics, University of Kassel); Angela Birk (Author-Workplace-Name: HWWA, University of Hamburg, Havard University, Department of Economics)
    Abstract: This paper explores how revenue-neutral tax reforms impact employment and economic growth in a model of endogenous growth and search frictions on the labor market. We analyze how savings and the incentive to create new jobs are affected by tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, the payroll tax is found to be neutral. If this tax is used to finance a cut in the capital income tax, we will observe an increase in both growth and, via the capitalization effect, employment. Most other tax reforms, however, imply a trade-off between employment and growth
    Keywords: search unemployment, growth, tax reform
    JEL: E6 H2 J6 O4
    Date: 2004–06
  90. By: Jochen Michaelis (Author-Workplace-Name: Department of Economics, University of Kassel)
    Abstract: This paper presents a general-equilibrium framework to revisit the issues of optimal monetary policies and international policy coordination in a two-country model, focusing on the role of a pricing-to-market (PTM) policy by firms. Both countries may be different with respect to PTM. Using the set-up developed by Corsetti and Pesenti (2001a) and Betts and Devereux (2000a,b), we show that (i) for a given Foreign monetary stance, a Home monetary expansion is beneficial for both countries only if Home PTM is at an intermediate range; (ii) in a world Nash equilibrium Home and Foreign welfare are bell-shaped in the degrees of PTM; (iii) relative welfare crucially depends on the degrees of PTM; (iv) there is a welfare gain from cooperation even in the cases of no and full PTM.
    Keywords: pricing to market, terms of trade, international coordination of monetary policies
    JEL: E40 F41 F42
    Date: 2005–01
  91. By: Kaie Kerem (Department of Economics at Tallinn University of Technology); Enn Listra (Department of Economics at Tallinn University of Technology); Katrin Rahu (Department of Economics at Tallinn University of Technology)
    Abstract: The paper studies the financial market efficiency based on the data from Tallinn Stock Exchange, the rationality of expectations that is treated as financial rationality and the time series properties of inflation time series to get the forecasting model. The hypotheses to be tested are of interest to both macroeconomists and policy-makers. Two time periods can be distinguished for the modelling purposes in the case of CPI. During the first period the concept of rational expectations is clearly non-usable in macroeconomic models of that period. It can probably be used during the second period. Three time periods can be distinguished in market data. Clear improvement of market efficiency has been found in Estonian capital market. The study relies both on the economic theory and on time series analysis. The authors use banking statistics and macroeconomic data on Estonia.
    Keywords: market efficiency, rational expectations, inflation, modelling
    JEL: E4 G14

This nep-mac issue is ©2005 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.