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on Macroeconomics |
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Issue of 2005‒02‒27
seventeen papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Peter Funk; Bettina Kromen |
| Abstract: | This paper models the relationship between inflation and steady state growth in a model combining standard Schumpeterian growth with a standard New Keynesian specification of nominal price rigidity. Positive money growth has two clear-cut countervailing effects on the incentive to innovate. Past price rigidity causes the use of an inefficiently large quantity of cheap old intermediate goods, reducing demand for new ones and hence, the incentive to innovate. Future price rigidity erodes the new good’s relative price, increasing demand and therefore the current incentive to innovate. In numerical calibrations the negative effect of inflation on growth dominates. |
| Keywords: | Inflation, endogenous growth, price rigidity |
| JEL: | E31 O30 O42 |
| Date: | 2005–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0016&r=mac |
| By: | Michael Woodford |
| Abstract: | A relation between inflation and the path of average marginal cost (often measured by unit labor cost) implied by the Calvo (1983) model of staggered pricing --- sometimes referred to as the %u201Cnew-Keynesian Phillips curve%u201D --- has been the subject of extensive econometric estimation and testing. Standard theoretical justifications of this form of aggregate-supply relation, however, either assume (i) the existence of a competitive rental market for capital services, so that the shadow cost of capital services is equated across firms and sectors at all points in time, despite the fact that prices are set at different times, or (ii) that the capital stock of each firm is constant, or at any rate exogenously given, and so independent of the firm's pricing decision. But neither assumption is realistic. The present paper examines the extent to which existing empirical specifications and interpretations of parameter estimates are compromised by reliance on either of these assumptions. The paper derives an aggregate-supply relation for a model with monopolistic competition and Calvo pricing in which capital is firm-specific and endogenous, and investment is subject to convex adjustment costs. The aggregate-supply relation is shown to again take the standard "new-Keynesian" form, but with an elasticity of inflation with respect to real marginal cost that is a different function of underlying parameters than in the simpler cases studied earlier. Thus the relations estimated in the empirical literature remain correctly specified under the assumptions proposed here, but the interpretation of the estimated elasticity is different; in particular, the implications of the estimated Phillips-curve slope for the frequency of price adjustment is changed. Assuming a rental market for capital results in a substantial exaggeration of the infrequency of price adjustment; assuming exogenous capital instead results in a smaller under-estimate. |
| JEL: | E30 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11149&r=mac |
| By: | Yunus Aksoy (School of Economics, Mathematics & Statistics, Birkbeck College); Tomasz Piskorski |
| Abstract: | Recent empirical research documents that the strong short-term relationship between U.S. monetary aggregates on one side and inflation and real output on the other has mostly disappeared since the early 1980s. Using the direct estimate of flows of USD abroad we find that domestic money (currency corrected for the foreign holdings of dollars) contains valuable information about future movements of U.S. inflation and real output. Statistical evidence suggests that the Friedman-Schwartz stylized facts can be reestablished once the focus of analysis is back on the correct measure of domestic monetary aggregates. |
| Keywords: | foreign holdings, domestic money, monetary aggregates, information value |
| JEL: | E3 E4 E5 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0506&r=mac |
| By: | Guillaume Plantin |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cmu:gsiawp:710428070&r=mac |
| By: | Zon,Adriaan,van; Lontzek,Thomas (MERIT) |
| Abstract: | This paper deals with the problem of tackling the adverse effect of output growth on environmental quality. For this purpose we use an intermediate sector that builds ‘putty-practically-clay’ capital consisting of an energy-raw capital amalgam used for final goods production. The putty-practically-clay model is a strongly simplified version of a full putty-clay model, that mimics all the relevant behaviour of a full putty-clay model, but that does not entail the administrative hassle of a full putty-clay vintage model. In addition to this, we introduce an R&D sector that develops renewable- and conventional energy-based technologies. The allocation of R&D activities over these two uses of R&D gives rise to an induced bias in technical change very much as in Kennedy (1964). In the context of our model, this implies that technological progress is primarily driven by the desire to counteract the upward pressure on production cost implied by a continuing price increase of conventional energy resources. Hotelling’s rule suggests that this price rise is unavoidable in the face of the ongoing depletion of conventional energy reserves. By means of some illustrative model simulations we study the effects of energy policy on the dynamics of the model for alternative policy options aimed at achieving GHG emission reductions. We identify the conditions under which energy policy might partly backfire and present some non-standard policy implications. |
| Keywords: | macroeconomics ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamer:2005006&r=mac |
| By: | di Giovanni, Julian (IMF); McCrary, Justin (University of Michigan); von Wachter, Till (Columbia University and IZA Bonn) |
| Abstract: | Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We compare this identification strategy to the vector autoregression approach, and give an interpretation of our estimates that is appropriate in a dynamic context. Moreover, we show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany. |
| Keywords: | monetary policy, forward looking bias, instrumental variables |
| JEL: | E52 J60 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1495&r=mac |
| By: | Devereux, Paul J. (UCLA and IZA Bonn); Hart, Robert A. (University of Stirling and IZA Bonn) |
| Abstract: | Based on the methodology of Beaudry and DiNardo (1991), this paper investigates the relative importance of the spot market and implicit contracts in the determination of British real wages. Empirical work is carried out separately for males and females with individuallevel data taken from the New Earnings Survey Panel for the years 1976 to 2001. In contrast to previous studies that used North American data, the spot market is found to be more important than implicit contracts in determining real wages. Indeed, there is very little support for implicit contracts in these data. Further evidence is provided through the analysis of individual wage sequences. These suggest that the downwardly rigid wage sequences implied by implicit contracts with costless worker mobility are not prevalent in Britain. |
| Keywords: | spot market wages, implicit contracts, unemployment, wage sequences |
| JEL: | E24 E32 J31 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1497&r=mac |
| By: | Michele Boldrin; Mariacristina De Nardi; Larry E. Jones |
| Abstract: | The data show that an increase in government provided old-age pensions is strongly correlated with a reduction in fertility. What type of model is consistent with this finding? We explore this question using two models of fertility, the one by Barro and Becker (1989), and the one inspired by Caldwell and developed by Boldrin and Jones (2002). In the Barro and Becker model parents have children because they perceive their children's lives as a continuation of their own. In the Boldrin and Jones' framework parents procreate because the children care about their old parents' utility, and thus provide them with old age transfers. The effect of increases in government provided pensions on fertility in the Barro and Becker model is very small, and inconsistent with the empirical findings. The effect on fertility in the Boldrin and Jones model is sizeable and accounts for between 55 and 65% of the observed Europe-US fertility differences both across countries and across time and over 80% of the observed variation seen in a broad cross-section of countries. Another key factor affecting fertility the Boldrin and Jones model is the access to capital markets, which can account for the other half of the observed change in fertility in developed countries over the last 70 years. |
| JEL: | E10 J10 J13 O10 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11146&r=mac |
| By: | Giorgio Primiceri |
| Abstract: | This paper provides an explanation for the run-up of U.S. inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s, which standard macroeconomic models have difficulties in addressing. I present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally, conditional on their current beliefs. The steady state associated with the self-confirming equilibrium of the model is characterized by low inflation. However, prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the Phillips curve. I estimate the model using likelihood methods. The estimation results show that the model accounts remarkably well for the evolution of policymakers%u2019 beliefs, stabilization policy and the postwar behavior of inflation and unemployment in the United States. |
| JEL: | E31 E32 E5 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11147&r=mac |
| By: | Steven R. Grenadier; Neng Wang |
| Abstract: | This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution. In particular, greater inertia occurs in investment, as the model predicts that the manager will have a more valuable option to wait than the owner. |
| JEL: | E31 E32 E5 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11148&r=mac |
| By: | Mitsuru Iwamara; Takeshi Kudo; Tsutomu Watanabe |
| Abstract: | We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999%u20142004. First, we find that the Bank of Japan%u2019s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan%u2019s commitment failed to have su.cient influence on the market%u2019s expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999%u20142002 was higher than predicted by the historical regularity, implying that the Japanese government deviated from the Ricardian rule toward fiscal tightening. These findings suggest that inappropriate conduct of monetary and fiscal policy during this period delayed the timing to escape from the liquidity trap. |
| JEL: | E31 E52 E58 E61 E62 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11151&r=mac |
| By: | Clara Patricia Martín; Juan Mauricio Ramírez |
| Abstract: | En este trabajo se hace una evaluación cuantitativa de los posibles efectos de un acuerdo de libre comercio (TLC) con Estados Unidos sobre la economía colombiana. Con este objetivo se utiliza un modelo de equilibrio general que representa el funcionamiento de la economía colombiana en condiciones de sustitución imperfecta entre los bienes domésticos y los bienes importados y exportados, rigideces salariales en el mercado laboral, y competencia imperfecta en los sectores industriales. Los resultados muestran que los efectos de un TLC sobre la economía colombiana dependen críticamente del grado en el cual se logren afectar las barreras no arancelarias vigentes en los Estados Unidos. Un TLC con disminución en estas barreras no arancelarias beneficiaría a los más pobres y tendría un efecto progresivo sobre la distribución del ingreso, contrario a lo que sostienen diferentes críticos. Sin embargo, esto depende del alcance del acuerdo. En especial, un TLC que mantenga las BNA sobre el sector agrícola en Estados Unidos tendría efectos negativos sobre los ingresos y el consumo de los trabajadores rurales, y en general sobre el sector agrícola colombiano. |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:326&r=mac |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Duo Wang |
| Abstract: | We develop a simple behavioural asset pricing model with fundamentalists and chartists to study price behaviour in financial markets. Within our model, the market impact of the weighting process of the conditional mean and variance of the chartists and investors' reactions are analysed. Price dynamics of the deterministic model under/over-reactions are analyzed. It shows different price dynamics and routes to complicated price behaviour when the chartists act as either trend followers or contrarians. It is found that (in a separate paper Chiarella et al (2004)) this analysis can be used to establish some connections between the statistical properties of the nonlinear stochastic system (such as distribution density and autocorrelation patterns of returns, in particular the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data) and the stability and bifurcation of the underlying deterministic system are established. |
| Keywords: | fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts |
| JEL: | D83 D84 E21 E32 C60 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:141&r=mac |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Duo Wang |
| Abstract: | Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. However, the impact of such dynamic phenomena on various statistical properties of the corresponding stochastic model, including skewness and excess kurtosis, various autocorrelation (AC) patterns of under and over reactions, and volatility clustering characterised by the long-range dependence of ACs, is not clear and has been very little studied. This paper aims to study this issue. Through a simple behavioural asset pricing model with fundamentalists and chartists, we examine the statistical properties of the model and their connection to the dynamics of the underlying deterministic model. In particular, our analysis leads to some insights into the type of mechanism that may be generating some of the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data. |
| Keywords: | fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts |
| JEL: | D83 D84 E21 E32 C60 |
| Date: | 2004–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:142&r=mac |
| By: | Christos Koulovatianos; Leonard J. Mirman |
| Abstract: | We study the determinants of voting outcomes on the provision of public consumption through marginal income taxes in the context of the simple linear growth model. We provide analytical results on how the dynamic politicoeconomic equilibrium maps the economic fundamentals to policies and long-run growth. We find that in a deterministic growth environment voters internalize, although imperfectly, the deadweight losses of taxation and vote for lower taxes when the productivity of capital is higher. Therefore, the politicoeconomic channel reinforces the positive role of productivity for growth. In a stochastic linear-growth environment where business cycles are driven by productivity shocks, in line with existing evidence, we find that the level of endogenous public consumption is procyclical but its share of GDP is countercyclical. |
| JEL: | C73 D72 E61 E62 O23 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0502&r=mac |
| By: | Jorge Martinez-Vazquez; F. Javier Arze; Jameson Boex |
| Abstract: | This study seeks to assess the current state of knowledge and contribute to the understanding of how fiscal policies and management interact with corruption issues by integrating concrete and practical issues with theoretical and quantitative analysis of their nature and consequences. The study presents a comprehensive analysis of corruption that not only highlights the problems, but also potential solutions for a broad range of fiscal policy and fiscal reform issues. The analysis and discussion is supported and clarified by relevant real-world examples and empirical analysis. In particular, country-specific examples prove to be quite useful to identify key issues or valuable lessons in minimizing corruption. |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:dai:wpaper:fr1003&r=mac |
| By: | Marco Vega (LSE and Central Bank of Peru); Diego Winkelreid (Central Bank of Peru) |
| Abstract: | This paper shows how persistent world inflation shocks hitting a small open economy can re-weight the importance of domestic and foreign factors in the determination of prices. In particular, we study why a global disinflation environment may imply a weakening of the channels whereby domestic shocks affect inflation. We derive a state-dependent Phillips curve based on translog preferences that make the elasticity of substitution of domestic goods sensitive to foreign prices. With this approach we are able to replicate this dragging effect of global disinflation on domestic inflation. We also provide empirical evidence from a wide panel of countries to support the significance of such an effect. |
| Keywords: | Phillips Curve, Translog Aggregator, Competitiveness |
| JEL: | E31 E52 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2005-001&r=mac |