nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒03‒06
nineteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? By Peter J. Klenow and Oleksiy Kryvtsov
  2. Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States By Amir Kia
  3. Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004 By Mitsuru Iwamura; Takeshi Kudo; Tsutomu Watanabe
  4. Monetary policy transmission mechanisms in the CEECs: How important are the differences with the euro area? By Jerome Creel; Sandrine Levasseur
  5. Technology Spillover through Trade and TFP Convergence: 120 Years of Evidence for the OECD Countries By Jakob Brøchner Madsen
  6. Policy Variability in Models of Endogenous Growth with Productive Spending. By D Varvarigos
  7. An Improved Annual Chronology of U.S. Business Cycles since the 1790's By Joseph H. Davis
  8. What's Real About the Business Cycle? By James D. Hamilton
  9. Fiscal gimmickry in Europe: one-off measures and creative accounting By Vincent Koen; Paul van den Noord
  10. Reforming Turkey's public expenditure management By Rauf Gönenç; Willi Leibfritz; Erdal Yilmaz
  11. Financial Constraints and Unemployment Equilibrium By CESARONI GIOVANNI; MESSORI MARCELLO
  12. Real Balance Effects, Determinacy and Optimal Monetary Policy By PIERGALLINI ALESSANDRO
  13. Welfare Effects of Monetary Policy Rules in a Model with Nominal Rigidities and Credit Market Frictions By PAUSTIAN MATTHIAS
  14. A Small-Sample Study of the New-Keynesian Macro Model By Seonghoon Cho; Antonio Moreno
  15. The Volatility Structure of the Fixed Income Market under the HJM Framework: A Nonlinear Filtering Approach By Carl Chiarella; Thuy-Duong To
  16. The Volatility Structure of the Fixed Income Market under the HJM Framework: A Nonlinear Filtering Approach By Carl Chiarella; Hing Hung; Thuy-Duong To
  17. Keynesian Dynamics and the Wage-Price Spiral: A Baseline Disequilibrium Model By Toichiro Asada; Pu Chen; Carl Chiarella; Peter Flaschel
  19. Distribution and Globalization: A Wage Bargaining Model By Ozlem Onaran

  1. By: Peter J. Klenow and Oleksiy Kryvtsov
    Abstract: Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S. Bureau of Labor Statistics to decompose the variance of consumer price inflation from 1988 through 2003. We find that around 95% of the variance of monthly inflation stems from fluctuations in the average size of price changes, i.e., the intensive margin. When we calibrate a prominent state-dependent pricing model to match this empirical variance decomposition, the model's shock responses are very close to those in time-dependent pricing models.
    Keywords: Inflation and prices
    JEL: E31 E32
    Date: 2005
  2. By: Amir Kia (Department of Economics,Carleton University)
    Keywords: Monetary Policy Transparency, forward looking agents, risk, volatility, money market.
    Date: 2005–02–21
  3. By: Mitsuru Iwamura; 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 1999-2004. First, we find that the Bank of Japan's 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's commitment failed to have suffcient influence on the market's expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999-2002 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.
    Date: 2005–03
  4. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Sandrine Levasseur (Observatoire Français des Conjonctures Économiques)
    Abstract: We use a structural VAR model with short-term restrictions to investigate the relative importance of interest rate, exchange rate and credit channels in the monetary policy transmission (MPT) for the Czech Republic, Hungary and Poland over 1993:1-2004:3. Main results are as follows. First, in the three countries, following a positive shock on the interest rate, prices increase instead of decreasing, due to the immediate depreciation of the nominal exchange rate. The results thus exhibit an "exchange rate" puzzle conducing to the appearance of a "price-puzzle". Second, none channel is very powerful for the MPT in the three countries. Nevertheless, the exchange rate and the interest rate channels play a growing role over the recent period in Poland, compared with the same channels in the Czech Republic and Hungary. As nominal exchange rate fluctuations allow for greater real shocks dampening in Poland, the cost of entering EMU may be more costly for this country than for the Czech Republic or Hungary.
    Keywords: monetary policy transmission, VAR models, exchange rate regimes
    JEL: E52 E58 F47
    Date: 2005
  5. By: Jakob Brøchner Madsen (Institute of Economics, University of Copenhagen)
    Abstract: Using a new dataset on imports of technology and total factor productivity (TFP) over more than a century for the OECD countries, this paper tests for international technological transmission through trade. The empirical estimates suggest that imports of knowledge have been responsible for an almost 200% increase in TFP over the past century, but that the spillover effect has been highly unevenly distributed across countries, but has contributed to TFP convergence among the OECD countries.
    Keywords: technology spillovers; imports; TFP convergence
    JEL: E13 E22 E23 O11 O3
    Date: 2005–02
  6. By: D Varvarigos
    Abstract: Existing theoretical analyses have shown that if policy variables affect investmentdecisions in either physical or human capital then an increase in policy variability results in higher trend output growth as individuals respond to higher uncertainty with a precautionary increase in these types of investment. In this paper I present two models in which policy variability arises from randomness in the provision of productive spending. In the first model, public spending enters as an input in the production technology of the economy. In this case I find that the sign of the policy variability-growth relationship depends critically on the technological parameters of the production function. In the second model, public spending is an input on the education sector of the economy. In this case I find that policy variability is always growth retarding as individuals respond to increased uncertainty by actually reducing rather than increasing their investment in human capital.
    Date: 2005
  7. By: Joseph H. Davis
    Abstract: The NBER's pre-WWI chronology of annual peaks and troughs has the remarkable implication that the U.S. economy spent nearly every other year in recession, although previous research has argued that the post-Civil War dates are flawed. This paper extends that research by redating annual peaks and troughs for the entire 1796-1914 period using a single metric: Davis' (2004) annual industrial production index. The new pre-WWI chronology alters more than 40% of the peak and troughs, and removes cycles long considered the most questionable. An important implication of the new chronology is the lack of discernible differences in the frequency and duration of industrial cycles among the pre-Civil War, Civil War to WWI, and post-WWII periods. Of course, my comparison between pre-WWI and post-WWII cycles is limited by its reliance on a single annual index (as opposed to many monthly series) that is less comprehensive than GDP.
    JEL: N1 E3
    Date: 2005–02
  8. By: James D. Hamilton
    Abstract: This paper argues that a linear statistical model with homoskedastic errors cannot capture the nineteenth-century notion of a recurring cyclical pattern in key economic aggregates. A simple nonlinear alternative is proposed and used to illustrate that the dynamic behavior of unemployment seems to change over the business cycle, with the unemployment rate rising more quickly than it falls. Furthermore, many but not all economic downturns are also accompanied by a dramatic change in the dynamic behavior of short-term interest rates. It is suggested that these nonlinearities are most naturally interpreted as resulting from short-run failures in the employment and credit markets, and that understanding these short-run failures is the key to understanding the nature of the business cycle.
    JEL: E3
    Date: 2005–02
  9. By: Vincent Koen; Paul van den Noord
    Abstract: Accounting conventions usually leave some room for judgment, which governments may be tempted to take advantage of, especially when fiscal rules bite or threaten to do so. The European experience over the past decade documented here in great detail illustrates that fiscal gimmicks come in many different guises, but also that some are less mischievous than others. Logit regression analysis confirms that when deficit rules or, to a lesser extent, debt thresholds tend to become more binding, recourse to gimmicks is more likely. It also suggests that more centralised budget systems are less prone to such gimmickry. The policy implications are clear as regards the virtues of transparent and consistent accounting practices, but more ambiguous regarding the merits or otherwise of one-off measures. <p> Astuces budgétaires en Europe: mesures non récurrentes et créativité comptable <p> En général, les conventions comptables sont sujettes à interprétation, et les gouvernements peuvent être tentés d'en profiter, notamment lorsqu'ils sont contraints, ou en voie de l'être, par des règles budgétaires. L'expérience européenne au cours de la décennie écoulée décrite ici avec force détails montre que les astuces budgétaires sont protéiformes, mais aussi que certaines posent moins de problèmes que d'autres. Des régressions logit confirment que lorsque les règles sur les déficits ou, dans une moindre mesure, les seuils d'endettement deviennent plus contraignants, la probabilité d'un recours à des astuces augmente. Elles corroborent également l'idée que les astuces tendent à être moins employées dans des systèmes budgétaires plus centralisés. Les implications de politique économique sont claires s'agissant des vertus de la transparence et de la cohérence des comptes, mais plus ambiguës concernant les mérites ou inconvénients des mesures non récurrentes.
    Keywords: Budgets; Economic and Monetary Union; fiscal deficit; fiscal rules; fiscal gimmicks; national accounts; political economy; public debt; Stability and Growth Pact
    JEL: D78 E61 H6 H27 H74 H81 H82 H87
    Date: 2005–02–10
  10. By: Rauf Gönenç; Willi Leibfritz; Erdal Yilmaz
    Abstract: Fiscal imbalances were a main cause for chronic high inflation and macroeconomic instability before the 2000/2001 crisis. Fiscal consolidation is the cornerstone of post-crisis stabilization. It has been quite successful over the past three years as sizeable primary surpluses have been sustained and the fall in interest rates has reduced the interest cost of public debt. Fiscal targets have been achieved chiefly by raising revenues which has increased the tax burden; greater emphasis should now be placed on the control of public expenditure. At the same time, core public services such as education, justice, infrastructure and rural development will need to be upgraded. Social security costs may also rise with the planned shift to universal health insurance, and the ambitious administrative decentralization project could cause upward pressure on local spending. Far-reaching rationalization of public expenditures is therefore required to meet the quantitative fiscal targets while achieving the intended improvement in public governance. Turkey has made important steps in this direction with new fiscal laws and regulations but an integrated strategy is necessary to harness their full benefits. This Working Paper relates to the 2004 OECD Economic Survey of Turkey ( <p> Réformer la gestion des dépenses budgétaires en Turquie <p> Les déséquilibres fiscaux ont été une cause majeure de l'inflation forte et de l'instabilité macroéconomique avant la crise de 2000-2001. La consolidation budgétaire a été au cœur de la stabilisation après la crise. Elle a été mise en œuvre depuis trois ans avec des excédents primaires larges, et la baisse des taux d'intérêt a réduit le coût du service de la dette publique. Les objectifs budgétaires ont été atteints principalement par une hausse des revenus, augmentant la pression fiscale, et plus d'attention devra être accordée à l'avenir au contrôle des dépenses. En même temps des services publics majeurs comme l'éducation, la justice, les infrastructures et le développement rural devront être améliorés. Les dépenses de sécurité sociale pourraient aussi augmenter avec le passage annoncé à la couverture médicale universelle, et l'ambitieux projet de décentralisation administrative pourrait accroître les dépenses locales. Une forte rationalisation des dépenses devient donc nécessaire pour atteindre les objectifs quantitatifs de la politique budgétaire tout en améliorant la qualité de la gouvernance publique. La Turquie a fait d'importants pas dans cette direction avec de nouvelles lois et réglementations budgétaires mais une stratégie intégrée est nécessaire pour recueillir pleinement leurs fruits.
    Keywords: Turkey; government expenditure; public sector efficiency; budget systems; intergovernmental relations; new public management
    JEL: E62 H1 H4 H5 H7
    Date: 2005–02–10
    Abstract: This paper aims to show (1) that the IS/LM model will be a coherent solution to Keynes's analysis of unemployment, if the relaxation of the general equilibrium framework is based solely on exogenous price and quantity constraints; (2) that the consequent determination of unemployment equilibria is analytically fragile and does not support Keynes' attempt to reduce the standard approach to a particular case of his "general theory"; and (3) that a more robust determination of unemployment equilibria has to be based on the integration of credit rationing into a general equilibrium model. To illustrate points (1) and (2), we review some of the traditional macroeconomic models of the neoclassical synthesis, and we show that the problems bequeathed by these models are only partially solved by the strand of the new Keynesian economics based on market imperfections and endogenous rigidities. To illustrate point (3) we build a simple general equilibrium model in which prices are - in principle - perfectly flexible and credit rationing implies unemployment equilibria. Apart from the crucial role played by the credit market, our model is very similar to that developed by the neoclassical synthesis.
    Date: 2003–05
    Abstract: This paper presents a dynamic New Keynesian macroeconomic model with real balance effects. Both the conditions of equilibrium determinacy under an interest rate rule of the Taylor-type and the implications for optimal monetary policy are considered. We find a number of results that would not appear in the traditional framework. It is shown that the real balance effect makes the so-called "Taylor principle" not necessary for determinacy of rational expectations equilibrium. A relatively "passive" monetary policy is found to be feasible also in the long run, but not necessarily optimal. In particular, within a class of policy rules constrained to be a linear function of state variables, an "active" optimal interest rate rule is more likely to be verified under commitment rather than under discretion.
    Date: 2004–02
    Abstract: This paper evaluates monetary policy rules in a business cycle model with staggered prices and wage setting a la Calvo and asymmetric information in the credit market. Rules are compared in a utility based welfare metric, the effects of the model's nonlinear dynamics are captured by a quadratic approximation to the policy function. The firms net worth crucially affects the terms of obtaining outside finance. Financial frictions dampen the economy's response to shocks and make them more persistent. For the baseline calibration, the welfare costs of price stickiness are found to be less than 0.04 per cent of steady state consumption. However, wage stickiness can induce welfare costs of up to 0.85 per cent of steady state consumption. An interest rate rule that places high weight on stabilizing wage inflation can eliminate most of these costs. These findings are by and large independent of the existence of other real distortions in the model, namely credit frictions.
    Date: 2004–03
  14. By: Seonghoon Cho (Korea Development Institute); Antonio Moreno (School of Economics and Business Administration, University of Navarra)
    Abstract: This paper presents a small-sample study of the threeequation- three variable New-Keynesian macro model. While the point estimates imply that the Fed has been stabilizing inflation fluctuations since 1980, our econometric analysis suggests considerable uncertainty regarding the stance of the Fed against inflation. We show that, if we add first order autocorrelation to the error terms of the New- Keynesian model, this is only marginally rejected.
    JEL: C32 E32 E52
    Date: 2005–02
  15. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Thuy-Duong To (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper seeks to estimate a multifactor volatility model so as to describe the dynamics of interest rate markets, using data from the highly liquid but short term futures markets. The difficult problem of estimating such multifactor models is resolved by using a genetic algorithm to carry out the optimization procedure. The ability to successfully estimate a multifactor volatility model also eliminates the need to include a jump component, the existence of which would create difficulties in the practical use of interest rate models, such as pricing options or producing forecasts.
    Keywords: term structure; volatility; mutlifactor; jump; eurodollar futures; genetic algorithm
    JEL: C51 C61 E43
    Date: 2005–01–01
  16. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Hing Hung (School of Finance and Economics, University of Technology, Sydney); Thuy-Duong To (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper considers the dynamics for interest rate processes within a multi-factor Heath, Jarrow and Morton (1992) specification. Despite the flexibility of and the notable advances in theoretical research about the HJM models, the number of empirical studies is still inadequate. This paucity is principally because of the difficulties in estimating models in this class, which are not only high-dimensional, but also nonlinear and involve latent state variables. This paper treats the estimation of a fairly broad class of HJMmodels as a nonlinear filtering problem, and adopts the local linearization filter of Jimenez and Ozaki (2003), which is known to have some desirable statistical and numerical features, to estimate the model via the maximum likelihood method. The estimator is then applied to the interbank offered-rates of the U.S, U.K, Australian and Japanese markets. The two-factor model, with the factors being the level and the slope effect, is found to be a reasonable choice for all of the markets. However, the contribution of each factor towards overall variability of the interest rates and the financial reward each factor claims differ considerably from one market to another.
    Keywords: term structure; Heath-Jarrow-Morton; local linearization; filtering
    JEL: C51 E43 G12
    Date: 2005–01–01
  17. By: Toichiro Asada (Faculty of Economics, Chuo University Faculty of Economics); Pu Chen (Department of Economics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Peter Flaschel (Department of Economics, University of Bielefeld)
    Abstract: We reformulate and extend the standard AS-AD growth model of the Neoclassical Synthesis (stage I) with its traditional microfoundations. The model retains an LM curve in the place of a Taylor interest rate rule, exhibits sticky wages as well as sticky prices, myopic perfect foresight of current inflation rates and adaptively formed medium-run expectations concerning the investment and the inflation climate in which the economy is operating. The resulting nonlinear 5D model of labor and goods market disequilibrium dynamics avoids the striking anomalies of the standard AS-AD model of the Neoclassical synthesis (stage I). It exhibits instead Keynesian feedback dynamics proper with, in particular, asymptotic stability of its unique interior steady state for low adjustment speeds and with cyclical loss of stability ? by way of Hopf bifurcations ? when some adjustment speeds are made suciently large, eventually leading to purely explosive dynamics. In such cases, downward money wage rigidity serves to make the overall dynamics bounded and thus viable. We thus obtain and analyze a baseline D(isequilibrium)AS-AD model characterised by Keynesian feedback channels with a rich set of stability/instability features as the sources of the business cycle. The outcomes of the model stand in stark contrast to those of the currently fashionable baseline model of the New Keynesian alternative (the Neoclassical Synthesis, stage II) that we suggest is more limited in scope.
    Keywords: DAS-AD growth; wage and price Phillips curves; real interest eects; real wage effects; (in)stability; persistent cycles; inflation and deflation
    JEL: E24 E31 E32
    Date: 2004–12–01
  18. By: Ozlem Onaran (Vienna University of Economics & B.A.); Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: In this study, a Kaleckian-Post-Keynesian macroeconomic model, which is an extended version of the Bhaduri and Marglin (1990) model, serves as the starting point. The merit of a Kaleckian model for our purposes is that it highlights the dual function of wages as a component of aggregate demand as well as a cost item as opposed to the mainstream economics, which perceive wages merely as a cost item. Depending on the relative magnitude of these two effects, Kaleckian models distinguish between profit-led and wage-led regimes, where the latter is defined as a low rate of accumulation being caused by a high profit share. Are actual economies wage-led or profit-led? Current orthodoxy implicitly assumes that they are profit-led, and thus supports the neoliberal policy agenda. The purpose of the paper is to carry this discussion into the empirical terrain, and to test whether accumulation and employment are profit-led in two groups of countries. We do so by means of a structural vector autoregression (VAR) model. The model is estimated for USA, UK and France to represent the major developed countries, and for Turkey and Korea to represent developing countries. The latter are chosen since they represent two different export-oriented growth experiences. The results of the adjustment experiences of both countries are in striking contrast to orthodox theory, however they also present counter-examples to each other in terms of their ways of integrating into the world economy.
    Keywords: Keynesian economics, macroeconomics, capital accumulation, distribution, unemployment, structural vectorautoregression, developed and developing countries
    JEL: E1 E12 E2 E3
    Date: 2005–01
  19. By: Ozlem Onaran (Vienna University of Economics & B.A.)
    Abstract: This paper develops a model of distribution to analyze the effects of neoliberal globalization on labor in the developing countries. Distribution is determined via wage bargaining by workers, price setting by firms, and improvements in productivity. The full model has the nature of a Post-Keynesian conflicting claims model for an open economy under the pressure of globalization. The conflict inflation is extended to an open economy case with imported inputs, where the pass through effect of the depreciation of the local currency also becomes important. The variables that reflect the macroeconomic effects of globalization are modeled as parameters that affect the bargaining power of labor on two levels: the first group is related with the interaction with the global economy, i.e. international trade, and FDI. The second is about the domestic fiscal and monetary policy variables, which are particularly related to the specific form that globalization takes in the era of neoliberalism, i.e. government expenditures, and the interest rate. Then the model is solved for distribution of income, i.e. the wage share, thus a reduced form of the model is obtained, which is estimated in a companion paper to test whether the change in the international and domestic macroeconomic environment has affected the decline the labor’s share.
    Keywords: Labor’s share, neoliberal policies, globalization
    JEL: E24 O15 O19 J23 J30 F02
    Date: 2005–02

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