nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒03‒20
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy under Model and Data-Parameter Uncertainty By Gino Cateau
  4. Inflation in open economies with complete markets By Marco Celentani; J. Ignacio Conde-Ruiz; Klaus Desmet
  5. Improving the SGP: Taxes and Delegation Rather than Fines By Lindbeck, Assar; Niepelt, Dirk
  6. Time Consistency of Fiscal and Monetary Policy: A Solution By Persson , Mats; Persson , Torsten; Svensson, Lars E.O.
  7. Exposure-based Cash-Flow-at-Risk under Macroeconomic Uncertainty By Andrén, Niclas; Jankensgård, Håkan; Oxelheim, Lars
  8. On the Link between Exchange-Rate Regimes and Monetary-Policy Autonomy: The European Experience By Forssbaeck, Jens; Oxelheim, Lars
  9. Some Further Evidence on Interest-Rate Smoothing: The Role of Measurement Errors in the Output Gap By Apel, Mikael; Jansson, Per
  10. Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  11. Are Constant Interest Rate Forecasts Modest Interventions? Evidence from an Estimated Open Economy DSGE Model of the Euro Area By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  12. Inference in Vector Autoregressive Models with an Informative Prior on the Steady State By Villani, Mattias
  13. Monetary Policies and Fiscal Policies in Emerging Markets By Ugo Panizza
  14. Fiscal Sustainability in Emerging Market Countries with an Application to Ecuador By Ugo Panizza; Alejandro Izquierdo; Carlos Díaz-Alvarado
  15. Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease By Ugo Panizza; Ana María Loboguerrero
  16. A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series By Massimiliano Marcellino; James Stock; Mark Watson
  17. Leading Indicators: What Have We Learned? By Massimiliano Marcellino
  18. What Drives Business Cycles in a SmallOpen Economy with a Fixed Exchange Rate? By Niels Arne Dam; Jesper Gregers Linaa
  19. Uninsured Idiosyncratic Investment Risk and Aggregate Saving By George-Marios Angeletos
  20. Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market By Robert E. Hall
  21. Optimal Taxation with Endogenous Insurance Markets By Mikhail Golosov; Aleh Tsyvinski
  22. Integrating Industry and National Economic Accounts: First Steps and Future Improvements By Ann M. Lawson; Brian C. Moyer; Sumiye Okubo; Mark A. Planting
  23. Special Purpose Vehicles and Securitization By Gary Gorton; Nicholas Souleles
  24. Self-Fulfilling Currency Crises: The Role of Interest Rates By Christian Hellwig; Arijit Mukherji; Aleh Tsyvinski
  25. Financial Markets and the Real Economy By John Cochrane
  26. Social Change By Jeremy Greenwood; Nezih Guner
  27. Regional Mismatch and Unemployment: Theory and Evidence from Italy, 1977-1998 By Marco Manacorda,Barbara Petrongolo
  28. FDI, Allocation of Talents and Differences in Regulation By Giovanni Pica; José V. Rodríguez Mora
  29. The Effects of Employment Protection on the Italian Labour Market By Adriana Kugler; Giovanni Pica
  30. Labour Market Seasonality in Canada: Trends and Policy Implications By Andrew Sharpe; Jeremy Smith
  31. Attributing Returns and Optimising United States Swaps Portfolios Using an Intertemporally-Consistent and Arbitrage-Free Model of the Yield Curve By Leo Krippner
  32. Instability in Exchange Rates of the World Leading Currencies: Implications of a Spatial Competition Model among Central Banks By Dirk Engelmann; Jan Hanousek; Evzen Kocenda
  33. Credibility and adjustment: gold standards versus currency boards By Jean Baptiste Desquilbet; Nikolay Nenovsky
  34. Money Market Liquidity under Currency Board – Empirical Investigations for Bulgaria By Petar Chobanov; Nikolay Nenovsky
  35. Volatile Interest Rates, Volatile Crime Rates: A new argument for interest-rate smoothing By Garett Jones; Ali M. Kutan
  36. Beliefs about Exchange-Rate Stability: Survey Evidence From the Currency Board in Bulgaria By Neven T. Valev; John A. Carlson
  37. The Stability and Growth Pact from the Perspective Of the New Member States By Gábor Orbán; György Szapáry
  38. Russia from Bust to Boom: Oil, Politics or the Ruble? By Bruno Merlevede; Koen Schoors; Bas van Aarle
  39. Gross Job Flows over the Past Two Business Cycles: Not all 'Recoveries' are Created Equal By R. Jason Faberman
  40. External and Fiscal Sustainability of the Czech Economy: A Quick Look Through the IMF’s Night-Vision Goggles By Ales Bulir
  41. Beyond Balassa - Samuelson: Real Appreciation in Tradables in Transition Countries By Martin Cincibuch; Jiri Podpiera
  42. Exploiting the Oil-GDP Effect to Support Renewables Deployment By Shimon Awerbuch; Raphael Sauter
  43. Stabilization via Currency Board By Jutta Maute

  1. By: Gino Cateau
    Abstract: Policy-makers in the United States over the past 15 to 20 years seem to have been cautious in setting policy: empirical estimates of monetary policy rules such as Taylor's (1993) rule are much less aggressive than those derived from optimizing models. The author analyzes the effect of an aversion to model and data-parameter uncertainty on monetary policy. Model uncertainty arises because a central bank finds three competing models of the economy to be plausible. Data uncertainty arises because real-time data are noisy estimates of the true data. The central bank explicitly models the measurement-error processes for both inflation and the output gap, and it acknowledges that it may not know the parameters of those processes precisely (which leads to data-parameter uncertainty). The central bank chooses policy according to a Taylor rule in a framework that allows an aversion to the distinct risk associated with multiple models and dataparameter configurations. The author finds that, if the central bank cares strongly enough about stabilizing the output gap, this aversion generates significant declines in the coefficients of the Taylor rule, even if the bank's loss function assigns little weight to reducing interest rate variability. He also finds that an aversion to model and data-parameter uncertainty can yield an optimal Taylor rule that matches the empirical Taylor rule. Under some conditions, a small degree of aversion is enough to match the historical rule.
    Keywords: Uncertainty and monetary policy
    JEL: E5 E58 D8 D81
    Date: 2005
  2. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper examines aggregate money demand relationships in five industrial countries by employing a two-step strategy for testing the null hypothesis of no cointegration against alternatives which are fractionally cointegrated. Fractional cointegration would imply that, although there exists a long-run relationship, the equilibrium errors exhibit slow reversion to zero, i.e. that the error correction term possesses long memory, and hence deviations from equilibrium are highly persistent. It is found that the null hypothesis of no cointegration cannot be rejected for Japan. By contrast, there is some evidence of fractional cointegration for the remaining countries, i.e., Germany, Canada, the US, and the UK (where, however, the negative income elasticity which is found is not theory-consistent). Consequently, it appears that money targeting might be the appropriate policy framework for monetary authorities in the first three countries, but not in Japan or in the UK.
    Date: 2005–01
  3. By: E Philip Davis; Yu-Wei Hu
    Date: 2005–02
  4. By: Marco Celentani; J. Ignacio Conde-Ruiz; Klaus Desmet
    Abstract: This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country's terms of trade of securities, central banks may choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.
  5. By: Lindbeck, Assar (Institute for International Economic Studies, Stockholm University); Niepelt, Dirk (Institute for International Economic Studies, Stockholm University)
    Abstract: We analyze motivations for, and possible alternatives to, the Stability and Growth Pact (SGP). With regard to the former, we identify domestic policy failures and various cross-country spillover effects; with regard to the latter, we contrast an "economic-theory" perspective on optimal corrective measures with the "legalistic" perspective adopted in the SGP.We discuss the advantages of replacing the Pact's rigid rules backed by fines with corrective taxes (as far as spillover effects are concerned) and procedural rules and limited delegation of fiscal powers (as far as domestic policy failures are concerned). This would not only enhance the efficiency of the Pact, but also render it easier to enforce.
    Keywords: Stability and Growth Pact; spillover effects; policy failures; Pigouvian taxes; policy delegation
    JEL: E63 F33 F42 H60
    Date: 2004–12–14
  6. By: Persson , Mats (Institute for International Economic Studies, Stockholm University); Persson , Torsten (Institute for International Economic Studies, Stockholm University); Svensson, Lars E.O. (Department of Economics, Princeton University)
    Abstract: This paper demonstrates how time consistency of the Ramsey policy–the optimal fiscal and monetary policy under commitment–can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including time varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
    Keywords: time consistency; Ramsey policy; surprise inflation
    JEL: E31 E52 H21
    Date: 2004–10–01
  7. By: Andrén, Niclas (Department of Business Administration); Jankensgård, Håkan (The Research Institute of Industrial Economics); Oxelheim, Lars (The Research Institute of Industrial Economics)
    Abstract: In this paper we derive an exposure-based measure of Cash-Flow-at-Risk (CFaR). Existing approaches to calculating CFaR either only focus on cash flow conditional on market changes or neglect market-risk exposures entirely. We argue here that an essential first step in a risk-management program is to quantify cash-flow exposure to macroeconomic and market risk. This is the information relevant for corporate hedging. However, it is the total level of cash flow in relation to the firm’s capital needs that is the information relevant for decision-making. The firm’s overall CFaR is then calculated based on an assessment of corporate risk exposure.
    Keywords: Cash-Flow-at Risk; Corporate Hedging; Downside Risk; Risk Exposure; MUST-analysis; Value-at-Risk
    JEL: F23 G30 G32 M21
    Date: 2005–03–14
  8. By: Forssbaeck, Jens (Institute of Economic Research); Oxelheim, Lars (The Research Institute of Industrial Economics)
    Abstract: We investigate monetary-policy autonomy under different exchange-rate regimes in small, open European economies during the 1980s and 1990s. We find no systematic link between ex post monetary-policy autonomy and exchange rate regimes. This result is enforced for countries/periods with alternative nominal targets. Our interpretation of the results is that over the medium and long term following an ‘independent’ target for monetary policy, which does not deviate much from the targets of those countries to which one is closely financially integrated, is as constraining as locking the exchange rate to some particular level
    Keywords: Exchange Rate Regimes; Monetary Policy Autonomy; Capital Mobility
    JEL: E42 E52 F41
    Date: 2005–03–15
  9. By: Apel, Mikael (Monetary Policy Department, Central Bank of Sweden); Jansson, Per (Monetary Policy Department, Central Bank of Sweden)
    Abstract: It has been suggested that interest-rate smoothing may be partly explained by an omitted variable that relates to conditions in financial markets. We propose an alternative interpretation that suggests that it relates to measurement errors in the output gap.
    Keywords: Interest-rate smoothing; Measurement errors; Output gap
    JEL: E43 E44 E52
    Date: 2005–03–01
  10. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: In this paper we develop a dynamic stochastic general equilibrium (DSGE) model for an open economy, and estimate it on Euro area data using Bayesian estimation techniques. The model incorporates several open economy features, as well as a number of nominal and real frictions that have proven to be important for the empirical fit of closed economy models. The paper offers: i) a theoretical development of the standard DSGE model into an open economy setting, ii) Bayesian estimation of the model, including assesments of the relative importance of various shocks and frictions for explaining the dynamic development of an open economy, and iii) an evaluation of the model's empirical properties using standard validation methods.
    Keywords: DSGE model; Open economy; Monetary Policy; Bayesian Inference; Business cycle
    JEL: C11 E40 E47 E52
    Date: 2005–03–01
  11. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: This paper uses an estimated open economy DSGE model to examine if constant interest forecasts one and two years ahead can be regarded as modest policy interventions during the period 1993Q4-2002Q4. An intervention is here defined to be modest if it does not trigger the agents to revise their expectations about the inflation targeting policy. Using univariate modesty statistics, we show that the modesty of the policy interventions depends on the assumptions about the uncertainty in the future shock realizations. In 1998Q4-2002Q4, the two year constant interest rate projections turn out immodest when assuming uncertainty only about monetary policy shocks during the conditioning period. However, allowing non-policy shocks to influence the forecasts makes the interventions more modest, at least one year ahead. Using a multivariate statistic, however, which takes the joint effects of the policy interventions into consideration, we find that the conditional policy shifts all projections beyond what is plausible in the latter part of the sample (1998Q4-2002Q4), and thereby affects the expectations formation of the agents. Consequently, the constant interest rate assumption has arguably led to conditional forecasts at the two year horizon that cannot be considered economically meaningful during this period.
    Keywords: Forecasting; Monetary policy; Open economy DSGE model; Policy interventions; Bayesian inference
    JEL: C11 C53 E47 E52
    Date: 2005–03–01
  12. By: Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: Vector autoregressions have steadily gained in popularity since their introduction in econometrics 25 years ago. A drawback of the otherwise fairly well developed methodology is the inability to incorporate prior beliefs regarding the system's steady state in a satisfactory way. Such prior information are typically readily available and may be crucial for forecasts at long horizons. This paper develops easily implemented numerical simulation algorithms for analyzing stationary and cointegrated VARs in a parametrization where prior beliefs on the steady state may be adequately incorporated. The analysis is illustrated on macroeconomic data for the Euro area.
    Keywords: Cointegration; Bayesian inference; Forecasting; Unconditional mean; VARs
    JEL: C11 C32 C53 E50
    Date: 2005–03–16
  13. By: Ugo Panizza (Research Department, Inter-American Development Bank)
    Abstract: This paper surveys possible monetary policy options for emerging market countries. As the paper does not seek to enter into the fix versus flex debate, it only considers monetary policy options for countries with a flexible exchange rate. After making the point that the conduct of monetary policy requires a nominal anchor and surveying different types of nominal anchors, the paper suggests that most academics and policymakers agree on the fact that inflation targeting should be the nominal anchor of choice. Hence, the paper describes the main characteristics of an inflation targeting regime and discusses its applicability to emerging market countries. Next, the paper recognizes the necessity of coordination between fiscal and monetary policy and points out that, in order to conduct countercyclical fiscal policies, emerging market countries need to build fiscal institutions that allow accumulating surpluses during periods of economic expansion. The paper concludes by studying the applicability of inflation targeting to Egypt and finds mixed support for this option.
    Keywords: Monetary Policy, Fiscal Policy, Inflation targeting, Egypt
    Date: 2004–12
  14. By: Ugo Panizza (Research Department, Inter-American Development Bank); Alejandro Izquierdo (Research Department, Inter-American Development Bank); Carlos Díaz-Alvarado (Research Department, Inter-American Development Bank)
    Abstract: This paper surveys the recent literature on fiscal sustainability with particular focus on emerging market countries. It discusses the main elements that differentiate emerging market countries from industrial countries and then discusses how probabilistic models can help to evaluate fiscal sustainability in an uncertain environment. Based on this discussion, the paper uses Ecuador to illustrate an application of the probabilistic model, and of the framework to evaluate the impact of shocks to current account financing on sustainability.
    Keywords: Fiscal Sustainability, Debt, Default, Sudden Stop, Emerging Markets, Ecuador
    JEL: E62 O23
    Date: 2004–08
  15. By: Ugo Panizza (Research Department, Inter-American Development Bank); Ana María Loboguerrero (Research Department, Inter-American Development Bank)
    Abstract: Inflation can “grease” the wheels of the labor market by relaxing downward wage rigidity but it can also increase uncertainty and have a negative “sand” effect. This paper studies the grease effect of inflation by looking at whether the interaction between inflation and labor market regulations affects how employment responds to changes in output. The results show that in industrial countries with highly regulated labor markets, the grease effect of inflation dominates the sand effect. In the case of developing countries, we rarely find a significant effect of inflation or labor market regulations and provide evidence indicating that this could be due to the presence of a large informal sector and limited enforcement of de jure labor market regulations.
    Keywords: Employment; Unemployment; Flexibility; Inflation; Deflation; Job Security
    JEL: E24 E31 E52
    Date: 2003–08
  16. By: Massimiliano Marcellino; James Stock; Mark Watson
    Abstract: “Iterated” multiperiod ahead time series forecasts are made using a one-period ahead model, iterated forward for the desired number of periods, whereas “direct” forecasts are made using a horizon-specific estimated model, where the dependent variable is the multi-period ahead value being forecasted. Which approach is better is an empirical matter: in theory, iterated forecasts are more efficient if correctly specified, but direct forecasts are more robust to model misspecification. This paper compares empirical iterated and direct forecasts from linear univariate and bivariate models by applying simulated out-of-sample methods to 171 U.S. monthly macroeconomic time series spanning 1959 – 2002. The iterated forecasts typically outperform the direct forecasts, particularly if the models can select long lag specifications. The relative performance of the iterated forecasts improves with the forecast horizon.
  17. By: Massimiliano Marcellino
    Abstract: We provide a summary updated guide for the construction, use and evaluation of leading indicators, and an assessment of the most relevant recent developments in this field of economic forecasting. To begin with, we analyze the problem of selecting a target coincident variable for the leading indicators, which requires coincident indicator selection, construction of composite coincident indexes, choice of filtering methods, and business cycle dating procedures to transform the continous target into a binary expansion/recession indicator. Next, we deal with criteria for choosing good leading indicators, and simple non-model based methods to combine them into composite indexes. Then, we examine models and methods to transform the leading indicators into forecasts of the target variable. Finally, we consider the evaluation of the resulting leading indicator based forecasts, and review the recent literature on the forecasting performance of leading indicators.
  18. By: Niels Arne Dam (Institute of Economics, University of Copenhagen); Jesper Gregers Linaa (Institute of Economics, University of Copenhagen)
    Abstract: We decompose the Danish business cycle into ten structural shocks using an open-economy DSGE model with infrequent determination of prices and wages which we estimate with Bayesian techniques. Consistent with the Danish monetary policy regime, we formulate an imperfect peg on the foreign exchange rate and analyse the resulting monetary transmission mechanism. We find that the Danish business cycle is dominated by stochastic movements in the labour supply in the long term, while demand shocks play a major role in the short term. Remarkably, the role of technology is negligible, and foreign factors only contribute little to the Danish business cycle, especially in the long term. With respect to the estimation, we generally find believable estimates although the degree of price stickiness is remarkably high.
    Keywords: open economy, peg, business cycles, Bayesian estimation
    JEL: E3 E4 F4
    Date: 2005–03
  19. By: George-Marios Angeletos
    Abstract: This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. A simple condition is identified for incomplete markets to result in both a lower interest rate and a lower capital stock in the steady state: the elasticity of intertemporal substitution must be higher than the income share of capital. For plausible calibrations of the model, the reduction in the steady-state levels of aggregate savings and income relative to complete markets is quantitatively significant. Finally, cyclical variation in private investment risks is shown to amplify the transitional dynamics.
    JEL: D52 E13 E32 G11
    Date: 2005–03
  20. By: Robert E. Hall
    Abstract: I consider three views of the labor market. In the first, wages are flexible and employment follows the principle of bilateral efficiency. Workers never lose their jobs because of sticky wages. In the second view, wages are sticky and inefficient layoffs do occur. In the third, wages are also sticky, but employment governance is efficient. I show that the behavior of flows in the labor market strongly favors the third view. In the modern U.S. economy, recessions do not begin with a burst of layoffs. Unemployment rises because jobs are hard to find, not because an unusual number of people are thrown into unemployment.
    JEL: E24 E32 J64
    Date: 2005–03
  21. By: Mikhail Golosov; Aleh Tsyvinski
    Abstract: We study optimal tax policy in a dynamic private information economy with endogenous private markets. We characterize efficient allocations and competitive equilibria. A standard assumption in the literature is that trades are observable by all agents. We show that in such an environment the competitive equilibrium is efficient. The only effect of government interventions is crowding out of private insurance. We then relax the assumption of observability of consumption and consider an environment with unobservable trades in competitive markets. We show that efficient allocations have the property that the marginal product of capital is different from the market interest rate associated with unobservable trades. In any competitive equilibrium without taxation, the marginal product of capital and the market interest rate are equated, so that competitive equilibria are not efficient. Taxation of capital income can be welfare-improving because such taxation introduces a wedge between market interest rates and the marginal product of capital and allows agents to obtain better insurance in private markets. Finally, we use plausibly calibrated numerical examples to compute optimal taxes and welfare gains and compare results to an economy with a restricted set of tax instruments, and to an economy with observable trades.
    JEL: E62 H21 H23 H53
    Date: 2005–03
  22. By: Ann M. Lawson; Brian C. Moyer; Sumiye Okubo; Mark A. Planting
    Abstract: The integration of the annual I-O accounts with the GDP-by-industry accounts is the most recent in a series of improvements to the industry accounts provided by the BEA in recent years. BEA prepares two sets of national industry accounts: The I-O accounts, which consist of the benchmark I-O accounts and the annual I-O accounts, and the GDPby- industry accounts. Both the I-O accounts and the GDP-by-industry accounts present measures of gross output, intermediate inputs, and value added by industry. However, in the past, they were inconsistent because of the use of different methodologies, classification frameworks, and source data. The integration of these accounts eliminated these inconsistencies and improved the accuracy of both sets of accounts. The integration of the annual industry accounts represents a major advance in the timeliness, accuracy, and consistency of these accounts, and is a result of significant improvements in BEA%u2019s estimating methods. The paper describes the new methodology, and the future steps required to integrate the industry accounts with the NIPAs. The new methodology combines source data between the two industry accounts to improve accuracy; it prepares the newly integrated accounts within an I-O framework that balances and reconciles industry production with commodity usage. Moreover, the new methodology allows the acceleration of the release of the annual I-O accounts by 2 years and for the first time, provides a consistent time series of annual I-O accounts. Three appendices are provided: A description of the probability-based method to rank source data by quality; a description of the new balancing produced for producing the annual I-O accounts; and a description of the computation method used to estimate chaintype price and quantity indexes in the GDP-by-industry accounts.
    JEL: C13 C67 C81 E1
    Date: 2005–03
  23. By: Gary Gorton; Nicholas Souleles
    Abstract: Firms can finance themselves on- or off-balance sheet. Off-balance sheet financing involves transferring assets to "special purpose vehicles" (SPVs), following accounting and regulatory rules that circumscribe relations between the sponsoring firm and the SPVs. SPVs are carefully designed to avoid bankruptcy. If the firm's bankruptcy costs are high, off-balance sheet financing can be advantageous, especially for sponsoring firms that are risky. In a repeated SPV game, firms can "commit" to subsidize or "bail out" their SPVs when the SPV would otherwise not honor its debt commitments. Investors in SPVs know that, despite legal and accounting restrictions to the contrary, SPV sponsors can bail out their SPVs if there is the need. We find evidence consistent with these predictions using data on credit card securitizations.
    JEL: G3 G2 E5 K2
    Date: 2005–03
  24. By: Christian Hellwig; Arijit Mukherji; Aleh Tsyvinski
    Abstract: We develop a stylized currency crises model with heterogeneous information among investors and endogenous determination of interest rates in a noisy rational expectations equilibrium. Our model captures three key features of interest rates: the opportunity cost of attacking the currency responds to the investors' behavior; the domestic interest rate may influence the central bank's preferences for a fixed exchange rate; and the domestic interest rate serves as a public signal which aggregates private information about fundamentals. We explore the payoff and informational channels through which interest rates determine devaluation outcomes, and examine the implications for equilibrium selection by global games methods. Our main conclusion is that multiplicity is not an artifact of common knowledge. In particular, we show that multiplicity emerges robustly, either when a devaluation is triggered by the cost of high domestic interest rates as in Obstfeld (1996), or when a devaluation is triggered by the central bank's loss of foreign reserves as in Obstfeld (1986), provided that the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domestic bond supply are sufficiently small.
    JEL: E43 E44 E58 F30
    Date: 2005–03
  25. By: John Cochrane
    Abstract: I survey work on the intersection between macroeconomics and finance. The challenge is to find the right measure of marginal utility of wealth, or "bad times" so that we can understand average return premia distilled in finance "factors" as compensation for assets' tendency to pay off badly in "bad times." I survey the equity premium, consumption-based models, general equilibrium models, and labor income/idiosyncratic risk approaches to this question.
    JEL: G1 E3
    Date: 2005–03
  26. By: Jeremy Greenwood (University of Rochester); Nezih Guner (Pennsylvania State University)
    Abstract: Social norms are influenced by the technological environment that a society faces. Behavioral modes reflect purposive decision making by individuals, given the environment they live in. Thus, as technology changes, so might social norms. There were big changes in social norms during the 20th century, especially in sexual mores. In 1900 only six percent of unwed women engaged in premarital sex. Now, three quarters do. It is argued here that this was the result of technological improvement in contraceptives, which lowered the cost of premarital sex. The evolution from an abstinent to a promiscuous society is studied using an equilibrium matching model.
    Keywords: Social change; the sexual revolution; technological progress in contraceptives; bilateral search.
    JEL: E1 J1 O3
    Date: 2005–03
  27. By: Marco Manacorda,Barbara Petrongolo (Dept. of Economics Queen Mary; Dept. of Economics London School of Economics; University of London; CEP and STICERD,London School of Economics)
    Abstract: This paper describes the functioning of a two-region economy characterized by asymmetric wage-setting. Labor market tightness in one region (the leading-region) affects wages in the whole economy. IN equilibrium, net labor demand shifts towards the leading region raise unemployment in the rest of the economy and leave regional wages unchanged, causing an increase in aggregate unemployment. This model has some success in explaining the evolution of regional unemployment rates in Italy during the period 1977-1998. Based on SHIW micro data on earnings and ISTAT data on unemployment rates we find strong evidence that wages in Italy only respond to labor market tightness in the North. We estimate that around one third of the increase in aggregate unemployment in Italy can be explained by regional mismatch, mainly due to an excess labor supply growth in the South.
    Keywords: Regional imbalances, Wage curve, Unemployment.
    JEL: E24 J23 J31
  28. By: Giovanni Pica (University of Southampton, University of Salerno and CSEF); José V. Rodríguez Mora (Universitat Pompeu Fabra, CREA, CEPR, CES-ifo and IZA)
    Abstract: This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD International Direct Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.
    Keywords: Multinational Firms, Heterogeneous Agents, Policy Harmonization
    JEL: E61 F23 F41
    Date: 2005–03–01
  29. By: Adriana Kugler (University of Houston, Universitat Pompeu Fabra, NBER, CEPR and IZA); Giovanni Pica (University of Southampton, University of Salerno and CSEF)
    Abstract: This paper uses the Italian Social Security employer-employee panel to study the effect of a reform that introduced a cost for unjust dismissals only for firms below 15 employees, while leaving firing costs unchanged for bigger firms. We find that the increase in dismissal costs decreased accessions and separations in small relative to big firms, the more so in sectors with higher employment volatility. Moreover, the reform reduced firms’ entry rates while increasing the exit rate. We also find evidence that higher EPL flattened employment policies over the cycle
    Keywords: Costs of Unjust Dismissals, European Unemployment, Firms’ Entry and Exit, Employment Volatility
    JEL: E24 J63 J65
    Date: 2005–03–01
  30. By: Andrew Sharpe; Jeremy Smith
    Abstract: The objective of this paper is to examine labour market seasonality in Canada over the past three decades in order to shed light on what policies might be best suited to address seasonal economies. The main findings are as follows. The seasonality of the Canadian economy has declined since 1976 according to a wide range of output and labour market variables. However, since 1996 unemployment rate seasonality has increased. Seasonality – both in employment and the unemployment rate – is much higher for the young than for older workers and much higher for men than for women. Canada’s level of employment seasonality was more than three times higher than that in the United States in 2003. However, unemployment rate seasonality was perhaps surprisingly the same in the two countries. Relative to OECD countries, Canada has average unemployment rate seasonality, but very high employment seasonality. Atlantic Canada has higher levels of employment and unemployment rate seasonality than the other provinces reflecting a greater importance of primary industries and greater propensity of employers to hire part-year workers. Seasonal unemployment represents a much more important public policy issue than seasonal employment. The basic problem is an underlying lack of employment opportunities in rural and remote areas where seasonal unemployment is concentrated, not seasonal unemployment itself. An economic development strategy that ensures that all persons who want full year work can obtain it must be the most important element in any attempt to reduce seasonal unemployment. But such a strategy might need to be supplemented, at least in the short-to-medium term, by out-migration, particularly in very high unemployment regions, and incentives for firms to transform seasonal work into full-year work, or at least into near full-year work. Since unrestricted benefits for seasonal EI repeaters will not reduce seasonal unemployment, a strong case can be made that long-term income support for the seasonally unemployed is not in the long-run in the best interest of the beneficiaries, high unemployment regions, and the country, although reducing such benefits is politically difficult.
    Keywords: seasonality, seasonal employment, seasonal unemployment, unemployment, Atlantic Canada, Canada
    JEL: E24 J23 J65 R58 O51
    Date: 2005–02
  31. By: Leo Krippner (AMP Capital Investors)
    Abstract: This paper uses the volatility-adjusted orthonormalised Laguerre polynomial model of the yield curve (the VAO model) from Krippner (2005), an intertemporally-consistent and arbitrage-free version of the popular Nelson and Siegel (1987) model, to develop a multi-dimensional yield-curve-based risk framework for fixed interest portfolios. The VAO model is also used to identify relative value (i.e. potential excess returns) from the universe of securities that define the yield curve. In combination, these risk and return elements provide an intuitive framework for attributing portfolio returns ex-post, and for optimising portfolios ex-ante. The empirical applications are to six years of daily United States interest rate swap data. The first application shows that the main sources of fixed interest portfolio risk (i.e. unanticipated variability in ex-post returns) are first-order (‘duration’) effects from stochastic shifts in the level and shape of the yield curve; second-order (‘convexity’) effects and other contributions are immaterial. The second application shows that fixed interest portfolios optimised ex-ante using the VAO model risk/relative framework significantly outperform a naive evenly-weighted benchmark over time.
    Keywords: yield curve; term structure; fixed interest securities; portfolio optimisation; interest rate swaps
    JEL: E43 G11 G12
    Date: 2005–03–11
  32. By: Dirk Engelmann; Jan Hanousek; Evzen Kocenda
    Abstract: We use a spatial competition based model in a two-stage game setup to assess whether equilibrium in exchange rates among the leading currencies is attainable. We show that a stable equilibrium can be reached in the case of two leading currencies, but not in the case of three. In our model, central banks of leading currencies attract, through the workings of their objective and policy, small currencies that tie with leading currencies via exchange rate regimes. This can be thought of as a competition to link smaller currencies to a leading currency that is motivated by the fact that such a tie greatly reduces volatility within such an informal “currency area”. Our theoretical findings are supported by empirical evidence. Since firms, traders, and countries currently recognize three leading currencies and their economic behavior reflects this, we may expect disagreement on overvaluation or undervaluation of certain currencies to continue.
    Keywords: exchange rates, exchange rate regimes, central bank policy, monetary union, spatial competition
    JEL: C72 E42 E58 N20 O23
    Date: 2004–06–01
  33. By: Jean Baptiste Desquilbet; Nikolay Nenovsky
    Abstract: It is often maintained that currency boards (CBs) and gold standards (GSs) are alike in that they are stringent monetary rules, the two basic features of which are high credibility of monetary authorities and the existence of automatic adjustment (non discretionary) mechanism. This article includes a comparative analysis of these two types of regimes both from the perspective of the sources and mechanisms of generating confidence and credibility, and the elements of operation of the automatic adjustment mechanism. Confidence under the GS is endogenously driven, whereas it is exogenously determined under the CB. CB is a much more asymmetric regime than GS (the adjustment is much to the detriment of peripheral countries) although asymmetry is a typical feature of any monetary regime. The lack of credibility is typical for peripheral countries and cannot be overcome completely even by “hard” monetary regimes.
    Keywords: monetary regime, gold standards, and currency boards
    JEL: E42
    Date: 2004–05–01
  34. By: Petar Chobanov; Nikolay Nenovsky
    Abstract: Over the last years the efficiency and existence of an automatic adjustment mechanism of currency boards are in the centre of economic discussions. This study is intended to provide an empirical analysis of the volume and interest rate of unsecured overnight deposits at Bulgarian interbank market. Three empirical models are developed in order to explain the behaviour of demand, supply and interest rates. The impact of reserve requirements, operations connected with government budget, transactions in reserve currency (Euro) and some seasonal factors is discussed. The developments of interest rates and volumes are well captured by the employed variables and their statistically significant signs coincide with the theoretical literature.
    Keywords: money market, currency board, Bulgaria
    JEL: E4 E5
    Date: 2004–05–01
  35. By: Garett Jones; Ali M. Kutan
    Abstract: Good monetary policy requires estimates of all of its effects: monetary policy impacts traditional economic variables such as output, unemployment rates, and inflation. But does monetary policy influence crime rates? By extending the vector autoregression literature, we derive estimates of the dynamic effect of higher interest rates on crime rates. Higher interest rates have socially and statistically significant positive effects on rates of theft and knife robberies, while effects on rates of burglary and assault are smaller and statistically insignificant. Higher interest rates have no effect on homicide rates. We conclude that monetary policy influences the rate of economically-motivated crimes.
    Keywords: crime, monetary policy, vector autoregressive models (VARs)
    JEL: E5 C3
    Date: 2004–05–01
  36. By: Neven T. Valev; John A. Carlson
    Abstract: We use unique survey data from Bulgaria’s currency board to examine the reasons for persistent incomplete credibility of a financial stabilization regime. Although it produced remarkably positive effects in terms of sustained low inflation since 1997, the currency board has not achieved full credibility. This is not uncommon in other less-developed countries with fixed exchange rate regimes. Our results reveal that incomplete credibility is explained primarily by concerns about external economic shocks and the persistent high unemployment in the country. Past experiences with high inflation do not rank among the top reasons to expect financial instability in the future.
    Keywords: Credibility, Currency Boards, Financial Stabilization Programs
    JEL: E5 F3
    Date: 2004–06–01
  37. By: Gábor Orbán; György Szapáry
    Abstract: The purpose of this paper is to examine the fiscal characteristics of the new members in the light of the requirements of the SGP and the criticisms levelled against the Pact and to see in what ways their initial conditions differ from those faced by the current euro zone countries in the run-up to the adoption of the euro. Overall, because of the lower debt levels and greater yield convergence already achieved, the new members will be able to rely less on gains from yield convergence than the current euro zone members were able to do. EU accession will also have a negative net impact on the budgets of the new members in the early years of membership. We also look at the cyclical sensitivities of the budgets and find that in the new members the smoothing capacity of the automatic stabilizers might be weaker than in the current euro zone members. Beyond these general characteristics, we also emphasize that there are large differences in the starting fiscal positions of the new members. Some of the policy implications of our findings are discussed.
    Keywords: EU enlargement, fiscal policy, fiscal rules, Stability and Growth Pact
    JEL: E61 H6 H87
    Date: 2004–07–01
  38. By: Bruno Merlevede; Koen Schoors; Bas van Aarle
    Abstract: This paper develops and estimates a small macroeconomic model of the Russian economy. The model is tailored to analyze the impact of the oil price, the exchange rate, and political stability on economic performance. The model does very well in explaining Russia’s economic history in the period 1995-2002. We then use the model to simulate two sets of scenarios, one with various oil price scenarios and one with various adverse shocks. The simulations suggest that the Russian economy is still very vulnerable to oil price swings, and that these swings have asymmetric effects. Indeed the cost of a downward swing of oil prices seems to be larger than the benefit of an upward swing. We also find that the aggregate effects of an oil price collapse are comparable to these of renewed political instability. Although their propagation mechanism is quite different, both adverse shocks do have a similar effect on real GDP. A real exchange rate appreciation on the other hand has relatively mild effects on real GDP. All in all, it is suggested that Russia should reduce its vulnerability to adverse oil price shocks and maintain political stability.
    Keywords: Russia, Macroeconomic Modeling, Macroeconomic stabilization
    JEL: C70 E17 E58 E63
    Date: 2004–10–01
  39. By: R. Jason Faberman (U.S. Bureau of Labor Statistics)
    Abstract: I compare the behavior of job creation and job destruction over the past two economic downturns. Both periods have brief but sharp rises in job destruction followed by flat net job growth. The dynamics underlying these slow recoveries differ drastically. In 1991-92, job destruction is slow to decline. In 2001, job creation falls dramatically and remains persistently low through 2003. I find this trend qualitatively similar in both manufacturing and service industries. I also find that neither a structural shift of jobs across industries nor increased trade liberalization is a consistent explanation for the recent lack of growth. Instead, the evidence suggests that a large drop in business investment may explain the decline in job creation.
    Keywords: job reallocation, business cycles, employment fluctuations
    JEL: E24 E32
    Date: 2004–06
  40. By: Ales Bulir
  41. By: Martin Cincibuch; Jiri Podpiera
    Abstract: Using the simple arbitrage model, we decompose real appreciation in tradables in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for a commodity like goods.
  42. By: Shimon Awerbuch (SPRU, University of Sussex); Raphael Sauter (SPRU, University of Sussex)
    Abstract: The empirical evidence from a growing body of academic literature clearly suggests that oil price increases and volatility dampen macroeconomic growth by raising inflation and unemployment and by depressing the value of financial and other assets. Surprisingly, this issue seems to have received little attention from energy policy makers. In percentage terms, the Oil-GDP effect is relatively small, producing losses in the order of 0.5% of GDP for a 10% oil price increase. In absolute terms however, even a 10% oil price rise. and oil has risen at least 50% in the last year alone. produces GDP losses that, could they have been averted, would significantly offset the cost of increased RE deployment. While we focus on renewables, the GDP offset applies equally to energy efficiency, DSM and nuclear and other non-fossil technologies. This paper draws on the empirical Oil-GDP literature, which we summarize, to show that by displacing gas and oil, renewable energy investments can help nations avoid costly macroeconomic losses produced by the Oil-GDP effect. We show that a 10% increase in RE share avoids GDP losses in the range of $29.$53 billion in the US and the EU ($49.$90 billion for OECD). These avoided losses offset one-fifth of the RE investment needs projected by the EREC and half the OECD investment projected by a G-8 Task Force. For the US, the figures further suggest that each additional kW of renewables, on average, avoids $250.$450 in GDP losses, a figure that varies across technologies as a function of annual capacity factors. We approximate that the offset is worth $200/kW for wind and solar and $800/kW for geothermal and biomass (and probably nuclear). The societal valuation of non-fossil alternatives needs to reflect the avoided GDP losses, whose benefit is not fully captured by private investors. This said, we fully recognize that wealth created in this manner does not directly form a pool of public funds that is easily earmarked for renewables support. Finally, the Oil-GDP relationship has important implications for correctly estimating direct electricity generating cost for conventional and renewable alternatives and for developing more useful energy security and diversity concepts. We also address these issues.
    Keywords: Oil price shocks, oil price volatility, Oil-GDP effects, renewable energy, RES-E targets, financial beta risk, funding renewables
    JEL: Q4 E2
    Date: 2005–01–13
  43. By: Jutta Maute (Universität Hohenheim)
    Abstract: The breakdown of the Argentine currency board in early 2002 produced a number of obituaries that often quite rashly declared the country’s monetary constitution since 1991 the main responsible for its recent near-catastrophic economic collapse. Contrary to such rather one-sided negative ascriptions to the currency board system, the intention of this paper is to give a comprehensive and balanced description of the currency board model in theory, as well as to name its functioning conditions under today’s economic and political conditions prevailing in developing and transforming countries. It will become clear that the success of a currency board in terms of lasting stabilization of an economy not only depends on its initial design (e.g. the choice of the anchor currency, of the exchange rate, the legal and institutional fixings) but also on an ongoing process of economic and institutional reform that extends from a general macroeconomic and especially public sector streamlining to banking sector reforms, product and labour market deregulation, and to a general realignment of the economy towards exportorientation and international competitiveness. The extent to which these reforms are tackled and completed decides over the degree to which the economy is able to absorb real shocks without incurring high economic and social adaptation costs, hence over the degree to which a country is able to benefit from the currency board’s strengths without falling victim to its potentially severe weaknesses. Along with some basic reflections about the concept and motivation of modern currency boards, sections 1-3 give a brief overview over the historical background of the currency board idea as well as of its implementation. Section 4 focuses on the constitutional elements of a currency board, while section 5 provides the core of the discussion of pros and cons of currency boards, depicting the system’s strengths and weaknesses as well as the conditions under which they materialize. Section 6 will discuss under which circumstances a currency board is a good choice for a country, and ask whether less strict stabilization policies might be able to deliver the hoped-for benefits less costly. Some problems related to the questions of duration and termination of currency boards are addressed in section 7. Finally, section 8 will give a brief exposition of the idea of dual currency boards as a theoretical extension of the currency board model which promises to eliminate one of the biggest immanent threats to a currency board.
    Keywords: New Economic Geography, Foreign Direct Investment, Multinational Enterprises
    JEL: E5

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