nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒05‒07
53 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Bringing Macroeconomics into the Lab. By Roberto Ricciuti
  2. Output Gap in Colombia: An Eclectic Approach By Adolfo L.Cobo
  3. Is the Proposed East African Monetary Union an Optimal Currency Area? A Structural Vector Autoregression Analysis By Steven K. Buigut; Neven Valev
  4. Eastern and Southern Africa Monetary Integration: A Structural Vector Autoregression Analysis By Steven K. Buigut; Neven T. Valev
  5. Fiscal Decentralization,Macrostability, and Growth By Jorge Martinez-Vazquez; Robert McNab
  6. Disinflation Costs Under Inflation Targeting in Small Open Economy Economy By Paulina Restrepo Echavarría
  7. Exchange Rate Pass-Through Effects: A Disaggregate Analysis of Colombian Imports of Manufactured Goods By Hernán Rincón; Edgar Caicedo; Norberto Rodríguez
  8. Exploring the International Linkages of the Euro Area: a Global VAR Analysis By Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
  9. Job Protection Laws and Agency Problems Under Asymmetric Information By Schmitz, Patrick W.
  10. Deconstructing the Art of Central Banking By Bayoumi, Tamim; Sgherri, Silvia
  11. Interest Rate Setting by the ECB: Words and Deeds By Gerlach, Stefan
  12. Too Many to Fail - An Analysis of Time Inconsistency in Bank Closure Policies By Acharya, Viral V; Yorulmazer, Tanju
  13. Welfare-Maximizing Operational Monetary and Tax Policy Rules By Kollmann, Robert
  14. The Welfare Cost of Business Cycles in an Economy with Non-Clearing Markets By Portier, Franck; Puch, Luis
  16. Were Verbal Efforts to Support the Euro Effective? A High-Frequency Analysis of ECB Statements By David-Jan Jansen; Jakob de Haan
  17. Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability By Riemer P. Faber; Ad C.J. Stokman
  18. Financial Acceleration of Booms and Busts By Jan Kakes; Cees Ullersma
  19. Adjustment to the Asymmetric Shocks and Currency Unions: the Case of Belarus and Russia By Charnavoki Valery
  20. Why do bigger countries have more problems with the Stability and Growth Pact? By Bodo Herzog
  21. International Monetary Policy Coordination By Michael Carlberg
  22. Labor Supply and Saving under Uncertainty By Floden, Martin
  23. The Japanese Deflation: Has It Had Real Effects? Could It Have Been Avoided? By Claudio Morana
  24. Robust Monetary Policy in a Small Open Economy By Kai Leitemo; Ulf Söderstrom
  25. The Dynamics of Growth and Distribution in a Spatially Heterogeneous World By Paulo Brito
  26. Fiscal Consolidations in the Central and Eastern European Countries By António Afonso; Christiane Nickel; Philipp Rother
  27. Is the Taylor Rule Missing? A Statistical Investigation By Bunzel, Helle; Enders, Walter
  28. Learning and the Welfare Implications of Changing Inflation Targets By Kevin Moran
  29. Estimating Life—Cycle Parameters from Consumption Behavior at Retirement” By John Laitner; Dan Silverman
  30. Taylor Rules, McCallum Rules and the Term Structure of Interest Rates By Michael Gallmeyer; Burton Hollifield; Stanley E. Zin
  31. Work and Leisure in the U.S. and Europe: Why So Different? By Alberto Alesina; Edward L. Glaeser; Bruce Sacerdote
  32. Understanding and Comparing Factor-Based Forecasts By Jean Boivin; Serena Ng
  33. Branch Banking, Bank Competition, and Financial Stability By Mark Carlson; Kris James Mitchener
  34. A Quantitative Model of Sudden Stops and External Liquidity Management By Ricardo Caballero; Stavros Panageas
  35. The Time-Series Properties of Aggregate Consumption: Implications for the Costs of Fluctuation By Ricardo Reis
  36. The Amplification of Unemployment Fluctuations through Self-Selection By Robert E. Hall
  37. Intra-Industry Trade and Business Cycles in ASEAN By Carlos Cortinhas
  38. Consumption, (Dis) Aggregate Wealth and Asset Returns By Ricardo M. Sousa
  39. The Variability of Velocity of Money in a Search Model By Weimin Wang; Shouyong Shi
  40. Money, Price Dispersion and Welfare By Brian Peterson; Shouyong Shi
  41. Price Index Convergence Among Provinces and Cities of Canada: 1978 - 2001" By Ajit Dayanandan; Mukesh Ralhan
  42. CRISES & CRASHES: ARGENTINA 1885 – 2003 By Osvaldo Meloni; Ana María Cerro
  43. An Exploration of Asset Returns in a Production Economy with Relative Habits By Santiago Budria
  44. Exchange Rate Determination from Monetary Fundamentals: an Aggregation Theoretic Approach By William Barnett; Chang Ho Kwag
  45. The Effects of Heterogeneity in Price Setting on Price and Inflation Inertia By Carlos Viana de Carvalho
  46. Debt-Deflation: Concepts, and a Stylised Model By Goetz von Peter
  48. Argentina and Inflation Targeting. ¿Can it be implemented? - Some considerations regarding the Brazilian Experience- By juancarlos soldanodeheza
  49. Does Foreign Direct Investment Transfer Technology Across Borders? A Reexamination By Jürgen Bitzer; Monika Kerekes
  50. Tax Burden and the Mismeasurement of State Tax Policy By W. Robert Reed; Cynthia L. Rogers
  51. Housing Debt, Employment Risk and Consumption By Viola Angelini; Peter Simmons
  52. Estão os Portugueses a ‘votar com os pés’? Alguma evidência empírica By António Caleiro
  53. Openness, Centralized Wage Bargaining, and Inflation By Joseph P. Daniels; Farrokh Nourzad; David D. VanHoose

  1. By: Roberto Ricciuti
    Abstract: This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and partial equilibrium experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists.
    Keywords: Macroeconomics; experiments
  2. By: Adolfo L.Cobo
    Abstract: In an economy conducted under an Inflation Targeting regime, the output gap becomes one of the most important variables to guide monetary policy. Defined as the difference between observed and potential or non-inflationary output, the gap is a measure of the state of aggregate demand and, therefore, of inflationary pressures on the economy. However, this relationship might be obscured by supply and price shocks, perhaps more relevant in the case of emerging economies. This paper estimates and evaluates the output gap for Colombia between 1970 and 2003 using a wide array of methods that go from univariate approaches such as Hodrick-Prescott (HP) and Band Pass filters to multivariate or structural methods obtained by the Kalman filter technique or the production function approach. We also include some mixed procedures like the multivariate filter and the prior-consistent filter. The last one takes into account some supply and price shocks observed in the Colombian economy since 1990. An evaluation of the different estimators is made by a simulated out-of sample forecasting exercise. The results show that multivariate structural filters have a better performance than pure mechanical approaches, but the difference is marginal with respect to a prior-consistent HP filter that takes into account supply shocks. In general, the forecasting performance of all the output gaps estimators improves when we re-define core inflation to exclude some price shocks.
    Keywords: Colombia, output gap, inflation forecasting, supply shocks.
    JEL: E31 E37 E52
  3. By: Steven K. Buigut; Neven Valev (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The treaty of 1999 to revive the defunct East African Community (EAC) ratified by Kenya, Uganda, and Tanzania came into force on July 2000 with the objective of fostering a closer co-operation in political, economic, social, and cultural fields. To achieve this, an East Africa Customs Union protocol was signed in March 2004. A Common Market, a Monetary Union, and ultimately a Political Federation of East Africa states is planned. Though the question of a monetary union has been discussed in the political arena there has been no corresponding empirical study on the economic viability of such a union. This article fills the gap and assesses whether the political force driving the EAC towards a monetary union has economic basis. In particular, we focus on the symmetry of the underlying shocks across the East African economies as a precondition for forming an optimum currency area (OCA). As Mundell (1961) and McKinnon (1963) describe, the member countries of a monetary union do not have independent monetary policy, which differs from that of the union as a whole; governments cannot use monetary and exchange rate policies to react to a country-specific shock. How serious this limitation is for the union countries depends on the degree of asymmetry of shocks and the speed with which the economies adjust to these shocks. If disturbances are distributed symmetrically across union countries, a common response will suffice. If, however, the countries face mostly asymmetric shocks, the retention of policy autonomy is beneficial.
    Keywords: East African, Monetary Union, Optimal Currency Area, Structural Vector Autoregression Analysis
    Date: 2004–09–01
  4. By: Steven K. Buigut (Andrew Young School of Policy Studies, Georgia State University); Neven T. Valev (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper uses VAR techniques to investigate the potential for forming monetary unions in Eastern and Southern Africa. All countries in the sample are members of various regional economic organizations. Some of the organizations have a monetary union as an immediate objective whereas others consider it as a possibility in the more distant future. Our objective is to sort out which countries are suitable candidates for a monetary union based on the synchronicity of demand and supply disturbances. Although economic shocks are not highly correlated across the entire region, we tentatively identify three sub regional clusters of countries that may benefit from a currency union.
    Keywords: Eastern and Southern Africa Monetary Integration: Structural Vector Analysis
    Date: 2005–02–01
  5. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Robert McNab
    Abstract: This paper examines how fiscal decentralization may influence economic growth. Previous research on this question has primarily focused on the potential direct relationship between decentralization and growth. In this paper, we also examine the potential indirect influence of decentralization on growth through its impact on macroeconomic stability. Using an international panel data set, we find that fiscal decentralization appears to reduce the rate of inflation in the sample countries and it does not appear to directly influence economic growth. Fiscal decentralization, however, appears to have an indirect, positive effect on growth through its positive influence on macroeconomic stability. The indirect effect of fiscal decentralization on economic growth via macroeconomic stability has not been previously identified in the literature.
    Keywords: Fiscal Decentralization,Macrostability, and Growth
    Date: 2005–02–01
  6. By: Paulina Restrepo Echavarría
    Abstract: Since 1991, inflation in Colombia was reduced from 25% on average to about 6% more recently. Although this performance is in line with a long run inflation target of 3%, some analysts ask whether the Central Bank should continue disinflating. In this paper we present a dynamic stochastic general equilibrium model of inflation targeting for a small open economy to answer this question. We calibrate the model to the Colombian economy and compute the welfare cots and benefits of achieving the long run inflation target. We find that the long run welfare gains are about 4.54% in terms of capital. Furthermore, accounting for the transition the welfare gains are about 1.18% in terms of capital. Our results differ from previous findings because transition costs are introduced and our environment considers the presence of real rigidities (monopolistic competition) and nominal rigidities (sticky information) in a small open economy. We also analyze the sensitivity of the results to some key parameters and conclude that higher price flexibility leads to lower gains from reducing inflation and that a country with markups. The weight given to the inflation gap in the monetary policy rule is important, as a more aggressive Central Bank can improve welfare. Finally, we find that disinflation is more expensive in the case of a closed economy.
    Keywords: Small Open Economy,Inflation Targeting,Compensation;Colombia.
    JEL: E31 E32 E52 F41
  7. By: Hernán Rincón; Edgar Caicedo; Norberto Rodríguez
    Abstract: Colombian monthly data covering the period from 1995:01 to 2002:11 and ECM, fixed and time-varying parameters and Kalman filter techniques are used in this paper to quantify the exchange rate pass-through effects on import prices within a sample of manufactured imports. Also, whether the foreign exchange and inflation regimes affect the degree of pass-through is evaluated. The analytical framework used was a mark-up model. The main finding is that the long-run pass-through elasticities for the industries in the sample are stable and go from 0.1 to 0.8 and the short-run ones are unstable and go from 0.1 to 0.7, supporting mark-up hypotheses, in contrast to the hypotheses of perfect market competition and complete pass-through. The findings also show evidence of the variability and different degrees of pass-trough among manufacturing sectors, which confirm the importance of using dynamic models and disaggregate data for an analysis of the pass-through. Both, the hypothesis that under a floating regime there is a low degree of pass-through and the hypothesis that a low inflation environment has the same result are not supported.
    Keywords: Pass-through effects; PPP;Imperfect competition;Floating regime;Low inflation environment;Fixed parameter model; Time-varying parameter model; Kalman filtering.
    JEL: F31 F41 E31 E52 C32 C51 C52
  8. By: Stephane Dees; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
    Abstract: We presents a global model linking individual country vector error-correcting models in which domestic variables are related to country-specific variables as an approximate solution to a global common factor model. The model is estimated for 26 economies. It provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model, and using average pair-wise cross-section error correlations, the approach is shown to be quite effective in dealing with common factor interdependencies and international co-movements of business cycles. In addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables.
    Keywords: Global VAR (GVAR), Global interdependencies, global macroeconomic modeling, impulse responses.
    JEL: C32 E17 F47
    Date: 2005–05
  9. By: Schmitz, Patrick W.
    Abstract: Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties’ total surplus. The law restricts the principal’s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal’s possibilities to inefficiently reduce the agent’s rent.
    Keywords: employment protection; job security; labour market rigidities
    JEL: D82 E24 J65 K31
    Date: 2004–12
  10. By: Bayoumi, Tamim; Sgherri, Silvia
    Abstract: This Paper proposes a markedly different transmission from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated US monetary model distinguishing four monetary regimes since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
    Keywords: inflation; monetary policy; rational expectation models
    JEL: E31 E32
    Date: 2004–10
  11. By: Gerlach, Stefan
    Abstract: This Paper discusses interest rate setting by the ECB between 1999 and 2004. I develop from the Monthly Bulletins quantitative indicators of the Governing Council’s assessment of inflation, economic activity, and M3 growth, and investigate their impact on its interest rate decisions. I also estimate reaction functions with ordered probit techniques, using the Monthly Bulletins to guide the choice of variables for the analysis. The results show that the ECB reacts strongly to economic sentiment indicators as measures of the state of the real economy. Furthermore, I find statistically significant reactions to inflation and M3 growth.
    Keywords: ECB; empirical reaction functions; ordered probit
    JEL: E43 E52 E58
    Date: 2004–12
  12. By: Acharya, Viral V; Yorulmazer, Tanju
    Abstract: This Paper shows that bank closure policies suffer from a ‘too-many-to-fail’ problem: when the number of bank failures is large, the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of bank failures is small, failed banks can be acquired by the surviving banks. This gives banks incentives to herd and increases systemic risk, the risk that many banks may fail together. The ex-post optimal regulation may thus be sub-optimal from an ex-ante standpoint. We formalize this time-inconsistency of bank regulation. We also argue that by allowing banks to purchase failed banks at discounted prices and by partially nationalizing the bailed-out banks, a regulator may be able to mitigate the induced systemic risk.
    Keywords: bailout; bank regulation; herding; moral hazard; systemic risk
    JEL: D62 E58 G21 G28 G38
    Date: 2004–12
  13. By: Kollmann, Robert
    Abstract: This Paper computes welfare-maximizing monetary and tax policy feedback rules, in a calibrated dynamic general equilibrium model with sticky prices. The government makes exogenous final good purchases, levies a proportional income tax, and issues nominal one-period bonds. A quadratic approximation method is used to solve the model, and to compute household welfare. Optimized policy has a strong anti-inflation stance and implies persistent fluctuations of the tax rate and of public debt. Very simple optimized policy rules, under which the interest rate just responds to inflation and the tax rate just responds to public debt, yield a welfare level very close to that generated by richer rules.
    Keywords: fiscal policy; monetary policy; welfare
    JEL: E50 E60 H60
    Date: 2004–12
  14. By: Portier, Franck; Puch, Luis
    Abstract: In this Paper we measure the welfare cost of fluctuations in a simple representative agent economy with non-clearing markets. The market friction we consider involves price rigidities and a voluntary exchange-rationing scheme. These features are incorporated into an otherwise standard neoclassical growth model. We show that the frictions we introduce make the losses from fluctuations much bigger than in a frictionless environment.
    Keywords: cost of business cycles; dynamic general equilibrium; non-clearing markets
    JEL: C63 C68 E32
    Date: 2004–12
  15. By: Carlos Maravall Rodriguez
    Abstract: The structure of each level of government in the United States has changed over the last 200 years. Wallis (2000) has presented empirical evidence that relates the dominance of each level not to the functions government decides to undertake (the expenditures it commits to), but to the costs and benefits of the financial instruments each level has available (the way each level extracts revenues). In this paper we provide theoretical evidence for this hypothesis. We show why two different levels of government (e.g. state and federal) would not want to use a common instrument to finance the same good.
    Date: 2005–04
  16. By: David-Jan Jansen; Jakob de Haan
    Abstract: This paper studies the effects of verbal interventions by European cen-tral bankers on high-frequency euro-dollar exchange rates. We find that ECB verbal interventions have had only small and short-lived effects. Ver- bal interventions which are reported in news report headlines are more likely to be successful, whereas verbal interventions on days with releases of macroeconomic data are less successful. There is no difference in the effects of comments by members of the ECB Executive Board and presi- dents of national central banks.
    Keywords: verbal intervention; high-frequency exchange rates; European Central Bank; sign test
    JEL: E58 F31 C14
    Date: 2005–04
  17. By: Riemer P. Faber; Ad C.J. Stokman
    Abstract: In an earlier study of ours, we provided evidence of consumer price level convergence in Europe,particularly in the 1960s and the 1990s (Faber and Stokman, 2004). The analysis was based on transformations of country HICP indices into absolute price levels, by combining time series HICP data back to 1960 with nominal figures of HICP for one particular benchmark year (1999). In this paper, we demonstrate that this simple procedure delivers reliable estimates of absolute price levels both for short and longer time spans. We adopt this methodology to analyse price dispersion at the onedigit level of HICP in the former EU-15 member states (1980-2003). We find strong price level convergence for most of the product groups in the early 1990s. However, price dispersion levels for tradable products are still much smaller than for non-tradable products. Compared to the US, the dispersion level of consumer prices has always been higher in the euro area, but EMU is narrowing the gap. Price dispersion within the smaller DM-zone is below American levels.
    Keywords: Economic integration; Price level convergence; HICP product groups; EMU
    JEL: E31 E50 F15 F40
    Date: 2005–04
  18. By: Jan Kakes; Cees Ullersma
    Abstract: For a panel of 20 industrialized countries from 1970 through 2002,we analyze the role of financial variables in economic cycles. We focus on equity busts, which are considered a proxy for downward revisions of economic prospects. Our empirical findings provide support for financial accelerator effects around asset price busts. The financial accelerator mechanism appears to have become stronger over time. The typical bust is followed by a reduction in nominal policy interest rates, sometimes to levels close to the zero lower bound.
    Keywords: asset price busts; financial accelerator
    JEL: E44 E32
    Date: 2005–04
  19. By: Charnavoki Valery
    Abstract: The paper analyzes mechanism of adjustment to the asymmetric shocks in terms of trade in possible currency union of Belarus and Russia. It is emphasized the role of real exchange rate in this process. An empirical analysis based on panel data confirms the asymmetric effect of fuel price changes on the equilibrium real exchange rate in two countries. At the same time, according to our estimates, real exchange rate changes affect significantly real output and its structure in Belarus. On the base of analysis provided, conclusion is made about necessity to create a fiscal stabilization mechanism which would allow to smooth negative effect of asymmetric shocks on Belarusian economy under currency union.
    Keywords: Belarus, Russia, currency union, asymmetric shocks, terms of trade, real exchange rate.
    JEL: C23 E42 F31 F33
    Date: 2005–05–04
  20. By: Bodo Herzog
    Abstract: The European Fiscal Framework and the Stability and Growth Pact (SGP) have had great significance since the completion of the European Monetary Union (EMU) in 1999. The current enforcement and credibility problems, and discussion about reforming the SGP, as well as the failure to impose sanctions and early warnings against states in breach of the Pact, have introduced a new subject for economic research. One of the most surprising observations in recent years is that the larger countries in the EMU have more problems with the budget thresholds in the SGP than the smaller countries. To explain this `stylized fact\' we solve a model of `ratio- nal\' delay in consolidation and relate it to several economic and political variables. The model shows that larger governments tend to prefer slower consolidation because they are not concerned about the risk of breaching the SGP and face less output volatility. Moreover we solve in the theoretical model one unexplored phenomenon in empirical macroeconomics: why does larger government size imply less macroeconomic volatility? We demonstrate this approach and its results with current empirical data on the performance of the EMU and the SGP.
    Keywords: Monetary Union, Fiscal Policy, Stability and Growth Pact
    JEL: E60 F30 F33
    Date: 2005–05–04
  21. By: Michael Carlberg
    Abstract: This paper studies the international coordination of monetary policies in the world economy. It carefully discusses the process of policy competition and the structure of policy cooperation. As to policy competition, the focus is on monetary competition between Europe and America. Similarly, as to policy cooperation, the focus is on monetary cooperation between Europe and America. The spillover effects of monetary policy are negative. The policy targets are price stability and full employment.
    Keywords: European Monetary Union, International Policy Coordination, Monetary Policy
    JEL: E52 F33 F41 F42
    Date: 2005–05–04
  22. By: Floden, Martin (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: This paper examines how variations in labor supply can be used to self-insure against wage uncertainty, and the impact of such self-insurance on precautionary saving. The analytical framework is a two-period model with saving and labor-supply decisions where preferences are consistent with balanced growth. The main findings are that (i) labor-supply flexibility raises precautionary saving when future wages are uncertain, and (ii) uncertainty about future wages raises current labor supply and reduces future labor supply.
    Keywords: precautionary saving; prudence; labor supply
    JEL: D81 E21
    Date: 2005–04–22
  23. By: Claudio Morana
    Abstract: Has deflation contributed to the long lasting stagnation of the Japanese economy? Could the Bank of Japan have stopped deflation by implementing a more expansionary monetary policy? Our tentative answers are probably not to the first question, and probably yes to the second question. We find that the total cost of deflation over the period 1995-2003 has been close to a 1.1% rate of lost GDP. Yet, on the basis of statistical significance and robustness to specification choices, this evidence is not compelling. On the other hand, the estimated positive linkage between nominal base money growth and inflation is significant and robust, even given current economic conditions. However, in order to be inflationary, monetary policy should have been more expansionary than what actually observed, even since the launch of the quantitative easing in 2001.
    Keywords: deflation; monetary policy; Friedman's rule; Japan; generalised flexible least squares; time-varying parameter VAR; thick modelling
    JEL: C32 E50
  24. By: Kai Leitemo; Ulf Söderstrom
    Abstract: This paper studies how a central bank’s preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyze the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.
  25. By: Paulo Brito
    Abstract: This paper tries to reconcile growth and geographical economics by dealing directly with capital accumulation through time and space and by seeing growth convergence and spatial agglomeration as jointly generated by dynamic processes displaying pattern formation. It presents a centralized economy in which a Bergson-Samuelson- Millian central planner finds a flow of optimal distributions of consumption, subject to a spatial-temporal capital accumulation budget constraint. The main conclusions are: first, if the behavioral parameters are symmetric, but there is an asymmetric distribution of the capital stock, then the long run asymptotic distribution will be spatially homogeneous; second, if there is homogeneous distribution of the capital stock, but there is an asymmetric shock in any parameter, then the economy will converge towards a spatially heterogeneous asymptotic state; third, spatially heterogeneous asymptotic states will only emerge exogenously, not endogenously; fourth, the spatial propagation mechanism can give birth, when the production function is close to linear, to a Turing instability, which implies that for some parameter values, a conditionally stable spacetime distribution should display spatial pattern formation.
    Keywords: Optimal growth and distribution; Spatial growth; Optimal control of partial differential equations; Traveling waves; Fourier transforms; Turing instability.
    JEL: C6 D9 E1 R1
  26. By: António Afonso; Christiane Nickel; Philipp Rother
    Abstract: We study fiscal consolidations in the Central and Eastern European countries and what determines the probability of their success. We define consolidation events as substantive improvements in fiscal balances adjusting for the impact of cyclical effects. We use Logit models for the period 1991–2003 to assess the determinants of the success of a fiscal adjustment. The results seem to suggest that for these countries expenditure based consolidations have tended to be more successful. By contrast, revenue based consolidations have a tendency to be less successful.
    Keywords: fiscal policy; fiscal episodes; Central and Eastern Europe; Logit models.
    JEL: C25 E62 H62
  27. By: Bunzel, Helle; Enders, Walter
    Abstract: We conduct a fairly thorough statistical analysis of the empirical foundations for the existence of a Taylor rule. Inflation, the output gap and the federal funds rate appear to be non-stationary variables that are not cointegrated. Although this lack of cointegration could be caused by missing variables or structural breaks, we are unable to ‘salvage’ the rule using several plausible candidate variables and break dates. We also investigate the possibility that the Taylor rule should be modeled as a non-linear relationship. We find that a simple threshold model makes significant progress towards rectifying some of the shortcomings of the standard model.
    JEL: E0
    Date: 2005–05–01
  28. By: Kevin Moran
    Abstract: This paper computes the welfare consequences, for a representative agent, of a shift in the inflation target of monetary authorities. The welfare computations are conducted first by comparing the two steady states that the different inflation targets entail, and next by accounting for the transition from one steady-state to the next. Further, the paper allows this transition to be characterized by incomplete information, under which private agents learn about the inflation target shift using Bayesian updating. The analysis is repeated in a variety of model parameterizations, to test the robustness of the results. We find that the welfare benefits of reducing the target rate of inflation from 2% initially to 0% may at first appear to be significant. When measured by comparing steady states, these benefits are worth up to 0.5% of steady-state consumption. However, accounting for the transition towards the new, low inflation steady state significantly reduces the computed benefits, by at least one half.
    Keywords: Inflation targeting, welfare benefits of lower inflation, new keynesian model
    JEL: E31 E52 E58
    Date: 2005
  29. By: John Laitner (University of Michigan); Dan Silverman (University of Michigan)
    Abstract: Using pseudo-panel data, we estimate the structural parameters of a life—cycle consumption model with discrete labor supply choice. A focus of our analysis is the abrupt drop in consumption upon retirement for a typical household. The literature sometimes refers to the drop, which in the U.S. Consumer Expenditure Survey we estimate to be approximately 16%, as the “retirement—consumption puzzle.” Although a downward step in consumption at retirement contradicts predictions from life—cycle models with additively separable consumption and leisure, or with continuous work-hour options, a consumption jump is consistent with a setup having nonseparable preferences over consumption and leisure and requiring discrete work choices. This paper specifies a life—cycle model with these latter two elements, and it uses the empirical magnitude of the drop in consumption at retirement to provide an advantageous method of identifying structural parameters–most importantly, the intertemporal elasticity of substitution.
    Date: 2005–02
  30. By: Michael Gallmeyer; Burton Hollifield; Stanley E. Zin
    Abstract: Recent empirical research shows that a reasonable characterization of federal-funds-rate targeting behavior is that the change in the target rate depends on the maturity structure of interest rates and exhibits little dependence on lagged target rates. See, for example, Cochrane and Piazzesi (2002). The result echoes the policy rule used by McCallum (1994) to rationalize the empirical failure of the `expectations hypothesis' applied to the term- structure of interest rates. That is, rather than forward rates acting as unbiased predictors of future short rates, the historical evidence suggests that the correlation between forward rates and future short rates is surprisingly low. McCallum showed that a desire by the monetary authority to adjust short rates in response to exogenous shocks to the term premiums imbedded in long rates (i.e. "yield-curve smoothing"), along with a desire for smoothing interest rates across time, can generate term structures that account for the puzzling regression results of Fama and Bliss (1987). McCallum also clearly pointed out that this reduced-form approach to the policy rule, although naturally forward looking, needed to be studied further in the context of other response functions such as the now standard Taylor (1993) rule. We explore both the robustness of McCallum's result to endogenous models of the term premium and also its connections to the Taylor Rule. We model the term premium endogenously using two different models in the class of affine term structure models studied in Duffie and Kan (1996): a stochastic volatility model and a stochastic price-of- risk model. We then solve for equilibrium term structures in environments in which interest rate targeting follows a rule such as the one suggested by McCallum (i.e., the "McCallum Rule"). We demonstrate that McCallum's original result generalizes in a natural way to this broader class of models. To understand the connection to the Taylor Rule, we then consider two structural macroeconomic models which have reduced forms that correspond to the two affine models and provide a macroeconomic interpretation of abstract state variables (as in Ang and Piazzesi (2003)). Moreover, such structural models allow us to interpret the parameters of the term-structure model in terms of the parameters governing preferences, technologies, and policy rules. We show how a monetary policy rule will manifest itself in the equilibrium asset-pricing kernel and, hence, the equilibrium term structure. We then show how this policy can be implemented with an interest-rate targeting rule. This provides us with a set of restrictions under which the Taylor and McCallum Rules are equivalent in the sense if implementing the same monetary policy. We conclude with some numerical examples that explore the quantitative link between these two models of monetary policy.
    JEL: G0 G1 E4
    Date: 2005–04
  31. By: Alberto Alesina; Edward L. Glaeser; Bruce Sacerdote
    Abstract: Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European "culture," but Europeans worked more than Americans as late as the 1960s. In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.
    JEL: J3 E0
    Date: 2005–04
  32. By: Jean Boivin; Serena Ng
    Abstract: Forecasting using `diffusion indices' has received a good deal of attention in recent years. The idea is to use the common factors estimated from a large panel of data to help forecast the series of interest. This paper assesses the extent to which the forecasts are influenced by (i) how the factors are estimated, and/or (ii) how the forecasts are formulated. We find that for simple data generating processes and when the dynamic structure of the data is known, no one method stands out to be systematically good or bad. All five methods considered have rather similar properties, though some methods are better in long horizon forecasts, especially when the number of time series observations is small. However, when the dynamic structure is unknown and for more complex dynamics and error structures such as the ones encountered in practice, one method stands out to have smaller forecast errors. This method forecasts the series of interest directly, rather than the common and idiosyncratic components separately, and it leaves the dynamics of the factors unspecified. By imposing fewer constraints, and having to estimate a smaller number of auxiliary parameters, the method appears to be less vulnerable to misspecification, leading to improved forecasts.
    JEL: E37 E47 C3 C53
    Date: 2005–05
  33. By: Mark Carlson; Kris James Mitchener
    Abstract: It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s.
    JEL: G21 N22 E44
    Date: 2005–05
  34. By: Ricardo Caballero; Stavros Panageas
    Abstract: Emerging market economies, which have much of their growth ahead of them, run persistent current account deficits in order to smooth consumption intertemporally. The counterpart of these deficits is their dependence on capital inflows, which can suddenly stop. In this paper we develop and estimate a quantifiable model of sudden stops and use it to study practical mechanisms to insure emerging markets against them. We first assess the standard practice of protecting the current account through the accumulation of international reserves and conclude that, even when optimally managed, this mechanism is expensive and incomplete. External insurance, on the other hand, is hard to obtain because sudden stops often come together with distress in emerging market investors themselves (the most natural insurers). Thus, one needs to find global (non-emerging-market-specific) assets that are correlated to sudden stops. We show an example of such an asset based on the S&P 500's implied volatility index. If added to these countries portfolios, it would significantly enhance their sudden stop risk-management strategies. In our simulations, the median gain in terms of reserves available at the time of sudden stop is around 30 percent. Moreover, in instances where the level of non-contingent reserves is low, the median gain is close to 300 percent. We also find that as countries manage to reduce the size of the sudden stops that afflict them, they should reduce their stock of reserves and significantly increase their share of contingent reserves. The main insights of the paper extend to external liquidity and liability management more generally.
    JEL: E2 E3 F3 F4
    Date: 2005–05
  35. By: Ricardo Reis
    Abstract: While this is typically ignored, the properties of the stochastic process followed by aggregate consumption a.ect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption.
    JEL: E32 E21 E60
    Date: 2005–05
  36. By: Robert E. Hall
    Abstract: Unemployment arises from frictions in the matching of job-seekers and employers. The level of resources that employers devote to evaluating applicants for jobs is a key factor in the magnitude of the frictions. Unemployment will be low if employers can review applicants cheaply. The cost of evaluation per hire depends on the fraction of applicants who are qualified for the job. Applicants may be better informed about their qualifications than are employers. If incentives induce self-selection by job-seekers, so that they apply mainly for jobs where they are qualified, friction and thus unemployment will be low. Self-selection is strongest in markets where unemployment is low and jobs are easy to find. Because of this positive feedback, the equilibrium in a market with self-selection is fragile -- unemployment is sensitive to its determinants. Self-selection provides a mechanism for amplification of small changes in the determinants of unemployment.
    JEL: E24 E32 J64
    Date: 2005–03
  37. By: Carlos Cortinhas (Universidade do Minho - NIPE)
    Abstract: Recently, a new resolve for both increased economic integration and monetary and exchange rate cooperation has started to emerge in ASEAN, especially since the 1997- 1998 Asian financial crisis. According to the optimum currency area theory, the degree of trade integration is one most important criterion for joining a currency union. The large increase in intra-ASEAN trade in recent years naturally raises the question of whether the ASEAN countries are becoming better prepared to form a currency union. This paper sets to test whether the recorded increase in intra-ASEAN trade is leading the ASEAN members to closer economic integration and thus to better satisfy the criteria for a common currency. Two separate models are estimated for that purpose. First, a variation of the model of Frankel and Rose (1997) was estimated for the ASEAN members. As the results were not very significant, a new methodology that uses the whole sample period data instead of dividing the data into sub-periods was conducted. The results with our own model were very significant and robust when four of the ASEAN5 countries were considered, and showed a clear positive correlation between intra-industry trade and business cycle synchronization in ASEAN. This result has important implications for the prospects of the creation of a common currency in the region.
    Keywords: Intra-Industry Trade; Business Cycle Harmonization; Economic Integration; Asean.
    JEL: F15 F33 E42
    Date: 2005
  38. By: Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: In this work, we analyse the importance of disaggregation of wealth into main components (financial and housing wealth). We show, from the consumer´s intertemporal budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income (summarized by the variable cday) should help to predict U.K quarterly asset returns, and to provide better forecasts than a variable like cay from Lettan and Ludvigson (2001), which considers aggregate wealth instead. Using a sample for the U.K. for the period 1975:Q1 - 2003:Q4, we also find that: (i) financial wealth effects are significantly different from housing wealth efects; (ii) changes in financial wealth are mainly transitory, while changes in housing wealth are better understood as permanent; (iii) the relationship among consumption, (dis)aggregate wealth and labor income was relatively stable over time; (iv) consumption doesn´t react asymmetrically to positive and negative financial (or housing) wealth shocks.
    Keywords: financial wealth, housing wealth, consumption, expected returns.
    JEL: E21 E44 D12
    Date: 2005
  39. By: Weimin Wang; Shouyong Shi
    Abstract: We construct a dynamic equilibrium model where there is costly search in the goods market and the labor market. Incorporating shocks to money growth and productivity, we calibrate the model to the US time series data to examine the model's quantitative predictions on aggregate variables and, in particular, on the variability of consumption velocity of money. Despite the fact that money is the only asset, the model captures most of the variability of velocity in the data. It also generates realistic predictions on the moments of other variables and provides peresistent propagation of the shocks. The model generates these results largely because costly search gives an important role to the extensive margin of trade.
    JEL: E40 E30 D83
  40. By: Brian Peterson; Shouyong Shi
    Abstract: We introduce heterogeneous preferences into a tractable model of monetary search to generate price dispersion, and then examine the effects of money growth on price dispersion and welfare. With buyers' search intensity fixed, we find that money growth increases the range of (real) prices and lowers welfare as agents shift more of their consumption to less desirable goods. When buyers' search intensity is endogenous, multiple equilibria are possible. In the equilibrium with the highest welfare level, money growth reduces welfare and increases the range of prices, while having ambiguous effects on search intensity. However, there can be a welfare-inferior equilibrium in which an increase in money growth increases search intensity, increases welfare, and reduces the range of prices.
    Keywords: Price dispersion; Search; Efficiency
    JEL: E31 D60
  41. By: Ajit Dayanandan (Department of Economics, University of Northern B.C.); Mukesh Ralhan (Department of Economics, University of Victoria)
    Abstract: We study the convergence of price indices for Canadian provinces and cities for the period 1978-2001 for (a) ten provinces and nine commodity/price groups; and (b) fifteen cities a cross Canada and four commodity/price groups using panel unit root tests. The empirical results reject the unit root hypothesis for price data across provinces and cities. The estimated rate of convergence in Canada is comparatively faster than the rates for similar studies reported for U.S. c ities. The empirical results also reveal a relatively faster rate of convergence during the post-inflation targeting period (1991-2001), than earlier.
    Keywords: Intra-national PPP, Panel unit root, Canada, CPI, Half-life
    JEL: E31 F41
    Date: 2005–05–05
  42. By: Osvaldo Meloni (Universidad Nacional de Tucumán, Argentina); Ana María Cerro (Universidad Nacional de Tucumán, Argentina)
    Abstract: This paper is aimed at studying the determinants of currency crises suffered by Argentina from 1885 to 2003, on one hand, and at characterizing each particular currency crisis, on the other hand. Firstly, we identify crises episodes throughout the Argentine history. We apply the Eichengreen, Rose and Wyplosz (1994) methodology to sort crises from non-crises periods, and we distinguish among deep crises (crashes), mild crises and minor turbulences. Secondly, we look for regularities and common factors throughout history. We report the two- sample Kolmogorv-Smirnov test of equality of distributions and the Kruskal-Wallis test of equality of population. We complemented it by estimating a logit model including a set of variables chosen from the prescriptions of the existing currency crises theories. Thirdly, following Kaminsky (2003) we perform regression tree analysis to classify crises and crashes into different varieties proposed by the theories at stake. We use fifteen financial and macroeconomic variables suggested by the empirical literature. It is found that fiscal imbalances were always present, which is consistent with the predictions of the first generation speculative attack models. All three methods used to characterize currency crises in Argentina show the importance of the fiscal side. Adverse foreign factors had also a key role in explaining crises. Finally, in most of the crises, regularities in the behavior of macroeconomic variables can be detected.
    Keywords: currency crises - Argentina - regression tree analysis -
    JEL: E3 N20
    Date: 2005–05–04
  43. By: Santiago Budria (University of Madeira & CEEAplA)
    Abstract: This paper explores asset returns in a production economy with habit forming households. I show that a model with capital adjustment costs and relative habits is consistent with salient financial facts, such as the equity premium, the market price of risk, and the riskfree interest rate. These predictions are not at odds with good business cycle predictions. In the model economy investment is strongly procyclical and more volatile than output, which in turn is more volatile than consumption. Moreover, consumption growth is positively autocorrelated and negatively (positively) correlated with future (past) stock returns.
    Keywords: Equity premium, Business cycles, Habit persistence.
    JEL: G12 E22
    Date: 2005–05–03
  44. By: William Barnett (University of Kansas); Chang Ho Kwag (POSCO Research Institute)
    Abstract: We incorporate aggregation and index number theory into monetary models of exchange rate determination in a manner that is internally consistent with money market equilibrium. Divisia monetary aggregates and user-cost concepts are used for money supply and opportunity-cost variables in the monetary models. We estimate a flexible price monetary model, a sticky price monetary model, and the Hooper and Morton (1982) model for the US dollar/UK pound exchange rate. We compare forecast results using mean square error, direction of change, and Diebold-Mariano statistics. We find that models with Divisia indexes are better than the random walk assumption in explaining the exchange rate fluctuations. Our results are consistent with the relevant theory and the 'Barnett critique.'
    Keywords: Exchange rate, forecasts, vector error correction, aggregation theory, index number theory, Divisia index number
    JEL: E
    Date: 2005–05–05
  45. By: Carlos Viana de Carvalho (Princeton University)
    Abstract: This paper analyzes the implications of heterogeneity in price setting for both price and inflation inertia. Standard models based on Taylor- or Calvo-style price setting usually assume ex-ante identical firms, while Calvo's approach implies only ex-post heterogeneity. While it is known that these models have different implications in terms of the dynamic effects of monetary shocks, the role of heterogeneity has not yet been properly explored. In a simple framework, this paper provides analytical results which suggest that ex-ante heterogeneity should have a role in models which attempt to understand the persistence of real effects of monetary shocks.
    Keywords: heterogeneity, price-setting, inflation persistence
    JEL: E
    Date: 2005–04–30
  46. By: Goetz von Peter (Bank for International Settlements)
    Abstract: This paper proposes a model of how agents adjust their asset holdings in response to losses in general equilibrium. By emphasising the relation between deflation and financial distress, we capture some original features of the early debt-deflation literature, such as distress selling, instability, and endogenous monetary contraction. The agents affected by a shock sell off assets to prevent their debt from crowding out consumption. But their distress-selling causes a decline in equilibrium prices, and the resulting losses elicit reactions by all agents. This activates several channels of debt-deflation. Yet we show that this process remains stable, even in the presence of large shocks, high indebtedness, and wide-spread default. What keeps the asset market stable is the presence of agents without prior debt or losses, who borrow to exploit the expected asset price recovery. By contrast, debt-deflation becomes unstable when agents try to contain their indebtedness, or when a credit crunch interferes with the accommodation necessary for stability.
    Keywords: Debt-Deflation, Leverage, Refinancing, Losses, Financial Distress, Distress Selling, Asset Prices, Credit, Inside Money.
    JEL: E31 E51 G33 G21 G18
    Date: 2005–05–02
  47. By: Valery Chernookiy
    Abstract: This paper discusses the econometric model of inflation processes in the Republic of Belarus which makes it possible to explain major factors determining the dynamics of the GDP deflator, consumer price index and producer price index during the period 1994 - 2003. For estimation of the model the author used the statistical tools of nonstationary time series econometrics: cointegration analysis and error-correction models. The model has good statistical properties, it demonstrates stability of the coefficients and enables one to conduct analysis of the various choices in the field of monetary and foreign exchange policies, as well as in the area of labour remuneration, prices and tariffs.
    Keywords: inflation, GDP deflator, consumer price index, producer price index, Belarus, cointegration
    JEL: E31 C32 P24
    Date: 2005–05–02
  48. By: juancarlos soldanodeheza
    Abstract: Countries use different type of “anchors” with who intend to make the agents expectations to converge to a specified level of inflation. Those anchors could be either based on the exchange rate or some kind of monetary policy. Modern trend is to use Inflation Targeting rather than the traditional monetary aggregates. Countries that adopt Inflation Targeting could be classified as EIT (Eclectic Inflation Targeters), FFIT (Full Fledge Inflation Targeters) and ITL (Inflation Targeting Light). Argentina, if it walks through an IT regime, would be a very particular case, since there is no background that a country in default, with its financial system almost destroyed and a very low degree of credibility on its institutions, have had the capability of successfully implemented this kind of policies. A first issue that should be considered to adopt this monetary regime is to obtain a level of fiscal equilibrium that will allow the agents to believe in the long term solvency of the country. A second issue is reconstruction of credibility of the agents in the monetary authority, in such a way that its analysis would tend to a convergence of expectations and minimize doubts on the reasons the Central Bank should make interventions in the market. A third issue is the creation of an area of economic studies in the Central Bank that will allow the monetary authority to analyze the transmition mechanisms of monetary policy to prices. A fourth issue is renegotiating the public services contracts in which the definition of a new model for adjusting tariffs could be a good idea to avoid linking them to price indexes, but to link them to the cost structure of the companies, due to their impact on the structure of the price indexes usually used as reference for IT. A last issue that cannot be forgiven is that the argentine economy is, in fact, partially dollarized, because currency used for major transactions is US dollar, and also operate, at least with a majority of sectors linked to goods production, a foreign currency standard (US dollar price adjustment) in commercial contracts. The first three issues show us that Argentina seems to be very far of implementing a FFIT policy and with some difficulties to be considered an ITL. It seems that it does not seem an advantage to make public yet the new anchor to avoid consequences of a hypothetically change of system. The fourth issue introduces the need of a difficult and complex negotiation on public services prices in terms of its technical aspects that also has an extreme political sensitiveness. Finally, the last issue shows that it could be necessary to introduce into the predictive models an à la Peru bias, where the economy works under a heavily dollarized component, which is quite more superior than what it happens in Brazil.
    JEL: E
    Date: 2005–05–03
  49. By: Jürgen Bitzer (Free University Berlin Department of Economics & Institute for East European Studies); Monika Kerekes (Free University Berlin Department of Economics & Institute for East European Studies)
    Abstract: Reexamining foreign direct investment (FDI) as a potential channel for knowledge diffusion -- based on industry data from seventeen OECD countries during the period 1973-2000 -- we find that FDI-receiving countries benefit strongly from FDI-related knowledge spillovers. We do not find evidence for positive FDI-related technology sourcing effects. Instead, our results suggest that outward FDI might have negative effects on the output of the FDI-sending country.
    Keywords: foreign direct investment, knowledge spillovers
    JEL: F21 O33 O47 E23
    Date: 2005–05–04
  50. By: W. Robert Reed (Department of Economics, University of Oklahoma); Cynthia L. Rogers (Department of Economics, University of Oklahoma)
    Abstract: Tax Burden, defined as the ratio of total tax revenues over personal income, is prominently used to summarize state tax policy. We analyze the empirical relationship between changes in Tax Burden and changes in state tax policy from 1987 to 2000 – as measured by states’ own forecasts of the revenue impacts of tax legislation – and find that Tax Burden contains substantial measurement error. We explain this result by decomposing Tax Burden changes into three components: (1) changes in state tax policy, (2) income-induced changes in revenue that are unrelated to state tax policy, and (3) other factors that do not measure state tax policy. We empirically demonstrate the statistical significance of the second component, highlighting important consequences for studies that estimate the impact of taxes on economic growth.
    Keywords: Tax Policy, Fiscal Policy, Tax Burden, State Economic Development, Tax Rates
    JEL: E62 H20 H71 R11
    Date: 2005–05–03
  51. By: Viola Angelini; Peter Simmons
    Abstract: We consider the interaction between the risk of unemployment, random house prices, consumption and savings. A critical decision is that of refinancing house purchase, up to 100% mortgages are possible. There is also a fixed transaction cost of refinancing. In a CARA framework we derive the value function for a finite horizon, the policy of refinance and the consumption function. Either there is a maximum mortgage or a zero mortgage depending on interest rates, house prices and the transaction cost. The consumption function is linear in wealth and in the uncertainty caused by employment status and house prices of the future. Since there is either 100% or 0% equity withdrawal, consumption jumps when there is refinancing.
    Keywords: Precautionary savings; employment risk; mortgages; housing
    JEL: D11 D14 E21
  52. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: Como é sabido, os movimentos migratórios à escala regional são fruto de uma diversidade de factores. Sendo entendidos como uma reacção, por parte da população, a desvantagens (inaceitáveis) de natureza económica apresentadas pela região de origem, estes movimentos demográficos constituem um importante exemplo da chamada ‘votação com os pés’. Claramente, a inexistência (ou a mera ineficácia) de políticas regionais que tenham como objectivo combater este fenómeno acarreta a inevitável desertificação humana a qual, certamente, constitui um crucial entrave ao desenvolvimento regional. Aliás, uma perspectiva, ainda que parcial, deste fenómeno demográfico admite ser esta, ela própria, a consequência lógica de políticas de incidência regional, as quais, sendo atendedoras ao peso eleitoral das diversas regiões, tendem a privilegiar as regiões já por si mais povoadas. Sendo certo que a decisão de migrar acarreta custos óbvios e só se justifica se (hipoteticamente) as condições de vida na região de destino se apresentarem inequivocamente melhores que as existentes na região de origem, tal significa que a ‘votação com os pés’ é, quase sempre, sinónimo de uma efectiva deslocalização da população activa (bem como das camadas populacionais mais jovens que dela dependem). Assim sendo, a este fenómeno demográfico, para além da desertificação humana, associa-se, quase inevitavelmente, o envelhecimento das regiões de origem por contrapartida do rejuvenescimento das regiões de destino. O objectivo principal deste trabalho é, assim, o de verificar se existe evidência empírica, em Portugal, suportando a hipótese de que aos movimentos migratórios regionais se pode associar o fenómeno da ‘votação com os pés’. Dado que o espaço de tempo decorrido entre os dois últimos Censos da População nos parece ser suficiente para se puderem observar com alguma segurança as tendências migratórias verificadas em Portugal, aquele objectivo pretende ser atingido usando os dados dos Censos de 1991 e 2001, recorrendo a uma metodologia que se baseia no uso de técnicas estatísticas especialmente adequadas no tratamento de variáveis que se apresentam localizadas no espaço nacional.
    Keywords: Demografia Regional, Desemprego, Econometria Espacial, Movimentos Migratórios
    JEL: E24 J61 J64 R15
    Date: 2005
  53. By: Joseph P. Daniels (Department of Economics, Marquette University); Farrokh Nourzad (Department of Economics, Marquette University); David D. VanHoose (Hanmaker School of Business, Baylor University)
    Abstract: This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation dropoff; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970-1999 provides generally strong and robust empirical support for all three of these predictions.
    Date: 2004–10

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