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on Macroeconomics |
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Issue of 2005‒05‒23
108 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Alvaro Aguirre; César Calderón |
| Abstract: | El presente trabajo se enmarca en un APT (Ross, 1976a) de la vertiente de Variables Macroeconómicas, que tiene la ventaja (en comparación con Análisis Factorial) de permitir la interpretación económica de los factores y los premios por riesgo factoriales. Similar a Burmeister y McElroy (1988), consideramos cuatro factores macroeconómicos medidos y un factor no observado; la presencia de factores no observados es una generalización del trabajo previo de Chen, Roll y Ross (1986). Partiendo del modelo de factores, la Teoría de Precios por Arbitraje (APT) impone restricciones, las que son comprobadas empíricamente en el período 1990-2003. Además, el Modelo de Valoración de Activos de Capital (CAPM) está anidado en el APT, lo que permite someter a prueba el modelo CAPM. Nuestros resultados son: (a) la restricción del APT no es rechazada por los datos, (b) las sorpresas en la tasa de crecimiento del Índice Mensual de Actividad Económica (IMACEC), en el precio del cobre y en el precio del petróleo aparecen como factores con premios por riesgo estadísticamente distintos a cero en los retornos accionarios chilenos; mientras que las sorpresa en inflación no aparecen preciadas en la muestra, y (c) el modelo CAPM es fuertemente rechazado por los datos, en favor del APT. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:316&r=mac |
| By: | Leon Bettendorf (Faculty of Economics, Erasmus Universiteit Rotterdam); Stephanie van der Geest (Faculty of Economics, Erasmus Universiteit Rotterdam); Gerard Kuper (University of Groningen) |
| Abstract: | This paper analyzes adjustments in the Dutch retail gasoline prices. We estimate an error correction model on changes in the daily retail price for gasoline (taxes excluded) for the period 1996-2004 taking care of volatility clustering by estimating an EGARCH model. It turns out the volatility process is asymmetrical: an unexpected increase in the producer price has a larger effect on the variance of the producer price than an unexpected decrease. We do not find strong evidence for amount asymmetry. However, there is a faster reaction to upward changes in spot prices than to downward changes in spot prices. This implies timing or pattern asymmetry. This asymmetry starts three days after the change in the spot price and lasts for four days. |
| Keywords: | Asymmetry; Retail gasoline prices; Volatility |
| JEL: | D43 E31 |
| Date: | 2005–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20050040&r=mac |
| By: | Marco Del Negro; Frank Schorfheide; Frank Smets; Raf Wouters |
| Abstract: | The paper provides new tools for the evaluation of DSGE models and applies them to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR) and then systematically relax the implied cross-equation restrictions. Let --denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of --. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large as to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2004-37&r=mac |
| By: | Arantza Gorostiaga; Juan Francisco Rubio-Ramírez |
| Abstract: | In this paper, we derive conditions under which a minimum-wage law combined with anonymous taxes and transfers and an agent-specific tax-transfer scheme are equivalent policies. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-08&r=mac |
| By: | Joanna Stavins |
| Abstract: | The recent decline in the Federal Reserve’s check volumes has received a lot of attention. Although switching to electronic payments methods and electronic check-processing has been credited for much of that decline, some of it could be caused by changes following bank mergers involving Federal Reserve customer banks. This paper evaluates the effect of bank mergers on Federal Reserve check-processing volumes. ; Using inflow-outflow and regression methods, we find that mergers between two or more Reserve Bank customers have resulted in volume losses, especially during the first quarter following the merger. On average, the estimated cumulative loss of volume during the first five post-merger quarters was 2.6 million checks. While the overall number of checks in the United States has declined during the past few years, the Federal Reserve has lost additional check-processing volume because of bank mergers. |
| Keywords: | Bank mergers ; Check collection systems |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:04-7&r=mac |
| By: | James M. Nason; Gregor W. Smith |
| Abstract: | Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under generalized methods of moments (GMM) and traces this syndrome to a lack of persistence in either exogenous variables or shocks. The authors employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, they revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward-looking inflation dynamics. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-01&r=mac |
| By: | Mark Aguiar; Gita Gopinath |
| Abstract: | Business cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility, and dramatic “sudden stops” in capital inflows. These features contrast with those of developed, small open economies and highlight the uniqueness of emerging markets. Nevertheless, we show that both qualitatively and quantitatively a standard dynamic stochastic, small open economy model can account for the behavior of both types of markets. Motivated by the observed frequent policy-regime switches in emerging markets, our underlying premise is that these economies are subject to substantial volatility in their trend growth rates relative to developed markets. ; Consequently, shocks to trend growth--rather than transitory fluctuations around a stable trend--are the primary source of fluctuations in these markets. When the parameters of the income process are structurally estimated using GMM for each type of economy, we find that the observed predominance of permanent shocks relative to transitory shocks for emerging markets and the reverse for developed markets explain differences in key features of their business cycles. Lastly, employing a VAR methodology to identify permanent shocks, we find further support for the notion that, for emerging economies, the cycle is the trend. |
| Keywords: | Emerging markets ; Business cycles |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:04-4&r=mac |
| By: | Peter Ireland |
| Abstract: | This paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates, using a model with population growth that nests, as a special case, a more conventional specification in which there is a single infinitely lived representative agent. The paper shows that with a growing population, monetary policy has distributional effects that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive. |
| Keywords: | Monetary policy ; Price levels |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-3&r=mac |
| By: | F. Owen Irvine; Scott Schuh |
| Abstract: | As has been widely observed, the volatility of GDP has declined since the mid-1980s compared with prior years. One leading explanation for this decline is that monetary policy improved significantly in the later period. We utilize a cross-section of 2-digit manufacturing and trade industries to further investigate this explanation. Since a major channel through which monetary policy operates is variation in the federal funds rate, we hypothesized that industries that are more interest sensitive should have experienced larger declines in the variance of their outputs in the post-1983 period. We estimate interest-sensitivity measures for each industry from a variety of VAR models and then run cross-sectional regressions explaining industry volatility ratios as a function of their interest-sensitivity measures. These regressions reveal little evidence of a statistically significant relationship between industry volatility reductions and our measures of industry interest sensitivity. This result poses challenges for the hypothesis that improved monetary policy explains the decline in GDP volatility. |
| Keywords: | Gross domestic product ; Monetary policy ; Interest rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-4&r=mac |
| By: | Ricardo Lagos; Guillaume Rocheteau |
| Abstract: | This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers’ search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates. |
| Keywords: | Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0407&r=mac |
| By: | Aleksander Berentsen; Guillaume Rocheteau; Shouyong Shi |
| Abstract: | In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency, and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. The authors analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, they extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities. |
| Keywords: | Monetary policy - Mathematical models ; Money - Mathematical models |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0408&r=mac |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models. |
| Keywords: | Monetary policy ; Money |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0410&r=mac |
| By: | William A. Branch; John Carlson; George W. Evans; Bruce McGough |
| Abstract: | This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "great moderation" that began in the 1980s. |
| Keywords: | Monetary policy ; Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0411&r=mac |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. |
| Keywords: | Monetary policy ; Banks and banking, Central |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0413&r=mac |
| By: | David E. Altig; Lawrence J. Christiano; Martin Eichenbaum; Jesper Linde |
| Abstract: | Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period. |
| Keywords: | Inflation (Finance) ; Monetary policy ; Business cycles |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0416&r=mac |
| By: | Guillaume Rocheteau; Christopher Waller |
| Abstract: | Search models of monetary exchange have typically relied on Nash (1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition. |
| Keywords: | Money ; Monetary policy ; Game theory |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0501&r=mac |
| By: | Amit Basu; Thomas F. Siems |
| Abstract: | New information technologies and e-business solutions have transformed supply chain operations from mass production to mass customization. This paper assesses the impact of these innovations on economic productivity, focusing on the macroeconomic benefits as supply chain operations have evolved from simple production and planning systems to today's real-time performance-management information systems using advanced e-business technologies. While many factors can influence macroeconomic variables, the impact of IT-enabled supply chains should not be overlooked. We find evidence that the impact of e-business technologies on supply chain operations have resulted in a reduced "bullwhip effect," lower inventory, reduced logistics costs, and streamlined procurement processes. These improvements, in turn, have likely helped to lower inflation, reduce economic volatility, strengthen productivity growth, and improve standards of living. |
| Keywords: | Information technology ; Macroeconomics ; Productivity |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:04-04&r=mac |
| By: | Evan F. Koenig |
| Abstract: | In economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the “persistence problem” and a new rationalization for McCallum’s P-bar inflation equation are also presented. |
| Keywords: | Productivity |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:04-05&r=mac |
| By: | Keith R. Phillips; Jesus Canas |
| Abstract: | In this paper we use a dynamic single-factor model originally due to Stock and Watson [18, 19] to measure the business cycle in four Texas border Metropolitan Statistical Areas (MSAs) and Mexico. We then measure the degree of economic integration between border cities, the US, Texas, and Mexican economies using correlation, spectral and cluster analysis. Results suggest border MSAs are significantly integrated with the broader economies and that major changes have occurred in these relationships since 1994, the year in which NAFTA was enacted and the time maquiladora industry began to accelerate. |
| Keywords: | North American Free Trade Agreement ; Maquiladora |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:05-02&r=mac |
| By: | John M. Roberts |
| Abstract: | Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these phenomena. The results suggest that changes in the parameters and shock volatility of monetary policy reaction functions can account for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy changes can explain only a small portion of the output growth volatility decline. However, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader concept of monetary-policy changes--one that includes improvements in the central bank's ability to measure potential output--enhances the ability of monetary policy to account for the changes in the economy. |
| Keywords: | Monetary policy - United States ; Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-62&r=mac |
| By: | Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch |
| Abstract: | From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models. |
| Keywords: | Bonds ; Macroeconomics ; Finance ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfam:2005-04&r=mac |
| By: | Vittorio Corbo; Leonardo Hernández; Fernando Parro |
| Abstract: | A pesar del esfuerzo de reformas de las décadas pasadas, el desempeño económico y social de los países de América Latina durante los noventa fue bastante pobre. La excepción fue Chile, que creció a tasas promedio de 7% durante la mayor parte de la década y redujo significativamente su tasa de pobreza. Este trabajo intenta explicar esta notable diferencia. Siguiendo la literatura más reciente, que destaca el rol que juegan las instituciones y políticas en el crecimiento económico, argumentamos que el mejor desempeño de Chile se debió a que las reformas implementadas fueron mucho más profundas y abarcaron más áreas que aquellas implementadas en otros países de América Latina. Durante este proceso Chile terminó con fundamentos económicos más sólidos y, aún más importante, con mejores instituciones, lo que le permitió enfrentar de mejor manera los shocks adversos en los noventa. Basados en un modelo econométrico de corte transversal estimado para el período 1960-2000, argumentamos que el mejor desempeño de Chile vis-a-vis al resto de la región puede ser explicado en partes iguales por las mejores instituciones y políticas del país (en contraste, el mejor desempeño de Asia del Este es explicado principalmente por mejores políticas). Adicionalmente, estimamos que América Latina puede aumentar su tasa de crecimiento anual del producto per cápita un 1,6%, en promedio, si tuviera la calidad de instituciones de Chile. Por otro lado, si el promedio de los países de América Latina tuviera políticas (desarrollo financiero y sobrevaluación cambiaria) similares a Chile, la tasa de crecimiento anual del producto per cápita aumentaría en un 1,0%, en promedio. Concluimos que, para lograr tasas de crecimiento más altas, los países de América Latina deben avanzar en sus procesos de reformas y poner más énfasis en el desarrollo y fortalecimiento de sus instituciones, las cuales, como muestra la experiencia de Chile, pueden ser modificadas (aunque lentamente). |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:317&r=mac |
| By: | Michelle L. Barnes; Jose Lopez |
| Abstract: | The Monetary Control Act of 1980 requires the Federal Reserve System to rovide payment services to depository institutions through the twelve Federal Reserve Banks at rices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the CAPM model and compare them using econometric and materiality criteria. Our results suggests that the benchmark CAPM model applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line-of-business concentration. Thus, a standard implementation of the benchmark CAPM model provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfam:2005-06&r=mac |
| By: | Bruce McGough; Glenn D. Rudebusch; John C. Williams |
| Abstract: | Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find when Taylor-type policy rules are used to set the long rate in a standard New Keynesian model, indeterminacy--that is, multiple rational expectations equilibria--may often result. However, a policy rule with a long rate policy instrument that responds in a "forward-looking" fashion to inflation expectations can avoid the problem of indeterminacy. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2004-22&r=mac |
| By: | Glenn D. Rudebusch; Tao Wu |
| Abstract: | This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes over time in the pricing of risk associated with a “level” factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as perceived by investors. |
| Keywords: | Interest rates ; Monetary policy ; Econometric models |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2004-25&r=mac |
| By: | Roberto Chang; Andres Velasco |
| Abstract: | Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating. |
| Keywords: | Monetary policy ; Foreign exchange |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-30&r=mac |
| By: | Tobías Broer |
| Abstract: | This paper identifies the information content of monetary aggregates for output and inflation in Chile, using a large set of reduced-form statistics and regression specifications. Unlike almost all previous studies on money in Chile, we compare 10 traditional and new definitions of money, rather than just looking at the customary definition M1A. Also, given the changes in the financial system and disinflation in Chile over the last 20 years, as well as contrasting growth rates of GDP and narrow money in recent times, we report recursive estimations for all our statistics to highlight parameter constancy. While there seems to be a strong and often one-to-one association between money growth and inflation on average over the whole sample as indicated by Nelson (2003) type regressions, the relation drops strongly during the last 10 years, and thus seems much lower in times of low inflation. Also, an increase in nominal money growth never causes acceleration of inflation in a Granger sense. However, we do find a significant and positive impact of deviations from (an estimated or HP-filtered) equilibrium level of money holdings on inflation, as indicated by error-correction and Pstar models. But the deviations from a simple estimated equilibrium are very large for both broad money aggregates and M1A at the end of the sample, casting some doubt on the stability of their demand relation. Accordingly, cointegration tests for the existence of a stable demand for money function over the whole sample are somewhat inconclusive. We find a strong Granger causality relationship between money and output, which however vanishes once we control for the effect of past inflation and changes in the monetary policy rate. Also, the information in lags of M1A for GDP drops strongly towards the end of the sample. More generally, M1A does not seem to merit its role as the money sum par excellence in Chile, being inferior in information content for example to Notes and Coin, or a broad money sum excluding bonds (M7 minus Central Bank documents). |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:319&r=mac |
| By: | Athanasios Orphanides; Simon van Norden |
| Abstract: | A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for countercyclical monetary policy in many models. In this paper, we evaluate the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. Many of the ex post output gap measures we examine appear to be quite useful for predicting inflation. However, forecasts using real-time estimates of the same measures do not perform nearly as well. The relative usefulness of real-time output gap estimates diminishes further when compared to simple bivariate forecasting models which use past inflation and output growth. Forecast performance also appears to be unstable over time, with models often performing differently over periods of high and low inflation. These results call into question the practical usefulness of the output gap concept for forecasting inflation. |
| Keywords: | Inflation (Finance) ; Phillips curve ; Input-output analysis |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-68&r=mac |
| By: | Mark W. French |
| Abstract: | The cycle in output and hours worked is not symmetric: it behaves differently around recessions than in expansions. Similarly, the trend in multifactor productivity (MFP) seems to pass through different regimes; there was an extended period of slow MFP growth from about 1973 through 1995, and faster growth thereafter. Typical linear models and linear filters such as the Kalman filter deal poorly with asymmetry and regime changes. This paper attempts to determine more accurately and quickly any shifts in trend MFP growth, using a nonlinear Kalman/Markov filter with a model of the unobserved components of output and hours. This hybrid model incorporates regime-switching in the business cycle and in the trend growth of MFP. Estimation results are promising. The hybrid model and associated filter appear to be faster than the basic Kalman filter in detecting turning points in the smoothed conditional mean estimate of trend MFP growth; in addition, the hybrid model avoids some of the Kalman filter's biases in reconstructing historical business cycles and the MFP trend. |
| Keywords: | Business cycles ; Econometric models ; Nonlinear theories |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-12&r=mac |
| By: | Valerie A. Ramey; Daniel J. Vine |
| Abstract: | Recent papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) uncover a dramatic decline in the volatility of U.S. GDP growth beginning in 1984. Determining whether the source is good luck, good policy or better inventory management has since developed into an active area of research. This paper seeks to shed light on the source of the decline in volatility by studying the behavior of the U.S. automobile industry, where the changes in volatility have mirrored those of the aggregate data. We find that changes in the relative volatility of sales and output, which have been interpreted by some as evidence of improved inventory management, could in fact be the result of changes in the process driving automobile sales. We first show that the autocorrelation of sales dropped during the 1980s, and that the behavior of interest rates may be the force behind the change in sales persistence. A simulation of the assembly plants' cost function illustrates that the persistence of sales is a key determinant of output volatility. A comparison of the ways in which assembly plants scheduled production in the 1990s relative to the 1970s supports the intuition of the simulation. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-14&r=mac |
| By: | Robert M. Adams; Dean F. Amel |
| Abstract: | We study the relationship between banking competition and the transmission of monetary policy through the bank lending channel. Using business small loan origination data provided from the Community Reinvestment Act from 1996-2002 in our analysis, we are able to reaffirm the existence of the bank lending channel of monetary transmission. Moreover, we find that the impact of monetary policy on loan originations is weaker in more concentrated markets. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-16&r=mac |
| By: | Alain P. Chaboud; Sergey Chernenko; Edward Howorka; Raj S. Krishnasami Iyer; David Liu; Jonathan H. Wright |
| Abstract: | We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume. |
| Keywords: | Foreign exchange ; Foreign exchange rates ; International trade |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:823&r=mac |
| By: | Sanjay Chugh |
| Abstract: | Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets. |
| Keywords: | Inflation (Finance) ; Econometric models ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:829&r=mac |
| By: | Marianne Baxter; Michael Kouparitsas |
| Abstract: | This paper investigates the determinants of business cycle comovement between countries. Our dataset includes over 100 countries, both developed and developing. We search for variables that are “robust” in explaining comovement, using the approach of Leamer (1983). Variables considered are (i) bilateral trade between countries; (ii) total trade in each country; (iii) sectoral structure; (iv) similarity in export and import baskets; (v) factor endowments; and (vi) gravity variables. We find that bilateral trade is robust. However, two variables that the literature has argued are important for business cycles—industrial structure and currency unions—are found not to be robust. |
| Keywords: | Business cycles ; Trade |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-14&r=mac |
| By: | Jeffrey R. Campbell; Zvi Hercowitz |
| Abstract: | Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases. |
| Keywords: | Households - Economic aspects ; Macroeconomics ; Labor supply |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-24&r=mac |
| By: | Bernardino Adão; Isabel Correia; Pedro Teles |
| Abstract: | What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-26&r=mac |
| By: | Bernardino Adão; Isabel Correia; Pedro Teles |
| Abstract: | We consider a standard cash in advance monetary model with flexible prices or prices set in advance and show that there are interest rate or money supply rules such that equilibria are unique. The existence of these single instrument rules depends on whether the economy has an infinite horizon or an arbitrarily large but finite horizon. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-30&r=mac |
| By: | Penelope A. Smith; Peter M. Summers |
| Abstract: | Recent work by Hamilton, Waggoner and Zha (2004) has demonstrated the importance of identification and normalization in econometric models. In this paper, we use the popular class of two-state Markov switching models to illustrate the consequences of alternative identification schemes for empirical analysis of business cycles. A defining feature of (classical) recessions is that economic activity declines on average. Somewhat surprisingly however, this property has been ignored in most published work that uses Markov switching models to study business cycles. We demonstrate that this matters: inferences from Markov switching models can be dramatically affected by whether or not average growth in the 'low state' is required to be negative, rather than simply below trend. Although such a restriction may not be appropriate in all applications, the difference is crucial if one wants to draw conclusions about 'recessions' based on the estimated model parameters. |
| Keywords: | Business cycles ; Recessions |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp04-09&r=mac |
| By: | Marcela Meirelles-Aurelio |
| Abstract: | This paper studies monetary and fiscal policy rules, and investigates the characteristics of optimal policies. The central focus of the paper is on the comparison of two types of fiscal rules: a balanced budget and a target for the primary surplus. Balanced budget rules (or, more generally, numeric ceilings to the overall budget deficit) are criticized because they may dictate higher taxes in periods of weak economic activity. The primary surplus rule, in contrast, has a less pro-cyclical nature, given that it does not require higher fiscal austerity in periods when the cost of servicing public debt is higher. In a nutshell, it allows a higher degree of tax smoothing. It is not clear, however, if (inevitable) fiscal adjustments should be postponed. These issues are investigated in the context of a dynamic stochastic general equilibrium model that describes an open economy, with capital accumulation, and where nominal rigidities are present. The model shows that previous findings drawn from open economy models—in particular with respect to the characteristics of optimal monetary policy—do not hold once the implications of certain fiscal regimes are taken into account, and once different scenarios concerning the degree of capital mobility are considered. The model is calibrated and simulated for the case of Brazil, a country that since 1999 has targets for inflation and for the primary surplus. The main finding is that a fiscal regime characterized by a target for the primary surplus delivers superior economic performance, a property captured by the shape of the efficient policy frontier. |
| Keywords: | Monetary policy ; Fiscal policy ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-01&r=mac |
| By: | Kevin L. Kliesen; Frank A. Schmid |
| Abstract: | Real-business-cycle models suggest that an increase in the rate of productivity growth increases the real rate of interest. But economic theory is ambiguous when it comes to the effect of government budget deficits on the real rate of interest. Similarly, little is known about the effect of monetary policy actions on real long-term interest rates. We investigate these questions empirically, using macroeconomic announcement data. We find that the real long-term rate of interest responds positively to surprises in labor productivity growth. However, we do not reject the hypothesis that the real long-term rate of interest does not respond to surprises in the size of the government*s budget deficit (or surplus). Finally, we find no support for the proposition that the Federal Reserve has information about its actions or the state of the real economy that is not in the pubic domain and, hence, priced in the real long-term interest rate. |
| Keywords: | Interest rates ; Monetary policy ; Fiscal policy |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-019&r=mac |
| By: | William T. Gavin; Benjamin D. Keen; Michael R. Pakko |
| Abstract: | This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, we examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. We show that inflation persistence and the variability of inflation relative to money growth depends on whether the central bank follows a money growth rule or an interest rate rule. With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply. Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not. A central bank's utilization of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-026&r=mac |
| By: | Hui Guo; Robert Savickas |
| Abstract: | The paper analyzes aggregate idiosyncratic volatility (IV) in G7 countries using recent data up to 2003. Consistent with Campbell, Lettau, Malkiel, and Xu's (2001) results obtained from U.S. data over the period 1962-97, we find that the equal-weighted IV exhibits a significant upward trend in the U.S. and some other countries in the extended sample. The trend, however, appears to be mainly due to the increasing number of publicly traded companies since we fail to uncover a similar trend in the value-weighted IV of all seven countries. IV is highly correlated across countries and we document a significant Granger causality from the U.S. to the other countries and vice versa. Moreover, while U.S. value-weighted IV has significant predictive power for international stock returns, the value-weighted IV of other countries helps forecast U.S. stock returns as well because of its co-movements with U.S. data. The results indicate that IV is a proxy for systematic risk. |
| Keywords: | Stock exchanges |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-027&r=mac |
| By: | Jian Yang; Hui Guo; Zijun Wang |
| Abstract: | We investigate the international transmission of inflation among G-7 countries using a data-determined vector autoregression analysis, as advocated by Swanson and Granger (1997). Over the period 1973 to 2003, we find that U.S. innovations have a large effect on inflation in the other countries, although they are not always the dominant international factor. Similarly, shocks to some other countries also have a statistically and economically significant influence on U.S. inflation. Moreover, our evidence indicates that U.S. inflation has become less vulnerable to foreign shocks since the early 1990s, mainly because of the diminished influence from Germany and France |
| Keywords: | International finance ; Time-series analysis |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-028&r=mac |
| By: | James Morley; Jeremy M. Piger |
| Abstract: | This paper considers the ability of simulated data from linear and nonlinear time-series models to reproduce features in U.S. real GDP data related to business cycle phases. We focus our analysis on a number of linear ARIMA models and nonlinear Markov-switching models. To determine the timing of business cycle phases for the simulated data, we present a model-free algorithm that is more successful than previous methods at matching NBER dates in the postwar data. We find that both linear and Markov-switching models are able to reproduce business cycle features such as the average growth rate in recessions, the average length of recessions, and the total number of recessions. However, we find that Markov-switching models are better than linear models at reproducing the variability of growth rates in different business cycle phases. Furthermore, certain Markov-switching specifications are able to reproduce high-growth recoveries following recessions and a strong correlation between the severity of a recession and the strength of the subsequent recovery. Thus, we conclude that nonlinearity is important in reproducing business cycle features. |
| Keywords: | Business cycles |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-032&r=mac |
| By: | William T. Gavin; David M. Kemme |
| Abstract: | Empirical work in macroeconomics is plagued by small sample size and large idiosyncratic variation. This problem is especially severe in the case of transition economies. We use a mixed estimation method incorporating information from OECD country data to estimate the parameters of a reduced-form transition economy model. An exactly identified structural VAR model is then constructed to analyze monetary policy. The OECD information increases the precision of the impulse response functions in the transition economies. The method provides a systematic way to use extraneous information to analyze monetary policy in the transition economies where data availability is limited. |
| Keywords: | Monetary policy ; Macroeconomics |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-034&r=mac |
| By: | Thomas A. Garrett; David C. Wheelock |
| Abstract: | State per capita incomes became more disperse during the contraction phase of the Great Depression, and less disperse during the recovery phase. We investigate the effects of geography, industry structure, bank failures and fiscal policies on state income growth during each phase. We find that industrial composition and spatial interdependencies contributed to negative state income growth during the contraction, whereas New Deal spending and spatial interdependencies contributed to positive state income growth during the expansion phase. We find no evidence that banking conditions or state government expenditures influenced state income growth during the Great Depression. |
| Keywords: | Depressions |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-013&r=mac |
| By: | Huberto M. Ennis |
| Abstract: | I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright’s model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmem:142&r=mac |
| By: | Patrick J. Kehoe |
| Abstract: | This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies. Most of the variables turned out to be fragile. The main contribution is to show that countries with large amounts of bilateral trade tend to have robustly higher business cycle correlations. Another interesting finding is that neither currency unions nor industrial structure are robustly related to business cycle correlations. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:349&r=mac |
| By: | Ellen R. McGrattan; Edward C. Prescott |
| Abstract: | In this paper, we show that ignoring corporate intangible investments gives a distorted picture of the post-1990 U.S. economy. In particular, ignoring intangible investments in the late 1990s leads one to conclude that productivity growth was modest, corporate profits were low, and corporate investment was at moderate levels. In fact, the late 1990s was a boom period for productivity growth, corporate profits, and corporate investment. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:350&r=mac |
| By: | Aubhik Khan; Julia Thomas |
| Abstract: | We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S, s) rules with respect to capital; thus, their investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though, with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, increase the persistence of aggregate investment, yielding a better match with the data. In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks makes the average distribution of plant investment rates largely invariant to market-clearing movements in real wages and interest rates. Nonetheless, we find that understanding the dynamics of plant-level investment requires general equilibrium analysis. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:352&r=mac |
| By: | Matthias Doepke; Fabrizio Zilibotti |
| Abstract: | We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Since child labor income depends on family size, fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:354&r=mac |
| By: | Harold L. Cole; Lee E. Ohanian; Ron Leung |
| Abstract: | This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn’t account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:356&r=mac |
| By: | V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan |
| Abstract: | The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that standard business cycle models in which technology shocks leads to a rise in hours should be discarded. We evaluate the DSVAR approach by asking the following: Is the specification derived from this approach misspecified when the data is generated by the very model the literature is trying to discard, namely the standard business cycle model? We find that it is misspecified. Moreover, this misspecification is so great that it leads to mistaken inferences that are quantitatively large. We show that the other popular specification which uses the level of hours (LSVAR) is also misspecified with respect to the standard business cycle model. We argue that an alternative approach, the business cycle accounting approach, is a more fruitful technique for guiding the development of business cycle theory. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:631&r=mac |
| By: | Timothy Cogley; Argia M. Sbordone |
| Abstract: | The foundation of the New Keynesian Phillips curve (NKPC) is a model of price setting with nominal rigidities that implies that the dynamics of inflation are well explained by the evolution of real marginal costs. In this paper, we analyze whether this is a structurally invariant relationship. We first estimate an unrestricted time-series model for inflation, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression (VAR) with drifting coefficients and volatilities. We then apply a two-step minimum distance estimator to estimate deep parameters of the NKPC. Given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that this theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constant-parameter NKPC with the drifting-parameter VAR; therefore, we argue that the price-setting model is structurally invariant. |
| Keywords: | Phillips curve ; Vector autoregression ; Inflation (Finance) ; Keynesian economics ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:203&r=mac |
| By: | Argia M. Sbordone |
| Abstract: | This article discusses a more general interpretation of the two-step minimum distance estimation procedure proposed in earlier work by Sbordone. The estimator is again applied to a version of the New Keynesian Phillips curve, in which inflation dynamics are driven by the expected evolution of marginal costs. The article clarifies econometric issues, addresses concerns about uncertainty and model misspecification raised in recent studies, and assesses the robustness of previous results. While confirming the importance of forward-looking terms in accounting for inflation dynamics, it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting. |
| Keywords: | Phillips curve ; Keynesian economics ; Econometric models ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:204&r=mac |
| By: | Gauti Eggertsson; Eric Le Borgne |
| Abstract: | We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Political science |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:205&r=mac |
| By: | Michael Dotsey; Robert G. King |
| Abstract: | State-dependent pricing (SDP) models treat the timing of price changes as a profit-maximizing choice, symmetrically with other decisions of firms. Using quantitative general equilibrium models that incorporate a “generalized (S,s) approach,” we investigate the implications of SDP for topics in two major areas of macroeconomic research: the early 1990s SDP literature and more recent work on persistence mechanisms. First, we show that state-dependent pricing leads to unusual macroeconomic dynamics, which occur because of the timing of price adjustments chosen by firms as in the earlier literature. In particular, we display an example in which output responses peak at about a year, while inflation responses peak at about two years after the shock. Second, we examine whether the persistence-enhancing effects of two New Keynesian model features, namely, specific factor markets and variable elasticity demand curves, depend importantly on whether pricing is state dependent. In an SDP setting, we provide examples in which specific factor markets perversely work to lower persistence, while variable elasticity demand raises it. |
| Keywords: | Price levels |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:05-2&r=mac |
| By: | M. Ayhan Kose; Kei-Mu Yi |
| Abstract: | Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair’s business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model. |
| Keywords: | Business cycles ; International trade |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:05-3&r=mac |
| By: | Thomas M. Humphrey |
| Abstract: | Marshall made at least four contributions to the classical quantity theory. He endowed it with his Cambridge cash-balance money-supply-and-demand framework to explain how the nominal money supply relative to real money demand determines the price level. He combined it with the assumption of purchasing power parity to explain (i) the international distribution of world money under metallic standards and fixed exchange rates, and (ii) exchange rate determination under floating rates and inconvertible paper currencies. He paired it with the idea of money wage and/or interest rate stickiness in the face of price level changes to explain how money-stock fluctuations produce corresponding business-cycle oscillations in output and employment. He applied it to alternative policy regimes and monetary standards to determine their respective capabilities of delivering price-level and macroeconomic stability. In his hands the theory proved to be a powerful and flexible analytical tool. |
| Keywords: | Economists ; Money |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:04-10&r=mac |
| By: | Mervyn King (Bank of England) |
| Abstract: | Mervyn King is the Deputy Governor of the Bank of England and a co-founder of the LSE Financial Markets Group. On Wednesday 29 October 1997 he gave a public lecture at the LSE to mark the 10th anniversary of the Financial Markets Group and the 5th annivesay of the Bank of England Inflation Target. This Special Paper is the Transcript of that lecture. |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp0099&r=mac |
| By: | Bonfiglioli, Alessandra (Institute for International Economic Studies, Stockholm University) |
| Abstract: | This paper studies the relationship between investor protection, the development of financial markets and income inequality. In the presence of market frictions, investor protection promotes financial development by raising confidence and reducing the costs of external financing. Developed financial systems spread risk among financiers and firms, allocating them to the agents bearing them best. Therefore, financial development plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between financial development and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-nine countries, as well as a panel of fifty-two countries over the period 1976-2000, supports the predictions of the model. |
| Keywords: | Income inequality; financial development; capital market frictions; investor protection; instrumental variables; dynamic panel data |
| JEL: | D31 E44 G30 O15 O16 |
| Date: | 2005–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0737&r=mac |
| By: | Bengtsson, Ingemar (Department of Economics, Lund University) |
| Abstract: | This paper presents a model that pictures how inflation is determined in a decentralized market process where prices are set in both simultaneous and sequential contracts. Price setting is seen as a coordination game between the price setters of sequential contracts. An important property of the model is that inflation thus can be explained without any reference to the quantity of money.Following up the finding that inflation is determined in a coordination game, it is subsequently claimed that whenever inflation does not follow a random path, people do seem to follow some rule of thumb when predicting future price levels. In the last section of the paper, it is finally claimed that this rule is best understood as a focal point, and furthermore that the central banks provides the focal point for inflation in the western world today. Central banks could thus be shown to be able to influence inflation rates, although the quantity of money plays no part in this process. |
| Keywords: | Central Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory |
| JEL: | C70 E31 E42 E43 E44 E51 E52 E58 |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_028&r=mac |
| By: | Bengtsson, Ingemar (Department of Economics, Lund University) |
| Abstract: | In the paper, an analogy with length measurement is applied in order to explore the nature of the unit for value measurement, i.e. the unit of account. As the meter is defined as the length traveled by light in vacuum during 1/299 792 458 of a second, the unit of account krona is defined as the purchasing power of the medium of exchange krona. However, one should be cautious when drawing conclusions from this analogy. Our unit of account is defined in our medium of exchange, but it is meaningful only because we can observe prices on real goods expressed in it. As it would be pointless to define the meter as the length traveled by light in vacuum during 1/299 792 458 of a second if we could not compare this length with anything else, it would be pointless to define our unit of account in something that is not priced. In the paper it is explained how different payment techniques help to overcome transaction costs in the market. In particular, following Alchian (1977), it is argued that to reap the full benefit from the use of payment techniques, it has to be combined with the use of both a unit of account and specialist middlemen. The use of payment techniques helps to reduce costs due to sequential payment, but to reduce costs due to sequential quality evaluation, you need unit of account as well as reputable middlemen. |
| Keywords: | Medium of Exchange; Money; Payment Techniques; Quantity Theory; Transaction Costs; Unit of Account |
| JEL: | B52 D23 E31 E41 E42 E51 |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_029&r=mac |
| By: | Holden, Steinar (Dept. of Economics, University of Oslo); Wulfsberg, Fredrik (Norges Bank) |
| Abstract: | This paper explores the existence of downward nominal wage rigidity (DNWR) in 19 OECD countries, over the period 1973–1999, using data for hourly nominal wages at industry level. Based on a novel nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 70 percent in the 1970s to 11 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when inflation is high,unemployment is low, union density is high and employment protection legislation is strict. |
| Keywords: | Downward nominal wage rigidity; OECD; employment protection legislation; wage setting |
| JEL: | C14 C15 E31 |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_010&r=mac |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo); Leitemo, Kai (Norwegian School of Management) |
| Abstract: | We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. |
| Keywords: | VAR; monetary policy; asset prices; identification |
| JEL: | E43 E52 E61 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_012&r=mac |
| By: | David G. Blanchflower (Dartmouth College and IZA Bonn); Andrew J. Oswald (University of Warwick, Harvard University and IZA Bonn) |
| Abstract: | According to the well-being measure known as the U.N. Human Development Index, Australia now ranks 3rd in the world and higher than all other English-speaking nations. This paper questions that assessment. It reviews work on the economics of happiness, considers implications for policymakers, and explores where Australia lies in international subjective well-being rankings. Using new data on approximately 50,000 randomly sampled individuals from 35 nations, the paper shows that Australians have some of the lowest levels of job satisfaction in the world. Moreover, among the sub-sample of English-speaking nations, where a common language should help subjective measures to be reliable, Australia performs poorly on a range of happiness indicators. The paper discusses this paradox. Our purpose is not to reject HDI methods, but rather to argue that much remains to be understood in this area. |
| Keywords: | well-being, happiness, HDI, macroeconomics |
| JEL: | E6 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1601&r=mac |
| By: | René Böheim (University of Linz and IZA Bonn); Alfred Stiglbauer (Austrian National Bank); Rudolf Winter-Ebmer (University of Linz, Institute for Advanced Studies Vienna, CEPR and IZA Bonn) |
| Abstract: | While the volatility of job creations has been studied extensively, the survival chances of new jobs are less researched. The question when and how to expand a firm is of importance, both from the firms and from a macro perspective. Adjustment cost theories and arguments about option values of investment in firm expansion make predictions about the timing, sequencing and form of firm expansions. When we analyze 21 years of job creation in Austria, we find that the survival of new jobs (and of new firms) depends upon the state of the business cycle at the time of job creation, on the number of jobs created, and on firm age. Jobs in new firms last longer than new jobs in continuing firms. |
| Keywords: | job creation, business cycle, reallocation, persistence |
| JEL: | J23 J63 E24 E32 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1602&r=mac |
| By: | David G. Blanchflower; Andrew J. Oswald |
| Abstract: | This paper provides evidence for the existence of a wage curve -- a micro-econometric association between the level of pay and the local unemployment rate -- in modern U.S. data. Consistent with recent evidence from more than 40 other countries, the wage curve in the United States has a long-run elasticity of approximately %uF8180.1. In line with the paper%u2019%u2019s theoretical framework: (i) wages are higher in states with more generous unemployment benefits, (ii) the perceived probability of job-finding is lower in states with higher unemployment, and (iii) employees are less happy in states that have higher unemployment. We conclude that it is reasonable to view the wage curve as an empirical law of economics. |
| JEL: | J3 E2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11338&r=mac |
| By: | Geert Bekaert; Seonghoon Cho; Antonio Moreno |
| Abstract: | This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the "level factor" whereas the monetary policy shocks dominate the variation in the "slope and curvature factors". |
| JEL: | E4 E5 G2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11340&r=mac |
| By: | Giancarlo Corsetti; Paolo Pesenti |
| Abstract: | This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies. |
| JEL: | E31 E52 F42 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11341&r=mac |
| By: | Benjamin M. Friedman |
| Abstract: | Under conventional representations of economic policymaking, any innovation is either (1) a change in the objectives that policymakers are seeking to achieve, (2) a change in the choice of policy instrument, or (3) a change in the way auxiliary aspects of economic activity are used to steer policy in the context of time lags. Most public discussion of the 1979 Volcker experiment at the time, and likewise most of the subsequent academic literature, emphasized either the role of quantitative targets for money growth (3) or the use of an open market operating procedure based on a reserves quantity rather than a short-term interest rate (2). With time, however, neither has survived as part of U.S. monetary policymaking. What remains is the question of whether 1979 brought a new, greater weight on the Federal Reserve%u2019s objective of price stability vis-a-vis its objective of output growth and high employment (1). That is certainly one interpretation of the historical record. But the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. |
| JEL: | E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11346&r=mac |
| By: | Philippe Aghion; George-Marios Angeletos; Abhijit Banerjee; Kalina Manova |
| Abstract: | We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long-term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth. |
| JEL: | E22 E32 O16 O30 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11349&r=mac |
| By: | William Nordhaus |
| Abstract: | Productivity has rebounded in the last decade while manufacturing employment has declined sharply. The present study uses data on industrial output and employment to examine the sources of these trends. It finds that the productivity rebound since 1995 has been widespread, with approximately two-fifths of the productivity rebound occurring in New Economy industries. Moreover, after suffering a slowdown in the 1970s, productivity growth since 1995 has been at the rapid pace of the earlier 1948-73 period. Finally, the study investigates the relationship between employment and productivity growth. If finds that the relevant elasticities indicate that more rapid productivity growth leads to increased rather than decreased employment in manufacturing. The results here suggest that productivity is not to be feared - at least not in manufacturing, where the largest recent employment declines have occurred. This shows up most sharply for the most recent period, since 1998. Overall, higher productivity has led to lower prices, expanding demand, and to higher employment, but the partial effects of rapid domestic productivity growth have been more than offset by more rapid productivity growth and price declines from foreign competitors. |
| JEL: | O4 E1 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11354&r=mac |
| By: | Gary Gorton; Ping He |
| Abstract: | Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks%u2019 beliefs about rival banks%u2019 behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. We also find that the relative bank performance is a priced risk factor for both banks and nonfinancial firms. The factor-coefficients for non-financial firms are decreasing with size. |
| JEL: | E3 G2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11363&r=mac |
| By: | George Kapetanios (Queen Mary, University of London); Elias Tzavalis (Queen Mary, University of London) |
| Abstract: | This paper applies a new model of structural breaks developed by Kapetanios and Tzavalis (2004) to investigate if there exist structural changes in the mean reversion parameter of US macroeconomic series. Ignoring such type of breaks may lead to spurious evidence of unit roots in the autoregressive parameters of economic series. Our model specifies that both the timing and size of breaks are stochastic. We apply the model to a variety of macroeconomic and finance series from the US. |
| Keywords: | Structural breaks, State space model, Nonlinearity. |
| JEL: | E32 C13 C22 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp537&r=mac |
| By: | Marco Pagano (Università di Napoli "Federico II", CSEF and CEPR) |
| Abstract: | The Modigliani-Miller (MM) theorems are a cornerstone of finance for two reasons. The first is substantive and it stems from their nature of “irrelevance propositions”: by providing a crystal-clear benchmark case where capital structure and dividend policy do not affect firm value, by implication these propositions help us understand when these decisions may affect the value of firms, and why. Indeed, the entire subsequent development of corporate finance can be described essentially as exploring the consequences of relaxing the MM assumptions. The second reason for the seminal importance of MM is methodological: by relying on an arbitrage argument, they set a precedent not only within the realm of corporate finance but also (and even more importantly) within that of asset pricing. |
| Keywords: | Modigliani-Miller theorem, capital structure, leverage, dividend policy |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:139&r=mac |
| By: | Tullio Jappelli (Università di Salerno, CSEF and CEPR) |
| Abstract: | The paper reviews some of the most important results of the Life Cycle Hypothesis for understanding individual and aggregate saving behaviour. It then turns to the implications for fiscal policy and social security, highlighting Modigliani’s seminal contributions. Over time competing theories have emerged, and some empirical findings are difficult to reconcile with LCH; chiefly aspects of inertia, myopia, and irrational behaviour documented by the recent behavioural literature. But the LCH is still the benchmark model to think about individual saving decisions, the aggregate evidence and policy issues. |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:140&r=mac |
| By: | José Noguera; Susan J. Linz; |
| Abstract: | This paper develops a model to investigate the welfare implications of barter in Russia and other transition economies during the 1990s. We argue that barter is a welfare-improving phenomenon that acts as a defense mechanism against monetary instability. When firms react to tighter credit markets by switching to barter, the risk they face diminishes, allowing for a higher level of production. |
| Keywords: | Barter, welfare, Russia, money, credit, payment system, interest rate |
| JEL: | E0 E6 P20 P21 P23 P26 |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-757&r=mac |
| By: | Maxim Bouev; ; |
| Abstract: | This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model à la Pissarides (2000) with formal and informal sectors to show how a government’s auditing of informal firms and barriers to firms’ entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms’ bargaining position vis-à-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus (e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare. |
| Keywords: | informal economy, regulations, wage bargaining, labour markets, search models |
| JEL: | E24 H26 J31 J41 J42 J64 O17 |
| Date: | 2005–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-764&r=mac |
| By: | Viviana Fernandez; Ali M. Kutan; |
| Abstract: | Using monthly industrial sector data from January 1971 to March 2004, we test for business cycles convergence among the major APEC members: Japan, South Korea, Malaysia, Mexico, USA, and Canada. In addition, we examine the synchronization of business cycles among Australia, Japan, and South Korea, based on the quarterly data for the 1957-2003 period, as well as among the different economic sectors of the NAFTA countries from January 1970 through March 2004. We apply different techniques to identify business cycles. In particular, we propose a new trend-cycle decomposition method based on wavelet analysis. The results show that convergence of business cycles of Asia-Pacific countries is far from complete, but joining the APEC has increased the mean correlation of industrial production cycles of the member economies. On the other hand, although some economic sectors of the NAFTA countries already exhibited some degree of business cycle co-movement even during pre-NAFTA period, the volatility of pair-wise correlation of business cycles declined during NAFTA. In addition, we conclude that, in general, the transmission of business cycles is relatively slow, and, consequently, business cycles appear to be asynchronous. |
| Keywords: | business-cycles convergence, wavelets, APEC, NAFTA |
| JEL: | B41 E32 |
| Date: | 2005–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-765&r=mac |
| By: | Imed Drine; Christophe Rault; |
| Abstract: | We investigate inflation convergence between the Euro Zone and its CEE partners using panel data methods that incorporate structural shifts. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the East-European countries for the 1995:1 to 2000:4 period. |
| Keywords: | Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks |
| JEL: | E31 F0 F31 C15 |
| Date: | 2005–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-768&r=mac |
| By: | Balázs Égert; László Halpern; |
| Abstract: | This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates. |
| Keywords: | equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-769&r=mac |
| By: | Balázs Égert; ; |
| Abstract: | This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands. |
| Keywords: | Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey |
| JEL: | E31 O11 P17 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-770&r=mac |
| By: | Daniel Levy (Bar-Ilan University) |
| Abstract: | Using a new series of capital stock and frequency domain analysis, this paper provides new empirical evidence on the relative importance of capital and labor in the determination of output in the short and long- run. Contrary to the common practice in the traditional growth accounting literature of assigning weights of 0.3 and 0.7 to capital and labor inputs respectively, the evidence presented here suggests that capital is a far more important factor than labor for determination of output at and near the zero frequency band. Furthermore, I show that the zero-frequency labor elasticity of output may well be close to zero, or even zero. Additional findings reported here support the traditional accelerator model of investment as a good description of the long-run investment process. |
| Keywords: | Growth Accounting, Capital Investment, Output Fluctuation, Employment, Business Cycles and Aggregate Fluctuation, Frequency Domain Analysis, Spectrum and Cross-Spectrum, Coherence, Phase Shift, Gain, Zero-Frequency, Capital and Labor Elasticity of Output, Short-Run, Long- Run, Capital's and Labor's Share in Output, Accelerator Model of Investment |
| JEL: | O47 E22 E24 E32 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505012&r=mac |
| By: | Hashem Dezhbakhsh (Emory University); Daniel Levy (Bar-Ilan University) |
| Abstract: | Although linearly interpolated series are often used in economics, little has been done to examine the effects of interpolation on time series properties and on statistical inference. We show that linear interpolation of a trend tationary series superimposes a ‘periodic’ structure on the moments of the series. Using conventional time series methods to make inference about the interpolated series may therefore be invalid. Also, the interpolated series may exhibit more shock persistence than the original trend stationary series. |
| Keywords: | Linear Interpolation, Trend-Stationary Series, Shock Persistence, Periodic Properties of Time Series |
| JEL: | C10 C22 C82 E37 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505004&r=mac |
| By: | Daniel Levy (Bar-Ilan University); Mark Bergen (University of Minnesota) |
| Abstract: | We describe a multiproduct barter trading experiment in which students exchange real goods in an open market based on their own personal preference. The experiment is designed for simulating a pure exchange market in order to demonstrate the role of money and its functions in real economies by showing the limitations and inefficiencies of the traditional barter economy. In addition, the simulation is very effective in highlighting some of the key features that an object that serves as money needs to possess in order to function as an efficient medium of exchange, unit of account, and store of value. |
| Keywords: | Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost |
| JEL: | A22 C90 C91 C92 E40 E41 E42 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpex:0505002&r=mac |
| By: | Harold Fried (Union College); Daniel Levy (Bar-Ilan University) |
| Abstract: | This note describes an experiment, which is an extension of the experiment proposed by Levy and Bergen (1993). The experiment is designed to simulate an environment where something that is very similar to fiat money (i.e., is homogenous, durable, portable, storable, divisible, has no intrinsic value of its own, etc.) will be accepted in market transactions and thus will have a “value.” This is accomplished through an implementation of a taxation mechanism in the spirit of legal restriction theory of monetary economics. |
| Keywords: | Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost |
| JEL: | A22 C90 C91 C92 E40 E41 E42 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0505001&r=mac |
| By: | Daniel Levy (Bar-Ilan University) |
| Abstract: | I expand Feldstein’s (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using this model, I demonstrate how a positive investment-saving correlation can arise in a world with endogenous fiscal policy. I show that this correlation does not depend on capital mobility and therefore is compatible with any degree of capital mobility. This implies that the observed investment- saving comovement is not necessarily due to imperfect capital mobility. The model has a testable implication: it predicts a lack of Granger causality from private saving to private investment. Empirical examination of this prediction indicates that U.S. time series data is compatible with the hypothesis of endogenous fiscal policy during a flexible exchange rate period, but not during a fixed exchange rate period. |
| Keywords: | Feldstein-Horioka Puzzle, Investment, Saving, Capital Mobility, Endogenous Fiscal Policy |
| JEL: | F41 E62 H39 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505008&r=mac |
| By: | Axel Dreher (Thurgau Institute of Economics & University of Konstanz); Roland Vaubel (University of Mannheim) |
| Abstract: | By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique. |
| Keywords: | Foreign exchange interventions, political business cycles |
| JEL: | F31 E58 |
| Date: | 2005–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505009&r=mac |
| By: | Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.) |
| Abstract: | We are interested on assessing the effectiveness of the Bank of Greece (BoG) exchange rate policy, to achieve the objective of adjusting balance of payments des-equilibrium, during the period 1983:1-1995:12. The traditional theory of the balance of payments adjustment process through exchange rate changes is used for this purpose. We found evidence, first, about the doubtful effectiveness of this policy due to the marginal verification of the critical elasticities condition; second, about the success of the exchange rate policy in the short-run, since the monthly data of bilateral exchange rates (USD, DEM, ITL, FRF, GBP, JPY) of the Hellenic Drachma (GRD) Granger cause the respective trade balances; third, about the significant co-movement in the series which in the long-run, are driven by the same stochastic trend. We are much aware of the tentative nature of these conclusions. However, our findings suggest that the loss of the exchange rate policy was costly in the case of Hellas because an efficient policy sacrificed by the BoG to the European Central Bank (ECB). |
| Keywords: | Optimum Currency Area, EMS, EMU, Traditional Adjustment Process for Merchandise Payments, Granger Causality, Integration and Co- integration Analysis |
| JEL: | F32 F36 F41 E58 C32 |
| Date: | 2005–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505012&r=mac |
| By: | Daniel Levy (Bar-Ilan University); Shantanu Dutta (University of Southern California); Mark Bergen (University of Minnesota); Robert Venable (Robert W. Baird, Co.) |
| Abstract: | We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stock outs or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes. |
| Keywords: | Cost of Price Adjustment, Price Adjustment Process, Menu Cost, Posted Prices, Multiproduct Retailer, Price rigidity, Sticky Prices, Frequency of Price Changes, Time Dependent Pricing, Retail Supermarket and Drugstore Chains |
| JEL: | E31 E12 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505005&r=mac |
| By: | Petri Böckerman (Labour Institute for Economic Research); Edvard Johansson (The Research Institute of the Finnish Economy); Satu Helakorpi (National Public Health Institute); Ritva Prättälä (National Public Health Institute); Erkki Vartiainen Antti Uutela (National Public Health Institute) |
| Abstract: | This paper explores the relationship between obesity and economic conditions in Finland, using individual microdata from 1978 to 2002. The results reveal that an improvement in regional economic conditions measured by the employment-to-population ratio produces a decrease in obesity over the period of investigation, other things being equal. This effect arises from the decline in the height-adjusted weight of people who are deeply overweight, (BMI>35). In addition, the effect is strongest for the people in later middle age (aged 45-65). The incidence of obesity is unrelated to the regional growth rate. All in all, the Finnish evidence presented does not support the conclusions reported for the USA, according to which temporary economic slowdowns are good for health. In contrast, at least overweight increases during slumps. |
| Keywords: | overweight, business cycles, health |
| JEL: | E32 I12 R11 |
| Date: | 2005–05–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505011&r=mac |
| By: | Daniel Levy (Bar-Ilan University); Mark Bergen (University of Minnesota); Shantanu Dutta (University of Sourthern California); Robert Venable (Robert W. Baird, Co.) |
| Abstract: | We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi-store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law. |
| Keywords: | Menu Cost, Posted Prices, Multiproduct Retailer, Price Rigidity, Sticky Prices, Rigid Prices, Cost of Price Adjustment, New Keynesian Economics, Time Dependent Pricing |
| JEL: | E12 E31 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505012&r=mac |
| By: | Mark Zbaracki (The Wharton); Mark Bergen (University of Minnesota); Shantanu Dutta (University of Sourthern California); Daniel Levy (Bar-Ilan University); Mark Ritson (London Business School) |
| Abstract: | The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms’ price-setting activities as “producing” prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these “pricing” production processes. We coin the term “pricing capital” for these investments, and suggest that they can improve the efficiency of the “pricing production” activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level “pricing capital” has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the “pricing capital” to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, “pricing capital” introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital. |
| Keywords: | Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost |
| JEL: | E31 D21 D4 L11 L16 L22 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505013&r=mac |
| By: | Mark Ritson (London Business School); Mark Zbaracki (The Wharton); Shantanu Dutta (University of Sourthern California); Daniel Levy (Bar-Ilan University); Mark Bergen (University of Minnesota) |
| Abstract: | In this paper we explore the possibility, heretofore unexplored in the marketing literature, that firms “invest funds” in their pricing processes. This builds on some of the recent economic work on the costs of price adjustment. To do this we undertook a two-year, cross- disciplinary, ethnographic study on the nature of investments made by senior managers to enhance the effectiveness of the pricing processes within their firms. We discovered at least three distinct types of investments that managers at these firms made to price more effectively, which we term as the three capitals of pricing - human capital, systems capital and social capital. Our evidence suggests that pricing is really about managing both prices and investments in the pricing capital used to set and adjust those prices. The existence of these three forms of pricing capital provides a new perspective on pricing strategy, suggesting that firms compete on prices simultaneously in three different ways within their organizations. First, they compete on whether to invest in pricing capital versus or other areas of capital investment, such as plant, equipment, etc. Second, they decide what form of pricing capital to invest in – human, systems or social. Third, they set and adjust prices constrained by the existing pricing capital they have in place at the time of their pricing actions. We discuss the implications of these three forms of pricing capital and these new perspectives on pricing for the marketing, economics and strategy literature. |
| Keywords: | Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost, Pricing, Human Capital, Systems Capital, Social Capital, Resource Based View of the Firm, Ethnography |
| JEL: | A22 C90 C91 C92 E40 E41 E42 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505014&r=mac |
| By: | Efrem Castelnuovo (University of Padua); Paolo Surico (Bank of England & University of Bari) |
| Abstract: | This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs that consistently with the theory include the output gap as a measure of real activity, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a ‘weak’ central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Then, using a micro-founded New-Keynesian model of the US economy, this paper shows that a structural VAR on the simulated data is capable of reproducing the price puzzle only when monetary policy is ‘passive’ and hence multiple equilibria arise. The omission of a variable capturing the high persistence of inflation expectations under indeterminacy is found to bias the impulse response functions of the structural VAR relative to the structural model. This bias appears to account for most of the price puzzle observed in actual data. |
| Keywords: | Price puzzle, New-Keynesian Model, Taylor principle, Indeterminacy, SVAR. |
| JEL: | C32 C52 E52 |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505015&r=mac |
| By: | Feng Dai (Zhengzhou Information Engineering University); Ying Wang (Zhengzhou Information Engineering University); Zifu Qin (Zhengzhou Information Engineering University) |
| Abstract: | Based on the Partial Distribution [F. Dai, 2001] and the theory of Development Power [F. Dai, 2004], this paper discusses the power model of relation between development power (DP) and productivity. The power model also supports the hypothesis [F. Dai, 2005] that there are three kinds of energy states in economy, i.e. normal state, strong state and super state, and DP is the continuous motivity to economic growth. By the power model of DP, we could interpret in analytic way that the diffusion of DP and the diversifications of economic development also might be occurred after the super state. Finally, the conclusions in this paper are researched in the empirical way, the results indicate the power model is better than the exponential model of DP in many cases, and we could get the inimitable outcomes in describing the macroeconomic process by the power model of DP. |
| Keywords: | Development Power (DP), Partial Distribution, power model, macroeconomic analysis |
| JEL: | E |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505016&r=mac |
| By: | William Barnett (University of Kansas) |
| Abstract: | This paper is a comment on Serletis and Shintani, 'Chaotic Monetary Dynamics with Confidence,' which is to appear in a special issue of the Journal of Macroeconomics on chaos in economics. The Editor of the special issue invited comments from discussants of all papers in the special issue, with the comments to be published in the special issue. This invited comment is to appear in the special issue along with Serletis and Shintani's paper. |
| Keywords: | chaos bifurcation Divisia money aggregation |
| JEL: | C14 C22 E37 E32 |
| Date: | 2005–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505017&r=mac |
| By: | António Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF); João Sousa Andrade (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) |
| Abstract: | This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal. |
| Keywords: | Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots |
| JEL: | B10 C32 E42 E58 F31 F33 N23 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpmh:0505002&r=mac |
| By: | Daniel Levy (Bar-Ilan University) |
| Abstract: | I estimate time varying aggregate capital stock depreciation rates for the post-war U.S. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especially during the last 10–15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument. |
| Keywords: | Time Varying Depreciation Rate, Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Technological Progress |
| JEL: | E22 C82 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505007&r=mac |
| By: | Daniel Levy (Bar-Ilan University); Haiwei Chen (Westminster College) |
| Abstract: | We construct quarterly aggregate gross and net capital stock series for the post-war U.S. economy using annual capital stock, capital depreciation, and capital discard figures along with quarterly investment series. We construct nominal and real measures of all three categories in the aggregate capital stock: consumer durable goods, producer durable goods, and business structures. In constructing the nominal series we take into account the changes in capital goods’ prices. The series are constructed using four different methods. Using time- and frequency domain techniques, we compare the constructed series and characterize their short-run, business cycle, and long-run cyclical properties. We find that the constructed series exhibit very different cyclical and shock persistence dynamics. Practical implications are discussed. |
| Keywords: | Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Capital Depreciation and Discard, Capital Goods Prices, Frequency Domain, Cyclical Behavior, Linear Interpolation, Numerical Iteration |
| JEL: | E22 C82 E32 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505008&r=mac |
| By: | Norihiro KASUGA (Faculty of Economics, Nagasaki University); Katsumi Matsuura (Department of Economics, Hiroshima University) |
| Abstract: | In this paper, we analyze the financial asset selection behavior of Japanese households. Especially, we focus on whether or not liquidity constraint decreases the amount of a householdfs risky assets. To investigate this, we first empirically examine which types of household suffer from liquidity constraint. Then, based on the probability obtained from this first stage, we use the Tobit model to estimate the risky asset ratio (=risky asset/total financial asset), and examine the relationship between liquidity constraint and household portfolio. Our results show that the more households suffer from liquidity constraint, the less the households hold risky assets. This is consistent with previous empirical research on Italian households, implemented by Guiso et al.(1996). Our research suggests that the Japanese post-war financial system, which has provided money primarily to the industrial sector rather than the household sector (e.g. consumer loans), might lower the amount of risky assets held by Japanese households. |
| Keywords: | risky asset ratio, liquidity constraint, household portfolio, saving rate |
| JEL: | D12 E2 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505010&r=mac |
| By: | Ludwig, Alexander (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504); Sløk, Torsten (OECD) |
| Abstract: | This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems. |
| Date: | 2004–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-12&r=mac |
| By: | Yochanan Shachmurove (Department of Economics, University of Pennsylvania, and City College of the City University of New York) |
| Abstract: | The recent political developments in the Middle East have prompted increased scrutiny of the economies of the nations lying in this region. Over the past few months, the financial markets of Middle East and North Africa (MENA) have been affected by the speculations that existed before the war in Iraq as well as its subsequent repercussions. Factors such as lagging domestic, political reforms, government interference, and inflexible monetary and fiscal policies remain obstacles to privatization, globalization, and foreign investment in MENA economies. As the economies enter the post-war recovery phase, reform of financial markets seems necessary to accelerate economic growth. |
| Keywords: | Middle East and North African (MENA) Emerging Financial Markets; Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, Turkey; Foreign Direct Investment; Globalization and Growth; Iraq War; Gulf War; Macroeconomic and Financial Indicators |
| JEL: | E0 E1 F3 F4 G1 N2 O4 O5 |
| Date: | 2003–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-017&r=mac |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco); S. Boragan Aruoba (Department of Economics, University of Maryland) |
| Abstract: | We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis. |
| Keywords: | Yield curve, term structure, interest rates, macroeconomic fundamentals, factor model, statespace model |
| JEL: | G1 E4 C5 |
| Date: | 2003–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-024&r=mac |
| By: | Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We compare three pricing mechanisms for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We do this in a framework that, in addition to considering different mechanisms, extends existing work on the microfoundations of money by allowing a general matching technology and endogenous entry. We study how the nature of equilibrium and effects of policy depend on the mechanism. Under bargaining, trades and entry are both inefficient, and inflation implies a first-order welfare loss. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation can actually improve welfare. Under posting, the Friedman rule implies first best, and inflation reduces welfare but the effect is second order. |
| Keywords: | Money, Search |
| JEL: | D83 E31 |
| Date: | 2003–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-031&r=mac |
| By: | Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare. |
| Keywords: | Money, Search, Frictions, Inflation |
| JEL: | D83 E31 |
| Date: | 2003–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-032&r=mac |
| By: | Christopher Edmonds (Economics Study Area, East-West Center); Manabu Fujimura (Economics Department, Aoyama Gakuin University, Tokyo) |
| Abstract: | The paper examines the long-run relationship between demographic and macroeconomic development trends in the Philippines, and compares trends observed in that country to trends in eight regional neighbors in East and Southeast Asia. The Philippines stands out from these countries in that available data suggests the country has completed its demographic transition to a much lesser extent than comparison countries. Analysis of trends shows that the Philippine economy has lost ground to the country's neighbors over the past 50 years, and that its unfulfilled demographic transition has played a key role in explaining the country's relative economic decline. The paper reviews established economic theory and a few simple counter-factual simulations to explain and support this conclusion. The authors also consider the relationship between demographic trends and associated economic developments, and the political situation in the country. Despite discouraging findings regarding the Philippines' relative economic decline, the paper notes the country's more favorable performance in social development vis-à-vis its neighbors. The paper ends on an optimistic note, pointing to: recent economic reforms, the unrealized potential of a 'demographic dividend,' rising demand and use of modern family planning among Philippine households, and the favorable long run outlook for Philippine Overseas Contract Workers, as causes for optimism regarding future demographic change and the country's economic prospects. |
| JEL: | J13 J18 N35 O15 D13 E66 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:ewc:wpaper:wp77&r=mac |