nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒06‒05
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. What if the UK has Joined the Euro in 1999? An Empirical Evaluation using a Global VAR By M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
  2. The Role of Industry, Geography and Firm Heterogeneity in Credit Risk Diversification By M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler
  3. Inflation Targeting, Committee Decision Making and Uncertainty: The case of the Bank of England’s MPC By Arnab Bhattacharjee; Sean Holly
  4. Inversión pública y crecimiento económico. Una revisión crítica con propuesta de futuro By Carmen Díaz Roldán; Diego Martínez-López
  5. Policy Responses to External Shocks: The Experiences of Australia, Brazil and Chile By Luis Felipe Céspedes,,,; Ilan Goldfajn; Phil Lowe; Rodrigo Valdés
  6. Stability of the Demand for Real Narrow Money in lndonesia By Reza Anglingkusumo
  7. Money - Inflation Nexus in Indonesia: Evidence from a P-Star Analysis By Reza Anglingkusumo
  8. Housing and Equity Wealth Effects of Italian Households By Charles Grant; Tuomas Peltonen
  9. A `Global Village' without borders? International price differentials at eBay By Philipp Maier
  10. Trust and Fiscal Performance: A Panel Analysis with Swiss Data By Benno Torgler; Christoph A. Schaltegger
  11. The Implosion of the Brussels Economic Consensus. By George Irvin
  12. Economic Performance and Unemployment: Evidence from an Emerging Economy - Turkey By Hakan Berument; Nukhet Dogan; Aysit Tansel
  13. A, B, C's (and D)'s for Understanding VARs By Jesus Fernandez-Villaverde; Juan Rubio-Ramirez; Thomas J. Sargent
  14. Fiscal Remedies for Japan's Slump By Laurence Ball
  15. The Rise in Firm-Level Volatility: Causes and Consequences By Diego Comin; Thomas Philippon
  16. Optimal Policy Projection By Lars O. Svensson; Robert J. Tetlow
  17. Is China's Growth Real and Sustainable By Justin Lifu Lin
  18. A Regional Bond Market for East Asia? The Evolving Political Dynamics of Regional Financial Cooperation By Jennifer A. Amyx
  19. Precautionary Saving and Employment Risk in the 1990s By Takero Doi
  20. Japan's Banking System: From the Bubble and Crisis To Reconstruction By Masahiro Kawai
  21. To Establish Sustainability of Government Deficits: Methodology and Application By Takero Doi
  22. Structural Change in Japanese Business Fluctuations and Nikkei 225 Stock Index Futures Transactions By Toshiaki Watanabe; Hirokuni Uchiyama
  23. Public Debt and the Macroeconomic Stability of Japan By Keigo Kameda; Masao Nakata
  24. Optimal Capital Investment, Uncertainty and Outsourcing By Justin Y. Lin; Yingyi Tsai; Ching-Tang Wu
  25. Optimal Constrained Interest-rate Rules By George W. Evans; Bruce McGough
  26. Monetary Policy, Asset-price Bubbles and the Zero Lower Bound By Tim Robinson; Andrew Stone
  27. The Exact Insensitivity of Market Budget Shares and the 'Balancing Effect'. By Gaël GIRAUD; Isabelle MARET
  28. Environment in an Overlapping Generations Economy with Endogenous Labor Supply : a Dynamic Analysis. By Thomas SEEGMULLER; Alban VERCHÈRE
  29. Is Monetary Union Necessarily Counterproductive ? By Giuseppe DIANA; Blandine ZIMMER
  30. Coordination des négociations salariales en UEM : un rôle majeur pour la BCE. By Blandine ZIMMER
  31. Asynchronous Risk: Unemployment, Equity Markets, and Retirement Savings By Jason S. Seligman; Jeffrey B. Wenger
  32. A Test of the Strategic Effect of Basel II Operational Risk Requirements on Banks By Carolyn Currie
  33. Dynamic Effects of Regulation and Deregulation in Goods and Labour Markets By Pasquale Commendatore; Ingrid Kubin
  34. Bermudan swaptions in Hull-White one-factor model: analytical and numerical approaches By Marc Henrard
  35. Europe’s economic institutions: Stability- or growth-oriented? By Nicola Acocella; Giovanni Di Bartolomeo
  36. Solving Models with Imperfect and Asymmetric Information By Pawel Kowal
  37. What determines macroeconomic volatility? A cross-section and panel data study By Leonidas Spiliopoulos
  38. Control of Generalized Error Rates in Multiple Testing By Joseph P. Romano; Michael Wolf
  39. Search, Money and Capital: A Neoclassical Dichotomy, Second Version By S. Boragan Aruoba; Randall Wright
  40. Do Large Cabinets Favor Large Governments? Evidence from Swiss Sub-federal Jurisdictions By Christoph A. Schaltegger; Lars P. Feld
  41. Growth Effects of Public Expenditure on the State and Local Level: Evidence from a Sample of Rich Governments By Christoph A. Schaltegger; Benno Torgler

  1. By: M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
    Abstract: We provide a conceptual framework to analysis counterfactual scenarios using macroeconometric models. We consider UK entry to the euro. We derive conditional probability distributions for the difference between the future realisations of variables of interest subject to UK entry restrictions being fully met over a given period, and the alternative realisations without the restrictions. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. We use the Global VAR developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about UK entry.
    Keywords: Global VAR (GVAR), Counterfactual Analysis, euro.
    JEL: C32 C35 E17 F15 F42
    Date: 2005–05
  2. By: M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler
    Abstract: In theory the potential for credit risk diversification for banks could be substantial. Portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. We propose a model for exploring these dimensions of credit risk diversification: across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity greatly reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.
    Keywords: Risk management, default dependence, economic interlinkages, portfolio choice
    JEL: C32 E17 G20
    Date: 2005–05
  3. By: Arnab Bhattacharjee; Sean Holly
    Abstract: Transparency and openness of the monetary policymaking process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee and the information on which they are based. We consider this decision making process in the context of a model in which inflation forecast targeting is used but there is heterogeneity among the members of the committee. We find that internally generated forecasts of output and market generated expectations of medium term inflation provide the best description of discrete changes in interest rates. We find a role for asset prices through the equity market, foreign exchange market and housing prices. There are identifiable forms of heterogeneity among members of the committee that improves the predictability of interest rate changes. This can be thought of as supporting the argument that full transparency of monetary policy decision making can be welfare enhancing.
    Keywords: Monetary policy, interest rates, Monetary Policy Committee, Committee decision making
    JEL: E42 E43 E50 E58
    Date: 2005–06
  4. By: Carmen Díaz Roldán (Universidad de Castilla-La Mancha); Diego Martínez-López (Centro de Estudios Andaluces y Univesidad Pablo de Olavide)
    Abstract: The relationship between public investment and economic performance has received a substantial attention by economists and policy-makers over the recent few years. In such a way, several approaches have been followed, from different theoretical and empirical points of view. The aim of this paper is to survey the main results found in the literature, especially those concerning productive public spending and economic growth. Moreover, we present a simple growth model in which regional characteristics are explicitly taken into account.
    Keywords: Growth, infrastructures, regional policy
    JEL: E62 H54
    Date: 2005
  5. By: Luis Felipe Céspedes,,,; Ilan Goldfajn; Phil Lowe; Rodrigo Valdés
    Abstract: Open economies, particularly emerging markets and commodity-intensive economies, deal with large external shocks. Interestingly enough, policy reactions and policy set-ups may dampen or amplify the consequences of these shocks, affecting the magnitude of the shock. This paper revisits the recent experience of policy frameworks and reactions in three countries: Australia, Brazil and Chile. In particular, we analyse and evaluate alternative policy set-ups and policy reactions to the Asian crisis in the period 1997-98, and to the lower world growth and higher risk aversion in 2001-2002.
    Date: 2005–05
  6. By: Reza Anglingkusumo (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank Indonesia, Jakarta)
    Abstract: The stability of the demand for real Ml in Indonesia is empirically examined using quarterly data between 1981 and 2002. A cointegrated VAR methodology that isolates the period of structural breaks in the data generating process of the variables, caused by the Asian crisis, is used. The results show that the nominal Ml demand function is long run homogenous in the price level and the price level itself is endogenous in the equation for nominal Ml. Therefore, a reparameterization towards the real Ml demand function is necessary. In the pre and post Asian crisis era, the demand function for real Ml in Indonesia is empirically stable and consists of a small number of variables. In the long run, the real private household consumption spending forms the permanent part of the demand for real Ml balances. Meanwhile, in the short run, the opportunity cost of holding real Ml balances, measured by the l-month nominal interest rate of time deposits in commercial banks, and agents' seasonal preference for real money balances, are key determinants of the demand for real Ml balances. In addition, there is evidence of a co-breaking relationship between the real Ml balances and the real private household consumption spending in Indonesia during the Asian crisis.
    Keywords: money demand; cointegrated V AR; structural breaks; co-breaking; Asian crisis; Indonesia
    JEL: E41 C12
    Date: 2005–05–19
  7. By: Reza Anglingkusumo (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, and Bank-Indonesia, Jakarta)
    Abstract: In this paper the effect of excess narrow money (MI) on C PI intlation in Indonesia before, during, and after the Asian crisis is empirically examined. The standard model for the monetary analysis of inflation, i.e. the P-Star model by Hallman-Porter-Small (1991), is applied and tested empirically using quarterly Indonesian data between 1981 and 2002. The empirical model is a Markov switching error correction model. The results show that the two regime P-star model, in terms of excess MI, tracks the long run dynamics of CPI inflation in Indonesia remarkably weIl. Hence, there is an empirical support for the assertion that long run CPI intlation in Indonesia is a monetary phenomenon. In addition, there is evidence of a co-breaking relationship between excess MI and consumer prices in Indonesia during the Asian crisis.
    Keywords: inflation; monetary model; structural break; regime switching error correction model; co-breaking; Asian crisis; Indonesia
    JEL: E31 C12
    Date: 2005–05–30
  8. By: Charles Grant; Tuomas Peltonen
    Abstract: The study quantifies stock market and housing market wealth effects on households' non-durable consumption using Italian household panel data (SHIW) of 1989-2002. We found, averaging over all households, both statistically and economically insignificant housing wealth effects. However, we found homeowners' MPC out of housing wealth gains to be The study quantifies stock market and housing market wealth effects on households' non-durable consumption using Italian household panel data (SHIW) of 1989-2002. We found, averaging over all households, both statistically and economically insignificant housing wealth effects. However, we found homeowners' MPC out of housing wealth gains to be The study quantifies stock market and housing market wealth effects on households' non-durable consumption using Italian household panel data (SHIW) of 1989-2002. We found, averaging over all households, both statistically and economically insignificant housing wealth effects. However, we found homeowners' MPC out of housing wealth gains to be
    Keywords: Wealth Effect; Consumption; MPC; Housing; Equities; SHIW
    JEL: D12 E21
    Date: 2005–05
  9. By: Philipp Maier
    Abstract: One of the key advances of the internet age is the increase in transparency. Does high price transparency imply that consumers in different countries pay the same price for similar goods? We compare prices for new, tradable goods sold via the internet auction site eBay. We find ample evidence that prices differ between countries. This indicates that suffcient scope for price discrimination exists between countries, even in very transparent markets such as online auctions. Moreover, our results show that national borders are a key force driving international price differentials. Contrary to other studies, we do not find that having a currency of one's own drives up cross-border price differentials significantly. Lastly, differences in taxes and shipping costs are important factors in explaining price differentials.
    Keywords: price differentials; online auctions
    JEL: E30 E31 E50 F40
    Date: 2005–05
  10. By: Benno Torgler (Yale Center for International and Area Studies); Christoph A. Schaltegger (Swiss Federal Tax Administration University of St. Gallen and CREMA, Center for Research in Economics, Management and the Arts)
    Abstract: Citizens are willing to abandon their short-term financial interest in free-riding considerably, if governments act in their interest, if procedures of the public decisions-making process are felt to be fair and if other fellow-citizens have to contribute also an adequate share to the community. In such a situation trustworthiness of a government and trust in a government is high. This paper provides empirical evidence that trust is crucial for fiscal performance using data for the full sample of Swiss cantons over the 1981-2001 period. In cantons with high levels of trust, the level of indebtedness is significantly lower. Trust supports fiscal discipline. In order to get a useful approximation for mutual trust among citizens and between citizens and their representatives, we use information from direct voter participation on political issues (initiatives and public referenda) held in Swiss state (cantonal) governments. Electoral support of government proposals reveals an important aspect of trust in a real world setting. Hence, our trust variable measures the behavior at the ballots thereby reducing possible subjective biases derived from surveys and questionnaires.
    Keywords: Trust, Social capital, Fiscal performance, Indebtedness
    JEL: Z13 H11 O17 D72 E62
    Date: 2005–05
  11. By: George Irvin
    Abstract: Underlying the current political crisis of EU is a decade of cumulative malaise produced by low growth, high unemployment and welfare cuts. The poor economic record of the core Eurozone states is attributable neither to supply-side sclerosis nor top-heavy welfare, but rather to the ECB’s obsession with inflation and the fiscal strait-jacket imposed by the Stability and Growth Pact (SGP), referred to here as ‘Brussels Consensus’ economics. The paper critically examines the SGP rules, argues that the 2005 SGP compromise reached at Luxembourg has not addressed the fundamental problem of Europe’s asymmetric economic institutions, and proposes radical remedies.
    Keywords: Eurozone growth; unemployment; Maastricht; EIB; SGP rules; EU fiscal and monetary policy; neo-liberal Brussels consensus.
    Date: 2005–05
  12. By: Hakan Berument (Bilkent University); Nukhet Dogan (Gazi University); Aysit Tansel (Middle East Technical University and IZA Bonn)
    Abstract: This article examines whether various macroeconomic policy shocks have different effects on overall unemployment rate and the unemployment rate by different levels of education in Turkey. These effects are assessed for total, male and female unemployment rates separately. To examine the relationship, a quarterly VAR model with a recursive order is employed to estimate the effects of real GDP, price, exchange rate, interbank interest rate, money supply and unemployment for the period from 1988:01 to 2003:04. Main findings indicate that a positive income shock reduces total unemployment while positive exchange rate and interbank interest rate innovations both increase the unemployment rate during the initial periods. The responses of high school educated unemployment rate to five macroeconomic variable shocks are different than the response of other educational unemployment rates. Furthermore, the overall results across gender are similar.
    Keywords: unemployment, economic performance and vector autoregressive regression
    JEL: E24 C32
    Date: 2005–05
  13. By: Jesus Fernandez-Villaverde; Juan Rubio-Ramirez; Thomas J. Sargent
    Abstract: The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A,B,C,D) that define a state space system. An associated state space system (A,K,C,Sigma) determines a vector autoregression for observables available to an econometrician. We review circumstances under which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there are equal numbers of VAR and economic shocks.
    JEL: E0 C11 C3
    Date: 2005–06
  14. By: Laurence Ball
    Abstract: This paper asks how a fiscal expansion would affect Japan. It uses a textbook-style macro model calibrated to fit the Japanese economy. According to the results, Japan%u2019s output slump would be ended by a fiscal transfer of 6.6% of GDP. This policy raises the debt-income ratio in the short run, but it reduces this ratio in the long run through higher inflation and tax revenue. The financing of the transfer -- bonds or money -- affects debt in the short run but not the long run.
    JEL: E3 E6
    Date: 2005–05
  15. By: Diego Comin; Thomas Philippon
    Abstract: We document that the recent decline in aggregate volatility has been accompanied by a large increase in firm level risk. The negative relationship between firm and aggregate risk seems to be present across industries in the US, and across OECD countries. Firm volatility increases after deregulation. Firm volatility is linked to research and development spending as well as access to external financing. Further, R&D intensity is also associated with lower correlation of sectoral growth with the rest of the economy.
    JEL: E3 O3 D4
    Date: 2005–05
  16. By: Lars O. Svensson; Robert J. Tetlow
    Abstract: We outline a method to provide advice on optimal monetary policy while taking policymakers' judgment into account. The method constructs Optimal Policy Projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board's FRB/US model, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections - of target variables, instruments, and other variables of interest -that minimize that loss function for given judgment terms. The method is illustrated by revisiting the Greenbook forecasts of February 1997 and November 1999, in each case using the vintage of the FRB/US model that was in place at that time. These two particular forecasts were chosen, in part, because they were at the beginning and the peak, respectively, of the late 1990s boom period. As such, they differ markedly in their implied judgments of the state of the world, and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations.
    JEL: E52 E58
    Date: 2005–06
  17. By: Justin Lifu Lin (China Center for Economic Research)
    Abstract: Since the reform of 1978, China's overall economic performance has been remarkable. The average annual GDP growth rate reached 9.4% in 1978-2002. However, in the last few years, China's economic growth rate has been questioned. A deflation was evident at the end of 1997. In spite of the Chinese government's many efforts, the deflation has continued. A deflation in an economy in general accompanied by stagnation or slow GDP growth. However, China's GDP growth rate reached 7.8% annually during the deflation period in 1998-2002, which was the fastest growth rate in the world. Moreover, the energy consumption dropped in 1998 and 1999. The abnormality prompted some economists to question the reliability of China's statistics. In the paper, the author will analyze why it is possible for china to maintain high growth with reduction of energy consumption during the deflation period and suggest the way for China to absorb excess capacity and get out of the deflation. The author will also discuss the prospect for China's long-term growth.
    Keywords: China, growth, inflation, deflation, GDP, stagnation
    JEL: E31 E43 O4
    Date: 2004–02
  18. By: Jennifer A. Amyx (Australia–Japan Research Centre)
    Abstract: This paper examines the evolving political dynamics of regional financial cooperation in East Asia since the 1997–98 Asian financial crisis, examining in particular the factors contributing to the growing momentum behind the recent Asian bond market initiative being pursued by the Association for Southeast Asian (ASEAN) nations plus Japan, China and South Korea (referred to collectively as ‘ASEAN+3’). The paper argues that this initiative is making rapid progress because it resonates positively with the domestic political agendas of many leaders in the region, is an initiative that numerous countries can claim at least partial ‘ownership’ of, and elicits considerable support from actors outside the region.
    Keywords: Regional Bond Market, East Asia, Financial Cooperation, Asian financial crisis, ASEAN, Japan, China, South Korea
    JEL: E61 E62 F33
    Date: 2004–01
  19. By: Takero Doi (Ministry of Finance Japan)
    Abstract: This paper analyzes the reason that Japan’s household saving rate rose in the 1990s. The unemployment rate as well as saving rate of workers’ households was increasing in the 1990s, and growth rate of disposable income was decreasing in the late 1990s. The evidence may imply that an increase in the saving rate is explained by precautionary saving motive among growing uncertainty (risk) concerning future income and employment. An increase in income risk means that households’ expectation of future income becomes more uncertain. This paper investigates this evidence, and finds that correlation between Japan’s saving rate of workers’ households (using data for the Family Income and Expenditure Survey) and the income risk is significantly positive during the full sample period (from 1976 to 1998), but not significantly positive in the recent years. Therefore it is concluded that the increase in Japan’s household saving rate in the 1990s is not explained by precautionary saving hypothesis with the income risk.
    Keywords: Japan, saving, unemployment rate, household income, disposable income,
    JEL: H24 E21 E24 O16
    Date: 2004–03
  20. By: Masahiro Kawai (university of Tokyo)
    Abstract: The Japanese banking sector is now going through major restructuring, reorganization, and consolidation on a scale unprecedented in its history, all against a background of an increasingly market-oriented, more deregulated and globalized policy environment. This process was set in motion and greatly precipitated by recent economic difficulties, i.e., the asset disinflation and economic stagnation that started in the early 1990s and led to the systemic banking crisis in 1997-98. The focus of this paper is the state of the Japanese banking system that was exposed to an asset price bubble (in the late 1980s), its collapse (in the early 1990s) and subsequent systemic crisis (in the late 1990s), and is undergoing recent reconstruction.
    Keywords: Japan, banking, asset price, reorganization, reconstruction
    JEL: G21 E58 G12
    Date: 2003–12
  21. By: Takero Doi (Ministry of Finance Japan)
    Abstract: The purpose of this paper is to survey methodology of test for fiscal sustainability. The econometrical tests for fiscal sustainability have been improved since the 1980s. We introduce the methods and backgrounds of these tests. Also we apply the tests to the Indonesian and Japanese data. It is important to analyze the sustainability of government bonds consisting with the fiscal system, particularly intergovernmental relationship. Namely, we should investigate debt sustainability of the consolidated government including not only the central government but also local governments and other (off-budget) account of the central government. In the second half of this paper, we explain the Japanese fiscal policy from the viewpoint of the sustainability problem of government bond policy.
    Keywords: Japan, Indonesia, government bonds, debt sustainability, fiscal policy
    JEL: O23 H30 E62
    Date: 2004–03
  22. By: Toshiaki Watanabe (Institute for Monetary and Economic Studies, Bank of Japan); Hirokuni Uchiyama (Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: Structural changes in business fluctuations have been gathering attention in Europe and the US in recent years. It has become clear that business fluctuations in the US began to stabilize from the middle of the 1980s, and similar structural changes have been observed in Europe. On the other hand, there have been only a few studies concerning structural changes in Japanese business fluctuations. With this background, this paper presents an analysis as to whether or not there has been a structural change in Japanese business fluctuations in recent years, and if so, when and what kind of change.
    Keywords: business fluctuations, Japan, Europe, US
    JEL: L11 L22 E32 E44
    Date: 2005–01
  23. By: Keigo Kameda (Niigata university); Masao Nakata (Ministry of Finance Japan)
    Abstract: Recently, the outstanding debt of the Japanese government amounts to 695 trillion yen, which implies 139.5% of GDP. In this paper, we constructed three IS-LM type dynamic models and estimate the eigenvalues of their differential systems. Then we confirm whether or not the huge amount of public debt violates the stability conditions for the Japanese economy. Our estimation concludes the Japanese economy to be unstable with the existence of a saddle-point equilibrium. Our simulation also shows that severe tax reform would be required to restore the economic stability. Concretely, the government has to raise the consumption tax rate to 15% from 5%, and in addition, allowing the income elasticities of income taxes and inhabitant taxes to increase by 0.033 each, which is equivalent to tax hikes of about 8.3 trillion yen. We assert that structural reform for the government budget including a tax system is essential and emergent.
    Keywords: Public Debt, Macroeconomic Stability, Japan, Yen, GDP, consumption tax, saddle-point equilibrium, IS-LM type dynamic models, eigenvalues
    JEL: C30 H61 H63 H20
    Date: 2005–01
  24. By: Justin Y. Lin (China Center for Economic Research); Yingyi Tsai (China Center for Economic Research); Ching-Tang Wu (China Center for Economic Research)
    Abstract: This paper provides an explanation for outsourcing based on uncertainty. We study an optimal capital investment model both with and without the possibility to outsource under uncertainty. We show, in the presence of uncertainty, that outsourcing is Pareto-improving and that a brand-producing monopolistic reduces its fixed-asset investment if outsourcing is possible. We also show that the cost of undertaking outsourcing can have a significant impact on the monopolist's choices of optimal capital investment and outsourcing quantity.
    Keywords: Outsourcing, Investment, Uncertainty
    JEL: D24 D40 D81 E22 L23
    Date: 2003–11
  25. By: George W. Evans (University of Oregon Economics Department); Bruce McGough (Oregon State University Economics Department)
    Abstract: We show that if policy-makers compute the optimal unconstrained interest-rate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.
    Keywords: Monetary policy, Taylor rules, indeterminacy, learning, Estability, parameter uncertainty, robust rules
    JEL: E52 E32 D83 D84
    Date: 2005–05–19
  26. By: Tim Robinson (Reserve Bank of Australia); Andrew Stone (Reserve Bank of Australia)
    Abstract: We use a simple model of a closed economy to study the recommendations of monetary policy-makers attempting to respond optimally to an asset-price bubble whose stochastic properties they understand. We focus on the impact which the zero lower bound (ZLB) on nominal interest rates has on the recommendations of such policy-makers. For a given target inflation rate, we identify several different forms of ‘insurance’ which policy-makers could potentially take out against encountering the ZLB due to the future bursting of a bubble. Even with perfect knowledge of the bubble process, however, which of these will be optimal varies from one type of bubble to another and, for certain bubbles, from one period to the next. It is therefore difficult to draw general conclusions as to whether the ZLB should cause policy-makers to operate policy more tightly or loosely than otherwise, while a bubble is growing – even after abstracting from the informational difficulties they face in practice. We also examine the implications of the ZLB for policy-makers’ preferences as to their inflation target. Policy-makers who wish to avoid concerns about the ZLB should take care not to set too low a target, especially if the neutral real interest rate is low. Such policy-makers should also set a higher target inflation rate if the economy’s natural propensity to rebound from a shock to output is weak, or if output is relatively unresponsive to real interest rate settings.
    Keywords: monetary policy; asset-price bubbles; zero lower bound
    JEL: E32 E52 E60
    Date: 2005–06
  27. By: Gaël GIRAUD; Isabelle MARET
    Abstract: We reformulate Grandmont's and its successors' notion of behavioral heterogeneity such as to get the exact insensitivity of the aggregate budget share function with respect to changes in prices and income, instead of a mere approximate insensitivity. We propose a non parametric set-up such that, if the population is distributed according to some ``uniform'' probability measure, the aggregate budget share function is constant. The important contribution is that this exact insensitivity is not explained by any insensitivity at the microeconomic level but rather by an exact "balancing effect". We give illustrative examples of populations that fulfill our requirements.
    Keywords: Statistical approach, aggregation of demand, behavioral heterogeneity, balancing effect, large economy, Law of Demand, insensitivity of market budget shares.
    JEL: D11 D12 D30 D41 D50 E1
    Date: 2005
  28. By: Thomas SEEGMULLER; Alban VERCHÈRE
    Abstract: We consider an overlapping generations model with environment, where we introduce an elastic labor supply. In this framework, consumers have to choose between consumption, environmental quality and leisure. We establish that several steady states can coexist, even under a Cobb-Douglas technology, and we put in evidence a non monotonic relationship between pollution and per capita income, as suggested by the Environmental Kuznets Curve. Moreover studying local dynamics, we show the existence of deterministic cycles and endogenous fluctuations due to self-fulfilling expectations. In contrast to previous results, the occurrence of such fluctuations does not require a high emission rate of pollution. Finally, we discuss some welfare and policy implications of our results. Especially, we show that a government which would reduce pollution emissions can face a trade-off between an increase of steady state welfare and an intergenerational welfare inequality due to indeterminacy.
    Keywords: Environment, Labor supply, Overlapping generations, Multiplicity of steady states, Environmental Kuznets Curve, Indeterminacy, Endogenous cycles.
    JEL: C62 E32 Q20
    Date: 2005
  29. By: Giuseppe DIANA; Blandine ZIMMER
    Abstract: This paper analyses the case of a monetary union between identical countries characterised by oligopolistic competition in their labour market. It suggests that the switch to a common currency may improve their macroeconomic performances depending on labour market features.
    Keywords: Monetary Union, Employment, Inflation.
    JEL: E24 F33 J51
    Date: 2005
  30. By: Blandine ZIMMER
    Abstract: Cet article s'interroge sur l'applicabilité d'un système de négociations salariales coordonnées dans l'Union Economique et Monétaire (UEM). Nous évoquons, dans un premier temps, les gains en termes d'emploi, que pourrait générer une telle démarche. Nous montrons ensuite que si les résolutions issues de cette coordination ne sont pas assorties de mesures contraignantes interdissant toute déviation ultérieure, alors leur mise en pratique reste illusoire. La question qui se pose est donc de savoir comment amener les syndicats de l'union à tenir leurs engagements collectifs et garantir ainsi l'application effective de l'accord de coordination salariale. L'idée proposée dans cet article est de faire intervenir la Banque Centrale Européenne (BCE). Plus précisé- ment, nous supposons que la BCE "dédommage" l'effort de discipline salariale des syndicats au moyen d'un système de récompense monétaire.
    Keywords: emploi ; UEM; coordination syndicale.
    JEL: E24 E42 J51
    Date: 2005
  31. By: Jason S. Seligman (University of Georgia); Jeffrey B. Wenger (University of Georgia)
    Abstract: The link between unemployment and pension accumulations is conceptually straightforward; periods of unemployment lead to lower pension contributions, and thus to lower accumulations. However, impacts on accumulation may differ as a result of the timing and frequency of unemployment spells. We hypothesize that unemployment is more likely during periods in which the equities market experiences greater than average returns, largely due to a lead/lag structure of the stock and labor markets, respectively. This would imply that workers may systematically miss opportunities to purchase equities through DC plans when prices are relatively low. To test this hypothesis, we match historic stock returns to stochastically generated unemployment spells for men and women across the earnings distribution. We find lower income workers suffer greater percentage losses in retirement savings as a result of more frequent spells of unemployment. Higher income worker losses are more greatly affected by the timing of unemployment relative to the equities market.
    Keywords: Unemployment, retirement, savings, defined contribution, pensions, earnings distribution
    Date: 2005–05
  32. By: Carolyn Currie (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Most problematic of the Basel II capital adequacy requirements is the subset of Pillar I, requiring provision for operational risk (OR) as distinct from credit and market risk. Previous tests of the strategic effect of this new regulation from three prior Quality Impact Studies (QIS) conducted in G10 countries under the guidance of the Bank for International Settlements, have concluded that OR requirements poses difficulties of definition, implementation, and strategic planning. Anticipated strategic effects include dramatic changes to product development, investment and asset mix, as well as the necessity to rapidly develop new risk rating models and techniques, together with vastly expanded internal and external audit compliance routines. Unlike QIS1, 2 and 3, QIS4 focuses on operational risk, but still has drawbacks. This paper discusses its approach, in view of the ongoing difficulties that banks are experiencing with operational risk, particularly in the construction of a database. It concludes by listing the unanswered questions that have not even been addressed in four studies of the strategic impact of Basel II?s OR requirements. It also suggests that many smaller banks and emerging nations may not be able to use the sophisticated approaches and hence will suffer a competitive disadvantage. Hence in view of drawbacks in the simpler approaches such as lack of correlation of operational risk and revenue, other indicators such as the standard deviation of efficiency measures are suggested.
    Keywords: operational risk; Basel II
    JEL: E42 E44 E58
    Date: 2005–05–01
  33. By: Pasquale Commendatore (Università di Napoli 'Federico II'); Ingrid Kubin (Vienna University of Economics & B.A.)
    Abstract: Modern macroeconomic models with a Keynesian flavour usually involve nominal rigidities in wages and goods prices. A typical model is static and combines wage bargaining in the labour markets and monopolistic competition in the goods markets. As central policy implication it follows that deregulating labour and/or goods markets increases equilibrium employment. We reassess the consequences of deregulation in a dynamic model. It still increases employment at the fixed point, which corresponds to the static equilibrium solution. However, deregulation may also lead to stability loss and endogenous fluctuations.
    Keywords: Labour and goods markets deregulation, monopolistic competition, business cycles
    JEL: E1
    Date: 2005–05
  34. By: Marc Henrard (Bank for International Settlements)
    Abstract: A popular way to value (Bermudan) swaption in a Hull-White or extended Vasicek model is to use a tree approach. In this note we show that a more direct approach through iterated numerical integration is also possible. A brute force numerical integration would lead to a complexity exponential in the number of exercise dates in the base of the number of points ($p^N$). By carefully choosing the integration points and their order we can reduce it to a complexity $pN^2$ versus a quadratic $(pN)^2$ in the tree. We also provide a semi-explicit formula that leads to a faster converging implementation.
    Keywords: Bermudan option, swaption, Hull-White model, one-factor model, numerical integration.
    JEL: G13 E43
    Date: 2005–05–30
  35. By: Nicola Acocella (University of Rome La Sapienza); Giovanni Di Bartolomeo (University of Rome La Sapienza)
    Abstract: The paper deals with various aspects of the performance, especially from a macroeconomic point of view, expected from some of the most relevant European institutions (monetary and tax authorities, unions) vis-à-vis alternative ones. The role of the rules (e.g. the Stability and Growth Pact) as a coordination device to deal with externalities arising from national fiscal policies is first considered and compared to explicit coordination. The priority given to price stability is then discussed together with the questions of reputation, credibility and the relationship with fiscal policy and labour markets. A conservative central bank eliminates the temptation to inflate, but is only a second- best solution for internalizing the externalities arising from uncoordinated-wage bargaining. The paper finally discusses the consequences on growth of the stability pursued by actual European institutions. Some reflections on the ‘model’ adopted for shaping European institutions conclude the paper.
    JEL: E
    Date: 2005–05–27
  36. By: Pawel Kowal (Department of Economics, Warsaw School of Economics)
    Abstract: We consider linear dynamic models with rational expectations in case of incomplete and asymmetric information as well as agents heterogeneity. This problem requires solving infinite dimensional matrix equations. We propose asymptotic expansion method to reduce this problem to the finite dimensional problem.
    Keywords: Computational Methods, Imperfect Information, Asymmetric Information, Linear Rational Expectations Model, Asymptotic Expansion.
    JEL: C61 C63 E17
    Date: 2005–05–28
  37. By: Leonidas Spiliopoulos (University of Sydney)
    Abstract: This paper examines the determinants of the volatility in growth rates, seeking to expand on a very limited literature which has focused almost exclusively on financial determinants of volatility. An analysis of 41 variables and their effects on growth volatility yields some surprising results: the relationship between financial sophistication and volatility is not clearly positive as expounded in many studies, the oft cited negative relationship between real GDP per capita and volatility turns out to be positive, and there is no important relationship between inflation and volatility. The main policy implication for authorities is that intervention in most cases, whether in the form of trade and currency controls, or high government consumption, tends to exacerbate volatility.
    Keywords: volatility; international economics; international finance; growth
    JEL: E
    Date: 2005–05–30
  38. By: Joseph P. Romano; Michael Wolf
    Abstract: Consider the problem of testing s hypotheses simultaneously. The usual approach to dealing with the multiplicity problem is to restrict attention to procedures that control the probability of even one false rejection, the familiar familywise error rate (FWER). In many applications, particularly if s is large, one might be willing to tolerate more than one false rejection if the number of such cases is controlled, thereby increasing the ability of the procedure to reject false null hypotheses One possibility is to replace control of the FWER by control of the probability of k or more false rejections, which is called the k-FWER. We derive both single-step and stepdown procedures that control the k-FWER in finite samples or asymptotically, depending on the situation. Lehmann and Romano (2005a) derive some exact methods for this purpose, which apply whenever p-values are available for individual tests; no assumptions are made on the joint dependence of the p-values. In contrast, we construct methods that implicitly take into account the dependence structure of the individual test statistics in order to further increase the ability to detect false null hypotheses. We also consider the false discovery proportion (FDP) defined as the number of false rejections divided by the total number of rejections (and defined to be 0 if there are no rejections). The false discovery rate proposed by Benjamini and Hochberg (1995) controls E(FDP).
    Keywords: Bootstrap, False Discovery Proportion, False Discovery Rate, Generalized Familywise Error Rates, Multiple Testing, Stepdown Procedure.
    JEL: E43
  39. By: S. Boragan Aruoba (Department of Economics, University of Maryland); Randall Wright (Department of Economics, University of Pennsylvania)
    Abstract: Recent work has reduced the gap between search-based monetary theory and mainstream macroeconomics by incorporating into the search model some centralized markets as well as some decentralized markets where money is essential. This paper takes a further step towards this integration by introducing labor, capital and neoclassical firms. The resulting framework nests the search-theoretic monetary model and a standard neoclassical growth model as special cases. Perhaps surprisingly, it also exhibits a dichotomy: one can determine the equilibrium path for the value of money independently of the paths of consumption, investment and employment in the centralized market.
    Keywords: Money, Search, Capital
    JEL: D83 E31
    Date: 2002–09–09
  40. By: Christoph A. Schaltegger; Lars P. Feld
    Abstract: The fiscal commons problem is one of the most prominent explanations of excessive spending and indebtedness in political economics. The more fragmented a government, the higher its spending, deficits and debt. In this paper we investigate to what extent this problem can be miti-gated by different fiscal or constitutional institutions. We distinguish between two variants of fragmented governments: cabinet size and coalition size. Theoretically, they both describe the degree to which the costs of spending decisions are internalized by individual decision-makers. In addition, we evaluate whether constitutional rules for executive and legislation as well as budget rules shape the size of government and how the different rules interact with fragmentation in de-termining government size. The empirical study of the role of fragmented governments for fiscal policy outcomes is based on a panel of the 26 Swiss cantons over the 1980-1998 period. The re-sults indicate that the number of ministers in the cabinet is negatively associated with fiscal disci-pline. Furthermore, the fiscal referendum does effectively restrict the fiscal commons problem, but less successfully than the budget rule.
    Keywords: Fragmentation; Fiscal Policy; Referendums; Legislative Rules; Budget Rules
    JEL: E61 E63 H61
    Date: 2004–07
  41. By: Christoph A. Schaltegger; Benno Torgler
    Abstract: There is a vast empirical literature investigating the relationship between government size and economic growth. But the empirical evidence of growth effects of public expenditure using cross-country regres-sions is still inconclusive. According to a number of authors this is not surprising since the negative rela-tionship only applies for rich countries with a large public sector. Restricting their analysis on rich coun-tries only they can show the predicted negative impact. Naturally, a selection of a sub-sample of rich countries is always somewhat arbitrary. Another possibility is to concentrate on governments within a rich country. However, only few studies investigate the effect of state and local spending on economic growth. This paper concentrates on the relationship between public expenditure and economic growth within a rich country using the full sample of state and local governments from Switzerland over the 1981-2001 period. The general finding is a fairly robust negative relationship between government size and economic growth. However, in contrast to public spending from operating budgets there is no significant impact on economic growth by expenditure from capital budgets.
    Keywords: Economic Growth; Government expenditure; Public Sector
    JEL: E62 H20 O23
    Date: 2004–07

This nep-mac issue is ©2005 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.