|
on Macroeconomics |
|
Issue of 2005‒06‒14
127 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Razin, Assaf |
| Abstract: | We analyse how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. Specifically, I demonstrate how the relative weight of the output gap term in a utility-based loss function shrinks when the economy is open to international trade in goods, and is integrated to the world capital markets. |
| Keywords: | aggregate supply; captial market openness; inflation-output tradeoff; trade openness |
| JEL: | E50 F02 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4826&r=mac |
| By: | Howard Petith |
| Abstract: | A new model of unemployment based on an idea of Marx is presented and used to interpret the development of the British economy from the beginning of capitalism to the present. It is shown that unemployment may be created purposely by capitalists in order to weaken the bargaining position of the workers. This mechanism leads to complex temporal pattern of unemployment and can explain why wages took almost a century and a half to react to the growing capital to labour ratio that characterised early British capitalism. |
| Keywords: | Capitalism, Marx, Great Britain, unemployment |
| JEL: | E11 E24 N33 O41 O51 P1 |
| Date: | 2005–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:649.05&r=mac |
| By: | Martin Menner; Hugo Rodriguez Mendizabal |
| Abstract: | The purpose of this paper is twofold. First, we construct a DSGE model which spells out explicitly the instrumentation of monetary policy. The interest rate is determined every period depending on the supply and demand for reserves which in turn are affected by fundamental shocks: unforeseeable changes in cash withdrawal, autonomous factors, technology and government spending. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks. We show that these monetary shocks have the usual effects on economic activity without the need of imposing additional frictions as limited participation in asset markets or sticky prices. Second, we show that this view of monetary policy may have important consequences for empirical research. In the model, the contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. In addition, we use the sign of the impact responses of all shocks on output, prices and interest rates derived from the model to identify the sources of shocks in the data. |
| Keywords: | Monetary Policy, Shocks, Identification, Taylor Rules |
| JEL: | E32 E52 E58 |
| Date: | 2005–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:650.05&r=mac |
| By: | Q. Farooq Akram (Norges Bank); Øyvind Eitrheim (Norges Bank); Lucio Sarno (Norges Bank) |
| Abstract: | We characterise the behaviour of Norwegian output, the real exchange rate and real money balances over a period of almost two centuries. The empirical analysis is based on a new annual data set that has recently been compiled and covers the period 1830{2003. We apply multivariate linear and smooth transition regression models proposed by Terasvirta (1998) to capture broad trends, and take into account non-linear features of the time series. We particularly investigate and characterise the form of the relationship between output and monetary policy variables. It appears that allowance for statedependent behaviour and response to shocks increases the explanatory powers of the models and helps bring forward new aspects of the dynamic behaviour of output, the real exchange rate and real money balances. |
| Keywords: | Business cycles, real exchange rates, money demand, non-linear modelling, smooth transition regressions. |
| JEL: | C51 E32 E41 F31 |
| Date: | 2005–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_02&r=mac |
| By: | Ainura Uzagalieva |
| Abstract: | The ideal measure of inflation should reflect long-run price movements driven by actual demand in the economy and exclude short-term supply shocks. Considering that the CPI does not correspond to such a measure, the purpose of this research is to analyze alternative methods of core (or underlying) inflation and to choose a method suitable for measuring core inflation in the Kyrgyz Republic. The results can be useful for proper monetary policy reaction to inflationary shifts in the Kyrgyz Republic. |
| Keywords: | Kyrgyz Republic, inflation, core inflation, monetary policy, smoothing, optimality criteria. |
| JEL: | E31 E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp261&r=mac |
| By: | Bofinger, Peter; Mayer, Eric |
| Abstract: | In this Paper we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are vulnerable and therefore in need of fiscal policy as an independent stabilization agent with room to breath. |
| Keywords: | fiscal policy; inflation targeting; monetary policy; policy coordination |
| JEL: | E50 E60 H70 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4790&r=mac |
| By: | Attfield, Clifford; Temple, Jonathan |
| Abstract: | Standard macroeconomic models suggest that the ‘great ratios’ of consumption to output and investment to output should be stationary. The joint behaviour of consumption, investment and output can then be used to measure trend output. We adopt this approach for the USA and UK, and find support for stationarity of the great ratios when structural breaks are taken into account. From the estimated vector error correction models, we extract multivariate estimates of the permanent component in output, and comment on trend growth in the 1980s and the New Economy boom of the 1990s. |
| Keywords: | great ratios; New Economy; permanent components; structural breaks; trend output |
| JEL: | C32 C51 E20 E30 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4796&r=mac |
| By: | Gerlach, Stefan; Wensheng, Peng |
| Abstract: | This Paper studies the relationship between residential property prices and lending in Hong Kong. This is an interesting topic for three reasons. First, swings in property prices have been extremely large and frequent in Hong Kong. Second, under the currency board regime, monetary policy cannot be used to guard against asset price swings. Third, despite the collapse in property prices since 1998, the banking sector remains sound. While the contemporaneous correlation between lending and property prices is large, our results suggest that the direction of influence goes from property prices to bank credit rather than conversely. |
| Keywords: | bank lending; Hong Kong; property prices |
| JEL: | E32 E42 G21 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4797&r=mac |
| By: | Leitemo, Kai; Söderström, Ulf |
| Abstract: | We study the effects of model uncertainty in a simple New-Keynesian model using robust control techniques. Due to the simple model structure, we are able to find closed-form solutions for the robust control problem, analysing both instrument rules and targeting rules under different timing assumptions. In all cases but one, an increased preference for robustness makes monetary policy respond more aggressively to cost shocks but leaves the response to demand shocks unchanged. As a consequence, inflation is less volatile and output is more volatile than under the non-robust policy. Under one particular timing assumption, however, increasing the preference for robustness has no effect on the optimal targeting rule (nor on the economy). |
| Keywords: | Knightian uncertainty; min-max policies; model uncertainty; robust control |
| JEL: | E52 E58 F41 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4805&r=mac |
| By: | Belke, Ansgar; Kaas, Leo; Setzer, Ralph |
| Abstract: | According to the traditional 'optimum currency area' approach, the case for adopting a common currency is stronger if the countries are subject to relatively similar output shocks. This Paper takes a different approach and highlights the fact that high exchange rate volatility may as well signal high costs for labour markets. The impact of exchange rate volatility on labour markets in the CEECs is analysed, finding that volatility vis-à-vis the euro significantly lowers employment growth and raises the unemployment rate. Hence, the elimination of exchange rate volatility can be considered equally important for labour markets as a removal of employment protection legislation. |
| Keywords: | Central and Eastern Europe; currency union; euroization; exchange rate variability; job creation |
| JEL: | E42 F36 F42 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4802&r=mac |
| By: | Dunne, Peter; Hau, Harald; Moore, Michael |
| Abstract: | Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and macroeconomic order flows. |
| Keywords: | equities; exchange rates; international macroeconomics; microstructure |
| JEL: | F30 F31 G10 G15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4806&r=mac |
| By: | Michelacci, Claudio; Quadrini, Vincenzo |
| Abstract: | We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data. |
| Keywords: | investment financing; long-term contracts; wages |
| JEL: | E24 G31 J31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4867&r=mac |
| By: | Bell, Clive; Gersbach, Hans |
| Abstract: | We study the formation of human capital and its transmission across generations when a society is assailed by an epidemic disease such as AIDS. We establish that the disease can severely retard economic growth, even to the point of leading to an economic collapse. We also show that the epidemic may exacerbate inequality. Pooling health risks in the society puts the society on a ‘make and break’ road. |
| Keywords: | AIDS; epidemic diseases; growth; human capital; pooling risks |
| JEL: | E13 I12 I21 O41 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4800&r=mac |
| By: | Meh, Césaire A.; Quadrini, Vincenzo |
| Abstract: | This Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts – compared to simple debt contracts – brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences. |
| Keywords: | Aggregate Capital; Asymmetric Information; optimal contracts |
| JEL: | D58 D82 E20 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4807&r=mac |
| By: | Égert, Balázs; Halpern, László; MacDonald, Ronald |
| Abstract: | In this Paper we present an overview of a number of issues relating to the equilibrium exchange rates of the new EU member states from Central and Eastern Europe. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the new member states. We then consider some methodological issues, relating to the implementation of an equilibrium exchange rate model for new member states, such as the speed with which equilibrium exchange rates change and issues of implementation. Finally, we present an overview of the various extant measures of equilibrium that have been calculated for the new member states. |
| Keywords: | Balassa-Samuelson effect; equilibrium exchange rate; Purchasing Power Parity; tradable prices; transition economies |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4809&r=mac |
| By: | Beyer, Andreas; Farmer, Roger E A |
| Abstract: | We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Benhabib and Farmer [1] is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule. |
| Keywords: | Benhabib-Farmer model; Identification; indeterminacy; new-Keynesian model |
| JEL: | C39 C62 D51 E52 E58 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4811&r=mac |
| By: | Camacho, Maximo; Pérez-Quirós, Gabriel; Saiz, Lorena |
| Abstract: | We propose a comprehensive methodology to characterize the business cycle comovements across European economies and some industrialized countries, always trying to ‘let the data speak’. Out of this framework, we propose a novel method to show that there is no ‘Euro economy’ that acts as an attractor to the other economies of the area. We show that the relative comovements across EU economies are prior to the establishment of the Monetary Union. We are able to explain an important proportion of the distances across their business cycles using macro-variables related to the structure of the economy, to the directions of trade, and to the size of the public sector. Finally, we show that the distances across countries that belong to the European Union are smaller than the distances across newcomers. |
| Keywords: | business cycle synchronization; cluster analysis; economic integration; european union enlargement; multidimensional scaling |
| JEL: | C22 E32 F02 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4824&r=mac |
| By: | Lindé, Jesper |
| Abstract: | Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive permanent technology shock once one allows for the possibility that the process for the permanent technology shock is persistent in growth rates. A more serious limitation of the RBC model is its inability to generate a persistent rise in hours worked after a positive permanent technology shock along with a rise in labour productivity that are in line with what the data suggests. |
| Keywords: | hours worked per capita; labour productivity; permanent technology shocks; real business cycle model; vector autoregressions |
| JEL: | E24 E32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4827&r=mac |
| By: | Locarno, Alberto; Massa, Massimo |
| Abstract: | We study the relationship between inflation and stock returns focusing on the signalling content of inflation. Investors use inflation to learn about the stance of the monetary policy. Depending on investors’ beliefs, a change in consumption prices has different effects on the risk premium. A change in consumption prices that confirms investors' beliefs reduces stock risk premia, while a change that contradicts them increases risk premia. This may generate a negative correlation between returns and inflation that explains the Fisher puzzle. We model this intuition and test its implication on US data. We construct a market-based proxy of monetary policy uncertainty, we show that it is priced and that, by conditioning on it, the Fisher puzzle disappears. |
| Keywords: | asset pricing; learning risk; monetary policy uncertainty; risk factors |
| JEL: | G11 G12 G14 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4828&r=mac |
| By: | Orphanides, Athanasios; van Norden, Simon |
| 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 forecasts; output gap; Phillips curve; real-timing data |
| JEL: | C53 E37 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4830&r=mac |
| By: | Clarida, Richard; Sarno, Lucio; Taylor, Mark P; Valente, Giorgio |
| Abstract: | We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties. |
| Keywords: | forecasting; markov switching; term structure of interest rates |
| JEL: | E43 E47 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4835&r=mac |
| By: | Perotti, Roberto |
| Abstract: | This Paper studies the effects of fiscal policy on GDP, inflation and interest rates in five OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The effects of fiscal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more effectively than spending increases. 3) The effects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these effects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive effects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small effects on inflation. 6) Both the decline in the variance of the fiscal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980. |
| Keywords: | fiscal policy; Government Spending; taxes |
| JEL: | E62 E63 H50 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4842&r=mac |
| By: | Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín |
| Abstract: | This paper explores the macroeconomic consequences of preferences displaying a subsistence point. It departs from the existing related literature by assuming that subsistence points are specific to each variety of goods rather than to the composite consumption good. We show that this simple feature makes the price elasticity of demand for individual goods procyclical. As a result, markups behave countercyclically in equilibrium. This implication is in line with the available empirical evidence. |
| Keywords: | business cycles; non-homothetic preferences; time-varying markups |
| JEL: | D10 D12 D42 E30 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4843&r=mac |
| By: | Orphanides, Athanasios; Williams, John C |
| Abstract: | Central bankers frequently emphasize the critical importance of anchoring private inflation expectations for successful monetary policy and macroeconomic stabilization. In most monetary policy models, however, expectations are already anchored through the assumption of rational expectations and perfect knowledge of the economy. In this Paper, we re-examine the role of inflation expectations by positing, instead, that agents have imperfect knowledge of the precise structure of the economy and policy-makers' preferences, and rely on a perpetual learning technology to form expectations. We find that with learning, disturbances can give rise to endogenous inflation scares, that is, significant and persistent deviations of inflation expectations from those implied by rational expectations, even at long horizons. The presence of learning increases the sensitivity of inflation expectations and the term structure of interest rates to economic shocks, in line with the empirical evidence. We also explore the role of private inflation expectations for the conduct of efficient monetary policy. Under rational expectations, inflation expectations equal a linear combination of macroeconomic variables and as such provide no additional information to the policy-maker. In contrast, under learning, private inflation expectations follow a time-varying process and provide useful information for the conduct of monetary policy. |
| Keywords: | inflation forecasts; learning; policy rules; rational expectations |
| JEL: | E52 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4844&r=mac |
| By: | Gillman, Max; Nakov, Anton |
| Abstract: | The Paper presents a model in which the exogenous money supply causes changes in the inflation rate and the output growth rate. While inflation and growth rate changes occur simultaneously, the inflation acts as a tax on the return to human capital and in this sense induces the growth rate decrease. Shifts in the model’s credit sector productivity cause shifts in the income velocity of money that can break the otherwise stable relation between money, inflation, and output growth. Applied to two accession countries, Hungary and Poland, a VAR system is estimated for each that incorporates endogenously determined multiple structural breaks. Results indicate Granger causality positively from money to inflation and negatively from inflation to growth for both Hungary and Poland, as suggested by the model, although there is some feedback to money for Poland. Three structural breaks are found for each country that are linked to changes in velocity trends, and to the breaks found in the other country. |
| Keywords: | Granger causality; growth; inflation; structural breaks; transition; VAR; velocity |
| JEL: | C22 E31 O42 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4845&r=mac |
| By: | Benczúr, Péter; Rátfai, Attila |
| Abstract: | We carry out a detailed analysis of quarterly frequency dynamics in macroeconomic aggregates in twelve countries of Central and Eastern Europe. The facts we document include the variability and persistence in and the co-movement among output, and other major real and nominal variables. We find that consumption is highly volatile and government spending is procyclical. Gross fixed capital formation is highly volatile. Net exports are countercyclical. Imports are procyclical, much more than exports. Exports are most procyclical and persistent in open countries. Labour market variables are all highly volatile. Employment is lagging, and often procyclical. Real wages are dominantly procyclical. Productivity is dominantly procyclical and coincidental. Private credit is procyclical and dominantly lagging the cycle. The CPI is countercyclical, and is weakly leading or coincidental. The cyclicality of inflation is unclear, but its relative volatility is low. Net capital flows are mostly leading and procyclical and exhibit low persistence. Nominal interest rates are in general smooth and persistent. The nominal exchange rate is more persistent than the real one. Overall, we find that fluctuations in CEE countries are larger than in industrial countries, and are of similar size than in other emerging economies. This is particularly true about private consumption. The co-movement of variables, however, shows a large degree of similarity. A notable exception is government spending: unlike in industrial economies, it is rather procyclical in transition economies. The findings also indicate that Croatia and the accession group show broadly similar cyclical behaviour to industrial countries. The most frequent country outliers are Bulgaria, Romania and Russia, especially in labour market, price and exchange rate variables. Excluding these countries from the sample makes many of the observed patterns in cyclical dynamics quite homogenous. |
| Keywords: | business cycle facts; Central and Eastern Europe |
| JEL: | E32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4846&r=mac |
| By: | Demyanyk, Yuliya; Volosovych, Vadym |
| Abstract: | We study the degree of output and consumption asymmetry for the ten new and fifteen original European Union members during the period 1994–2001. We establish basic stylized facts about macroeconomic asymmetry from correlations of GDP and consumption growth rates with corresponding aggregates. In addition, we determine which countries would potentially gain the most from international risk sharing within the European Union employing a utility-based measure suggested by Kalemli-Ozcan, Sørensen and Yosha (2001). We find much higher potential gains for the new members compared to those for original EU-15 countries. In particular, economies with the most volatile and counter-cyclical output growth – Czech Republic, Slovak Republic, and the three Baltic states – might benefit the most. We show that EU enlargement would not reduce the welfare of EU-15 members. If these countries move towards full risk sharing their potential welfare gains after enlargement would be virtually unchanged. |
| Keywords: | asymmetry of GDP; consumption insurance; EU enlargement; risk sharing |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4847&r=mac |
| By: | Eijffinger, Sylvester C W; Tesfaselassie, Mewael F. |
| Abstract: | In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank’s preference is common knowledge. When there is uncertainty about the central bank’s preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts. |
| Keywords: | central bank disclosure; central bank forecasts; central bank transparency; forward-looking expectations; private information |
| JEL: | E42 E43 E52 E58 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4854&r=mac |
| By: | Altig, David E; Christiano, Lawrence; Eichenbaum, Martin; Lindé, Jesper |
| Abstract: | Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model that resolves this apparent micro/macro conflict. Our model is consistent with post-war US 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 pre-determined within a period. |
| JEL: | E30 E40 E50 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4858&r=mac |
| By: | Orphanides, Athanasios; Williams, John C |
| Abstract: | We develop an estimated model of the US economy in which agents form expectations by continually updating their beliefs regarding the behaviour of the economy and monetary policy. We explore the effects of policy-makers' misperceptions of the natural rate of unemployment during the late 1960s and 1970s on the formation of expectations and macroeconomic outcomes. We find that the combination of monetary policy directed at tight stabilization of unemployment near its perceived natural rate and large real-time errors in estimates of the natural rate uprooted here-to-fore quiescent inflation expectations and contributed to poor macroeconomic performance. Had monetary policy reacted less aggressively to perceived unemployment gaps, inflation expectations would have remained anchored and the stagflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both inflation and unemployment. We argue that policy-makers, learning from the experience of the 1970s, eschewed activist policies in favour of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the US economy. |
| Keywords: | learning; monetary policy; rational expectations; stagflation |
| JEL: | E52 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4865&r=mac |
| By: | Lindsey, David E; Orphanides, Athanasios; Rasche, Robert H |
| Abstract: | This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed. |
| Keywords: | Federal Reserve; FOMC; monetary reform; operating procedures; Paul Volcker |
| JEL: | E52 E58 E61 E65 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4866&r=mac |
| By: | Égert, Balázs; Halpern, László |
| Abstract: | This Paper sets out to analyse 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. We study the extent to which the estimated real misalignments reported in the literature depend on the underlying theoretical approach (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and on other characteristics of the individual studies. We also seek to explore whether we can gain more insight from the literature regarding what determines the size and, perhaps more importantly, the sign of the estimated coefficient of the productivity variable and of two other variables commonly included in real exchange rate determination equations, notably net foreign assets and openness. |
| Keywords: | Balassa-Samuelson effect; equilibrium exchange rate; meta-analysis |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4869&r=mac |
| By: | Dufourt, Frédéric; Lloyd-Braga, Teresa; Modesto, Leonor |
| Abstract: | We extend the finance-constrained economy proposed by Woodford (1986) to incorporate imperfectly insured unemployment, by introducing unions and unemployment benefits financed by labour taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labour; (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labour, so that a rich set of dynamics may emerge at ‘realistic’ parameters’ values. |
| Keywords: | bifurcations; endogenous fluctuations; imperfectly insured unemployment; indeterminacy |
| JEL: | E24 E32 E62 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4874&r=mac |
| By: | Faia, Ester; Monacelli, Tommaso |
| Abstract: | We study optimal monetary policy in two prototype economies with sticky prices and credit market frictions. In the first economy, credit frictions apply to the financing of the capital stock, generate acceleration in response to shocks and the ‘financial markup’ (i.e., the premium on external funds) is countercyclical and negatively correlated with the asset price. In the second economy, credit frictions apply to the flow of investment, generate persistence, and the financial markup is procyclical and positively correlated with the asset price. We model monetary policy in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in both models, credit frictions work in the direction of dampening the cyclical behaviour of inflation relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation and investment dynamics, generates a trade-off between price and financial markup stabilization. A corollary of this result is that reacting to asset prices does not bear any independent welfare role in the conduct of monetary policy. |
| Keywords: | asset prices; financial distortions; optimal monetary policy rules; price stability |
| JEL: | E52 F41 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4880&r=mac |
| By: | Bottazzi, Renata; Jappelli, Tullio; Padula, Mario |
| Abstract: | We estimate the effect of pension reforms on households’ expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of Italian pension reforms as a source of exogenous variation in expected pension wealth. Two parameters are crucial to estimate pension wealth: the age at which workers expect to retire and the expected ratio of pension benefits to pre-retirement income. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits these expectations during a period of intense pension reforms between 1989 and 2002. These reforms had different consequences for different cohorts and employment groups, providing a quasi-experimental framework to study the effect of social security arrangements on expectations of retirement outcomes and household saving decisions. Our main findings are that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth. |
| Keywords: | expectations; pension reform |
| JEL: | E21 H55 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4882&r=mac |
| By: | Adam, Klaus |
| Abstract: | This paper presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. With rational inflation expectations, the economy does not generate persistent deviations of output and inflation in response to a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns. Such behaviour emerges because subjects’ inflation expectations fail to be captured by rational expectations functions. Instead, a Restricted Perceptions Equilibrium (RPE), which assumes that agents use optimal but ’simple’ forecast functions, describes subjects’ inflation expectations surprisingly well and explains the observed behaviour of output and inflation. |
| Keywords: | experiments; output and inflation dynamics; rational expectations; restricted perceptions equilibrium |
| JEL: | C91 E32 E37 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4885&r=mac |
| By: | Blanchard, Olivier; Giavazzi, Francesco; Sa, Filipa |
| Abstract: | There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US assets. Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro. |
| Keywords: | current account; dollar exchange rate; portfolio models |
| JEL: | E30 F21 F32 F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4888&r=mac |
| By: | Fronti, Javier Garcia; Miller, Marcus; Zhang, Lei |
| Abstract: | The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification. |
| Keywords: | Argentina debt crisis; asymmetric pesification; conflicting beliefs; keynesian recession; twin crisis |
| JEL: | E12 E51 F34 G18 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4889&r=mac |
| By: | Gaiotti, Eugenio; Lippi, Francesco |
| Abstract: | This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behaviour, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the centre of the public discussion. First, the paper analyses the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms that may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10% and 9%, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40%). The changeover might have focused the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavourable developments on the costs side (strong increases in unit labour costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a ‘menu-cost’ hypothesis for pricing behaviour: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones. |
| Keywords: | euro changeover; inflation; menu cost |
| JEL: | E50 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4893&r=mac |
| By: | Loungani, Prakash; Razin, Assaf |
| Abstract: | The paper analyses how globalization forces induce monetary authorities, guided in their policies by the welfare criterion of a representative household, to put greater emphasis on reducing the inflation rate than on narrowing the output gaps. We demonstrate that the marginal rate of substitution between the output gap and the inflation (at a constant value of the utility-based loss function) rises when the economy is opening up to international trade in goods, and is integrated to the world capital markets. We associate the marginal rate of substitution with the sacrifice ratio, and provide evidence on trade and capital openness effects on inflation, through the efficiency channel. |
| Keywords: | capital-account openness; trade openness; utility-based loss function |
| JEL: | E50 F40 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4895&r=mac |
| By: | van der Ploeg, Frederick |
| Abstract: | The macroeconomic effects of different ways of rolling back the welfare state are analysed. Cutting public spending on market goods induces a lower interest rate, a higher wage, a lower capital stock and a fall in employment. Cutting public employment or the labour income tax rate leads, in contrast, to a lower wage, a higher interest rate and a higher capital stock. Employment rises on impact. If the extra revenues of rolling back the welfare state are handed back via a lower tax rate rather than a lump-sum subsidy, both cutting public employment and cutting public spending on market goods induce an investment boom. Making the tax system less progressive by cutting tax credits and the labour income tax rate induces an investment boom as well. The effects of endogenous growth, adjustment costs for investment and non-Walrasian labour markets on these results are considered as well. |
| Keywords: | fiscal retrenchment; growth; investment; labour market; public employment |
| JEL: | D90 E20 E60 H30 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4896&r=mac |
| By: | van der Ploeg, Frederick |
| Abstract: | After a brief review of classical, Keynesian, New Classical and New Keynesian theories of macroeconomic policy, we assess whether New Keynesian Economics captures the quintessential features stressed by JM Keynes. Particular attention is paid to Keynesian features omitted in New Keynesian workhorses such as the micro-founded Keynesian multiplier and the New Keynesian Phillips curve. These theories capture wage and price sluggishness and aggregate demand externalities by departing from a competitive framework and give a key role to expectations. The main deficiencies, however, are the inability to predict a pro-cyclical real wage in the face of demand shocks, the absence of inventories, credit constraints and bankruptcies in explaining the business cycle, and no effect of the nominal as well as the real interest rate on aggregate demand. Furthermore, they fail to allow for quantity rationing and to model unemployment as a catastrophic event. The macroeconomics based on the New Keynesian Phillips curve has quite a way to go before the quintessential Keynesian features are captured. |
| Keywords: | bankruptcy; inventories; Keynesian economics; liquidity; monetary policy; monopolistic competition; New Keynesian Phillips curve; nominal wage rigidity; pro-cyclical real wage; unemployment; welfare |
| JEL: | E12 E32 E63 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4897&r=mac |
| By: | Cukierman, Alex |
| Abstract: | This paper documents the evolution of the legal independence of the Bank of Israel since its creation in 1954 to present times, provides an international comparison, and assesses the changes in the actual independence of the Bank on a yearly basis following the 1985 stabilization of inflation. The data developed in the paper makes it possible to compare the evolution of actual and of legal independence after the 1985 stabilization and to compare the legal independence of the bank with that of other countries at different points in time. The paper also evaluates the level of legal independence embedded in the Levin’s committee recommendations for reform of the Bank of Israel law. The paper shows that various institutional changes have induced, since 1985, substantial changes in the actual independence of the bank without any legislative change. The paper also identifies domestic and international factors that stimulated those changes and evaluates the desirable level of independence for the future. In particular the paper evaluates the pros and the cons of assigning to the bank growth targets, in addition to inflation targets. |
| Keywords: | central banks; independence - legal and actual; Israel; monetary institutions and policy |
| JEL: | E40 E50 K40 P50 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4906&r=mac |
| By: | Favero, Carlo A; Milani, Fabio |
| Abstract: | This paper starts from the observation that parameter instability and model uncertainty are relevant problems for the analysis of monetary policy in small macroeconomic models. We propose to deal with these two problems by implementing a novel ‘thick recursive modelling’ approach. At each point in time we estimate all models generated by the combinations of a base-set of k observable regressors for aggregate demand and supply. We compute optimal monetary policies for all possible models and consider alternative ways of summarizing their distribution. Our main results show that thick recursive modelling delivers optimal policy rates that track the observed policy rates better than the optimal policy rates obtained under a constant parameter specification, with no role for model uncertainty. |
| Keywords: | model uncertainty; optimal monetary policy; parameter instability |
| JEL: | E44 E52 F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4909&r=mac |
| By: | Favero, Carlo A; Kaminska, Iryna; Söderström, Ulf |
| Abstract: | This paper brings together two strands of the empirical macro literature: the reduced-form evidence that the yield spread helps in forecasting output and the structural evidence on the difficulties of estimating the effect of monetary policy on output in an intertemporal Euler equation. We show that including a short-term interest rate and inflation in the forecasting equation improves the forecasting performance of the spread for future output but the coefficients on the short rate and inflation are difficult to interpret using a standard macroeconomic framework. A decomposition of the yield spread into an expectations-related component and a term premium allows a better understanding of the forecasting model. In fact, the best forecasting model for output is obtained by considering the term premium, the short-term interest rate and inflation as predictors. We provide a possible structural interpretation of these results by allowing for time-varying risk aversion, linearly related to our estimate of the term premium, in an intertemporal Euler equation for output. |
| Keywords: | estimated Euler equation; forecasting; GDP growth; predictability; term structure of interest rates; yield curve |
| JEL: | E27 E37 E43 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4910&r=mac |
| By: | Huang, Haizhou; Wei, Shang-Jin |
| Abstract: | Weak public institutions, including high levels of corruption, characterize many developing countries. With a simple model, we demonstrate that institutional quality has important implications for the design of monetary policies and can produce several departures from the conventional wisdom. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the problem of a lack of credibility, is typically not appropriate in developing countries with poor institutions. Such an arrangement is inferior to an optimal inflation targeting, or a Rogoff-style central banker, whose optimal degree of conservatism is proportional to the quality of institutions. Furthermore, our results cast doubt on the notion that a low inflationary target or a currency board can be used as an instrument to induce governments to strengthen quality of public institutions. |
| Keywords: | conservative central banker; corruption; currency board; dollarization; inflation targeting; institutional quality; monetary policy |
| JEL: | E52 E58 E61 E62 H50 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4911&r=mac |
| By: | Galí, Jordi |
| Abstract: | The present paper revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. First, I argue that, contrary to what is often believed, there are many reasons why hours could be non-stationary in those models, while preserving the property of balanced growth. Second, I show that the post-war evidence for most industrialized economies is clearly at odds with the assumption of stationary hours per capita. Third, I examine the implications of that evidence for the role of technology as a source of economic fluctuations in the G7 countries. |
| Keywords: | non-stationary hours; real business cycles; technology shocks |
| JEL: | E32 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4915&r=mac |
| By: | Corsetti, Giancarlo; Konstantinou, Panagiotis T |
| Abstract: | This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock – that we interpret as a technological shock – dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase – consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets – in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account. |
| Keywords: | consumption smoothing; current account; international adjustment mechanism; intertemporal approach to the current account; net foreign wealth; permanent-transitory decomposition |
| JEL: | C32 E21 F32 F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4920&r=mac |
| By: | Kocherlakota, Narayana; Pistaferri, Luigi |
| Abstract: | In this paper, we consider a dynamic economy in which the agents are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the x-th moment of the consumption distribution, where x is the coefficient of relative risk aversion. We use data from the Consumer Expenditure Survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors. |
| Keywords: | asset pricing; consumer expenditure survey |
| JEL: | E21 G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4930&r=mac |
| By: | Gersbach, Hans; Wenzelburger, Jan |
| Abstract: | This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low. |
| Keywords: | banking crises; banking regulation; financial intermediation; macroeconomic risks; risk premia |
| JEL: | D41 E40 G20 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4935&r=mac |
| By: | Persson, Torsten; Persson, Mats; Svensson, Lars E O |
| Abstract: | This paper demonstrates how time consistency of the Ramsey policy (the optimal fiscal and monetary policy under commitment) can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite general Ramsey policies, including time-varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe and Neumeyer (2004). |
| Keywords: | ramsey policy; surprise inflation; time consistency |
| JEL: | E31 E52 H21 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4941&r=mac |
| By: | Adao, Bernardino; Correia, Isabel Horta; Teles, Pedro |
| Abstract: | We consider standard cash-in-advance monetary models 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: | interest rate rules; monetary policy; unique equilibrium |
| JEL: | E31 E40 E52 E58 E62 E63 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4948&r=mac |
| By: | Angelini, Paolo; Lippi, Francesco |
| Abstract: | The introduction of the euro notes and coins during the first months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behaviour of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a simple theoretical model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis. |
| Keywords: | currency; euro changeover; inflation |
| JEL: | E31 E41 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4950&r=mac |
| By: | Bénabou, Roland; Tirole, Jean |
| Abstract: | International surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals' recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just deserts. This paper offers a model that helps explain: i) why most people feel such a need to believe in a ‘just world’; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labour supply, aggregate income, and popular perceptions of the poor. The model shows in particular how complementarities arise endogenously between individuals' desired beliefs or ideological choices, resulting in two equilibria. A first, ‘American’ equilibrium is characterized by a high prevalence of just-world beliefs among the population and relatively laissez-faire policies. The other, ‘European’ equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning ‘money’ (consumption) and happiness, as well as religion. |
| Keywords: | cognitive dissonance; ideology; inequality; memory; psychology; religion; self-control; social mobility; welfare state; willpower |
| JEL: | D31 D72 D80 E62 P16 Z12 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4952&r=mac |
| By: | Scheibe, Jörg; Vines, David |
| Abstract: | This paper models Chinese inflation using an output gap Phillips curve. Inflation modelling for the world’s sixth largest economy is a still under-researched topic. We estimate a partially forward-looking Phillips curve as well as traditional backward-looking Phillips curves. Using quarterly data from 1988 to 2002, we estimate a vertical long-run Phillips curve for China and show that the output gap, the exchange rate, and inflation expectations play important roles in explaining inflation. We adjust for structural change in the economy where possible and estimate regressions for rolling sample windows in order to test for and uncover gradual structural change. We evaluate a number of alternative output gap estimates and find that output gaps which are derived from production function estimations for the Chinese economy are of more use in estimating a Phillips curve than output gaps derived from simple statistical trends. Partially forward-looking Phillips curves provide a better fit than backward-looking ones. The identification of a non-increasing exchange rate effect on inflation during a period of large import growth hints at increased pricing to market behaviour by importers. This result is relevant to policies regarding possible exchange rate liberalization in China. |
| Keywords: | China; monetary policy; output gap; Phillips curve; structural change |
| JEL: | E12 E31 E32 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4957&r=mac |
| By: | Küster, Keith; Wieland, Volker |
| Abstract: | In this paper, we examine the cost of insurance against model uncertainty for the euro area considering four alternative reference models, all of which are used for policy analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context. |
| Keywords: | euro area; minimax; model uncertainty; monetary policy rules; robustness |
| JEL: | E52 E58 E61 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4956&r=mac |
| By: | Jongen, Ron; Verschoor, Willem F C; Wolff, Christian C |
| Abstract: | This paper examines the validity of the expectations hypothesis of the term structure of interest rates by means of a previously unexploited dataset of market expectations that covers a broad range of EMS versus non-EMS foreign currency deposits. Although we find strong evidence in favour of rejecting the ‘pure’ version of the expectations hypothesis, we still cannot reject the hypothesis that the forward rate is a biased estimate of future interest rate levels. Nevertheless, we find some evidence that the behaviour of market participants, when making predictions about the future level of interest rates, is not entirely in line with what rational behaviour would suggest. We also find that there is strong evidence of time-variation in the term structure of interest rates. Furthermore, while this variation in term premia can be very well explained by low-order variations of the ARMA class models, there is sufficient evidence that the conditional heteroskedasticity of term premia plays an important role in explaining the time-variation. Finally, no significant difference is found between the behaviour of EMS interest rate deposits and non-EMS deposits. |
| Keywords: | EMS; expectations hypothesis; interest rate expectations; rationality; survey data; term structure; time-varying term premia |
| JEL: | E42 E43 G15 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4959&r=mac |
| By: | Repullo, Rafael |
| Abstract: | This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn, and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement, and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of a LLR. Thus, in contrast with the general view, the existence of a LLR does not increase the incentives to take risk, while penalty rates do. |
| Keywords: | bank supervision; capital requirements; central bank; deposit insurance; lender of last resort; moral hazard; penalty rates |
| JEL: | E58 G21 G28 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4967&r=mac |
| By: | Schabert, Andreas; Stoltenberg, Christian |
| Abstract: | This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-of-period money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. |
| Keywords: | monetary policy rules; predetermined money; price level determination; real balance effects; real determinacy |
| JEL: | E32 E41 E52 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4974&r=mac |
| By: | Camacho, Maximo; Pérez-Quirós, Gabriel |
| Abstract: | One of the most extended empirical stylized facts about output dynamics in the United States is the positive autocorrelation of output growth. This paper shows that the positive autocorrelation can be better captured by shifts between business cycle states rather than by the standard view of autoregressive coefficients. This result is extremely robust to different non-linear alternative models and also applies not only to output, but also to the most relevant macroeconomic variables. |
| Keywords: | business cycles; output growth; time series |
| JEL: | C22 E27 E32 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4975&r=mac |
| By: | Marcellino, Massimiliano; Stock, James H; Watson, Mark W |
| Abstract: | ‘Iterated’ multiperiod ahead time series forecasts are made using a one-period ahead model, iterated forward for the desired number of periods, whereas ‘direct’ forecasts are made using a horizon-specific estimated model, where the dependent variable is the multi-period ahead value being forecasted. Which approach is better is an empirical matter: in theory, iterated forecasts are more efficient if correctly specified, but direct forecasts are more robust to model misspecification. This paper compares empirical iterated and direct forecasts from linear univariate and bivariate models by applying simulated out-of-sample methods to 171 US monthly macroeconomic time series spanning 1959-2002. The iterated forecasts typically outperform the direct forecasts, particularly if the models can select long lag specifications. The relative performance of the iterated forecasts improves with the forecast horizon. |
| Keywords: | forecast comparisons; multistep forecasts; VAR forecasts |
| JEL: | C32 E37 E47 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4976&r=mac |
| By: | Marcellino, Massimiliano |
| Abstract: | We provide a summary updated guide for the construction, use and evaluation of leading indicators, and an assessment of the most relevant recent developments in this field of economic forecasting. To begin with, we analyse the problem of selecting a target coincident variable for the leading indicators, which requires coincident indicator selection, construction of composite coincident indexes, choice of filtering methods, and business cycle dating procedures to transform the continuous target into a binary expansion/recession indicator. Next, we deal with criteria for choosing good leading indicators, and simple non-model based methods to combine them into composite indexes. Then, we examine models and methods to transform the leading indicators into forecasts of the target variable. Finally, we consider the evaluation of the resulting leading indicator based forecasts, and review the recent literature on the forecasting performance of leading indicators. |
| Keywords: | business cycles; coincident indicators; forecasting; leading indicators; turning points |
| JEL: | C53 E32 E37 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4977&r=mac |
| By: | Giannone, Domenico; Reichlin, Lucrezia; Sala, Luca |
| Abstract: | We analyse the panel of the Greenbook forecasts (sample 1970-96) and a large panel of monthly variables for the US (sample 1970-2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy. |
| Keywords: | forecasting; large datasets; monetary policy; real time analysis; Taylor rules |
| JEL: | C33 C53 E52 E58 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4981&r=mac |
| By: | Mélitz, Jacques |
| Abstract: | Official adjustments of the budget balance to the cycle merely assume that the only category of government spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common to borrow official figures for cyclically adjusted budget balances, divide by potential output, and then use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of the cyclically-independent ratios of budget balances divided by potential output. (A fortiori, they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.) Accordingly, the paper provides separate estimates of the impact of the cycle on the levels of budget balances and the ratios of budget balances to output. In addition, it discusses the relation between the two sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustments depend more on inertia in government spending on goods and services than they do on taxes (which are largely proportional to output). But they depend even still more on transfer payments. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to ‘let the automatic stabilizers work’. |
| Keywords: | automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy |
| JEL: | E00 E60 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4988&r=mac |
| By: | Pissarides, Christopher; Vallanti, Giovanna |
| Abstract: | Theoretical predictions of the impact of TFP growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects by estimating the impact of TFP growth on unemployment in a panel of industrial countries. We find a large negative impact which implies that embodied technology and creative destruction play no role in the steady-state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained. |
| Keywords: | capitalization effect; creative destruction; embodied technology; TFP growth; unemployment |
| JEL: | E24 J64 O51 O52 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5002&r=mac |
| By: | Beetsma, Roel; Debrun, Xavier |
| Abstract: | The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater ‘procedural’ flexibility in the implementation of existing rules may improve welfare, thus making the Pact more easily acceptable to euro area Member States. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. |
| Keywords: | deficits; fiscal rules; procedural flexibility; Stability and Growth Pact; structural reforms |
| JEL: | E62 H60 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5005&r=mac |
| By: | Amstad, Marlene; Fischer, Andreas M |
| Abstract: | A new procedure for shock identification of macroeconomic forecasts based on factor analysis is proposed. The identification scheme relies on daily panels and on the recognition that macroeconomic releases exhibit a high level of clustering. A large number of data releases on a single day is of considerable practical interest not only for the estimation but also for the identification of the factor model. The clustering of cross-sectional information facilitates the interpretation of the forecast innovations as real or as nominal shocks. An empirical application is provided for Swiss inflation. We show that the monetary policy shocks generate an asymmetric response to inflation, that the pass-through for CPI inflation is weak, and that the information shocks to inflation are not synchronized. |
| Keywords: | common factors; daily panels; inflation forecasting |
| JEL: | E52 E58 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5008&r=mac |
| By: | Zeira, Joseph |
| Abstract: | Consumers make transactions of different sizes over time. This paper shows that this fact, together with transaction costs of various assets, can help in developing a theory of liquidity. Assets with different cost structures are used to purchase different sizes of transactions. This can explain the demand for money itself, the precautionary demand for money, and the demand for cash and demand deposits. Thus consumers use cash for small transactions, demand deposits for larger transactions, and use savings for the largest transactions. Finally, the paper shows that modeling banks as suppliers of liquidity leads to a better understanding of their success as financial intermediaries. |
| Keywords: | banks; demand deposits; demand for money; transactions |
| JEL: | E40 E41 E51 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5010&r=mac |
| By: | Gersbach, Hans; Schniewind, Achim |
| Abstract: | We examine wage bargaining in a two-sector economy when the employers and labour unions in each sector are not always aware of all the general equilibrium feedback effects. We show analytically that if agents only consider labour demand effects, low real wages and low unemployment are the result. With an intermediate view, i.e. when partial equilibrium effects within a sector are taken into account, high real wages and unemployment result. If all general equilibrium effects are simultaneously considered, we once again obtain a situation of low wages and unemployment. The assumption that unions and employers' federations are unable to incorporate all feedback effects from other sectors may explain why unemployment in Europe is high. |
| Keywords: | awareness of general equilibirum effects; sectoral wage bargaining; unemployment |
| JEL: | D58 E24 J60 L13 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5012&r=mac |
| By: | Žakovic, Stan; Rustem, B; Wieland, Volker |
| Abstract: | In this paper we compare expected loss minimization to worst-case or minimax analysis in the design of simple Taylor-style rules for monetary policy using a small model estimated for the euro area by Orphanides and Wieland (2000). We find that rules optimized under a minimax objective in the presence of general parameter and shock uncertainty do not imply extreme policy activism. Such rules tend to obey the Brainard principle of cautionary policy-making in much the same way as rules derived by expected loss minimization. Rules derived by means of minimax analysis are effective insurance policies limiting maximum loss over ranges of parameter values to be set by the policy-maker. In practice, we propose to set these ranges with an eye towards the cost of such insurance cover in terms of the implied increase in expected inflation variability. |
| Keywords: | euro area; minimax; monetary policy rules; robust control; worst-case analysis |
| JEL: | E52 E58 E61 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5019&r=mac |
| By: | Ferguson, Thomas; Voth, Hans-Joachim |
| Abstract: | We examine the effect of close ties with the NSDAP on the stock price of listed firms in 1932-33. We consider not only links between the National Socialists and executives, as was common in earlier work, but also with supervisory board members – whose importance is hard to overestimate in the case of German industry. One implication of our work is that, weighted by stock market capitalization in 1932, more than half of listed firms on the Berlin stock exchange had substantive links with the NSDAP. Crucially, stock market investors recognized the value of these links, sending the share prices of connected firms up as the new regime became firmly established. While the market as a whole rose after Hitler’s accession to power, firms with board members known to favour the party (or backing it financially) outperformed the market by 5-10% between January and May 1933. We show that this finding is robust to a range of additional control variables and alternative estimation techniques. |
| Keywords: | market efficiency; Nazi party; political connections; stock market returns |
| JEL: | E60 G14 G18 N24 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5021&r=mac |
| By: | Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti |
| Abstract: | This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behaviour is explicable within an RBC framework. |
| Keywords: | productivity; real business cycle; real exchange rate |
| JEL: | E32 F31 F41 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5029&r=mac |
| By: | Scaramozzino, Pasquale; Temple, Jonathan; Vulkan, Nir |
| Abstract: | The economic boom of the USA in the 1990s was remarkable in its duration, the sustained rise in equipment investment, the reduced volatility of productivity growth, and continued uncertainty about the trend growth rate. In this paper we link these phenomena using an extension of the classic model of implementation cycles due to Shleifer (1986). The key idea is that uncertainty about the trend growth rate can lead firms to bring forward the implementation of innovations, temporarily eliminating expectations-driven business cycles, because delay is risky when beliefs are not common knowledge. |
| Keywords: | implementation cycles; multiple equilibria; New Economy |
| JEL: | E32 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5032&r=mac |
| By: | Mody, Ashoka; Sarno, Lucio; Taylor, Mark P |
| Abstract: | A growing literature has examined the importance of credit market imperfections for macroeconomic fluctuations, the so-called financial accelerator. A related literature has provided evidence of international and regional co-movements in macroeconomic fluctuations. We tie together these strands of the literature in that we investigate the importance of both cross-country and country-specific credit cycles in explaining output fluctuations. Using data for four major economies and two world regions from 1973 to 2001, we find that both regional and country-specific components of indicators of credit availability are powerful in explaining output movements. This research provides the first empirical evidence of a cross-country financial accelerator. |
| Keywords: | credit cycle; financial accelerator; international business cycles; Kalman filter |
| JEL: | E32 E51 F36 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5037&r=mac |
| By: | Krueger, Dirk; Kubler, Felix |
| Abstract: | This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labour income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. |
| Keywords: | aggregate fluctuations; incomplete markets; intergenerational risk sharing; social security reform |
| JEL: | D58 D91 E62 H31 H55 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5039&r=mac |
| By: | Conesa, Juan Carlos; Krueger, Dirk |
| Abstract: | This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labour productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labour supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. |
| Keywords: | flat taxes; optimal taxation; progressive taxation; social insurance; transition |
| JEL: | E62 H21 H24 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5040&r=mac |
| By: | Demertzis, Maria; Hughes Hallett, Andrew |
| Abstract: | In this paper we examine the effects of private agents being less than fully rational. We examine this in the context of monetary policy, where the Central Bank may have uncertain preferences either by choice or by necessity. The new feature is that we allow the public to react in two different ways to this uncertainty. They either form rational expectations and internalize the uncertainty about the Central Bank’s preferences in full; or alternatively, and if this process of internalization is costly, it forms a ‘best’ guess regarding those preferences. This implies a certainty equivalence strategy applied to the preference parameters. As those parameters enter the decisions non-linearly, a systematic error emerges. We examine the magnitude of the resulting error in inflation and output, following the assumption of certainty equivalence. Under all reasonable levels of uncertainty this error turns out to be small but involves trading a deflation bias against the cost of gathering the information needed for the full rational expectations solution. |
| Keywords: | central bank preference uncertainty; certainty equivalence; rational expectations |
| JEL: | E52 E58 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5042&r=mac |
| By: | Hughes Hallett, Andrew |
| Abstract: | This paper attempts to reconcile the need for flexibility in fiscal policy, with the need for credibility and consistency in monetary policies. The idea is to generate fewer conflicts between policies but greater discipline within them. We assume an independent central bank and restraints on the use of national fiscal policies. Using a theoretical model, we examine the consequences of assigning leadership to fiscal or monetary policies to exploit the implicit (rule based) coordination available under standard transmission mechanisms, but where priorities and targets differ between policy makers. This works best with fiscal leadership: we introduce a debt rule (with hard or soft targets) to precommit fiscal policies over the longer term, but use monetary independence to guarantee credibility and discipline in the short run stabilization policies. Compared to the uncoordinated solution now operating in Europe, inflation biases are lower and debt repayments higher for no loss in output volatility. That corresponds to the experience of the UK, our benchmark case, whose empirical reaction functions show fiscal leadership. Across ten OECD countries, these gains are estimated to be worth 2%-4% of GDP. |
| Keywords: | debt rule; institutional coordination; soft targets; stackelberg leadership |
| JEL: | E52 E61 F42 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5043&r=mac |
| By: | Limão, Nuno; Olarreaga, Marcelo |
| Abstract: | The proliferation of preferential trade liberalization over the last 20 years has raised the question of whether it slows down multilateral trade liberalization. Recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that developed countries provide to small and poor countries but there is no estimate of the resulting welfare costs. To avoid this stumbling block effect we suggest replacing unilateral preferences by a fixed import subsidy. We argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a Pareto improvement. More importantly, we provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization. By combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5,000 products we calculate the welfare effects of the United States, European Union and Japan switching from unilateral preferences to Least Developed Countries to the import subsidy scheme. Even in a model with no dynamic gains to trade we find that the switch produces an annual net welfare gain for the 170 countries ($4,354 million) and for each group: the United States, European Union and Japan ($2,934 million), Least Developed Countries ($520 million) and the rest of the world ($900 million). |
| Keywords: | MFN tariff concessions; multilateral trade negotiations; preference erosion; preferential trade agreements |
| JEL: | D78 F13 F14 F15 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5045&r=mac |
| By: | Fischer, Andreas M |
| Abstract: | Recent time-series evidence has reconfirmed the forecasting ability of Swiss broad money. The same money demand studies and others, however, find that the income elasticity is greater than one. Such parameter estimates are difficult to reconcile with transactions demand theory. This study re-examines the estimates for income elasticity in money demand based on cross-regional evidence for Switzerland. Particular attention is given to the influence of regional financial sophistication. The cross-cantonal results find that the income elasticity lies between 0.4 and 0.6. This discrepancy between the two empirical methodologies has important consequences for the conduct of Swiss monetary policy. |
| Keywords: | cross-regional estimates; money demand; regional financial sophistication |
| JEL: | C21 E41 E50 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5050&r=mac |
| By: | Reis, Ricardo A.M.R. |
| Abstract: | This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behaviour implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using US aggregate and microeconomic data generally supports these predictions. |
| Keywords: | bounded rationality; consumption; excess sensitivity; excess smoothness; hand-to-mouth consumers; inattentiveness |
| JEL: | D1 D8 D9 E2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5053&r=mac |
| By: | Reis, Ricardo A.M.R. |
| Abstract: | While this is typically ignored, the properties of the stochastic process followed by aggregate consumption affect the estimates of the costs of fluctuations. This paper pursues two approaches to modelling aggregate consumption dynamics and to measuring how much society dislikes fluctuations, one statistical and one economic. The statistical approach estimates the properties of consumption and calculates the cost of having consumption fluctuating around its mean growth. The paper finds that the persistence of consumption is a crucial determinant of these costs and that the high persistence in the data severely distorts conventional measures. It shows how to compute valid estimates and confidence intervals. The economic approach uses a calibrated model of optimal consumption and measures the costs of eliminating income shocks. This uncovers a further cost of uncertainty, through its impact on precautionary savings and investment. The two approaches lead to costs of fluctuations that are higher than the common wisdom, between 0.5% and 5% of per capita consumption. |
| Keywords: | consumption persistence; costs of fluctuations; models of aggregate consumption |
| JEL: | E21 E32 E60 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5054&r=mac |
| By: | Aoki, Kosuke; Nikolov, Kalin |
| Abstract: | The paper evaluates the performance of three popular monetary policy rules when the central bank is learning about the parameter values of a simple New Keynesian model. The three policies are: (1) the optimal non-inertial rule; (2) the optimal history-dependent rule; (3) the optimal price-level targeting rule. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output-inflation trade off. When imperfect information about the model parameters is introduced, it is found that the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. The optimal history-dependent rule is worst affected and delivers the lowest welfare. Price level targeting performs best under learning and maintains the advantages of conducting policy under commitment. These findings are related to the literatures on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable because they deliver the beneficial output-inflation trade-off of commitment policy while being robust to implementation errors. |
| Keywords: | learning; monetary policy rules |
| JEL: | E31 E50 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5056&r=mac |
| By: | Leitemo, Kai; Söderström, Ulf |
| Abstract: | This paper studies how a central bank’s preference for robustness against model misspecification affects the design of monetary policy in a New-Keynesian model of a small open economy. Due to the simple model structure, we are able to solve analytically for the optimal robust policy rule, and we separately analyse the effects of robustness against misspecification concerning the determination of inflation, output and the exchange rate. We show that an increased central bank preference for robustness makes monetary policy respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification. |
| Keywords: | Knightian uncertainty; min-max policies; model uncertainty; robust control |
| JEL: | E52 E58 F41 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5071&r=mac |
| By: | Svensson, Lars E O |
| Abstract: | ‘Forecast targeting’, forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the US economy, one forward looking and one backward looking. A complicated infinite-horizon central bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complex function of all inputs in the monetary-policy decision process, including the central bank’s judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit. |
| Keywords: | forecasts; inflation targeting; optimal monetary policy |
| JEL: | E42 E52 E58 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5072&r=mac |
| By: | Corsetti, Giancarlo; Pesenti, Paolo |
| 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. |
| Keywords: | exchange rate pass-through; international cooperation; nominal rigidities; optimal monetary policy |
| JEL: | E31 E52 F42 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5080&r=mac |
| By: | Dell'Ariccia, Giovanni; Detragiache, Enrica; Rajan, Raghuram G |
| Abstract: | Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. |
| Keywords: | bank lending channel; banking crises |
| JEL: | E44 G21 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5088&r=mac |
| By: | F. Owen Irvine |
| Abstract: | A number of explanations for the observed decline in GDP volatility since the mid-1980s have been offered. Valerie Ramey and Daniel Vine (2003a, 2003b) in a couple of recent papers offer the hypothesis that a decline in the persistence of sales is an explanation for the decline in GDP volatility. Their models show that a decrease in sales persistence leads to a decline in the variance of production relative to the variance of sales. They provide econometric evidence that the persistence of unit automobile sales has declined at both the aggregate and model level. This paper explores reasons why sales persistence may have declined and then tests the Ramey-Vine hypothesis with monthly chain-weighted sales data from 2- and 3-digit manufacturing and trade industries. The estimates confirm the Ramey-Vine findings for motor vehicle retailers, wholesalers, and manufacturers. For a number of industries outside of motor vehicles, especially those in wholesaling and nondurable manufacturing, considerable evidence is found of declines in sales persistence. These declines seem to be consistent with changes in supply and distribution chains that have occurred as the result of the introduction of new information, inventory, and production control systems. However, in equations estimated for aggregate manufacturing, wholesaling, and retail sector sales, declines in sales persistence are not found. |
| Keywords: | Gross domestic product |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-5&r=mac |
| By: | Steven J. Davis; Felix Kubler; Paul Willen |
| Abstract: | We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity — which we show roughly matches the data — minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings. |
| Keywords: | Households - Economic aspects ; Investments |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-7&r=mac |
| By: | Paul Gomme; Peter Rupert |
| Abstract: | Calibration has become a standard tool of macroeconomics. This paper extends and refines the calibration methodology along several important dimensions. First, accounting for home production is important both in measuring calibration targets and in organizing the data in a model-consistent fashion. For this reason, thinking about home production is important even if the model under consideration does not include home production. Second, investment-specific technological change is included because of its strong balanced growth parameter restrictions. Third, the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations. The data and calculations used in this paper are available on the web. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0505&r=mac |
| By: | Jonathan N. Millar |
| Abstract: | Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-24&r=mac |
| By: | Javier Andres; J. David L¢pez-Salido; Edward Nelson |
| Abstract: | A major criticism of standard specifications of price adjustment in models for monetary policy analysis is that they violate the natural rate hypothesis by allowing output to differ from potential in steady state. In this paper we estimate a dynamic optimizing business cycle model whose price-setting behavior satisfies the natural rate hypothesis. The price-adjustment specifications we consider are the sticky-information specification of Mankiw and Reis (2002) and the indexed contracts of Christiano, Eichenbaum, and Evans (2005). Our empirical estimates of the real side of the economy are similar whichever price adjustment specification is chosen. Consequently, the alternative model specifications deliver similar estimates of the U.S. output gap series, but the empirical behavior of the gap series differs substantially from standard gap estimates. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-018&r=mac |
| By: | Marcelle Chauvet; Jeremy M. Piger |
| Abstract: | This paper evaluates the ability of formal rules to establish U.S. business cycle turning point dates in real time. We consider two approaches, a nonparametric algorithm and a parametric Markov-switching dynamic-factor model. In order to accurately assess the real-time performance of these rules, we construct a new unrevised "real-time" data set of employment, industrial production, manufacturing and trade sales, and personal income. We then apply the rules to this data set to simulate the accuracy and timeliness with which they would have identified the NBER business cycle chronology had they been used in real time for the past 30 years. Both approaches accurately identified the NBER dated turning points in the sample in real time, with no instances of false positives. Further, both approaches, and especially the Markov-switching model, yielded significant improvement over the NBER in the speed with which business cycle troughs were identified. In addition to suggesting that business cycle dating rules are an informative tool to use alongside the traditional NBER analysis, these results provide formal evidence regarding the speed with which macroeconomic data reveals information about new business cycle phases. |
| Keywords: | Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-021&r=mac |
| By: | Neville Francis; Michael T. Owyang; Jennifer E. Roush |
| Abstract: | Recent empirical studies using infinite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming for their sensitivity to changes in model specification and the general poor performance of long run restrictions in Monte Carlo experiments. We propose a alternative identification that maximizes the contribution of technology shocks to the forecast error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its infinite horizon counterpart by producing less biased impulse responses and technology shocks that are more highly correlated with the technology shocks form the underlying model. For U.S. data, we show that the negative hours response is not robust to allowing a greater role for non-technology shocks in the forecast error variance share at a ten year horizon. |
| Keywords: | Time-series analysis ; Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-024&r=mac |
| By: | Joydeep Bhattacharya; Joseph Haslag; Antoine Martin; Rajesh Singh |
| Abstract: | We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances-a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule. |
| Keywords: | Monetary policy ; Interest rates ; Friedman, Milton ; Banks and banking, Central |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:208&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, illustrating its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss are optimal monetary policy and the welfare gains from macroeconomic stabilization, the international transmission of real and monetary shocks and the role of exchange rate pass-through, and the design of optimal exchange rate regimes and monetary coordination among interdependent economies. |
| Keywords: | Macroeconomics ; Monetary policy ; Foreign exchange rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:209&r=mac |
| By: | Marcello Estevão (International Monetary Fund); Nigar Nargis (University of Dhaka and IZA Bonn) |
| Abstract: | France posted remarkable gains in employment in the second half of the 1990s, suggesting that, beyond cyclical factors, structural unemployment may have changed in the period. We provide a novel methodology to separate structural from cyclical labor market changes and apply it to French household level data from 1990 to 2000. We show that the equilibrium relationship between real wages and unemployment has improved significantly in France in the second half of the 1990s. Further calculations suggest that long-term unemployment will decline substantially in France with respect to its average level in the 1990s if this improved trade-off is not undone. |
| Keywords: | employment, wages, bargaining, structural change, labor market |
| JEL: | D2 E2 J23 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1621&r=mac |
| By: | Armin Falk (IZA Bonn and University of Bonn); Ernst Fehr (University of Zurich and IZA Bonn); Christian Zehnder (University of Zurich and IZA Bonn) |
| Abstract: | The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects. |
| Keywords: | minimum wages, labor market, monopsony, fairness, reservation wages, entitlement |
| JEL: | C91 D63 E64 J38 J42 J58 J68 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1625&r=mac |
| By: | Thomas K. Bauer (RWI Essen, Ruhr University of Bochum, CEPR and IZA Bonn); Mathias Sinning (RWI Essen) |
| Abstract: | This paper examines the relative savings position of migrant households in West Germany, paying particular attention to differences between temporary and permanent migrants. Utilizing household level data from the German Socio-Economic Panel (GSOEP), our findings reveal significant differences in the savings rates between foreign-born and Germanborn individuals. These differences disappear, however, for temporary migrants, if their remittances are taken into account. Fixed effects estimations of the determinants of immigrants’ savings rates reveal that intended return migration does not only affect remittances, but also the savings rate of migrant households in the host country. The results of a decomposition analysis indicate that differences in the savings rate between Germans and foreigners can mainly be attributed to differences in observable characteristics. We do not find strong evidence for an adjustment of the savings rate between immigrants and natives over time, indicating deficits in the long-term integration of permanent migrants in Germany. |
| Keywords: | savings, migration |
| JEL: | F22 E21 C24 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1632&r=mac |
| By: | Niels Arne Dam (Institute of Economics, University of Copenhagen); Jesper Gregers Linaa (Institute of Economics, University of Copenhagen) |
| Abstract: | This paper performs a welfare analysis based on the hypothetical scenario that Denmark gave up its peg and started conducting monetary policy according to a Taylor rule. For this we rely on a dynamic stochastic general equilibrium model for a small open economy that was estimated on Danish data using Bayesian methods. We obtain the result that the gain in welfare is equivalent to a permanent increase of around 0.8 pct in the level of consumption. Examining a range of alternative scenarios does not change this conclusion, unless we assume a degree of policy errors under the Taylor rule that is substantially larger than those estimated by other studies. |
| Keywords: | open economy; monetary policy; business cycles; welfare |
| JEL: | E3 E4 E5 F4 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:05-04&r=mac |
| By: | Christopher D. Carroll |
| Abstract: | This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided. |
| JEL: | C6 D9 E2 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberte:0309&r=mac |
| By: | Alberto Alesina; George-Marios Angeletos |
| Abstract: | Bigger governments raise the possibilities for corruption; more corruption may in turn raise the support for redistributive policies that intend to correct the inequality and injustice generated by corruption. We formalize these insights in a simple dynamic model. A positive feedback from past to current levels of taxation and corruption arises either when wealth originating in corruption and rent seeking is considered unfair, or when the ability to engage in corruption is unevenly distributed in the population. This feedback introduces persistence in the size of the government and the levels of corruption and inequality. Multiple steady states exist in some cases. |
| JEL: | D31 E62 H2 P16 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11399&r=mac |
| By: | Sergio Rebelo |
| Abstract: | In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research. |
| JEL: | E1 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11401&r=mac |
| By: | Gerald Pech; Bernhard Neumaerker |
| Abstract: | Why does the government not defect from the constitution? This article focuses on the dynamic restraints the government faces under the rule of law: violations against unconstitutional laws are not punished under the constitution. If a violating government cannot commit itself never to reinstall the constitution enforcing an unconstitutional law becomes difficult. Citizens' expectations to go unpunished when not complying may be self-fulfilling. Deriving the equilibrium of a global game we show that this mechanism is effectively deterring a government from defecting from a constitutionally permissible tax rate. |
| Keywords: | tax evasion, global games, self-fulfilling expectations, dynamic policy restraints |
| JEL: | K42 H26 E61 D7 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0213&r=mac |
| By: | Vladislav Damjanovic; Charles Nolan |
| Abstract: | This paper examines the consequences of (S,s) pricing rules in a dynamic economy with heterogeneous costs of price adjustment. We construct the stationary distributions for aggregate output and prices for our model economy. As a result of our assumption of heterogeneous costs we find that: (i) Some sectors change prices more regularly than others; (ii) Price changes are asynchronized (relative prices may be moving in opposite directions in different sectors); (iii) The economy may be more sensitive to demand shocks. There is broad empirical support for the predictions of the model. |
| Keywords: | Price rigidity, (Ss) pricing, macroeconomic dynamics. |
| JEL: | E31 E32 E37 E58 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0505&r=mac |
| By: | Vladislav Damjanovic; Charles Nolan |
| Abstract: | A key argument in Caplin and Leahy (1997) states that the correlation between monetary shocks and output is falling in the variance of the money supply. We demonstrate that this conclusion depends on solving for the correlation in the non-stationary state of the model. In the stationary state, that correlation is initially rising. |
| Keywords: | Ss pricing, money-output correlations, macroeconomic dynamics. |
| JEL: | E31 E32 E37 E58 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0506&r=mac |
| By: | Knut R. Wangen (Statistics Norway) |
| Abstract: | The seminal paper by Pissarides and Weber (1989) is one of several previous studies trying to measure the size of the black economy. Pissarides and Weber compared the relationship between food expenditure and income in two groups of workers, self-employed and employees in employment, assuming that employees reported income correctly. For a given level of reported income, the self-employed had a higher food expenditure than employees. Pissarides and Weber concluded that self-employed's actual income was 1.55 times reported income, and that this part of the black economy was about 5.5 percent of GDP in the UK in 1982. Presumably due to a too informal argumentation, Pissarides and Weber's estimators are not entirely correct and alternative estimators have been overlooked. In all, I suggest three different interval estimators for mean under-reporting. The first is obtained by formally solving optimization problems which Pissarides and Weber tried to solve informally. The other two follows from recognizing, and incorporating, parameter restrictions which were not fully appreciated. |
| Keywords: | Self-Employment; Under-Reporting of Income; Household Consumption; Black Economy; Informal Sector. |
| JEL: | D31 E21 H26 H31 J23 O17 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:414&r=mac |
| By: | Kazuya Kamiya (Faculty of Economics, University of Tokyo); Takashi Shimizu (Faculty of Economics, Kansai University) |
| Abstract: | This paper develops a new technique for proving the existence of monetary equilibria in money search models. In money search models with divisible money, the set of equilibria, if it exists, is at least one-dimensional. We develop a method to prove the existence of such a set in a fairly simple way. That is, we first find an endpoint of the set of equilibria and then we prove the existence of a continuum of the set of equilibria from this endpoint. Solving for these equilibria is complicated otherwise than using our method. Thus, our technique is simple but very powerful. Further, we consider a rather complicated bargaining procedure that allows us to prove the existence of equilibria in money search model with perfectly divisible goods and money. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf347&r=mac |
| By: | David Kiefer |
| Abstract: | In the new Keynesian model of endogenous stabilization governments react quickly to lean against the macroeconomic wind. Governments have ideological objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Voter influence on macroeconomic policy should be noticeable during election years, when the government and voters disagree about goals. We offer an econometric test of this principal-agent characterization of government control of the political-economic equilibrium and voter control over their governments. This methodology yields an inferences about the functional form of stabilization preferences, the stabilization ideology of Left and Right governments, and possibility a measure of voter ideology. |
| Keywords: | Stabilization; philips curve; public policy |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2005_03&r=mac |
| By: | Kenneth P. Jameson |
| Abstract: | The early twentieth century role of U.S. “money doctors” in establishing Latin American exchange rate regimes and monetary institutions is relatively well known. For example, the work of Edwin Kemmerer in the Andes has been extensively documented. Not so well-known is the work of Latin American economists on these same issues. This paper examines a number of cases where the Latin American analysts were active players and participants in analyzing the exchange rate and monetary issues and in formulating domestic policy to address them. The role of Latin American economists in a variety of international monetary conferences and commissions from 1903-1922 is investigated. In addition, the paper describes how Alberto Pani guided the formulation of Mexican economic policy after the Mexican Revolution and his ability to chart an independent course for Mexico. The conclusion is that there is evidence of “intense discussions of economic issues” based on Latin Americans’ economic analysis. The role of foreign advisors was often to break the political impasse and to recommend the policy the inviting government wanted to implement. |
| Keywords: | exchange rate; Latin America; depression |
| JEL: | B1 E42 F3 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2005_06&r=mac |
| By: | Pedro Francisco Páez |
| Abstract: | This paper presents an evaluation of the so-called Washington Consensus economic policies in the case of Ecuador during the eighties and the nineties in a game theoretical framework. In a multi-period game, in which it acts as Stackelberg leader, the government minimizes a quadratic loss function using stochastic dynamic control techniques. A system of simultaneous equations represents the private agents' aggregate best responses that result from the general equilibrium solutions to the different agents' optimization problems. Its dynamic features show a stable system by itself, isolated from the type of policies that the government chooses. However, the introduction of the specific “style” of neo-liberal policies typical of the Washington Consensus, econometrically captured as they were applied in Ecuador, generates an explosive dynamics in every state variable of the system, suggesting that these types of policies are intrinsically unsustainable. |
| Keywords: | economic policy evaluation; poverty; sustainability; neoliberal reforms |
| JEL: | C5 C6 C7 E6 I3 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2005_07&r=mac |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | It is argued that today's Canadian monetary system has certain important characteristics in common with a free banking regime such as might have evolved had matters been left to market forces, and that the Bank of Canada's recent success probably has more than a little to do with this fact. It is also argued, however, that, in Canada at the current juncture, further progress towards "free banking" as this alternative is nowadays known, would likely involve unilateral adoption of the US dollar as the basis for the monetary system. Hence, on the 70th anniversary of the Bank of Canada's founding, the author's wish that it may enjoy many happy returns of its birthday is a particularly sincere one. |
| Keywords: | Bank of Canada; central banking; free banking; price stability rates; unemployment; multiplier |
| JEL: | B22 E24 E59 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20054&r=mac |
| By: | Jakob Madsen (Copenhagen); Costas Milas (Keele University) |
| Abstract: | This paper argues that the linear price-dividend relationship as predicted in the Gordon model breaks down in regimes of high inflation and deflation. Using data for the US and the UK over the period from 1871 to 2002, nonlinear estimates support the prediction of the model. |
| Keywords: | Regime-switching, nonlinearity, price-dividend relationship, inflation and deflation. |
| JEL: | G12 E44 |
| Date: | 2005–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpem:0506002&r=mac |
| By: | Dmitri Vinogradov (Alfred Weber Institute, Heidelberg University, Germany) |
| Abstract: | The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents (workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg |
| Keywords: | Financial intermediation, Bank-based system, Market-based system, Regulation, Lelnder of Last Resort, Deposit Insurance |
| JEL: | D50 G21 G28 E44 E53 O16 |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506004&r=mac |
| By: | Georgios Bitros (Athens University of Economics & Business); Epaminondas Panas (Athens University of Economics & Business) |
| Abstract: | Our aim in this paper is to test the robustness of the relation between total factor productivity growth and inflation to the specification of the model adopted for its identification. In doing so we estimate a generalized Box-Box cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964-1980. The results confirm that the acceleration of inflation from 1964-1972 to 1973-1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable. In addition, they reveal that, even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. The reason being that cost functions such as the translog, the generalized Leontief, and the generalized square root quadratic are not general enough to account for the sensitivity of estimates to model specification. On these grounds then we conclude that, for a precise estimation of the adverse impact of inflation on total factor productivity growth, it is imperative both to sort out the three effects involved and do so by adopting the most general flexible functional form available for the cost function. |
| Keywords: | inflation, total factor productivity, generalized Box-Cox cost function, economic growth |
| JEL: | E31 O47 |
| Date: | 2005–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506001&r=mac |
| By: | manhal shotar (university of qatar); khalid shams (university of qatar) |
| Abstract: | The aim of this study is to identify the extent to which the GCC countries can adopt similar economic policies by the time of the formation of the GCC unified currency in 2010. Among many other convergence standards, the study suggests to examine the economic structure of the GCC countries to identify similarities. Estimating the model using SUR technique, the study finds significant differences between GCC countries economic policies. The results suggest that GCC countries need to grant more policy coordination to lessen the differences in order to facilitate better design of unified economic policies that are conducive to the establishment of a monetary union. |
| Keywords: | monetary policies, GCC area |
| JEL: | E |
| Date: | 2005–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506003&r=mac |
| By: | Elias Aravantinos (Stevens Institute of Technology, Wesley J. Howe School of Technology Management) |
| Abstract: | Dynamic models have been used in most businesses serving different purposes. The increased changes of the Telecommunications environment have created a dynamic industry emerging new dynamic economic models. We investigated the Telecom industry by conducting macroeconomic and infrastructure analysis. However, this paper uses recent data from the Telecommunications industry to reveal the infrastructure trends and predict the US wireless growth. The analysis is focused on several factors such as the infrastructure described by the Teledensity, the employment and the Telecom revenues in comparison with the Gross Domestic Product (GDP). The purpose of this analysis is to understand the industry’s behavior during a specific period of time, 1984-2003, propose an appropriate economic dynamic model, wireless oriented that identifies the current driving forces and detects the impact of some critical events and trends. |
| Keywords: | Dynamic Economic Model, Macroeconomic Analysis, Telecom Act, Teledensity |
| JEL: | E |
| Date: | 2005–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506004&r=mac |
| By: | Katsuya Takii (Osaka School of International Public Policy, Osaka University) |
| Abstract: | A person cannot make many decisions at a time, but an organization needs millions of interrelated decisions. We incorporate this idea into investment theory and examine its influence on a firm's growth rate. Two assumptions are emphasized: an agent cannot optimize more than one input at a time, and there is interaction among inputs. Each investment is lumpy, but adjustment is gradual. Without an adjustment cost function and exogenous shocks, we derive the growth rate of a firm. The derived growth rate is independent of firm size and imperfectly correlated with Tobin's Q. |
| Keywords: | Limited Attention, Complementarity and Substitutability, Investment, Tobin's Q. |
| JEL: | E |
| Date: | 2005–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506005&r=mac |
| By: | Daniel Tarka (University of Greenwich, London); Kanes Rajah (University of Greenwich,London) |
| Abstract: | This article explores two of the five major factors that determine success in high-growth small and medium-sized enterprises (SMEs). Research has shown that the internal characteristics of SMEs such as technology strategy and the demographics of the management team are critical and related to the organisational success. High-growth SMEs have been defined as innovative technology companies that introduce new products or services, opening new channels of distribution, pioneering novel production methods and management approaches. A sectorial classification* of “high technology” industries developed at the Department of Trade and Industry was used as a basis for selecting the sample in the study. This embraces the communications, IT, computing, biotechnology, electronics, and medical / life sciences industries. |
| Keywords: | Small firms, success, high-growth, technology strategy, management team. |
| JEL: | E |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506006&r=mac |
| By: | Leandro Cerutti (Universidad Nacional del Sur); Martin Schrod (Universidad Nacional del Sur) |
| Abstract: | Se analiza la viabilidad del modelo de crecimiento aplicado en nuestro país luego de la devaluación. Comenzaremos repasando las principales teorías de crecimiento con el fin de determinar si existe alguna que respalde dicha estrategia de crecimiento. Luego examinaremos el modelo aplicado en nuestro país en el período 1870-1930 para realizar una comparación con el modelo actual. Entonces teniendo la teoría y la historia como respaldo, intentaremos descubrir si es posible lograr crecimiento basados exclusivamente en la exportación de productos primarios. Para ello haremos un estudio teórico y empírico para el periodo post-devaluación. Por último expondremos en forma detallada las limitaciones que a nuestro juicio presenta dicha estrategia de desarrollo, y a modo de conclusión presentaremos distintos escenarios posibles de la economía internacional que afecten la inserción de Argentina en el mundo. |
| Keywords: | Modelo primario exportador, insercion de argentina en el mundo, restricciones, soluciones |
| JEL: | E |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506007&r=mac |
| By: | Andrew Young (University of Mississippi); Daniel Levy (Bar- Ilan University) |
| Abstract: | We offer the first direct evidence of an implicit contract in a well- known product market—the market for Coca-Cola. The Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. In general, observing implicit contracts directly is impossible because of their implicit nature. In the case of Coca-Cola, however, we are able to document the Company not only saying that it had an important implicit contract with its consumers, but also acting on it. This study makes an additional and unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. We present evidence that the implicit contract included the promise not only of a constant nominal price but also a constant quality. We document the dedication to a 6.5oz serving of the 'Secret Formula.' Indeed, during a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. In addition, we are able to offer one piece of direct evidence on the magnitude of these costs by studying the events surrounding the failed introduction of the New Coke in 1985. |
| Keywords: | Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long-Term Relationship, Price Rigidity, Coca-Cola, Nickel Coke |
| JEL: | E12 E31 L14 L16 L66 M30 A14 |
| Date: | 2005–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506008&r=mac |
| By: | Millan L. B. Mulraine (University of Toronto) |
| Abstract: | This paper re-examines the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to the relative price of investment goods. It does so by developing a stylized two-sector real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can qualitatively and quantitatively replicate the dynamic features of the Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. |
| Keywords: | Endogenous rate of time preference, International real business cycle, Investment-specific shocks, Relative price of investment goods, Small open economy |
| JEL: | E32 E37 F41 |
| Date: | 2005–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0506009&r=mac |
| By: | Andrew Hughes Hallett (Department of Economics, Vanderbilt University); John Lewis (Tallinn Technical University and Bank of Estonia) |
| Abstract: | This paper studies the evolution of European fiscal policies and the attempts at budgetary consolidation through three periods: the pre-Maastricht phase (to 1991); the run up to monetary union (1992-97), and finally the stability pact phase (1998 onwards). Using three separate indicators the probability of undertaking a consolidation, the degree to which it is sustained, and the probability of exceeding a specified deficit limit we search for structural breaks which could signify a change in the average level of fiscal discipline in these periods. We find increased discipline only up to 1997. Thereafter discipline erodes to the extent that, by 2005, there is less discipline than before the Maastricht process started. We conclude the new fiscal discipline was temporary; a product of the sanction of being denied entry to the Euro, and that EMU itself has had no impact on discipline (in the absence of that sanction). Our methodological innovation is to show the importance of the dynamics of fiscal behaviour: step dummies for changes in the average level of discipline, and trend dummies to capture any decline/increase relative to that average. A single structural break test will miss these dynamic effects, and may generate the erroneous conclusion that fiscal discipline had tightened since the start of phase two of EMU. |
| Keywords: | Fiscal consolidation, probit regressions, dynamic structural breaks |
| JEL: | H50 H61 E65 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0516&r=mac |
| By: | Eduardo L. Gimenez (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.); Jose M. Martin-Moreno (Departamento de Fundamentos de Analisis Economico e Historia Economica. Universidad de Vigo.) |
| Abstract: | This paper examines the consequences of introducing a cash-in-advance constraint in a small open economy business cycle model for the Spanish economy. A business cycle model is built extending Correia, Neves and Rebelo (1995) small open economy framework and Cooley and Hansen (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparation with Spanish data shows that the model is able to mimic the real dimension of the business cycle. In particular the high volatility of compsumtion for the Spanish economy is greatly reproduced. Some features of the nominal dimension are also reproduced. As a negative result the high correlation between money and output, and labor market relations are not reproduced. |
| Keywords: | Business Cycle, Cash-in-Advance Constraint, Small Open Economy |
| URL: | http://d.repec.org/n?u=RePEc:edg:anecon:0012&r=mac |
| By: | M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith |
| Abstract: | This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently 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 when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry. |
| Keywords: | Global VAR (GVAR), Counterfactual Analysis, UK and Sweden entry to euro |
| JEL: | C32 C35 E17 F15 F42 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-24&r=mac |
| By: | M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler |
| Abstract: | In theory the potential for credit risk diversifcation for banks could be substantial. Portfolios are large enough that idiosyncratic risk is diversifed away leaving exposure to systematic risk. The potential for portfolio diversifcation 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 diversifcation: across industry sectors and across di¤erent 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 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-25&r=mac |
| By: | John W. Dawson (Appalachian State University); John J. Seater |
| Abstract: | We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it - total factor productivity, physical capital, and labor. The effects are multifaceted and complex. Regulation changes the way output is produced by changing the mix of inputs. It also affects both the trends and deviations about the trends in output and its factors of production, and the effects differ across dependent variables. The effects display interesting intertemporal dynamics. Changes in regulation and marginal tax rates offer an explanation for the productivity slowdown of the 1970s. Regulation also has substantial opportunity costs in the form of foregone output. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:05-02&r=mac |