nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒06‒19
eleven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Europe Without Borders? The Effect of the EMU on Relative Prices By Hisham Foad
  2. The Impact of Government Debt on Private Consumption in OECD Countries By Robert-Paul Berben; Teunis Brosens
  3. Currency Unions, Options, and Foreign Direct Investment By Hisham Foad
  4. Annual Estimates of Swedish GDP in 1720-1800 By Edvinsson, Rodney
  5. Real and Nominal Wage Adjustment in Open Economies By Forslund, Anders; Gottfries, Nils; Westermark, Andreas
  6. Bank Supervision Russian Style: Rules vs Enforcement and Tacit Objectives By S. CLAEYS; G. LANINE; K. SCHOORs
  7. Inferential Expectations By Gordon Menzies; Daniel John Zizzo
  8. The Lagrange multipliers and existence of competitive equilibrium in an intertemporal model with endogenous leisure By Nguyen Manh Hung; San Nguyen Van
  9. Welfare Analysis of Debt Policy during Recessions By Takayuki Ogawa
  10. Monetary Transmissions Immediately after the Crisis in East Asia By Masahiro Enya; Akira Kohsaka
  11. Rational Addiction, Tax Revenues and Tobacco Control By Junmin Wan

  1. By: Hisham Foad
    Abstract: Has the formation of the European Monetary Union reduced the impact of national borders on cross-border market convergence? This paper extends Engel and Rogers (1996) well known work on border effects to cities across Western Europe over the period 1995 . 2002 and finds two key results. First, cross-border relative prices tend to be more volatile than prices between locations not separated by a border. This result is robust to a variety of potential explanations for border effects, such as uneven sampling bias, idiosyncratic price shocks, and incomplete exchange rate-pass through. Turning our attention to cross-border price volatility before and after the formation of the EMU, the effects vary by country size. Within the EMU, cross-border price volatility has not changed between the "small" countries, but has fallen significantly between the large EMU countries. Between the EMU and the UK, cross-border volatility has increased between the UK and the small EMU countries, but there has been no significant change between the UK and the large EMU countries. These results are consistent with the fact that exchange rates are more likely to adjust to price differentials between small countries than between large countries.
    Date: 2005–04
  2. By: Robert-Paul Berben; Teunis Brosens
    Abstract: Using data for 17 OECD countries from 1983 to 2003, this paper establishes a non-linear relationship between private consumption and the level of government debt. In countries with a high level of government debt, a fiscal expansion is partly crowded out by a fall in private consumption. In contrast, in low debt countries, private consumption is insensitive to changes in government debt. This means that fiscal policy will be less effective in stabilising business cycle fluctuations at higher levels of government debt.
    Keywords: consumption; government debt; panel data
    JEL: E21 E62 C23
    Date: 2005–06
  3. By: Hisham Foad
    Abstract: A multinational deciding on where to locate a foreign production facility may not be indifferent to the choice of location. Numerous variables such as production costs, market access, and local tax treatments will influence the decision as to where the plant is located. Another key variable in this decision is uncertainty. Following the work of Dixit, a firm has an option to make a risky investment, and if this investment is at least partially irreversible, the option has some positive value. As the uncertainty in the investment project increases, so too does the value of the option. When comparing two investment projects that are identical in all respects except their underlying profit volatility, the one with the greater degree of uncertainty will require a higher trigger level of profits to be exercised. This paper examines the impact of uncertainty in exchange rates on a multinational.s decision to locate within or outside a currency union. The option values and trigger levels of investment within and outside the union are derived as a function of exchange rate variances and correlations, transport costs, and market size.
    Date: 2005–04
  4. By: Edvinsson, Rodney (Stockholm University)
    Abstract: For the period 1800 onwards, annual figures over GDP and GDP per capita for Sweden have been presented in different studies. For the 18th century no such annual series exist. The aim of this paper is to present annual data on GDP and GDP per capita in volume values for Sweden for the whole period 1720-1800. Only very rough estimates are provided, which are not based on any disaggregation of the different components of GDP. To estimate annual fluctuations, four different indicators are used: changes in the official accounts of harvests, marriage rates, the price of rye and import of un-milled grains. When investigating the long-term trends, the conclusion is that there was only a very modest increase in GDP per capita over the studied period. The growth of the GDP per capita became substantial not until the mid 19th century. However, GDP grew significantly during the studied period, but this growth mainly took the form of population growth. This in itself constituted a kind of technological progress, allowing a larger population per unit of land without a significant decrease in per capita production.
    Keywords: GDP; 18th century; Sweden; economic growth; national accounts; economic history
    JEL: E23 E32 J10 N13 N53 O10 O13 O47 O52 Q13
    Date: 2005–06–14
  5. By: Forslund, Anders (Institute for Labour Makret Policy Evaluation); Gottfries, Nils (Department of Economics); Westermark, Andreas (Department of Economics)
    Abstract: A wage equation for a small open economy is derived and estimated on aggregate data for the Nordic countries. The equation is derived from a model of wage bargaining over nominal wages; hence both long run coefficients and adjustment parameters have clear economic interpretations. Wages depend on the scope (main course) for wage increases; based on our theoretical model we interpret this as evidence of union bargaining power. Unemployment benefits have substantial effects on wages in all four countries. There is substantial nominal wage rigidity; hence changes in exchange rates have large and persistent effects on competitiveness.
    Keywords: wage formation; bargaining; rent sharing; turnover; search; exchange rate policy; wage equation; wage rigidity; competitiveness
    JEL: E52 F33 F41 J31 J51 J63 J64
    Date: 2005–06–12
    Abstract: We focus on the conflict between two central bank objectives, namely individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) in 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately and banks that are active on the interbank market enjoy protection from license withdrawal, showing a tacit concern for systemic stability. The CBR is also reluctant to withdraw licenses from banks that violate the individuals’ deposits to capital ratio, because this conflicts with the tacit CBR objective to secure depositor trust and systemic stability.
    Keywords: Bank supervision, bank crisis, Russia
    JEL: G2 N2 E5
    Date: 2005–05
  7. By: Gordon Menzies (School of Finance and Economics, University of Technology, Sydney); Daniel John Zizzo (University of East Anglia)
    Abstract: We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Rational expectations are shown to be a special (limiting) case of inferential expectations, with the test size a becoming a metric for rationality. When inferential expectations are built into a Dornbusch-style model of the exchange rate, regression tests of Uncovered Interest Parity and the rational expectations version of the term structure both display downward bias in the slope coefficient. We present the results of an experiment that supports inferential expectations.
    Keywords: expectations; macroeconomics; rationality; uncovered interest parity; term structure; exchange rate
    JEL: C91 D84 E50 F31
    Date: 2005–05–01
  8. By: Nguyen Manh Hung (CERMSEM); San Nguyen Van (CERMSEM)
    Abstract: This paper proves the existence of competitive equilibrium in a single sector dynamic economy with elastic labor supply. The method of proof relies on some recent results (see Le Van and Saglam [2004]) concerning the existence of Lagrange multipliers in infinite dimensional spaces and their representation as a summable sequence.
    Keywords: Optimal growth model, Lagrange multipliers, competitive equilibrium, elastic labor supply
    JEL: C61 C62 D51 E13 O41
    Date: 2005–01
  9. By: Takayuki Ogawa (Institute of Social and Economic Research, Osaka University)
    Abstract: This paper develops an overlapping-generations model with nominal wage rigidities and examines the welfare effects of debt policy during recessions. Issues of public debt stimulate aggregate consumption demand and create employment. Future generations then face both increased wage incomes and higher taxes. If the amount of outstanding bonds is already large, debt policy deteriorates the welfare of future generations by levying heavy taxes. By contrast, if the outstanding bond issue is relatively small, debt policy can be Pareto improving by creating more employment. Therefore, the welfare implications of debt policy during recessions can be discriminated from those during booms.
    Keywords: debt policy, overlapping generations, welfare effects.
    JEL: E12 E24 H63
    Date: 2004–07
  10. By: Masahiro Enya (Faculty of Politics, Economics and Law Osaka International University); Akira Kohsaka (Osaka School of International Public Policy, Osaka University)
    Abstract: We examine dynamic patterns of macroeconomic variables in East Asia immediately after the Asian financial crisis. Particularly, focusing on East Asia, we can identify their distinctive features from those of aggregate cross-country results. Also, we check with the financial crises in East Asia in the 1980s in order to make sure to what extent the contrast between the aggregate cross-country results and that of the Asian financial crisis comes from differences in time (external environment) or in country structure or both. Some distinctive features in East Asia include higher real interest rates in the crisis year, persistent output as well as investment slowdown, and different behaviors of trade and fiscal surpluses after the crisis. The results suggest that initial monetary tightening be responsible for the unexpectedly serious recession and that favorable external conditions and fiscal stimulus did contribute to the post-crisis real recovery even without credit recoveries.
    Keywords: macroeconomic dynamics, East Asia, financial crisis
    JEL: E5 O11 O53
    Date: 2004–03
  11. By: Junmin Wan (Institute of Social and Economic Research, Osaka University)
    Abstract: The hypotheses of non-addiction, myopia and rational addiction are tested using annual, quarterly and monthly data. Changes in the prices of Japanese cigarettes can be viewed as natural experiments from the point of view of consumer behavior, because the Japanese government controls cigarette prices. The empirical results of this paper support the addiction hypothesis. The short-run and long-run price elasticities range from - 0.338to -0.421, and from -0.679 to -0.686, respectively; thus, increases in tax revenues in the long-run are likely to be smaller than those in the short-run. As a result, tax increases would be an effective means of curbing smoking and reducing its social cost. Furthermore, the debt compensation programs for the Japan Railway and the National Forestry will not go according to plan, unless revenues are increased in the future.
    Keywords: smoking, rational addiction, tax revenues
    JEL: D12 E21 H29
    Date: 2002–08

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