|
on Macroeconomics |
|
Issue of 2005‒07‒18
forty-four papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | René Lalonde |
| Abstract: | The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both outcome- and action-based credibility. Third, he estimates a non-linear relation between policy credibility and divergences of inflation from target, which is also assumed to change over history. Finally, the author's non-linear time-varying credibility indexes do not rely on a two-regime definition, but on a continuum of credibility regimes. The author finds strong, stable, and statistically significant outcome- and action-credibility effects that generate important inflation inertia. According to his results, the value of the endogenous credibility indexes has risen steadily across the different monetary policy regimes. |
| Keywords: | Transmission of monetary policy; Econometric and statistical methods; Inflation and prices |
| JEL: | E52 C32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-16&r=mac |
| By: | Francis X. Diebold (University of Pennsylvania, and NBER); Canlin Li (University of California) |
| Abstract: | Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects time-series dynamics, nor the equilibrium approach, which focuses on time-series dynamics (primarily those of the instantaneous rate) but pays comparatively little attention to fitting the entire cross section at any given time and has been shown to forecast poorly. Instead, we use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three-dimensional parameter evolving dynamically. We show that the three time-varying parameters may be interpreted as factors corresponding to level, slope and curvature, and that they may be estimated with high efficiency. We propose and estimate autoregressive models for the factors, and we show that our models are consistent with a variety of stylized facts regarding the yield curve. We use our models to produce term-structure forecasts at both short and long horizons, with encouraging results. In particular, our forecasts appear much more accurate at long horizons than various standard benchmark forecasts. |
| Keywords: | Term structure, yield curve, factor model, Nelson-Siegel curve |
| JEL: | G1 E4 C5 |
| Date: | 2004–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200409&r=mac |
| By: | Klaus Adam (CEPR, London, European Central Bank); Roberto M. Billi (Center for Financial Studies) |
| Abstract: | We determine optimal monetary policy under commitment in a forwardlooking New Keynesian model when nominal interest rates are bounded below by zero. The lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear. A calibration to the U.S. economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound. Rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached. While the empirical magnitude of U.S. mark-up shocks seems too small to entail zero nominal interest rates, shocks affecting the natural real interest rate plausibly lead to a binding lower bound. Under optimal policy, however, this occurs quite infrequently and does not require targeting a positive average rate of inflation. Interestingly, the presence of binding real rate shocks alters the policy response to (non-binding) mark-up shocks. |
| Keywords: | nonlinear optimal policy, zero interest rate bound, commitment, liquidity trap, New Keynesian |
| JEL: | C63 E31 E52 |
| Date: | 2004–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200413&r=mac |
| By: | Günter Coenen (Directorate General Research, European Central Bank); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität) |
| Abstract: | In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable. |
| Keywords: | monetary policy rules, zero-interest-rate bound, liquidity trap, rational expectations, nominal rigidities, exchange rates |
| JEL: | E31 E52 E58 E61 |
| Date: | 2004–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200414&r=mac |
| By: | Klaus Adam (CEPR, London, University of Frankfurt); George W. Evans (University of Oregon, United States); Seppo Honkapohja (Cambridge University, United Kingdom) |
| Abstract: | Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. The hyperinflationary paths are stable under learning if agents can utilize contemporaneous data. However, in an economy populated by a mixture of agents, some of whom only have access to lagged data, stable inflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high. |
| Keywords: | Indeterminacy, inflation, stability of equilibria, seigniorage |
| JEL: | C62 D83 D84 E31 |
| Date: | 2004–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200415&r=mac |
| By: | Andreas Jobst (Federal Deposit Insurance Corporation (FDIC), Center for Financial Research (CFR), 550 17th Street NW, Washington, DC 20429, USA; London School of Economics and Political Science (LSE), Dept. of Finance and Accounting and Financial Markets Group (FMG); J.W. Goethe-Universität Frankfurt am Main, Dept. of Finance) |
| Abstract: | The paper provides a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basle Committee for the regulatory treatment of asset securitisation. We carefully highlight the pathology of the new “securitisation framework” to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securitised credit exposures. Although we incorporate a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitisation transactions, we do not engage in a profound analysis of the benefits and drawbacks implicated in the new securitisation framework. |
| Keywords: | Banking Regulation, Asset Securitisation, Basle Committee, Basle 2 |
| JEL: | E58 G21 G24 K23 L51 |
| Date: | 2004–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200421&r=mac |
| By: | Robert G. King (Boston University); Alexander L. Wolman (Federal Reserve Bank of Richmond) |
| Abstract: | In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy responds. |
| Keywords: | Monetary Policy, Discretion, Time-Consistency, Multiple Equilibria, Complementarity |
| JEL: | E5 E61 D78 |
| Date: | 2004–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200422&r=mac |
| By: | Jordi Galí (CREI and Universitat Pompeu Fabra); J.David López-Salidoz (Banco de España); Javier Vallés (Banco de España) |
| Abstract: | Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non-Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. |
| Keywords: | Rule-of-Thumb Consumers, Fiscal Multiplier, Government Spending, Taylor Rules |
| JEL: | E32 E62 |
| Date: | 2004–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200423&r=mac |
| By: | Athanasios Orphanides (Federal Reserve Board, Washington, D.C. 20551); John C. Williams (Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco, CA 94105) |
| Abstract: | We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' 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 heretofore quiescent in inflation expectations and destabilized the economy. Had monetary policy reacted less aggressively to perceived unemployment gaps, in inflation expectations would have remained anchored and the stag inflation of the 1970s would have been avoided. Indeed, we find that less activist policies would have been more effective at stabilizing both in inflation and unemployment. We argue that policymakers, learning from the experience of the 1970s, eschewed activist policies in favor of policies that concentrated on the achievement of price stability, contributing to the subsequent improvements in macroeconomic performance of the U.S. economy. |
| Keywords: | Monetary Policy, Stagnation, Rational Expectations, Learning |
| JEL: | E52 |
| Date: | 2004–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200424&r=mac |
| By: | David E. Lindsey (before his retirement in 2003: Division of Monetary Affairs at the Board of Governors of the Federal Reserve System); Athanasios Orphanides (Division of Monetary Affairs at the Board of Governors of the Federal Reserve System, Centre for Economic Policy Research, Center for Financial Studies); Robert H. Rasche (Federal Reserve Bank of St. Louis) |
| 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, Paul Volcker, monetary reform, operating procedures |
| JEL: | E52 E58 E61 E65 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200501&r=mac |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104); Monika Piazzesi (Graduate School of Business, University of Chicago, Chicago IL 60637); Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco CA 94105) |
| Abstract: | From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models. |
| Keywords: | Term structure, yield curve, Nelson-Siegel model, affine equilibrium model |
| JEL: | G1 E4 E5 |
| Date: | 2005–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200503&r=mac |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER); Jin (Ginger) Wu (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104) |
| Abstract: | We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals. |
| Keywords: | Realized volatility, realized beta, conditional CAPM, business cycle |
| JEL: | G12 |
| Date: | 2005–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200504&r=mac |
| By: | Dirk Krueger (Goethe University Frankfurt, Mertonstr. 17, PF 81, 60054 Frankfurt); Harald Uhlig (Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin) |
| Abstract: | This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved. |
| Keywords: | Long-term Contracts, Risk Sharing, Limited Commitment, Competition |
| JEL: | G22 E21 D11 D91 |
| Date: | 2005–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200507&r=mac |
| By: | Juan Carlos Conesa (Universitat Pompeu Fabra, CREA and CREB-UB); Dirk Krueger (Department of Business and Economics, Johann Wolfgang Goethe-University Frankfurt am Main, Mertonstr. 17, PF 81, 60054 Frankfurt am Main, Germany; and CFS, CEPR and NBER) |
| Abstract: | This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor 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 labor 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: | Progressive Taxation, Optimal Taxation, Flat Taxes, Social Insurance, Transition |
| JEL: | E62 H21 H24 |
| Date: | 2005–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200510&r=mac |
| By: | Dirk Krueger (University of Frankfurt); Felix Kubler (University of Mannheim) |
| 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 labor 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 effcient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. |
| Keywords: | Social Security Reform, Aggregate Fluctuations, Intergenerational Risk Sharing, Incomplete Markets. |
| JEL: | E62 H55 H31 D91 D58 |
| Date: | 2005–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200512&r=mac |
| By: | Niloy Bose; Rebecca Neumann |
| Abstract: | In an overlapping generations economy, lenders fund risky investment projects of firms by drawing up loan contracts in the presence of an informational asymmetry. An optimal contract entails the issue of only debt, only equity, or a mix of the two. The equilibrium choice of contract depends on the state of the economy, which in turn depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development. The paper is able to explain both the endogenous emergence of the stock market along the path of economic development and the diversity in the mode of financing that is commonly observed in the intermediate stage of development. |
| JEL: | E13 E44 E50 O16 |
| Date: | 2005–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:47&r=mac |
| By: | Evi Pappa |
| Abstract: | We study the mechanics of transmission of fiscal shocks to labor markets. We characterize a set of robust implications following government consumption, investment and employment shocks in a RBC and a New-Keynesian model and use part of them to identify shocks in the data. In line with the New-Keynesian story, shocks to government consumption and investment increase real wages and employment contemporaneously both in US aggregate and in US state data. The dynamics in response to employment shocks are mixed, but in many cases are inconsistent with the predictions of the RBC model. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:293&r=mac |
| By: | Zheng Liu; Evi Pappa |
| Abstract: | Do countries gain by coordinating their monetary policies if they have different economic structures? We address this issue in the context of a new open-economy macro model with a traded and a non-traded sector and more importantly, with a across-country asymmetry in the size of the traded sector. We study optimal monetary policy under independent and cooperating central banks, based on analytical expressions for welfare objectives derived from quadratic approximations to individual preferences. In the presence of asymmetric structures, a new source of gains from coordination emerges due to a terms-of-trade externality. This externality affects unfavorably the country that is more exposed to trade and its effects tend to be overlooked when national central banks act independently. The welfare gains from coordination are sizable and increase with the degree of asymmetry across countries and the degree of openness, and decrease with the within-country correlation of sectoral shocks. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:296&r=mac |
| By: | David G. Blanchflower (Dartmouth College, NBER and IZA Bonn); Andrew J. Oswald (University of Warwick and IZA Bonn) |
| Abstract: | This paper provides evidence for the existence of a wage curve - a micro-econometric association between the level of pay and the local unemployment rate - in modern U.S. data. Consistent with recent evidence from more than 40 other countries, the wage curve in the United States has a long-run elasticity of approximately -0.1. In line with the paper’s theoretical framework: (i) wages are higher in states with more generous unemployment benefits, (ii) the perceived probability of job-finding is lower in states with higher unemployment, and (iii) employees are less happy in states that have higher unemployment. We conclude that it is reasonable to view the wage curve as an empirical law of economics. |
| Keywords: | wages, unemployment, wage curves |
| JEL: | J3 E2 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1665&r=mac |
| By: | Bertrand M. Koebel (BETA-Thème, Louis Pasteur University, Strasbourg and IZA Bonn) |
| Abstract: | In order to simplify the representation of a technological relationship between inputs and outputs, a production unit’s technology must typically satisfy some restrictive conditions, some of them being well known in the literature. This paper presents new results for aggregating labour inputs and outputs, in terms of restrictions on elasticities of scale and substitution. These conditions are then empirically investigated, in a framework that is flexible and does not lose its flexibility after separability being imposed. The empirical findings of the exact approach to aggregation are found to be rather pessimistic on the possibility to provide a simplified representation. |
| Keywords: | aggregation, separability, flexibility, exports, labour demand, Box-Cox, system serial correlation |
| JEL: | C33 D24 E10 J23 L60 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1672&r=mac |
| By: | Thierry Warin |
| Abstract: | The purpose of this note is to propose a breakdown of the European concept into different sub-categories, based upon the different stages of the European integration process. In doing so, it is easier to understand the political differences and debate between an allegedly Anglo-Saxon approach and a Continental one. This note challenges the usual definition of the Anglo-Saxon and Continental approaches, and highlights the usual misconceptions and misunderstandings of the European economic goal. |
| Keywords: | Europe, EMU, EU, Schengen Convention, Anglo-Saxon approach, Continental approach |
| JEL: | E5 H0 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0509&r=mac |
| By: | Alberto Petrucci |
| Abstract: | This paper analyzes the effects of a land rent tax on capital formation and foreign investment in a life-cycle small open economy with endogenous labor-leisure choices. The consequences of land taxation critically depend on how the tax proceeds are used by the government. A land tax depresses capital formation, crowds out foreign investment and increases national wealth and consumption when the land tax revenues are distributed as lump-sum payments. If the proceeds from land taxation are used to finance unproductive government expenditure, the land tax will be neutral in its effects on the capital stock, nonhuman wealth and labor. When the tax revenues are used to reduce labor taxes, the land rent tax spurs nonhuman wealth accumulation and ambiguously affects the capital stock and labor. |
| Keywords: | Land Taxation, Labor Supply, Capital Accumulation, Overlapping generations. |
| JEL: | E21 E62 H22 |
| Date: | 2005–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:mol:ecsdps:esdp05025&r=mac |
| By: | Filippo Altissimo; Pierpaolo Benigno; Diego Rodriguez Palenzuela |
| Abstract: | This paper analyzes the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU's harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analyzed. Our model departs in several respect from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level. |
| JEL: | E31 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11473&r=mac |
| By: | Lars Peter Hansen; John Heaton; Nan Li |
| Abstract: | We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth. This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values. We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity. Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth. |
| JEL: | G1 E2 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11476&r=mac |
| By: | Laura X.L. Liu; Jerold B. Warner; Lu Zhang |
| Abstract: | Previous work shows that the growth rate of industrial production is a common macroeconomic risk factor in the cross-section of expected returns. We demonstrate the connection between momentum profits and shifts in factor loadings on this macroeconomic variable. Winners have temporarily higher loadings on the growth rate of industrial production than losers. The loading dispersion derives mostly from the high, positive loadings of winners. Depending on model specification, this loading dispersion can explain up to 40% of momentum profits. |
| JEL: | G12 E44 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11480&r=mac |
| By: | Mark Aguiar; Manuel Amador; Gita Gopinath |
| Abstract: | We provide a rationale for the observed pro-cyclicality of tax policies in emerging markets and present a novel mechanism through which tax policy amplifies the business cycle. Our explanation relies on two features of emerging markets: limited access to financial markets and limited commitment to tax policy. We present a small open economy model with capital where a government maximizes the utility of a working population that has no access to financial markets and is subject to endowment shocks. The government's insurance motive generates pro-cyclical taxes on capital income. If the government could commit, this policy is not distortionary. However, we show that if the government lacks the ability to commit, the best fiscal policy available exacerbates the economic cycle by distorting investment during recessions. We characterize the mechanism through which limited commitment generates cycles in investment in an environment where under commitment investment would be constant. We extend our results to standard productivity shocks and to the case where the government has access to intra-period insurance markets. Lastly, we conjecture that our results would hold as well if the government could issue debt subject to borrowing constraints. |
| JEL: | F3 F4 E3 E6 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11490&r=mac |
| By: | M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler |
| Abstract: | The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity. |
| JEL: | C32 E17 G20 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11493&r=mac |
| By: | Daniel Suryadarma (SMERU Reasearch Centre); Rima Prama Artha (SMERU Reasearch Centre); Asep Suryahadi (SMERU Reasearch Centre); Sudarno Sumarto (SMERU Reasearch Centre) |
| Abstract: | This study provides an overview of inequality in Indonesia for the period of 1984 to 2002 using several widely used measurements of inequality. Firstly, unlike previous studies, our paper uses real consumption expenditure that takes into account the high regional price disparity across regions in Indonesia. Secondly, we found that, although during the crisis all measures indicate a decrease in inequality, it actually increased for those below the poverty line. Finally, this study also provides an estimation of ‘distribution corrected’ growth elasticity of poverty for Indonesia. This proves to be an important explanation for the fact that the poverty rate decreased very rapidly between 1999 and 2002: because inequality during the peak of the economic crisis in 1999 was at its lowest level in 15 years. |
| Keywords: | inequality, Indonesia, real consumption expenditure, disparity, poverty, economic crisis, Indonesia |
| JEL: | P46 E31 E21 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:525&r=mac |
| By: | Yonghyup Oh (Korea Institute for Internation Economic Policy) |
| Abstract: | This paper tests the validity of gravity variables to explain the degree of international consumption risk sharing. Our data show that consumption and output cycles for selected economies in the EU, NAFTA, East Asia and English-speaking countries have synchronized during the four decades since 1950s, but the lack of consumption risk sharing is evident. For the panel of 27 countries our results first show that the gravity variables such as distance, economic size, richness, sharing the same border and sharing the same language are valid in explaining consumption correlations, but among these variables sharing the same border is not significant in explaining correlation. Only richness, sharing the same border and sharing the same language turn out to be significant in explaining consumption risk sharing. When used for each of the four economic blocks in our sample, gravity variables have even less explanatory power with one notable exception that richness matters for the English speaking countries. Richer English speaking countries seem to share consumption risk better than any other group in our sample. |
| Keywords: | Capital market imperfection, consumption risk sharing, gravity model, real business cycle |
| JEL: | E32 F36 G15 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:351&r=mac |
| By: | Chang-Soo Lee (Korea Institute for International Economic Policy) |
| Abstract: | This study examines the impact of strengthening employment protection legislation, the structure of collective bargaining (centralization and coordination) and the labor market variables (national levels of unionization, strike levels and tax wedges on labor income) on a country's FDI inflows. Examining 29 OECD nations, our statistical analysis shows that strict EPL, which increases labor market rigidity, is usually associated with lower levels of FDI shares. Japanese investors are more sensitive to employment protection measures in choosing destinations for FDI than others. A 1-percentage-point increase in EPL causes a decrease of about 4.2 percent to Japan’s FDI share, compared to the decrease of 2.2 percent that results in the worldwide share. Finally, we discuss the implications of the recent employment protection policies in Korea that focus only on the interests of inside labor, reducing FDI inflows as well as neglecting the interests of outside labor (unemployed and future labor). Thus, policies for spending on outside labor and promoting entrepreneurship are necessary for national welfare to increase. |
| Keywords: | Labor Market , FDI Inflows, entrepreneurship |
| JEL: | E24 J23 J31 J51 |
| Date: | 2003–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:laborw:343&r=mac |
| By: | Hadi Soesastro (Centre for Strategic and International Studies) |
| Abstract: | Progress and realisation of the ASEAN Economic Community (AEC) can only be achieved if there is a clear blueprint, which identifies the end goal, the process to reach the end goal and a framework for proper assessment of the costs and benefits of an ASEAN Economic Community. AEC should not be based on the AFTA in which an agreement was reached first and the details negotiated afterwards earning it the nickname of "Agree First Talk After". A "new ASEAN way" will have to be developed and accepted as the rule of the game before the AEC has any serious chance of fulfilling the role of making ASEAN more competitive and attractive for world business. |
| Keywords: | ASEAN Economic Community (AEC), regional integration, economic cooperation |
| JEL: | E61 F33 F41 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:526&r=mac |
| By: | Ari A. Perdana (Centre for Strategic and International Studies) |
| Abstract: | This paper reviews some literatures on the mechanisms available for the poor in managing risk. Lacking access to formal mechanisms of risk management, the poor rely on informal mechanisms, which are built based on the existing social networks and trust. But when the shocks are big or affecting the entire community, these informal mechanisms may not be adequate. Some policy interventions are then required to help improving the ability of poor people in managing risk. Policy intervention should aim to provide access for the poor on saving, credit and insurance. Microfinance schemes have been applauded as a successful ‘best practice’ in providing access to saving and credit. However, microfinance institutions still have some room for improvement by expanding their role in providing insurance schemes. |
| Keywords: | poverty, vulnerability, risk management, microfinance |
| JEL: | E21 E51 E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:527&r=mac |
| By: | Guillaume Vandenbroucke (University of Rochester) |
| Abstract: | During the 20th century the average number of hours worked per worker in the United States declined, and the distribution of hours across wage deciles narrowed. Coincidentally, the wage distribution narrowed and then widened again. The explanation proposed here is that (i) Home production of leisure services creates an incentive to work less on the market as wages increase and the price of leisure goods decrease (ii) The development of education in the early 20th century explains the narrowing of the wage structure and, henceforth, of the distribution of hours. |
| Keywords: | Hours worked, leisure, home production, technological progress |
| JEL: | E24 J22 O11 O33 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:roc:ecavga:11&r=mac |
| By: | Karen Kopecky (University of Rochester) |
| Abstract: | A model with leisure production and endogenous retirement is used to explain the declining labor force participation rates of elderly males. The model is calibrated using the health and retirement study. The model is able to predict both the increase in retirement since 1850 and the observed drop in market consumption at the moment of retirement. The increase in retirement is driven by rising real wages and a falling price of leisure goods over time. |
| Keywords: | retirement, leisure, home production, consumption-drop,technological progress |
| JEL: | E13 J26 O11 O33 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:roc:ecavga:12&r=mac |
| By: | Taiji Harashima (University of Tsukuba & Cabinet Office of Japan) |
| Abstract: | Empirically R&D expenditure moves pro-cyclically, but the pro- cyclicality is a puzzle from the Schumpeterian point of view. The paper examines the cyclical property of R&D expenditure in the context of endogenous growth, and concludes that (i) substitutability between investing in physical capital and investing in technology/knowledge is a key of the cyclical property of R&D, (ii) basically technology shocks accompany counter-cyclical R&D and demand shocks accompany pro-cyclical R&D, and (iii) the easiest way to solve the pro-cyclical R&D puzzle is to abandon the conjecture that business cycles are generated mainly by technology shocks. |
| Keywords: | R&D; Technology shock; Business cycle; Schumpeterian; Endogenous growth |
| JEL: | E32 O30 |
| Date: | 2005–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507012&r=mac |
| By: | Gabor Vadas (Magyar Nemzeti Bank) |
| Abstract: | A house is generally considered as a 'roof over one's head', however, housing can be regarded as an investment or asset. Our paper focuses on this function of dwellings and develops a stochastic portfolio choice model for the housing market, which is easy to incorporate into medium and large-scale macro models. Theoretical results suggest that house prices move in line with households' income, although house prices have a higher variance than income does. On the other hand the positive correlation between the return on housing investment and consumption not only implies positive relationship between the portfolio share of housing investment and excess return but also renders the housing wealth inappropriate in consumption smoothing. We use UK data to test these theoretical implications of the model. In this case, empirical results strengthen the model framework. |
| Keywords: | households’ behaviour, housing investment, saving, portfolio decision, house price |
| JEL: | E |
| Date: | 2005–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507013&r=mac |
| By: | Maheshjani (G.H.Jani Charitable Trust,kampteelane,Rajnandgaon- 491441 C.G India) |
| Abstract: | World bank has comments that India has done pretigeous work,but it is only about a few people,what about 71% people of India? This is a very big problem,which has to be solved.Only by arms ,India canot become superpower of the world in 21st century.Corruption is the biggest problem in India,which can be solved only by World peace model,which is submitted by me to Econ.National income is increasing in India,but purchasing capacity of currency is decreasing.Debts are increasing.Population is increasing,but education system isnot developed,even claen water isnot available in most of the rural area.PM of India says to develop Agriculture production,but subsidy on agriculture is decreasing.Even Bio-Diesel project is encouraged in CG state of India only.Which can develop rural economy.The basic problem is insufficient funds for planning,which can be solved by World peace model.Class war and religious differences of opinion can be solved by Spiritual-science research magazine,the first part of it is reported by Econ,i have sent the second part also,which isnot reported by Econ and www.google.com also.G-8 nations are thinking to reduce bad debts of African nations.These Nations can solve it by Credit-Debeit card corporation,which i have sent the paper to Econ.The solution of bad debts of a state of a Nation.India maximum states are facing heavy debts problems also.Political parties choose thier candidates on ther basis of caste and religion in India.New political system has been mentioned in web search-maheshjani in www.google.com,www.yahoo.com,www.msn.com,www.altavista.com,www.rediff.co m |
| Keywords: | India with new Planning suggestions. |
| JEL: | E |
| Date: | 2005–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507014&r=mac |
| By: | Juan Carlos Cordoba (Rice University); Genevieve Verdier (Texas A&M University) |
| Abstract: | This note extends Lucas' (1987) analysis to assess welfare gains of economic growth and welfare costs of consumption inequality, both within and across countries. We find that the welfare costs of inequality are significantly larger than the gains of economic growth. While the gains of economic growth are equivalent to a permanent increase of 26% in per- capita consumption, the costs of within-country and cross-country inequality are equivalent to a permanent reduction in per-capita consumption of 45% and 90% respectively. A benevolent planner would accept a negative growth rate of 1\% (instead of the baseline positive rate of 2.1%) in exchange for the elimination of all within-country inequality. The gains of economic growth are equivalent to those of reducing within-country inequality by approximately 1/3. |
| Keywords: | Welfare cost, business cycles, economic growth, inequality |
| JEL: | E1 E2 D3 |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507016&r=mac |
| By: | Joreg Bibow (The Levy Economics Institute) |
| Abstract: | Challenging the conventional wisdom that structural problems are to blame for the euro area’s protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter—and a rather soft one, too—it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECB’s failure to internalize the euro area’s fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future. |
| Keywords: | Monetary policy, European Central Bank, inflation targeting, inflation persistence, tax-push inflation, antigrowth bias. |
| JEL: | E31 E42 E58 E61 |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0507017&r=mac |
| By: | Xabier Raurich (Universitat Girona and Creb, Universitat de Barcelona); Hector Sala (Universitat Autònoma de Barcelona and IZA); Valeri Sorolla (Universitat Autònoma de Barcelona) |
| Abstract: | We develop a growth model with unemployment due to imperfections in the labor market. In this model, wage inertia and balanced budget rules cause a complementarity between capital and employment capable of explaining the existence of multiple equilibrium paths. Hysteresis is viewed as the result of a selection between these different paths. We use this model to argue that, in contrast to the US, those fiscal policies followed by most of the European countries after the shocks of the 1970’s may have played a central role in generating hysteresis. |
| Keywords: | unemployment,hysteresis,multiple equilibria,economic growth,fiscal policy |
| JEL: | E24 E62 O41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:iei:wpaper:0502&r=mac |
| By: | Nathalie Etchart-Vincent (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées) |
| Abstract: | La mise en place d'une procédure monétaire incitative dans le cadre d'une expérience de laboratoire en économie suppose l'existence d'une relation positive étroite entre incitation et effort d'une part et entre effort et performance d'autre part. Pourtant, sur le plan empirique, l'impact des incitations monétaires sur l'effort et/ou la performance apparaît plus mitigé, voire négatif. Nous revenons ici sur un certain nombre d'arguments théoriques et empiriques avancés dans la littérature pour expliquer cet écart. Sont ainsi mis en cause le montant insuffisant des incitations, l'inadéquation des procédures incitatives utilisées, la fragilité du lien entre incitation et effort et/ou entre effort et performance, le rôle ambigu de la motivation intrinsèque. Nous nous intéressons ensuite au cas particulier de l'expérimentation dans des contextes de pertes, qui pose de manière plus fondamentale la question de l'opportunité des incitations monétaires. Nous concluons sur la nécessité d'une utilisation pragmatique de ces dernières selon la nature de l'étude envisagée. |
| Keywords: | économie expérimentale;incitations monétaires;motivation intrinsèque;contextes de pertes |
| Date: | 2005–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00004121_v1&r=mac |
| By: | Gianfranco Atzeni (University of Sassari); Claudio Piga (Dept of Economics univ. of Loughborough) |
| Abstract: | We study whether R&D-intensive firms are liquidity-constrained, by also modeling their antecedent decision to apply for credit. This sample selection issue is relevant when studying a borrower-lender relationship, as the same factors can influence the decisions of both parties. We find firms with no or low R&D intensity to be less likely to request extra funds. When they do, we observe a higher probability of being denied credit. Such a relationship is not supported by evidence from the R&D-intensive firms. Thus, our findings lend support to the notion of credit constraints being severe only for a sub-sample of innovative firms. Furthermore, the results suggest that the way in which the R&D activity is organized may differentially affect a firms’ probability of being credit-constrained. |
| Keywords: | Bivariate Probit; Innovation; selectivity; in-house R&D. |
| JEL: | D45 G21 G32 E51 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2005_6&r=mac |
| By: | Lenno Uusküla (Bank of Estonia); Peeter Luikmel (Bank of Estonia); Jana Kask |
| Abstract: | High credit growth in Central and Eastern European countries (CEEC) over recent years has sparked interest among many market analysts. Although banking supervision has improved, the continuation of such growth may cause concern about the threat of financial crisis. This paper is written with the aim of analysing the importance of debt factors as a potential cause of financial crises. First, a comparison is conducted of various debt indicators from episodes of crisis in banking across European countries since the 1970s. Second, a probit analysis is used to measure the probability of a crisis. Based on this analysis, it can be claimed that any direct link between debt indicators and financial crises is weak. However, there is some evidence that once the crisis occurs, greater indebtedness lengthens the crisis and raises costs in terms of GDP. |
| Keywords: | financial crisis, indebtedness indicators |
| JEL: | C23 E44 F34 G20 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2005-03&r=mac |
| By: | Janek Uiboupin |
| Abstract: | This paper analyses the short-term impact of foreign bank entry on bank performance in ten Central and Eastern European countries. A panel of 319 banks was analysed over the period 1995–2001. The Arellano-Bond dynamic panel estimation technique was used. The results indicate that foreign bank entry is associated with lower beforetax profits, non-interest income, interest income on interest earning assets and loan loss provisions. Foreign bank entry tends to increase the overhead costs of local banks in the short-run. The results generally indicate that foreign bank entry enhances competition on the market. The role the development of the banking sector plays in regard to the effects of foreign bank entry was analysed. Research results show that in more developed banking markets, foreign bank entry is associated less with decreasing incomes and loan loss provisions than in less developed banking markets. In more developed markets, the overhead costs of banks are less likely to increase. The results show that banks with a higher market share react less to foreign banks entering the market. |
| Keywords: | foreign bank entry, financial development, domestic banking |
| JEL: | E44 G21 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2005-04&r=mac |