nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒09‒17
twenty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  2. The Effect of Capital Requirement Regulation on the Transmission of Monetary Policy: Evidence from Austria. By Philipp Engler; Terhi Jokipii; Christian Merkl; Pablo Rovira Kaltwasser; Lúcio Vinhas de Souza
  3. Inflation dynamics and the New Keynesian Phillips Curve: an identification robust econometric analysis By DUFOUR, Jean-Marie Dufour; KHALAF, Lynda; KICHIAN, Maral
  4. Heterogeneity in Price Setting and the Real Effects of Monetary Shocks By Carlos Carvalho
  5. The Transmission of Monetary Policy in a Multi-Sector Economy By BOUAKEZ, Hafed, CARDIA Emanuela, RUGE-MURCIA Francisco
  6. Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries By Fabio Rumler
  7. Monetary Equilbrium By Siven, Claes-Henric
  8. Searching for Non-Monotonic Effects of Fiscal Policy: New Evidence By Francesco Giavazzi; Tullio Jappelli; Marco Pagano; Marina Benedetti
  9. The effect of oil price on industrial production and on stock returns By Ramón Cobo-Reyes; Gabriel Pérez Quirós
  10. CONSUMER PRICE SETTING IN ITALY By Silvia Fabiani; Angela Gattulli; Roberto Sabbatini; Giovanni Veronese
  11. The Price-Setting Behavior of Austrian Firms: Some Survey Evidence By Claudia Kwapil; Josef Baumgartner; Johann Scharler
  12. Firm Productivity Dispersion and the Matching Role of UI Policy By Tomer Blumkin; Yossi Hadar; Eran Yashiv
  13. Bargaining Frictions and Hours Worked By Stéphane Auray; Samuel Danthine
  14. Imperfectly Credible Disinflation under Endogenous Time-Dependent Pricing By Marco Antonio Cesar Bonomo; Carlos Carvalho
  15. Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data By Rasmus Fatum; Michael R. King
  16. How Frequently Do Consumer Prices Change in Austria? Evidence from Micro CPI Data By Josef Baumgartner; Ernst Glatzer; Fabio Rumler; Alfred Stiglbauer
  17. Asset Pricing with Incomplete Information under Stable Shocks By Prasad V. Bidarkota; Brice V. Dupoyet; J. Huston McCulloch
  18. The Impact of Institutions on the Employment Performance in European Labour Markets By Herbert Buscher; Christian Dreger; Raul Ramos; Jordi Surinach
  19. Are You Risk Averse Over Other People’s Money? By Chakravarty Sujoy; Harrison Glenn W; Haruvy Ernan E; Rutstrom Elisabet E
  21. Declining Volatility in the U.S. Automobile Industry By Valerie A. Ramey; Daniel J. Vine

    Abstract: We examine the transmission process of the policy rate to the lending and deposit rates in Greece for the period 1996-2004 within bivariate cointegration and error correction framework. A significant structural break takes place with the accession of Greece into EMU in 2001. The bank rates become much more responsive to the policy rate in terms of impact multipliers and speed of convergence to the equilibrium, a consequence of the common monetary policy. However, the process is still not complete even after the accession into the EMU.
    Keywords: interest rate pass-through, monetary policy, transmission dynamics, Greece.
    JEL: E52 E43
    Date: 2005–09–09
  2. By: Philipp Engler (Free University Berlin); Terhi Jokipii (Institute for International Integration Studies, Trinity College Dublin); Christian Merkl (Kiel Institute for World Economics and Kiel University); Pablo Rovira Kaltwasser (Catholic University of Leuven); Lúcio Vinhas de Souza (Kiel Institute for World Economics.)
    Abstract: This paper analyzes the role of bank capitalization on the transmission of monetary policy, using a quarterly dataset for Austrian banks spanning from 1997 to 2003. A substantial understanding of the transmission mechanism in different countries of the euro zone is not only of academic interest, but also an important prerequisite for central bankers to effectively accomplish their monetary policy goals. While we do find evidence in favor of the bank lending channel, with an important role active for capitalization, we are unable to confirm whether the bank capital channel is in force in Austria. Our results indicate some counter-cyclicality in lending activity, a finding that is in line with the existing Austrian literature.
    Keywords: Transmission of monetary policy; Bank capital regulation; Austria
    JEL: E4 E5
    Date: 2005–05–23
  3. By: DUFOUR, Jean-Marie Dufour; KHALAF, Lynda; KICHIAN, Maral
    Abstract: In this paper, we use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali and Gertler’s (1999) specification, on both U.S. and Canadian data. Two variants of the model are studied: one based on a rationalexpectations assumption, and a modification to the latter which consists in using survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (ii) the frequency of price adjustments. Overall, we find that there is some support for the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our findings underscore the need for employing identificationrobust inference methods in the estimation of expectations-based dynamic macroeconomic relations.
    Keywords: macroeconomics ; inflation dynamics ; New Keynesian Philli Curve ; identification robust inference ; weak instruments ; oimal instruments
    JEL: C12 C13 C3 C52 E3 E31 E5
    Date: 2005
  4. By: Carlos Carvalho (Princeton University)
    Abstract: This paper analyzes the implications of heterogeneity in price setting for the real effects of monetary shocks. Starting from otherwise standard sticky price and sticky information models, I introduce ex-ante heterogeneity in terms of price setting frictions, and compare the resulting dynamics with those of identical firms economies under alternative calibrations. Both the qualitative and the quantitative results show that heterogeneity leads monetary shocks to have substantially larger and more persistent real effects. In particular, reproducing the dynamics of a truly heterogeneous economy with a model based on identical firms requires unrealistically large degrees of price setting frictions.
    JEL: E
    Date: 2005–09–10
  5. By: BOUAKEZ, Hafed, CARDIA Emanuela, RUGE-MURCIA Francisco
    Abstract: This paper constructs and estimates a sticky-price, Dynamic Stochastic General Equilibrium model with heterogenous production sectors. Sectors differ in price stickiness, capital-adjustment costs and production technology, and use output from each other as material and investment inputs following an Input-Output Matrix and Capital Flow Table that represent the U.S. economy. By relaxing the standard assumption of symmetry, this model allows different sectoral dynamics in response to monetary policy shocks. The model is estimated by Simulated Method of Moments using sectoral and aggregate U.S. time series. Results indicate 1) substantial heterogeneity in price stickiness across sectors, with quantitatively larger differences between services and goods than previously found in micro studies that focus on final goods alone, 2) a strong sensitivity to monetary policy shocks on the part of construction and durable manufacturing, and 3) similar quantitative predictions at the aggregate level by the multi-sector model and a standard model that assumes symmetry across sectors.
    Keywords: Multi-sector models, sticky-ice DGSE models, monetary licy
    JEL: E3 E4 E5
    Date: 2005
  6. By: Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria)
    Abstract: This paper extends the existing literature on the open economy New Keynesian Phillips Curve by incorporating three dierent factors of production, domestic labor and imported as well as domestically produced intermediate goods, into a general model which nests existing closed economy and open economy models as special cases. The model is then estimated for 9 euro area countries and the euro area aggregate. We find that structural price rigidity is systematically lower in the open economy specification of the model than in the closed economy specification indicating that when firms face more variable input costs they tend to adjust their prices more frequently. However, when the model is estimated in its general specification including also domestic intermediate inputs, price rigidity increases again compared to the open economy specification without domestic intermediate inputs.
    Keywords: New Keynesian Phillips Curve; Open Economy; GMM
    JEL: E31 C22 E12
    Date: 2005–08–08
  7. By: Siven, Claes-Henric (Dept. of Economics, Stockholm University)
    Abstract: The first part of the paper surveys the discussion of monetary equilibrium by Wicksell, Lindahl, Myrdal, Ohlin and Palander. In the second part a number of analytical aspects of monetary equilibrium are discussed: The formulation of the first equilibrium condition in terms of prices instead of in terms of quantities; The interpretation of the second equilibrium condition as equality between saving and investments; What was the exact interpretation of the rate of interest as a monetary phenomenon; The economic interpretation of a gap between the natural and the loan rate of interest; and the use of equilibrium and disequilibrium analysis.
    Keywords: Monetary equilibrium; Monetary theory; Wicksell; Myrdal
    JEL: B22 B30 E40
    Date: 2005–09–07
  8. By: Francesco Giavazzi; Tullio Jappelli; Marco Pagano; Marina Benedetti
    Abstract: Data revisions and the availability of a longer sample offer the opportunity to reconsider the empirical findings that suggest that in the OECD countries national saving responds non-monotonically to fiscal policy. The paper confirms that the circumstance most likely to give rise to a non-monotonic response of national saving to a fiscal impulse is a "large and persistent impulse", defined as one in which the full employment surplus, as a percent of potential output, changes by at least 1.5 percentage points per year over a two-year period. This particular circumstance remains the only statistically significant one even when we allow for non-monotonic responses to arise when public debt is growing rapidly or interest rate spreads are widening. We find that non-monotonic responses are similar for fiscal contractions and expansions. In particular, an increase in net taxes has no effect on national saving during large fiscal contractions or expansions. For government consumption there is a large, albeit in some specifications less then complete, offset during expansions or contractions.
    JEL: E21 E62 H31
    Date: 2005–09
  9. By: Ramón Cobo-Reyes (Department of Economic Theory and Economic History, University of Granada); Gabriel Pérez Quirós (Bank of Spain)
    Abstract: This paper analyzes the relationship between oil price shocks and the industrial production and between oil price shocks and the stock returns. The objective is to study which relationship is stronger or which variables reacts more rapidly to changes in oil price. We develop a Markov switching model assuming that there exits a latent variable (the state of the economy) which determines the mean of industrial production and the volatility of stock returns. The results show that raises in oil price affects in a negative and statistically significant way to stock returns and to industrial production, but the effect on stock returns is stronger than on industrial production.
    Keywords: oil price, Markov switching models.
    JEL: E32 E37 C32
    Date: 2005–08–05
  10. By: Silvia Fabiani (BANK OF ITALY); Angela Gattulli (BANK OF ITALY); Roberto Sabbatini (BANK OF ITALY); Giovanni Veronese (BANK OF ITALY)
    Abstract: This paper investigates the microeconomic behaviour of consumer prices in Italy using the individual price records underlying the Italian CPI dataset collected by Istat. We discuss how to analyse price stickiness using such a detailed database and compute a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, with a sectoral breakdown as well as with a classification by type of outlet. Prices are in general found to be rather sticky, remaining unchanged on average for around 10 months; price spells last longer for non-energy industrial goods and services, much less for energy products. Prices are revised more frequently upwards than downwards, while the size of price changes is quite symmetric. Price st ickiness is found to be less marked in large modern stores than in smaller traditional shops. Price changes display considerable synchronisation, in particular in the services sector. The average frequency of price changes and the probability of observing a price change over time and across items are positively related to headline inflation and increases in VAT rates and negatively related to the share of attractive prices. These findings are consistent with the ones reported in similar national studies for other countries of the euro area, which were conducted by the National Central Banks within the Eurosystem Inflation Persistence Network.
    Keywords: consumer prices, nominal rigidity, frequency of price change
    JEL: D21 D40 E31
    Date: 2005–06
  11. By: Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria); Josef Baumgartner (Austrian Institute of Economic Research (WIFO), Arsenal Objekt 20, POB 91, 1103 Vienna, Austria); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria)
    Abstract: This paper explores the price-setting behavior of Austrian firms based on survey evidence. Our main result is that customer relationships are a major source of price stickiness in the Austrian economy. We also find that the majority of firms in our sample follows a timedependent pricing strategy. However, a substantial fraction of firms deviates from time-dependent pricing in the case of large shocks and switches to a state-dependent pricing strategy. In addition, we present evidence suggesting that the price response to various shocks is subject to asymmetries.
    Keywords: Price-setting behavior; Price rigidity
    JEL: C25 E30
    Date: 2005–07–11
  12. By: Tomer Blumkin (Ben Gurion University); Yossi Hadar (Ben Gurion University); Eran Yashiv (LSE (visiting), Tel Aviv University, CEPR and IZA Bonn)
    Abstract: This paper studies optimal UI policy from the perspective of worker assignment to heterogenous jobs in an environment of random matching. Workers react to UI policy through job acceptance decisions; firms react to UI policy through wage posting. There is endogenous assortative matching as a result of the fact that UI policy induces a time profile for reservation wages, shifting the labor force towards the more productive firms. The relation between productivity dispersion and UI policy is mediated by the wage posting policies of firms that take both productivity and policy into account. Optimal UI policy is shown to crucially depend on the properties of the firm productivity distribution, such as its variance and skewness.
    Keywords: productivity, heterogeneity, UI policy, endogenous assortative matching, search
    JEL: E24 J64 J65
    Date: 2005–08
  13. By: Stéphane Auray (Université Charles-de-Gaulle Lille 3, GREMARS and CIRPÉE); Samuel Danthine (Université du Québec à Montréal, CIRPÉE and IZA Bonn)
    Abstract: A matching model with labor/leisure choice and bargaining frictions is used to explain (i) differences in GDP per hour and GDP per capita, (ii) differences in employment, (iii) differences in the proportion of part-time work across countries. The model predicts that the higher the level of rigidity in wages and hours the lower are GDP per capita, employment, part-time work and hours worked, but the higher is GDP per hours worked. In addition, it predicts that a country with a high level of rigidity in wages and hours and a high level of income taxation has higher GDP per hour and lower GDP per capita than a country with less rigidity and a lower level of taxation. This is due mostly to a lower level of employment. In contrast, a country with low levels of rigidity in hour and in wage setting but with a higher level of income taxation has a lower GDP per capita and a higher GDP per hour than the economy with low rigidity and low taxation, because while the level of employment is similar in both economies, the share of part-time work is larger.
    Keywords: models of search and matching, bargaining frictions, economic performance, labor market institutions, part-time jobs, labor market rigidities
    JEL: E24 J22 J30 J41 J50 J64
    Date: 2005–07
  14. By: Marco Antonio Cesar Bonomo (EPGE/FGV); Carlos Carvalho
    Date: 2005–08
  15. By: Rasmus Fatum (School of Business, University of Alberta); Michael R. King (Financial Markets Department, Bank of Canada, Ottawa)
    Abstract: This paper analyzes official, high-frequency Bank of Canada intervention and exchange rate data (the latter quoted at the end of every 5-minute interval over every 24-hour period) over the January 1995 to September 1998 time-period. The data is of particular interest as it spans over two distinctly different intervention regimes – one characterized by purely rules-based (“mechanistic”) intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for both a comparison of the effects of rules-based version discretionary intervention and a general investigation of intraday effects of intervention. Employing an event-study methodology and three different criteria for success, the study presents strong evidence showing that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. Interestingly, there is no indication that discretionary intervention is more effective than rules-based intervention.
    Keywords: foreign exchange intervention; intraday data; event studies; currency co-movement
    JEL: E58 F31 G14 G15
    Date: 2005–05
  16. By: Josef Baumgartner (Austrian Institute of Economic Research (WIFO), Arsenal Objekt 20, POB 91, 1103 Vienna, Austria); Ernst Glatzer (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria); Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria); Alfred Stiglbauer (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3, POB 61, 1011 Vienna, Austria)
    Abstract: In this paper a data set with price records collected for the computation of the Austrian CPI is used to estimate the average frequency of price changes and the duration of price spells to provide empirical evidence on the degree and characteristics of price rigidity in Austria. Depending on the estimation method applied, on average, prices are unchanged for 10 to 14 months. We find a strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. For both cases the typical size of the weighted average price change is quite large (11 and 15 percent, respectively). Like in related contributions we find that the aggregate hazard function is decreasing with time. Apart from heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for the unobserved heterogeneity in estimating the probability of a price change with a panel logit model (with fixed elementary product effects), we find a small but positive effect of the duration of a price spell on the probability of a price change. We also find that during the Euro cash changeover period the probability of price changes was higher.
    Keywords: Consumer prices; sticky prices; frequency and synchronization of price changes; duration of price spells
    JEL: C41 D21 E31 L11
    Date: 2005–07–25
  17. By: Prasad V. Bidarkota (Department of Economics, Florida International University); Brice V. Dupoyet (Department of Finance, Florida International University); J. Huston McCulloch (Department of Economics, Ohio State University)
    Abstract: We study a consumption based asset pricing model with incomplete information and alpha-stable shocks. Incomplete information leads to a non-Gaussian filtering problem. Bayesian updating generates fluctuating confidence in the agents' estimate of the persistent component of the dividends’ growth rate. Similar results are obtained with alternate distributions exhibiting fat tails (Extreme Value distribution, Pearson Type IV distribution) while they are not with a thin-tail distribution (Binomial distribution). This has the potential to generate time variation in the volatility of model-implied returns, without relying on discrete shifts in the drift rate of dividend growth rates. A test of the model using US consumption data indicates strong support in the sense that the implied returns display significant volatility persistence of a magnitude comparable to that in the data.
    Keywords: asset pricing, incomplete information, time-varying volatility, fat tails, stable distributions
    JEL: G12 G13 E43
    Date: 2005–09
  18. By: Herbert Buscher (Institute for Economic Research Halle (IWH)); Christian Dreger (Institute for Economic Research Halle (IWH) and IZA Bonn); Raul Ramos (AQR, University of Barcelona); Jordi Surinach (AQR, University of Barcelona)
    Abstract: This paper investigates the role of institutions for labour market performance across European countries. As participation rates have been rather stable over the past, the unemployment problem is mainly caused by shortages in labour demand. Labour demand is expressed by its structural parameters, such as the elasticities of employment to output and factor prices. Institutional variables include employment protection legislation, the structure of wage bargaining, measures describing the tax and transfer system and active labour market policies. As cointegration between employment, output and factor prices is detected, labour demand equations are fitted in levels by efficient estimation techniques. To account for possible structural change, time varying parameter models and aysmmetries due to the business cycle situation are considered. Then, labour demand elasticities are explained by institutions using panel fixed effects regressions. The results suggest that higher flexibility and incentives of households to work appear to be appropriate strategies to improve the employment record. The employment response to economic conditions is stronger in a more deregulated environment, and the absorption of shocks can be relieved. However, the institutional database should be improved in order to arrive at more definite policy conclusions.
    Keywords: EU employment, labour market institutions
    JEL: E24 J23 J51
    Date: 2005–08
  19. By: Chakravarty Sujoy; Harrison Glenn W; Haruvy Ernan E; Rutstrom Elisabet E
    Abstract: Abstract. Decisions with uncertain outcomes are often made by one party in settingswhere another party bears the consequences. Whenever an agent is delegated tomake decisions that affect others, such as in the typical corporate structure, does theagent make decisions that reflect the risk preferences of the principal? We examinethis question in the simplest possible setting using controlled laboratory experiments.We find a remarkable result: when an individual makes a decision for an anonymousstranger, he tends to exhibit less risk aversion. This reduction is relative to his ownpreferences, and also relative to his belief about the other’s preferences. This resulthas significant implications for the design of contracts between principals and agents.
    Date: 2005–08–16
  20. By: Paola Caselli (Bank of Italy); Andrea Zaghini (Bank of Italy)
    Abstract: The paper compares the Argentine specialization model with that of the other major Latin American countries. Given the lack of production data at disaggregate level, we rely on trade flow information from the WTA Statistics Canada database (3-digit SITC classification), available for most Latin American countries for a rather long time span (1980-2000). Our analysis, based on the Lafay Index of international specialization, shows that Argentina concentrates its comparative advantages in raw materials, agricultural and food products and exhibits, at the same time, serious deficiencies in the production of manufactures. This specialization pattern has remained remarkably stable over the last two decades, in spite of the major reforms implemented in many different fields. These features are shared with the other major Latin American countries, with the notable exception of Mexico, whose comparative advantages have changed dramatically in the same period, from raw materials (essentially oil) towards manufactures. Moreover, the products in which Argentina is specialized are among those for which world demand growth is structurally lower; this could eventually lead to a decreasing weight of Argentina in international markets.
    Keywords: International trade; specialization model; revealed comparative advantages
    JEL: F14 F15 E23
    Date: 2005–06
  21. By: Valerie A. Ramey; Daniel J. Vine
    Abstract: This paper documents the dramatic changes in volatility that occurred in the U.S. auto industry in the early 1980s. Namely, output volatility declined significantly, the covariance of inventory investment and sales became much more negative, and adjustments to output, which in earlier decades stemmed primarily from plants hiring and laying off workers, were more often accomplished with changes in average hours per worker after the mid 1980s. Building on the work of Blanchard (1983), we show how all of these changes could have stemmed from one underlying factor—a decline in the persistence of motor vehicle sales. We use both industry-level data as well as micro data on production schedules from 103 assembly plants in the United States and Canada to document the developments in the early 1980s. We then use the original Holt, Modigliani, Muth and Simon (1960) linear quadratic inventory model to show how a decline in the persistence of sales leads to all of the changes noted above, including the propensity to use intensive margins of adjustment over extensive labor margins, even in the absence of technological change.
    JEL: E2
    Date: 2005–09

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