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on Macroeconomics |
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Issue of 2005‒09‒29
120 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Agustin Carstens (International Monetary Fund); Luis I. Jacome H. (International Monetary Fund) |
| Abstract: | This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America. |
| Keywords: | Central banks independence, monetary policy, inflation, Latin America |
| JEL: | E42 E52 E58 |
| Date: | 2005–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509022&r=mac |
| By: | Javier Díaz-Giménez; Giorgia Giovannetti; Ramon Marimon; Pedro Teles |
| Abstract: | We study the effects of nominal debt on the optimal sequential choice of monetary policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commtiment to fiscal policy. If there is full commitment to an optimal fiscal policy, then the resulting monetary policy is the Friedman rule of zero nominal interest rates. |
| Keywords: | Time-consistency, monetary policy, debt, recursive equilibrium |
| JEL: | E40 E52 E61 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:841&r=mac |
| By: | Tommy Sveen; Lutz Weinke |
| Abstract: | New-Keynesian (NK) models can only account for the dynamic effects of monetary policy shocks if it is assumed that aggregate capital accumulation is much smoother than it would be the case under frictionless firm-level investment, as discussed in Woodford (2003, Ch. 5). We find that lumpy investment, when combined with price stickiness and market power of firms, can rationalize this assumption. Our main result is in stark contrast with the conclusions obtained by Thomas (2002) in the context of a real business cycle (RBC) model. We use our model to explain the economic mechanism behind this difference in the predictions of RBC and NK theory. |
| Keywords: | Lumpy Investment, Sticky Prices |
| JEL: | E22 E31 E32 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:869&r=mac |
| By: | Galí, Jordi; López-Salido, J David; Vallés Liberal, Javier |
| Abstract: | Recent evidence suggests that consumption rises in response to an increase in government spending. That finding 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 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: | fiscal multiplier; government spending; non-Ricardian households; rule-of-thumb consumers; Taylor rules |
| JEL: | E32 E62 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5212&r=mac |
| By: | Fregert, Klas (Department of Economics, Lund University); Gustafsson, Roger (Department of Economics, Lund University) |
| Abstract: | We construct yearly fiscal series for Sweden between 1719 and 2003 including expenditures, revenues, deficits and debt. We present measures for the fiscal branch of the central government as well as for the consolidated fiscal and monetary branch, which includes seigniorage. We evaluate the reliability and consistency of the series by calculating the difference between budget deficits and the change in debt to test if the differences are serially uncorrelated around zero, which we confirm. |
| Keywords: | Fiscal Policy; Expenditures; Revenues; Deficits; Government debt; Seigniorage |
| JEL: | E58 E62 H61 H62 H63 N43 N44 |
| Date: | 2005–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_040&r=mac |
| By: | Giuseppe Diana (BETA-theme, Université Louis Pasteur, Strasbourg); Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels) |
| Abstract: | This paper studies monetary policy in the presence of asymmetric wage indexation. It is found that monetary authorities do not react to small output shocks and that their reaction to large shocks is asymmetric, insofar as they absorb positive shocks more than negative ones. As a consequence, asymmetric wage indexation skews the distribution of output to the left, and can therefore be contractionary. It has ambiguous effects on expected inflation, on the volatility of output and inflation, and on expected welfare, relative to an equivalent symmetric indexation. Optimal symmetric inflation however always outperforms optimal asymmetric indexation. |
| Keywords: | monetary policy, wage indexation. |
| JEL: | E30 E50 E61 J30 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:05-16rs&r=mac |
| By: | V.V. Chari; Larry E. Jones; Ramon Marimon |
| Abstract: | In monetary unions, monetary policy is typically made by delegates of the member countries. This procedure raises the possibility of strategic delegation - that countries may choose the types of delegates to influence outcomes in their favor. We show that without commitment in monetary policy, strategic delegation arises if and only if three conditions are met: shocks affecting individual countries are not perfectly correlated, risk-sharing across countries is imperfect, and the Phillips Curve is nonlinear. Moreover, inflation rates are inefficiently high. We argue that ways of solving the commitment problem, including the emphasis on price stability in the agreements constituting the European Union are especially valuable when strategic delegation is a problem. |
| Keywords: | Strategic delegation, monetary union, time-consistency, monetary policy |
| JEL: | E58 E61 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:842&r=mac |
| By: | Darvas, Zsolt; Rose, Andrew K; Szapáry, György |
| Abstract: | Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht 'convergence criteria', used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries' abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust. |
| Keywords: | criteria; European; Maastricht; monetary; Mundell; optimum; policy; union |
| JEL: | F42 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5188&r=mac |
| By: | Robert H. Rasche; Marcela M. Williams |
| Abstract: | The analysis addresses changing views of the role and effectiveness of monetary policy, inflation targeting as an "effective monetary policy," monetary policy and short-run (output) stabilization, and problems in implementing a short-run stabilization policy. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-048&r=mac |
| By: | K. Vela Velupillai |
| Keywords: | business cycles,nonlinear dynamics,endogenous cucles,bifurcation theory |
| JEL: | B31 C61 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0515&r=mac |
| By: | Jordi Galí; Tommaso Monacelli |
| Abstract: | We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to simple representation in domestic inflation and the output gap. We use the resulting framework to analyze the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules. |
| Keywords: | Small open economy, optimal monetary policy, sticky prices, exchange rate peg, exchange rate volatility |
| JEL: | E52 F41 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:835&r=mac |
| By: | Arthur Grimes (Motu Economic & Public Policy Research) |
| Abstract: | If two countries experience similar cycles, loss in monetary sovereignty following currency union may not be severe. Analysis of cyclical similarity is frequently carried out at the overall industry level, then interpreted with reference to regional industrial structures. By contrast, this paper explicitly incorporates regional industry structure into an examination of Australasian cycles. Since 1991, NZ and Australasian cycles have been highly correlated, but there is little evidence that the NZ cycle has been 'caused' by Australian regional or industry cycles. We test whether the NZDAUD exchange rate has insulated NZ from Australian shocks, but find it has not played a major buffering role in response to Australian industry shocks (including mining shocks). Instead, the strongest impacts on the NZDAUD stem from the NZ cycle. An important loss of monetary sovereignty under currency union may therefore arise in response to NZ-specific shocks. |
| JEL: | E32 E52 F36 R11 |
| Date: | 2005–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509020&r=mac |
| By: | Peng-fei Wang; Yi Wen |
| Abstract: | Price rigidity is the key mechanism for propagating business cycles in traditional Keynesian theory. Yet the New Keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles in general equilibrium. We show that price rigidity in fact can (by itself) give rise to a strong propagation mechanism of the business cycle in standard New Keynesian models, provided that investment is also subject to a cash-in-advance constraint. In particular, we show that reasonable price stickiness can generate highly persistent, hump-shaped movements in output, investment and employment in response to either monetary or non-monetary shocks, even if investment is only partially cash-in-advance constrained. Hence, whether or not price rigidity is responsible for output persistence (and the business cycle in general) may not be a theoretical question, but an empirical one. |
| Keywords: | Prices ; Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-051&r=mac |
| By: | Doepke, Matthias; Schneider, Martin |
| Abstract: | This paper provides a quantitative assessment of the effects of inflation through changes in the value of nominal assets. We document nominal positions in the US across sectors as well as different groups of households, and estimate the redistribution brought about by a moderate inflation episode. Redistribution takes the form of 'ends-against-the-middle': the middle class gains at the cost of the rich and poor. In addition, inflation favours the young over the old, and hurts foreigners. A calibrated OLG model is used to assess the macroeconomic implications of this redistribution under alternative fiscal policy rules. We show that inflation-induced redistribution has a persistent negative effect on output, but improves the weighted welfare of domestic households. |
| Keywords: | inflation; redistribution; welfare |
| JEL: | D31 D58 E31 E50 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5167&r=mac |
| By: | Ingolf Schwarz (Max-Planck-Institute for Research on Collective Goods); Jinhui H. Bai (Yale University, Department of Economics) |
| Abstract: | The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate. |
| Keywords: | Money, Incomplete Markets, Fiscal Policy, Indeterminacy |
| JEL: | D52 E40 E50 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2005_18&r=mac |
| By: | Bjørn-Roger Wilhelmsen (Norges Bank); Andrea Zaghini (Banca d’Italia) |
| Abstract: | The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for financial markets. Second, we find that the predictability of the ECB’s monetary policy is fully comparable (and sometimes slightly better) to that of the FED and the Bank of England. Finally, an econometric analysis of the ability of market participants to incorporate in the current money rates the expected changes in the key policy rate shows that in the euro area policy decisions are anticipated well in advance. |
| Keywords: | Monetary policy, Predictability, Money market rates |
| JEL: | E4 E5 G1 |
| Date: | 2005–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_07&r=mac |
| By: | Arthur Grimes (Motu Economic & Public Policy Research) |
| Abstract: | We place regional industry structures at centre stage in currency union analysis, decomposing differences between regional and aggregate cycles into 'industry structure' and 'industry cycle' effects. The industry structure effect indicates whether a region's industry structure causes its cycle to deviate from the aggregate; the industry cycle effect indicates the importance of region-specific shocks in causing a deviation between cycles. We apply the methodology to Australasia. One region, ACT, has a material industry structure effect arising from its heavy central government concentration. No other region has a material industry structure effect; their cycles differ from the aggregate due to region-specific shocks. |
| JEL: | E32 E52 F36 R11 |
| Date: | 2005–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509019&r=mac |
| By: | Riccardo DiCecio |
| Abstract: | A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models can- not account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages. |
| Keywords: | Business cycles ; Wages |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-035&r=mac |
| By: | Gunnar Bårdsen (Bank of Norway and Department of Economics, Norwegian University of Science and Technology); Q. Farooq Akram (Bank of Norway); Øyvind Eitrheim (Bank of Norway) |
| Abstract: | We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability. |
| Keywords: | Monetary policy; asset prices; simple interest rate rules; econometric model |
| JEL: | C51 C52 C53 E47 E52 |
| Date: | 2005–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:nst:samfok:5405&r=mac |
| By: | Jordi Galí |
| Abstract: | The present paper describes recent research on two central themes of Keynes’ General Theory: (i) the social waste associated with recessions, and (ii) the effectiveness of fiscal policy as a stabilization tool. The paper also discusses some evidence on the extent to which fiscal policy has been used as a stabilizing tool in industrial economies over the past two decades. |
| Keywords: | business cycles, inefficient allocations, government spending multiplier, non-Ricardian households, countercyclical policies |
| JEL: | E32 E63 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:830&r=mac |
| By: | George W. Evans; Seppo Honkapohja; Ramon Marimon |
| Abstract: | We analyze a monetary model with flexible labor supply, cash-inadvance constraints and seigniorage-financed government deficits. If the intertemporal elasticity of substitution of labor is greater than one, there are two steady states, one determinate and the other indeterminate. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases can in many cases eliminate the sunspot equilibria while raising consumption/labor taxes even enough to balance the budget may fail to achieve determinacy. |
| Keywords: | Indeterminacy, learnability, expectational stability, endogenous fluctuations, seigniorage |
| JEL: | C62 D83 D84 E31 E32 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:844&r=mac |
| By: | Giannone, Domenico; Reichlin, Lucrezia; Small, David |
| Abstract: | This paper formalizes the process of updating the nowcast and forecast on output and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing 'news' on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of GDP while inflation is only affected by nominal variables and asset prices. |
| Keywords: | factor model; forecasting; large datasets; monetary policy; news; real time data |
| JEL: | C33 C53 E52 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5178&r=mac |
| By: | Albert Marcet; Juan Pablo Nicolini |
| Abstract: | This paper studies the short run correlation of inflation and money growth. We study whether a model of learning can do better than a model of rational expectations, we focus our study on countries of high inflation. We take the money process as an exogenous variable, estimated from the data through a switching regime process. We find that the rational expectations model and the model of learning both offer very good explanations for the joint behavior of money and prices. |
| Keywords: | Inflation andmoney growth, switching regimes, quasi-rationality |
| JEL: | D83 E17 E31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:875&r=mac |
| By: | Farley Grubb (Department of Economics,University of Delaware) |
| Keywords: | Monetary Policy |
| JEL: | N1 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:04-07&r=mac |
| By: | Yi Wen |
| Abstract: | When monetary policies are endogenous, the conventional VAR approach for detecting the effect of monetary policies is powerless. This paper proposes to test the implication of monetary policies along a different dimension. That implication is to exploit the policy induced exogeneity of endogenous variables that are the source of monetary non-neutrality. We illustrate the idea by constructing a new Keynesian sticky wage model with capital accumulation and then testing the implications of optimal monetary policies for nominal wages under both complete and incomplete information. Econometric test using post war US data suggests that the nominal wage is exogenous with respect to lagged macro variables. Such exogeneity is consistent with new Keynesian models in which the monetary authority pursues active monetary policy based on information with a lag. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-052&r=mac |
| By: | Yi Wen |
| Abstract: | Post war US data show that consumption growth causes output and investment growth. This is puzzling if technology is the driving force of the business cycle. I ask whether general equilibrium models driven by demand shocks can rationalize the observed causal relations. My conclusion is that business cycle theory remains behind business cycle measurement. |
| Keywords: | Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-038&r=mac |
| By: | Mark Mink; Jakob de Haan |
| Abstract: | This paper examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivariate model for the period 1999-2004 and various election indicators we find strong evidence that the Stability and Growth Pact has not restricted fiscal policy makers in the euro area in pursuing expansionary policies before elections. In an election-year – but not in the year prior to the election – the budget deficit increases. This result is in line with third generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes. |
| Keywords: | fiscal policy, political budget cycle, Stability and Growth Pact |
| JEL: | D72 D78 E62 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1532&r=mac |
| By: | Danthine, Jean-Pierre; Kurmann, Andre |
| Abstract: | We develop and analyse a structural model of efficiency wages founded on reciprocity. Workers are assumed to face an explicit trade-off between the disutility of providing effort and the psychological benefit of reciprocating the gift of a wage offer above some reference level. The model provides a rationale for rent sharing -- a feature that is very much present in the data but absent from previous formulations of the efficiency wage hypothesis. This firm-internal perspective on efficiency wages has important macroeconomic consequences: rent-sharing considerations promote wage rigidity, internal amplification and asymmetric responses to technology and demand shocks. |
| Keywords: | efficiency wages; reciprocity; rent-sharing; wage rigidity |
| JEL: | E24 E32 J50 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5174&r=mac |
| By: | Léonce Ndikumana (University of Massachusetts Amherst) |
| Abstract: | This study explores the determinants of investment using both aggregated industry-level data and disaggretated data on 27 sub-sectors of the manufacturing sector for the period 1970-2001. According to the results in this study, the government has potentially powerful means at its disposal to stimulate private investment. In particular, a domestic demand stimulus and public investment expansion will produce large gains in private investment. While the direct effects of lowering the interest rate appear to be quantitatively small, indirect effects operating notably through domestic demand and cheaper credit are likely to be large. The evidence in this study also indicates that it is important to minimize exchange rate instability to encourage investment. JEL Categories: E22; E52; E62 |
| Keywords: | South Africa; private investment; public investment; monetary policy; fiscal policy |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2005-14&r=mac |
| By: | William T. Gavin |
| Abstract: | This paper summarizes recent developments in the theory and practice of monetary policy in a closed economy and explains what these developments mean for U.S. Dollar policy. There is no conflict between what is appropriate U.S. monetary policy at home or abroad because the dollar is the world's key currency country. Both at home and abroad, the main problem for U.S. policymakers is to provide an anchor for the dollar. Recent experience in other countries suggests that a solution is evolving in the use of inflation targets. |
| Keywords: | Dollar, American ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-062&r=mac |
| By: | James Bullard (Federal Reserve Bank of St. Louis); George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge) |
| Abstract: | We study how the use of judgement or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria. |
| Keywords: | Learning, expectations, excess volatility, bounded rationality, monetary policy |
| JEL: | E52 E61 |
| Date: | 2005–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2005-15&r=mac |
| By: | James S. Costain; Michael Reiter |
| Abstract: | This paper points out an empirical puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, both sticky wages and match-specific productivity shocks help the model reproduce the stylized facts: both make the firm's flow of surplus more procyclical, thus making hiring more procyclical too. |
| Keywords: | Real business cycles, matching function, unemployment insurance |
| JEL: | C78 E24 E32 I38 J64 |
| Date: | 2003–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:872&r=mac |
| By: | Beetsma, Roel; Giuliodori, Massimo; Klaassen, Franc |
| Abstract: | We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings) |
| Keywords: | coordination; European Union; Fiscal shocks; impulse responses; trade spillovers |
| JEL: | E62 F41 F42 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5222&r=mac |
| By: | Francesco Giavazzi (IGIER, Università Bocconi, NBER and CEPR); Tullio Jappelli (Università di Salerno, CSEF and CEPR); Marco Pagano (Università di Napoli Federico II, CSEF and CEPR); Marina Benedetti (IGIER, Università Bocconi) |
| 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. |
| Keywords: | Fiscal policy, national saving |
| JEL: | E21 E62 H31 |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:142&r=mac |
| By: | Beaudry, Paul; Portier, Franck |
| Abstract: | This paper uses aggregate Japanese data and sectoral US data to explore the properties of the joint behaviour of stock prices and total factor productivity (TFP) with the aim of highlighting data patterns that are useful for evaluating business cycle theories. The approach used follows that presented in Beaudry and Portier (2004b). The main findings are that (i) in both Japan and the US, innovations in stock prices that are contemporaneously orthogonal to TFP precede most of the long run movements in total factor productivity, and (ii) such stock prices innovations do not affect US sectoral TFPs contemporaneously, but do precede TFP increases in those sectors that are driving US TFP growth, namely durable goods, and among them equipment sectors. |
| Keywords: | business cycle; productivity shocks; stock prices |
| JEL: | E3 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5176&r=mac |
| By: | Jordi Galí |
| 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 nonstationary in those models, while preserving the property of balanced growth. Second, I show that the postwar 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 fl uctuations in the G7 countries. |
| Keywords: | real business cycles, technology shocks, market frictions, balanced growth path, stationarity of hours |
| JEL: | E32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:829&r=mac |
| By: | Levon Barseghyan; Riccardo DiCecio |
| Abstract: | We analyze optimal monetary policy in an endogenous sticky price model. Similar models with exogenous sticky prices can deliver multiplicity of equilibria. Multiplicity of equilibria is a necessary condition for expectation traps to explain the variation across time and countries of inflation patterns. In our model's equilibrium, profit differentials between sticky price firms and flexible price firms are small. Also, the gain from revising prices for sticky prices firms is increasing in inflation. Depending on the distribution of price revision costs, if enough sticky price firms choose to revise their prices, the monetary authority's benefit from inflation is reduced to the point that the model has a unique, low inflation equilibrium. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-036&r=mac |
| By: | Assaf Razin; Prakash Loungani |
| Abstract: | We demonstrate how capital account and trade account liberalizations help reduce inefficiencies associated with the fluctuations in the output gap, relative to the inefficiencies associated with the fluctuations in inflation. With capital account liberalization the representative household is able to smooth fluctuations in consumption, and thus becomes relatively insensitive to fluctuations in the output gap. With trade liberalization the economy tends to specialize in production but not in consumption. The correlation between fluctuations in the output gap and aggregate consumption is therefore weakened by trade openness; hence a smaller weight on the output gap in the utility-based loss function, compared to the closed economy situations.A key implication of the theory is that globalization forces could induce monetary authorities, to put a greater emphasis on reducing the inflation rate than on narrowing the output gaps. We provide a re- interpretation of the evidence on the effect of openness on the sacrifice ratio which supports the prediction of the theory. |
| JEL: | E3 F3 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11641&r=mac |
| By: | Darvas, Zsolt; Szapáry, György |
| Abstract: | This paper analyses the synchronization of business cycles between new and old EU members using various measures. The main findings are that Hungary, Poland and Slovenia have achieved a high degree of synchronization for GDP, industry and exports, but not for consumption and services. The other CEECs have achieved less or no synchronization. There has been significant increase in synchronization of GDP and its major components within EMU. This lends support to the argument of OCA endogeneity but there is also evidence of a world cycle. The consumption-correlation puzzle remains, but its magnitude has greatly diminished in the EMU members. |
| Keywords: | business cycle synchronization; consumption-correlation puzzle; EMU; new EU members; OCA endogeneity |
| JEL: | E32 F41 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5179&r=mac |
| By: | Jordi Galí; Mark Gertler; J. David López-Salido |
| Abstract: | In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household’s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted, the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions. |
| Keywords: | Business Cycles, Countercyclical Markups, Welfare Costs |
| JEL: | E32 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:836&r=mac |
| By: | Mª Ángeles Caraballo Pou (Universidad de Sevilla); Carlos Dabús (CONICET y Universidad Nacional del Sur (Argentina)) |
| Abstract: | The menu costs model developed by Ball and Mankiw (BM)(1994,1995) predicts that inflation is positively related to the skewness of price changes distribution. We test this prediction in different inflationary contexts: Spain (1975-2002) and Argentina (1960-1989). We find a positive inflation-skewness relationship in both countries at low inflation, even though the mean annual inflation rates were very different: 2,2% for Spain and 23% for Argentina. Therefore, the threshold of low inflation under which the menu costs model is suitable is determined endogenously, and it depends on the inflationary experience of each economy. In the higher inflation periods skewness is not significant. Finally, our results suggest that the menu-costs model is not suitable beyond certain threshold of inflation. |
| Keywords: | menu costs, skewness, relative prices, inflation regimes |
| JEL: | E31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2005_17&r=mac |
| By: | Yi Wen |
| Abstract: | This paper shows that economic fluctuations can be largely demand-driven. In particular, the stylized open-economy business cycle regularities documented by Feldstein and Horioka (1980) and Backus, Kehoe and Kydland (JPE 1992) can be explained by the standard general equilibrium theory if consumption demand is treated as the primary source of aggregate uncertainty. Frictions such as market incompleteness, increasing returns to scale, and sticky prices are not needed for resolving these longstanding puzzles. |
| Keywords: | Business cycles ; Saving and investment |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-043&r=mac |
| By: | Bhattacharya, Joydeep; Haslag, J; Martin, A |
| Abstract: | This paper studies a overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money. We assume a production function with a knowledge-externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long run growth (the Diamond model). With logarithmic utility, the Friedman rule is optimal (stationary welfare maximizing) irrespective of whether there is long run growth or not. Under the more general CRRA form of preferences, we find that a sufficient condition for the Friedman rule to be optimal is that the ‘anti-Tobin effect’ is operative. Also, contrary to models with a storage technology, zero inflation is not optimal (except for a set of parameters which has measure zero in the parameter space). These results are in sharp contrast to the received wisdom about the suboptimality of the Friedman rule in overlapping generation models. |
| Keywords: | Friedman rule, Tobin effect, monetary policy |
| JEL: | E4 |
| Date: | 2005–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12413&r=mac |
| By: | Christian Merkl; Dennis J. Snower |
| Abstract: | This paper explores the influence of wage and price staggering on monetary persistence. First, our analysis indicates that the degree of monetary persistence generated by wage vis-à-vis price staggering depends on the relative competitiveness of the labor and product markets. We show that the conventional wisdom that wage staggering can generate more persistence than price staggering does not necessarily hold. Second, this paper discusses weaknesses of the "contract multiplier," which is generally used to compare persistence, and proposes the measure "quantitative persistence." Third, we show that, for plausible parameter values, wage and price staggering are highly complementary in generating monetary persistence. Thus beyond understanding how they work in isolation, it is important to explore their interactions. |
| Keywords: | Monetary Persistence, Price Staggering, Wage Staggering, Monetary Policy |
| JEL: | E52 E50 E40 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1257&r=mac |
| By: | Emmanuel Dhyne (National Bank of Belgium, Research Department); Luis J. Álvarez (Banco de España); Hervé Le Bihan (Banque de France); Giovanni Veronese (Banca d'Italia); Daniel Dias (Banco de Portugal); Johannes Hoffmann (Deutsche Bundesbank); Nicole Jonker (De Nederlandsche Bank); Patrick Lünnemann (Banque Centrale du Luxembourg); Fabio Rumler (Oesterreichische Nationalbank); Jouko Vilmunen (Suomen Pankki) |
| Abstract: | This paper documents patterns of price setting at the retail level in the euro area, summarized in six stylized facts. First, the average euro area monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross product heterogeneity - prices of oil and unprocessed food products change very often, while price adjustments are less frequent for processed food, non energy industrial goods and services. Third, cross country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across retailers. Moreover, the frequency of price changes in the euro area is related to several factors, such as seasonality, outlet type, indirect taxation, pricing practices as well as aggregate or product specific inflation. |
| Keywords: | Price-setting, consumer price, frequency of price change. |
| JEL: | E31 D40 C25 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200509-2&r=mac |
| By: | Christiansen, Charlotte (Department of Accounting, Aarhus School of Business); Ranaldo, Angelo (Research Department, Swiss National Bank) |
| Abstract: | No abstract |
| Keywords: | Bond-stock correlation; Macroeconomic announcements; Realized correlation; Realized volatility |
| Date: | 2005–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aaracc:05-005&r=mac |
| By: | Buti, Marco; Eijffinger, Sylvester C W; Franco, Daniele |
| Abstract: | The Stability and Growth Pact has been under fire ever since it was born. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms show strengths and weaknesses. The latter tend to reflect trade-offs typical of supra-national arrangements. In the end, only a higher degree of fiscal integration would remove the inflexibility inherent in the recourse to predefined budgetary rules. No alternative solution put forward in the literature appears clearly superior. This does not mean that the original Pact of 1997 could not be improved. The debate on the SGP has shown that any reform should aim at overcoming the excessive uniformity of the rules, improving their transparency, correcting pro-cyclicality and strengthening enforcement. The reform of the Pact agreed in 2005 moves in this direction but leaves open a number of issues. |
| Keywords: | economic and monetary union; fiscal policy; fiscal rules; Stability and Growth Pact |
| JEL: | E61 H3 H6 H7 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5216&r=mac |
| By: | Laurence Seidman (Department of Economics,University of Delaware); Kenneth Lewis (Department of Economics,University of Delaware) |
| Abstract: | This paper simulates the use of transfers to households plus central-bank open-market purchases to generate a recovery of a low-interest-rate economy from a negative demand shock. Transfers to households are automatically triggered in recession; the prescribed anti-recession transfer ratio is proportional to the unemployment gap. Three alternative complementary monetary policies that the Federal Reserve might decide to implement are considered: standard, moderate, and aggressive. The simulations suggest that transfers plus open market purchases are likely to be an effective remedy for such a recession while limiting potential adverse impacts on inflation and government debt held by the non-central-bank public. |
| Keywords: | Macroecomics; Recession |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:04-02&r=mac |
| By: | Massimo Guidolin; Sadayuki Ono |
| Abstract: | We estimate a number of multivariate regime switching VAR models on a long monthly data set for eight variables that include excess stock and bond returns, the real T-bill yield, predictors used in the finance literature (default spread and the dividend yield), and three macroeconomic variables (inflation, real industrial production growth, and a measure of real money growth). Heteroskedasticity may be accounted for by making the covariance matrix a function of the regime. We find evidence of four regimes and of time-varying covariances. We provide evidence that the best in-sample fit is provided by a four state model in which the VAR(1) component fails to be regime-dependent. We interpret this as evidence that the dynamic linkages between financial markets and the macroeconomy have been stable over time. We show that the four-state model can be helpful in forecasting applications and to provide one-step ahead predicted Sharpe ratios. |
| Keywords: | Macroeconomics ; Assets (Accounting) - Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-056&r=mac |
| By: | Toke S. Aidt; Zafiris Tzannatos |
| Abstract: | Co-ordination through collective bargaining is recognised as an influential determinant of labour market and macroeconomic performance. This paper provides a systematic review of the empirical literature on the subject. We focus on comparative studies of labour institutions in the OECD area that try to disentangle the impact of different institutional approaches to collective bargaining from other determinants of macroeconomic performance, and review the recent literature on the interaction between labour market institutions and monetary policy. |
| Keywords: | collective bargaining, unions, macroeconomic performance |
| JEL: | J5 E24 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0541&r=mac |
| By: | Lloyd-Braga, Teresa; Nourry, Carine; Venditti, Alain |
| Abstract: | In this paper, we consider an aggregate overlapping generations model with endogenous labour, consumption in both periods of life, homothetic preferences and productive external effects coming from the average capital and labour. We show that under realistic calibrations of the parameters, in particular a large enough share of first period consumption over the wage income, local indeterminacy of equilibria cannot occur with capital externalities alone but that it can occur when there are only, however small, labour externalities. More precisely, under gross substitutability, the existence of multiple equilibria requires a large enough elasticity of capital-labour substitution and a large enough elasticity of the labour supply. We also show that if labour externalities are slightly stronger and the elasticity of labour supply is larger, local indeterminacy occurs in a Cobb-Douglas economy. Finally, we show that, as a consequence of our restriction on first period consumption, a locally indeterminate steady state is generically characterized by an under-accumulation of capital. It follows therefore that while agents live over a finite number of periods, the conditions for the existence of locally indeterminate equilibria are very similar to those obtained within infinite horizon models and that from this point of view, Diamond meets Ramsey. |
| Keywords: | capital and labour externalities; endogenous cycles; endogenous labour supply; indeterminacy; overlapping generations; under-accumulation |
| JEL: | C62 E32 O41 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5255&r=mac |
| By: | Buti,Marco; Eijffinger,Sylvester; Franco,Daniele (Tilburg University, Center for Economic Research) |
| Abstract: | The Stability and Growth Pact has been under fire ever since it was born. But is the Pact a flawed fiscal rule? Against established criteria for an ideal fiscal rule, its design and compliance mechanisms show strengths and weaknesses. The latter tend to reflect tradeoffs typical of supra-national arrangements. In the end, only a higher degree of fiscal integration would remove the inflexibility inherent in the recourse to predefined budgetary rules. No alternative solution put forward in the literature appears clearly superior. This does not mean that the original Pact of 1997 could not be improved. The debate on the SGP has shown that any reform should aim at overcoming the excessive uniformity of the rules, improving their transparency, correcting pro-cyclicality and strengthening enforcement. The reform of the Pact agreed in 2005 moves in this direction but leaves open a number of issues. |
| Keywords: | fiscal rules;Economic and Monetary Union;Stability and Growth Pact; H7; EMS;fiscal policy |
| JEL: | E61 H3 H6 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2005101&r=mac |
| By: | Woon Gyu Choi; Yi Wen |
| Abstract: | This paper investigates the behavior of short-term real and nominal rates of interest by combining consumption-based and production-based models into a single general equilibrium framework. Based on the theoretical nonlinear relationships that link interest rates to both the marginal rates of substitution and transformation in a monetary production economy, we develop an estimation and simulation procedure to generate historical time series of interest rates. We find that the predictions of interest rates based on a general equilibrium theory are partially consistent with US data. |
| Keywords: | Interest rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-037&r=mac |
| By: | Ziesemer,Thomas (MERIT) |
| Abstract: | We analyze empirically for Brazil a hypothesis by Stiglitz (2002) saying that devaluations may be more effective in reducing trade deficits than cuts in budget deficits. We find that the Ricardian equivalence does not hold. Devaluations have a stronger impact on the trade deficit than budget deficits when doing the analysis with yearly or monthly data even when the effect from a risk variable obtained from a TARCH estimate is subtracted. Devaluations have an effect that lasts 25 months. A J-or W-curve can be obtained from a polynomial distributed lag estimate. Devaluations can explain almost 19% of consumer price inflation. However, if inflation control is a task assigned to monetary policy rather than exchange rate policy, devaluations are available as an instrument to stabilize the trade balance under shocks rather than keeping exchange rates fixed through sales of reserves. This may avoid overvaluations, speculative attacks and currency crises. The results for the trade balance hold for several updates except for the last one, where budget deficits and exchange rate changes change signs. This suggests a role for imported investments and elasticity pessimism and casts doubts on the role of cutting budget deficits and devaluations in regard to the trade balance. Stability tests suggest that structural change seems to play a role. The change in signs of our estimates may have been caused by a change of exchange rate policies leading to appreciations since June 2004 and by an extraordinarily strong industrial recession in 2003 in some countries. If Ricardian equivalence for the trade balance is imposed by assumption we find a weakly significant N-curve for exchange rate risk jointly with a J-curve for devaluations. |
| Keywords: | economic development and growth ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamer:2005018&r=mac |
| By: | Chang, Yongsung; Doh, Taeyoung; Schorfheide, Frank |
| Abstract: | The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Relaxing these restrictions can close the gap between DSGE models and vector autoregressions. This paper modifies a simple stochastic growth model by incorporating permanent labor supply shocks that can generate a unit root in hours worked. Using Bayesian methods we estimate two versions of the DSGE model: the standard specification in which hours worked are stationary and the modified version with permanent labor supply shocks. We find that the data support the latter specification. |
| Keywords: | Bayesian econometrics; DSGE models; non-stationary hours |
| JEL: | C32 E52 F41 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5232&r=mac |
| By: | Lars E.O. Svensson; Robert J. Tetlow |
| Abstract: | We outline a method to provide advice on optimal monetary policy while taking policymakers' judgment into account. The method constructs optimal policy projections (OPPs) by extracting the judgment terms that allow a model, such as the Federal Reserve Board staff economic model, FRB/US, to reproduce a forecast, such as the Greenbook forecast. Given an intertemporal loss function that represents monetary policy objectives, OPPs are the projections---of target variables, instruments, and other variables of interest---that minimize that loss function for given judgment terms. The method is illustrated by revisiting the economy of early 1997 as seen in the Greenbook forecasts of February 1997 and November 1999. In both cases, we use the vintage of the FRB/US model that was in place at that time. These two particular forecasts were chosen, in part, because they were at the beginning and the peak, respectively, of the late 1990s boom period. As such, they differ markedly in their implied judgments of the state of the world in 1997 and our OPPs illustrate this difference. For a conventional loss function, our OPPs provide significantly better performance than Taylor-rule simulations. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-34&r=mac |
| By: | K. Vela Velupillai |
| Keywords: | theory of policy,dynamical system,computation universality,recursive rule,complex economy |
| JEL: | C60 E60 E61 E69 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0514&r=mac |
| By: | Koijen,Ralph S.J.; Nijman,Theo E.; Werker,Bas J.M. (Tilburg University, Center for Economic Research) |
| Abstract: | The riskless nature in real terms of inflation-linked bonds has led to the conclusion that inflation-linked bonds should constitute a substantial part of the optimal investment portfolio of long-term investors. This conclusion is reached in models where investors do not receive labor income during the investment period. Since such an income stream is often indexed with inflation, labor income in itself constitutes an implicit holding of real bonds. As such, the optimal investment in inflation-linked bonds is substantially reduced. By extending recently developed simulation-based techniques, we are able to determine the optimal portfolio choice among inflation-linked bonds, nominal bonds, and stocks for investors endowed with an indexed stream of income. We find that the fraction invested in inflation-linked bonds is much smaller than reported in the literature, the duration of the optimal nominal bond portfolio is lengthened, and the utility gains of having access to inflation-linked bonds are substantially reduced. We investigate as well the robustness of our results to time-variation in bond risk premia, the riskiness of labor income, and correlation between labor income risk and financial risks. We find that especially accounting for time-variation in bond risk premia and correlation between labor income risk and financial risks is important for both optimal portfolios and the utility gains of having access to inflation-linked bonds. |
| Keywords: | inflation linked bonds;optimal lifetime investment;simulation-based portfolio choice |
| JEL: | C15 C63 E43 G11 G12 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200595&r=mac |
| By: | Joseph E. Gagnon |
| Abstract: | This paper examines episodes of sudden large exchange rate depreciations (currency crashes) in industrial countries and characterizes the behavior of government bond yields during and after these crashes. The most important determinant of changes in bond yields appears to be inflationary expectations. When inflation is high and rising at the time of a currency crash, bond yields tend to rise. Otherwise--and in every currency crash since 1985--bond yields tend to fall. Over the past 20 years, inflation rates have been remarkably stable in industrial countries after currency crashes. |
| Keywords: | Balance of payments ; Inflation (Finance) ; Foreign exchange rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:837&r=mac |
| By: | Constantin Gurdgiev; (Department of Economics, Trinity College) |
| Abstract: | This paper presents a model of endogenous growth in the presence of habit formation in consumption. We argue that in addition to the traditional disutility effects of habitual consumption, the past history of consumption represents a past record of transactions as well. As a result, the knowledge acquired in the process of past consumption leads to efficiency gains in allocating time to other activities. In particular, the investment technology in broad household capital can be seen as benefiting from the habitual consumption knowledge, while being subject to the costly new consumption pathways learning. These learning-by-consuming effects imply a faster speed of convergence to the steady state growth rate in consumption and a higher steady state ratio of capital to habits. Alternatively our model allows for the case where new consumption is associated with the accumulation of broad capital, as is consistent with the case where consumption goods can also be used in production. In this case convergence to steady state growth rate is slower. |
| JEL: | D13 E21 E22 O40 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:200055&r=mac |
| By: | Jim Dolmas |
| Abstract: | Research over the past decade has led to improved measures of core inflation in the Consumer Price Index, or CPI. This paper discusses the application of some of the insights and techniques of that line of research to the Federal Reserve Bard of Governors’ preferred inflation gauge, the price index for Personal Consumption Expenditures (PCE). The result is a new measure of core PCE inflation—the trimmed mean PCE—and a somewhat different characterization of the economy’s recent inflation experience. ; Compared to the story told by the usual “excluding food and energy” measure, the trimmed mean PCE tells us that the lows reached in 2003 weren’t quite so low and that the highs reached in mid-2004 were really a bit higher. On a 12-month basis, the new measure suggests that core PCE inflation is currently about half a percentage point higher than what is being indicated by the “excluding food and energy” inflation rate. |
| Keywords: | Consumer price indexes ; Personal Consumption Expenditures Price Index |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:05-06&r=mac |
| By: | Constantin Gurdgiev; (Department of Economics, Trinity College) |
| Abstract: | This paper presents a model of endogenous growth in the presence of habit formation in consumption. We argue that in addition to the traditional disutility effects of habitual consumption, the past history of consumption represents a past record of transactions as well. As a result, the knowledge acquired in the process of past consumption leads to efficiency gains in allocating time to other activities. In particular, the investment technology in broad household capital can be seen as benefiting from the habitual consumption knowledge, while being subject to the costly new consumption pathways learning. These learning-by-consuming effects imply a faster speed of convergence to the steady state growth rate in consumption and a higher steady state ratio of capital to habits. Alternatively our model allows for the case where new consumption is associated with the accumulation of broad capital, as is consistent with the case where consumption goods can also be used in production. In this case convergence to steady state growth rate is slower. |
| JEL: | D13 E21 E22 O40 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:wpaper:tep5&r=mac |
| By: | Yi Wen |
| Abstract: | This paper provides a general equilibrium multi-stage production model to explain the co-existence and co-movement of output- and input-inventories. The model offers a neoclassical perspective on the propagation mechanism of demand uncertainty. It reveals that uncertainty in demand at downstream can be transmitted and amplified towards upstream by inventory investment at all stages of production via input-output linkages, leading to a chain-multiplier effect on aggregate output and employment. The model is capable of explaining several long-standing puzzles of the business cycle associated with inventories. |
| Keywords: | Business cycles ; Production (Economic theory) ; Investments |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-046&r=mac |
| By: | Pedro Silos |
| Abstract: | Much of the macroeconomics literature dealing with wealth distribution has become abstracted from modeling housing explicitly. This paper investigates the properties of the wealth distribution and the portfolio composition regarding housing and equity holdings and their relationship to macroeconomic shocks. To this end, I construct a business cycle model in which agents differ in age, income, and wealth and derive utility from housing services. The model is consistent with several facts such as the life-cycle pattern of housing-to-wealth ratios, the larger degree of concentration for nonhousing wealth, and the smaller weight of housing in richer households’ portfolios as well as the larger housing-to-wealth ratios in recessions. In addition, the model delivers the familiar business-cycle moments regarding relative standard deviations and procyclicality of consumption, investment, and employment. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-21&r=mac |
| By: | Viv B Hall (Victoria University of Wellington); C. John McDermott (National Bank of New Zealand) |
| Abstract: | We use National Bank of New Zealand Regional Economic Activity data, to identify and characterise classical business cycle turning points, for New Zealand’s 14 regions and aggregate New Zealand activity. Using Concordance statistic measures, logistic model and GMM estimation methods, meaningful regional business cycles have been identified and a number of significant associations established. All regions exhibit cyclical asymmetry for both durations and amplitudes, and synchronisations between aggregate NZ activity and each region are contemporaneous. The regional cycles rarely die of old age but are terminated by particular events. The regions most highly synchronised with the NZ activity cycle are Auckland, Canterbury, and Nelson- Marlborough; those least so are Gisborne and Southland. Noticeably strong co-movements are evident for certain regions. Geographical proximity matters, and unusually dry conditions can be associated with cyclical downturns in certain regions. There is no discernable evidence of association with net immigration movements, and no significant evidence of regional cycle movements being associated with real national house price cycles. The agriculture-based nature of the New Zealand economy is highlighted by the strong influence of external economic shocks on rural economic performance. In particular, there is considerable evidence of certain regional cycles being associated with movements in New Zealand’s aggregate terms of trade, real prices of milksolids, real dairy land prices and total rural land prices. |
| Keywords: | Classical business cycle; Turning Points; Regional business cycles; Concordance statistics; New Zealand |
| JEL: | C22 E32 R11 R12 R15 |
| Date: | 2005–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpur:0509013&r=mac |
| By: | Karsten Jeske; Dirk Krueger |
| Abstract: | This paper studies the macroeconomic effects of implicit government guarantees of the obligations of government-sponsored enterprises. We construct a model with competitive housing and mortgage markets in which the government provides banks with insurance against aggregate shocks to mortgage default risk. We use this model to evaluate aggregate and distributional impacts of this government subsidy of owner-occupied housing. Preliminary findings indicate that the subsidy leads to higher equilibrium housing investment, higher mortgage default rates, and lower welfare. The welfare effects of this policy vary substantially across members of the population with different economic characteristics. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-15&r=mac |
| By: | Stephen Quinn; William Roberds |
| Abstract: | This paper outlines a model of the first true central bank, the Bank of Amsterdam, founded in 1609. Employing a variant of the Freeman (1996) model of money and payments, we first analyze the problematic monetary situation in the Netherlands prior to the founding of the Bank. We then use the model to describe how the Bank could remedy this situation by creating a stable medium for the settlement of commercial obligations. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-16&r=mac |
| By: | Wouter J. Den Haan; Christian Haefke; Garey Ramey |
| Abstract: | According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this paper we reassess the turbulence-unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Lungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers. |
| Keywords: | Skill loss, European unemployment puzzle |
| JEL: | E24 J64 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:792&r=mac |
| By: | De Fiore, Fiorella; Uhlig, Harald |
| Abstract: | We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose between two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP. |
| Keywords: | agency costs; financial structure; heterogeneity |
| JEL: | C68 E20 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5213&r=mac |
| By: | Sarno, Lucio; Thornton, Daniel L; Valente, Giorgio |
| Abstract: | This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection of the EH throughout the maturity spectrum examined. |
| Keywords: | expectations hypothesis; term structure of interest rates; vector autoregression |
| JEL: | E43 G10 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5259&r=mac |
| By: | Kleimeier,Stefanie; Sander,Harald (METEOR) |
| Abstract: | This study investigates the current state of euro zone banking market integration by applying convergence and cointegration measures to mortgage and short-term corporate loan markets. These two measures of integration often lead to contradicting conclusions and are therefore comparatively analyzed. As an innovation to the literature, convergence measures are exposed to a difference-in-differences methodology which allows separating euro zone-specific from global integration effects. Our results show that euro zone-specific convergence exists mainly in the pre-EMU period whereas cointegration is especially prominent before 1993 and after 1998 but hardly present in between. Overall, we conclude that (1) in the presence of exchange rate uncertainty, cross-country convergence should focus on margins rather than rates, (2) convergence of retail banking interest rates is largely a result of integrating money and bonds markets in anticipation of the single currency and (3) a monetary union can produce (co)integration when retail rates react similarly to a single monetary policy rate. Thus, for the euro zone it appears that convergence measures provide the most information for the period leading up to the EMU whereas cointegration is more useful during the EMU period as well as prior to the ERM crisis in 1992. |
| Keywords: | monetary economics ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005031&r=mac |
| By: | Luis Aguiar-Conraria; Yi Wen |
| Abstract: | This paper provides new empirical evidence on and theoretical support for the close link between oil prices and aggregate macroeconomic performance in the 1970s. Although this link has been well documented in the empirical literature and is further confirmed in this paper, standard economic models are not able to replicate this link when actual oil prices are used to simulate the models. In particular, standard models cannot explain the depth of the recession in 1974-75 and the strong revival in 1976-78 based on the oil price movements in that period. This paper argues that a missing multiplier-accelerator mechanism from standard models may hold the key. This multiplier-accelerator mechanism not only exacerbated the impact of the oil shocks in 1973-74 but also helped create the temporary recovery in 1976-78. This paper derives the missing multiplier-accelerator mechanism from externalities in general equilibrium. Our calibrated model can explain both the recession in 1974-75 and the revival in 1976-78. |
| Keywords: | Petroleum industry and trade ; Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-042&r=mac |
| By: | KIMLONG CHHENG (Kobe University, Graduate School of International Cooperation Studies) |
| Abstract: | This paper studies whether and how capital investment and economic freedom jointly endogenize economic growth. The results produced by White’s heteroscedasticity-consistent matrix tests on a panel data of 50 countries over 1981-2000 support the crucial role of both domestic and foreign capital investment and economic freedom for rapid growth. Countries that improve economic freedom and that bolster capital investment tend to experience faster growth. The domestic investment rate _the breakdown of public and private investment_ and foreign direct investment are positively associated with economic growth, while the initial real per capita GDP is negatively correlated with subsequent growth rate. |
| Keywords: | Economic freedom; investment; growth |
| JEL: | E |
| Date: | 2005–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509021&r=mac |
| By: | Toshihiko Mukoyama; Aysegul Sahin |
| Abstract: | This paper reconsiders the cost of business cycles under incomplete markets. Primarily, we focus on the heterogeneity in the cost of business cycles among agents with different skill levels. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income translates into heterogeneity in the cost of business cycles. We set up a dynamic general equilibrium model with incomplete markets, in which there is heterogeneity in skills, employment status, asset holding, and the discount factor. We find that the welfare cost of business cycles for unskilled workers is substantially higher than that for skilled workers. |
| Keywords: | Unemployment ; Business cycles ; Labor market |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:214&r=mac |
| By: | Peter Tenim; Joachim Voth |
| Abstract: | Crowding-out during the British Industrial Revolution has long been one of the leading explanations for slow growth during the Industrial Revolution, but little empirical evidence exists to support it. We argue that examinations of interest rates are fundamentally misguided, and that the eighteenth- and early nineteenth-century private loan market balanced through quantity rationing. Using a unique set of observations on lending volume at a London goldsmith bank, Hoare’s, we document the impact of wartime financing on private credit markets. We conclude that there is considerable evidence that government borrowing, especially during wartime, crowded out private credit. |
| Keywords: | Credit rationing, Napoleonic wars, Industrial Revolution, technological change, crowding out |
| JEL: | E22 E43 E51 E65 N23 N13 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:859&r=mac |
| By: | Michael T. Owyang; Jeremy M. Piger; Howard J. Wall |
| Abstract: | This paper examines and compares the recent business cycle experiences of the seven states that lie partly or wholly within the Eighth Federal Reserve District (Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee). For the period surrounding the 1990-91 NBER recession, six of the seven states had recessions that were much shorter than for the country as a whole. For the period surrounding the 2001 NBER recession, four states-Arkansas, Indiana, Kentucky, and Tennessee-entered and exited recession earlier than the country as a whole. Recessions in the other three states began earlier and ended later than for the country as a whole. |
| Keywords: | Recessions ; Federal Reserve District, 8th |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-053&r=mac |
| By: | Kirby Faciane |
| Abstract: | This paper focuses on the multinational operations of the largest Russian business units within major economic sectors and analyzes the following: the driving forces behind the Russian companies’ internationalization; international locations of Russian capital outflow; dominant industries within Russian international corporate activities; and the main operational modes. |
| Keywords: | russia; russian investment; foreign direct investment; international corporate investment; international investment; capital budgeting; capital spending; market expenditures; kirby faciane; investment model; investment horizon; banking sector; banking investments |
| JEL: | G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32 E E0 E1 |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0509016&r=mac |
| By: | Ricardo J. Caballero; Arvind Krishnamurthy |
| Abstract: | Emerging market economies are fertile ground for the development of real estate and other financial bubbles. Despite these economies' significant growth potential, their corporate and government sectors do not generate the financial instruments to provide residents with adequate stores of value. Capital often flows out of these economies seeking these stores of value in the developed world. Bubbles are beneficial because they provide domestic stores of value and thereby reduce capital outflows while increasing investment. But they come at a cost, as they expose the country to bubble-crashes and capital flow reversals. We show that domestic financial underdevelopment not only facilitates the emergence of bubbles, but also leads agents to undervalue the aggregate risk embodied in financial bubbles. In this context, even rational bubbles can be welfare reducing. We study a set of aggregate risk management policies to alleviate the bubble-risk. We show that liquidity requirements, sterilization of capital inflows and structural policies aimed at developing public debt markets "collateralized" by future revenues, all have a high payoff in this environment. |
| JEL: | E32 E44 F32 F34 F41 G10 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11618&r=mac |
| By: | Ali Dib; Mohamed Gammoudi; Kevin Moran |
| Abstract: | This paper documents the out-of-sample forecasting accuracy of the New Keynesian Model for Canada. We repeatedly estimate our variant of the model on a series of rolling subsamples, forecasting out-of-sample one to eight quarters ahead at each step. We then compare these forecasts to those arising from simple VARs, using econometric tests of forecasting accuracy. Our results show that the forecasting accuracy of the New Keynesian model compares favourably to that of the benchmarks, particularly as the forecasting horizon increases. These results suggest that the model can become a useful forecasting tool for Canadian time series. The principle of parsimony is invoked to explain our findings. |
| Keywords: | New Keynesian Model, Forecasting accuracy |
| JEL: | C53 E37 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0527&r=mac |
| By: | Jean Imbs; Romain Rancière |
| Abstract: | We revisit the debt overhang question. We first use non-parametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent)growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, we depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, we ask whether, as overhang level of debt is reached: (i)investment falls precipitously as it should when it becomes optimal to default, (ii) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor, and (iii) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to pre-empt default and exact punitive interest rates. We find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing, or the burden of debt. |
| Keywords: | Debt overhang, kernel estimation, debt contracts, investment, debt relief |
| JEL: | E62 F34 F43 H63 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:878&r=mac |
| By: | Xavier Cuadras Morató |
| Abstract: | This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market. |
| Keywords: | money, notes, search, credit, currency shortage |
| JEL: | E40 D83 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:811&r=mac |
| By: | Muhleisen, Martin; Towe, Christopher M. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfocp:227&r=mac |
| By: | Alejandro Gaytan; Romain Rancière |
| Abstract: | This paper presents empirical support for the existence of wealth effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation for these effects. Using GMM dynamic panel data techniques applied to study the growth-promoting effects of financial intermediation, we show that the exogenous contribution of financial development on economic growth has different effects for different levels of income per capita. We find that this contribution is generally increasing with the level of income per capita of the economy, up to a relatively high level of income. This contribution is consistently lower for poor countries; and for some low levels of income per capita it can be negative. We provide a model to account for these wealth effects. The model is a overlapping generations growth model where financial intermediaries implement liquidity risk sharing among depositors. We show that at early stages of economic development, a bank can increase welfare of its depositors only at the cost of lowering investment and growth. However, once the economy has crossed certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. As wealth increases, banks offer improving liquidity insurance, and higher growth; however, for high levels of wealth, growth generated by financial intermediation declines as the economy attains the optimal level of consumption risk sharing. |
| Keywords: | Financial development, economic growth, OLG growth models, liquidity, financial intermediation |
| JEL: | E44 G21 O16 O40 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:851&r=mac |
| By: | Kirby Faciane |
| Abstract: | This paper focuses on the multinational operations of the largest Russian business units within major economic sectors and analyzes the following: the driving forces behind the Russian companies’ internationalization; international locations of Russian capital outflow; dominant industries within Russian international corporate activities; and the main operational modes. |
| Keywords: | russia; russian investment; foreign direct investment; international corporate investment; international investment; capital budgeting; capital spending; market expenditures; kirby faciane; investment model; investment horizon; energy sector; energy investments |
| JEL: | G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32 E E0 E1 |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0509014&r=mac |
| By: | William Barnett (University of Kansas); Apostolos Serletis (University of Calgary); Demitre Serletis (University of Toronto) |
| Abstract: | This paper was produced for the El-Naschie Symposium on Nonlinear Dynamics in Shanghai in December 2005. In this paper we provide a review of the literature with respect to fluctuations in real systems and chaos. In doing so, we contrast the order and organization hypothesis of real systems with nonlinear chaotic dynamics and discuss some techniques used in distinguishing between stochastic and deterministic behavior. Moreover, we look at the issue of where and when the ideas of chaos could profitably be applied to real systems. |
| Keywords: | Chaos, Nonlinearity, Self-organized criticality |
| JEL: | C8 C14 C22 E37 E32 |
| Date: | 2005–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpge:0509002&r=mac |
| By: | Kirby Faciane |
| Abstract: | This paper focuses on the multinational operations of the largest Russian business units within major economic sectors and analyzes the following: the driving forces behind the Russian companies’ internationalization; international locations of Russian capital outflow; dominant industries within Russian international corporate activities; and the main operational modes. |
| Keywords: | russia; russian investment; foreign direct investment; international corporate investment; international investment; capital budgeting; capital spending; market expenditures; kirby faciane; investment model; investment horizon; commodities sector; industrial commodity investments; commodities; industrial investments |
| JEL: | G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32 E E0 E1 |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0509015&r=mac |
| By: | Peter Tenim; Joachim Voth |
| Abstract: | Finance is important for development, yet the onset of modern economic growth in Britain lagged the British financial revolution by over a century. We present evidence from a new West-End London private bank to explain this delay. Hoare’s Bank loaned primarily to a highly select and well-born clientele, although it did not discriminate against “unknown” borrowers in the early 18th century. It could not extend credit more generally because of government restrictions (usury limits) and policies (frequent wars). Britain’s financial development could have aided growth substantially, had it not been for the rigidities and turmoil introduced by government interference. |
| Keywords: | Financial Revolution, growth, finance, rationing, usury laws, institutional evelopment, eighteenth-century England |
| JEL: | E44 N23 N13 G21 G18 G28 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:860&r=mac |
| By: | Fecht, Falko; Grüner, Hans Peter |
| Abstract: | Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale’s (2000) seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers’ ex ante expected utility, taking into account the trade-off between the contagion and the diversification effect of financial integration. We analyse the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market. |
| Keywords: | financial contagion; financial integration; interbank market; risk sharing |
| JEL: | D61 E44 G10 G21 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5253&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas); Apostolos Serletis (University of Calgary); Demitre Serletis (University of Toronto) |
| Abstract: | This paper was produced for the El-Naschie Symposium on Nonlinear Dynamics in Shanghai in December 2005. In this paper we provide a review of the literature with respect to fluctuations in real systems and chaos. In doing so, we contrast the order and organization hypothesis of real systems with nonlinear chaotic dynamics and discuss some techniques used in distinguishing between stochastic and deterministic behavior. Moreover, we look at the issue of where and when the ideas of chaos could profitably be applied to real systems. |
| Keywords: | Chaos, Nonlinearity, Self-organized criticality |
| JEL: | C8 C14 C22 E37 E32 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200517&r=mac |
| By: | Kirby Faciane |
| Abstract: | This paper focuses on the multinational operations of the largest Russian business units within major economic sectors and analyzes the following: the driving forces behind the Russian companies’ internationalization; international locations of Russian capital outflow; dominant industries within Russian international corporate activities; and the main operational modes. |
| Keywords: | oil; gas; gasoline; petrol; petroleum; russia; russian investment; foreign direct investment; international corporate investment; international investment; capital budgeting; capital spending; market expenditures; kirby faciane; investment model; investment horizon; oil sector; oil and gas investments; gasoline; import; imports; exports; export; crude oil; Yukos; |
| JEL: | G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32 E E0 E1 |
| Date: | 2005–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0509017&r=mac |
| By: | Jaume Ventura |
| Abstract: | This paper presents a stylized model of economic growth with bubbles. This model views asset price bubbles as a market-generated device to moderate the effects of frictions in financial markets, improving the allocation of investments and raising the capital stock and welfare. The model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms, and therefore, the rate of economic growth. The model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth. |
| Keywords: | Asset price bubbles, economic growth, financial frictions, innovations and reforms |
| JEL: | E32 O40 G10 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:848&r=mac |
| By: | Mark Aguiar; Erik Hurst |
| Abstract: | Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middle age, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 percent. From this elasticity and observed shopping intensity, we impute the opportunity cost of time for the shopper which peaks in middle age at a level roughly 40 percent higher than that of retirees. Using this measure of the price of time and observed time spent in home production, we estimate the parameters of a home production function. We find an elasticity of substitution between time and market goods in home production of close to two. Finally, we use the estimated elasticities for shopping and home production to calibrate an augmented lifecycle consumption model. The augmented model predicts the observed empirical patterns quite well. Taken together, our results highlight the danger of interpreting lifecycle expenditure without acknowledging the changing demands on time and the available margins of substituting time for money. |
| JEL: | E2 D1 J2 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11601&r=mac |
| By: | Kugler, Adriana D.; Pica, Giovanni |
| Abstract: | This paper uses the Italian Social Security employer-employee panel to study the effects of the Italian reform of 1990 on worker and job flows. We exploit the fact that this reform increased unjust dismissal costs for firms below 15 employees, while leaving dismissal costs unchanged for bigger firms, to set up a natural experiment research design. We find that the increase in dismissal costs decreased accessions and separations for workers in small relative to big firms, especially in sectors with higher employment volatility. Moreover, we find that the reform reduced firms' employment adjustments on the internal margin as well as entry rates while increasing exit rates. |
| Keywords: | employment volatility; European unemployment; firms' entry and exit; unjust dismissal costs |
| JEL: | E24 J63 J65 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5256&r=mac |
| By: | Mark Aguiar; Fernando Broner |
| Abstract: | Emerging market crises are characterized by large swings in both macroeconomic fundamentals and asset prices. The economic significance of observed movements in macroeconomic variables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of “effective” fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999). |
| Keywords: | Currency crises; emerging markets; stock prices; overshooting; credit markets |
| JEL: | E44 F31 F32 F41 G12 G14 G15 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:863&r=mac |
| By: | E.Panopoulou (National University of Ireland, Maynooth and University of Piraeus, Greece) |
| Abstract: | This paper attempts a resolution of the Fisher effect puzzle in terms of estimator choice. Using both short-term and long-term interest rates for 14 OECD countries, we find ample evidence supporting the existence of a long-run Fisher effect in which interest rates move oneto- one with inflation. Our results suggest that the reason why the Fisher effect has not found support internationally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested within the Autoregressive Distributed Lag (ADL) framework, which is invariant to the integration properties of the data, the Fisher effect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Least Squares (PW-FMLS) or the Johansen’s (JOH) estimators. |
| Keywords: | Cointegration Estimators,Fisher Effect,ADL; DOLS Small-sample properties |
| JEL: | E40 E50 C12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n1500205&r=mac |
| By: | Elisa Alòs; Christian-Olivier Ewald |
| Abstract: | We show that the Heston volatility or equivalently the Cox-Ingersoll-Ross process satisfying is Malliavin differentiable and give an explicit expression for the derivative. This result assures the applicability of Malliavin calculus in the framework of the Heston stochastic volatility model and the Cox-Ingersoll-Ross model for interest rates. |
| Keywords: | Malliavin calculus, stochastic volatility models, Heston model, Cox-Ingersoll-Ross process |
| JEL: | G12 G19 C19 E43 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:880&r=mac |
| By: | Nico Voigtländer; Joachim Voth |
| Abstract: | Why was England first? And why Europe? We present a probabilistic model that builds on big-push models by Murphy, Shleifer and Vishny (1989), combined with hierarchical preferences. The interaction of exogenous demographic factors (in particular the English low-pressure variant of the European marriage pattern)and redistributive institutions – such as the “old Poor Law” – combined to make an Industrial Revolution more likely. Essentially, industrialization is the result of having a critical mass of consumers that is “rich enough” to afford (potentially) mass-produced goods. Our model is then calibrated to match the main characteristics of the English economy in 1750 and the observed transition until 1850. This allows us to address explicitly one of the key features of the British Industrial Revolution unearthed by economic historians over the last three decades – the slowness of productivity and output change. In our calibration, we find that the probability of Britain industrializing is 5 times larger than France’s. Contrary to the recent argument by Pomeranz, China in the 18th century had essentially no chance to industrialize at all. This difference is decomposed into a demographic and a policy component, with the former being far more important than the latter. |
| Keywords: | Inequality, Industrial Revolution, growth, big push, redistribution, steam, general purpose technology |
| JEL: | N13 E22 E25 O41 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:857&r=mac |
| By: | Massimo Guidolin; Allan Timmerman |
| Abstract: | We propose a four-state multivariate regime switching model to capture common latent factors driving short-term spot and forward rates in the US. For this class of models we develop a flexible approach to combine forecasts of future spot rates with forecasts from alternative sources such as time-series models or models capturing macroeconomic information. We find strong empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for short-term interest rates in the US. Theoretical restrictions from the expectations hypothesis when imposed on the forecasting model are found to help only at long forecasting horizons. |
| Keywords: | Interest rates ; Forecasting |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-059&r=mac |
| By: | Alberto Alesina; Guido Tabellini |
| Abstract: | Many countries, especially developing ones, follow procyclical fiscal polices, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the “starving the Leviathan” classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11600&r=mac |
| By: | Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L |
| Abstract: | This paper analyses the welfare effects of changes in cross-sectional wage dispersion, using a class of tractable heterogeneous-agent economies. We emphasize a trade-off in the welfare calculation that arises when labour supply is endogenous. On the one hand, as wage uncertainty rises, so does the cost associated with missing insurance markets. On the other hand, greater wage inequality presents opportunities to increase aggregate productivity by concentrating market work among more productive workers. We find that the observed rise in wage dispersion in the United States over the past three decades implies a welfare loss roughly equivalent to a 2.5% decline in lifetime consumption. Assuming Cobb-Douglas preferences, this number is the result of a welfare gain of around 5% from the endogenous increase in productivity coupled with a loss of around 7.5% associated with greater volatility in consumption and leisure. |
| Keywords: | insurance; labour supply; productivity; wage dispersion; welfare |
| JEL: | D31 D58 D91 E21 J22 J31 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5200&r=mac |
| By: | Salvatore Nistico (Luiss Guido Carli) |
| Abstract: | La fiducia del piccolo risparmiatore nell’integrità del sistema economico in cui opera è un elemento cruciale per la sopravvivenza del modello capitalistico di sviluppo economico. Negli anni novanta si sono osservate marcate tendenze all’investimento in capitale di rischio per motivi tanto dovuti alle aspettative di maggiori profitti delle imprese (stimolate dalla rivoluzione tecnologica) quanto all'euforia speculativa, determinando l’ascesa dei mercati azionari globali e il successivo crollo, nel momento in cui è apparso chiaro che il movente speculativo cominciava ad essere quello predominante. Le difficoltà generate dal crollo dei mercati, inoltre, hanno determinato l’emersione di numerosi casi di frode contabile che, poggiando sulla corsa dei indici, avevano pasciuto amministratori disonesti e revisori compiacenti. Il saggio offre una rassegna critica e un commento delle dinamiche macroeconomiche, finanziarie e istituzionali che hanno caratterizzato i mercati finanziari di fine millennio. |
| JEL: | E |
| Date: | 2005–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0509018&r=mac |
| By: | Thomas Cooley; Ramon Marimon; Vicenzo Quadrini |
| Abstract: | We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market. |
| Keywords: | Innovation, enforcement, aggregate fluctuations, development, financing innovation |
| JEL: | E10 O11 O16 O40 |
| Date: | 1999–06 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:843&r=mac |
| By: | George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge); Noah Williams (Princeton University and NBER) |
| Abstract: | We study the properties of generalized stochastic gradient (GSG) learning in forwardlooking models. We examine how the conditions for stability of standard stochastic gradient (SG) learning both differ from and are related to E-stability, which governs stability under least squares learning. SG algorithms are sensitive to units of measurement and we show that there is a transformation of variables for which E-stability governs SG stability. GSG algorithms with constant gain have a deeper justification in terms of parameter drift, robustness and risk sensitivity. |
| Keywords: | adaptive learning, E-stability, recursive least squares, robust estimation |
| JEL: | C62 C65 D83 E10 E17 |
| Date: | 2005–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2005-17&r=mac |
| By: | Josep M. Colomer |
| Abstract: | This article presents a formal model of policy decision-making in an institutional framework of separation of powers in which the main actors are pivotal political parties with voting discipline. The basic model previously developed from pivotal politics theory for the analysis of the United States lawmaking is here modified to account for policy outcomes and institutional performances in other presidential regimes, especially in Latin America. Legislators' party indiscipline at voting and multi-partism appear as favorable conditions to reduce the size of the equilibrium set containing collectively inefficient outcomes, while a two-party system with strong party discipline is most prone to produce 'gridlock', that is, stability of socially inefficient policies. The article provides a framework for analysis which can induce significant revisions of empirical data, especially regarding the effects of situations of (newly defined) unified and divided government, different decision rules, the number of parties and their discipline. These implications should be testable and may inspire future analytical and empirical work. |
| Keywords: | Macroeconomic policy-making, Divided government, Political parties |
| JEL: | E60 E66 H70 H73 H77 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:817&r=mac |
| By: | Bodart,Vincent; Candelon,Bertrand (METEOR) |
| Abstract: | The purpose of this paper is to propose a new measure of contagion. Our approach to testing contagion is based on the frequency analysis of causality developed recently by Breitung and Candelon (2004). This approach handles, in a unified framework, several of the statistical problems identified in the literature. It also permits clear differentiation between temporary and permanent shifts in cross-market linkages: the first case is contagion while the second one is simply a measure of interdependence among markets. In examining the ”Tequila” and Asian crises, we find evidence for contagion during both. It also turns out that during the Asian crisis both contagion and higher interdependence have contributed simultaneously to the diffusion of the crisis in Asia. The spillover effects of these crises have been geographically limited to the region where the shock originated. |
| Keywords: | macroeconomics ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005024&r=mac |
| By: | Caselli, Francesco; Feyrer, James |
| Abstract: | Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that the MPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions. Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries' incomes. |
| Keywords: | capital flows; investment |
| JEL: | E22 O11 O16 O41 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5203&r=mac |
| By: | Charles W. Calomiris; Joseph R. Mason |
| Abstract: | The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance, and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a “pure arbitrage” strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope between note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements. |
| Keywords: | Bank notes ; National banks (United States) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:05-19&r=mac |
| By: | Bruinshoofd,Allard; Candelon,Bertrand; Raabe,Katharina (METEOR) |
| Abstract: | We show that, complementary to trade and financial linkages, the strength of the bankingsector helps explain the transmission of currency crises. Specifically, we demonstrate thatthe Mexican, Thai, and Russian crises predominantly spread to countries with weaknesses intheir banking sectors. At the same time, the role of banking sector strength varies per crisis;where the Mexican crisis spread to countries with a strong presence of foreign banks indomestic credit provision, the Thai crisis disproportionately contaminated countries wherethe banking sector was most sensitive to currency realignments, wh ile the Russian crisisspread to countries with inefficiencies in the banking sector. |
| Keywords: | macroeconomics ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005023&r=mac |
| By: | Fernando Broner |
| Abstract: | The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations. |
| Keywords: | Currency crises; First generation models; private information; discrete devaluations; multiple equilibria |
| JEL: | D8 E58 F31 F32 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:839&r=mac |
| By: | Kugler, Peter; Weder, Beatrice |
| Abstract: | It is well known that the uncovered interest rate parity fails in the short run but usually holds in the long run. This paper analyses the long and short run interest rate parity of 10 major OECD currencies and finds that there is a long run failure of the uncovered interest rate parity condition for the Swiss franc. After correcting for exchange rate changes, mean returns on Swiss assets have been significantly lower than in other currencies, an anomaly not found in any other major currency. The long run return differential has been stable over the last 20 years, transitory structural breaks are only found in times of currency turmoil. We suggest that the return anomaly may be due to an insurance premium against very rare catastrophic events, such as a major war. Supporting evidence for this hypothesis comes from two empirical findings. First, we show that the return differential is negatively affected by large unexpected geo-political events. Second we examine historical data on interest rates differentials and show that the abnormally low level of Swiss returns arises after the First World War only. |
| Keywords: | asset prices; Swiss franc assets; uncovered interest rate parity |
| JEL: | E43 E44 G15 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5181&r=mac |
| By: | Ziesemer,Thomas (MERIT) |
| Abstract: | In this paper we develop a simple neoclassical growth model with perfect international capital mobility to analyze the stability of the differential equation in the foreign debt/GDP dynamics of developing countries in general and Korea, Malaysia and Thailand in particular in the long run using data over the period 1960-2000, and to use it as a counterfactual for bad times. We show that three different regimes can be distinguished: a stable steady state debtor regime, a stable steady state creditor regime and an unstable regime. A switch from a stable debtor or a stable creditor position to an unstable creditor regime with an increasing debt/GDP ratio is a sign of forthcoming trouble. We investigate this issue empirically for the three Asian countries in the run-up to the 1997 Asia crisis. Over the full sample, the evidence suggests that debt dynamics evolved according to the stable debtor case in each country with an equilibrium value of zero for Malaysia but positive ones for Korea and Thailand. Using a rolling regression technique, we find that indeed occasional switches to the unstable regime occurred. We demonstrate that all three countries investigated here were facing deteriorating domestic fundamentals – reflected in a movement towards unstable debt/GDP dynamics – some years prior to the breakout of the Asia crisis. As such, our approach appears to offer an interesting early warning indicator – the vanishing stability and appearance of instability in the differential equation of the debt/GDP ratio - for financial (debt) crises that should be used together with others for countries with fixed exchange rates. |
| Keywords: | economic development and growth ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamer:2005016&r=mac |
| By: | Gerhard Glomm; Jürgen Jung; Changmin Lee; Chung Tran |
| Abstract: | We use an OLG model to study the effects of the generous public sector pension system in Brazil. In our model there are two types of workers, one working in the private sector, the other working in the public sector. Public workers produce infrastructure or education services. We find that reducing generosity of the public sector pensions has large effects on capital accumulation and steady state income. |
| Keywords: | pension reform, capital accumulation |
| JEL: | E62 H41 H55 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1539&r=mac |
| By: | Fernando Broner; Guido Lorenzoni; Sergio L. Schmukler |
| Abstract: | We argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term borrowing and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders’ risk aversion are important to understand emerging market crises. |
| Keywords: | Emerging market debt; maturity structure; sovereign spreads; risk premium; term premium; financial crises |
| JEL: | E43 F30 F32 F34 F36 G15 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:838&r=mac |
| By: | Peter Tenim; Joachim Voth |
| Abstract: | This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and nonetheless invested in the stock; it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by institutional factors such as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may only attack when some coordinating event promotes joint action. |
| Keywords: | Efficient Market Hypothesis, Bubbles, Crashes, Synchronization Risk, Investor Sentiment, South Sea Bubble, Market Timing, Limits to Arbitrage |
| JEL: | G14 E44 N23 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:861&r=mac |
| By: | Denis Kadochnikov (Leontief Center - International Center for Social & Economic Research) |
| Abstract: | The research presented in this paper is undertaken in response to the debate on capital flight from Russia. This debate usually involves discussion of its determinants but misses the question of its ultimate effects on the economy. Lack of understanding of the economic nature of capital flight and of its institutional context leads to numerous calls for a policy response, such as stricter capital controls, which are not grounded in any theory or empirical studies, but at the same time are not opposed on theoretical grounds, with only ideological or technical arguments employed at the very best. The purpose of the paper is to examine capital flight from Russia within the institutional environment in which it occurs and to establish whether this capital flight has detrimental effect on the economy. New Institutional Economics approach is adopted to argue that in Russia’s case capital flight might be considered not just a consequence, as some researchers have argued earlier, but also an optimal solution to the institutional deficiencies with its economic role being neutral. To support the validity of this claim modified Granger non-causality test is used to determine whether capital flight dynamics have a causal effect on that of the interest rate differential and vice versa, that is to test whether price mechanism is not working. Rethinking the nature and the economic impact of capital flight allows postulating that within the existing institutional context the observed capital flight is a normal economic process which per se does not require any policy response and restricting capital flight by imposing capital controls cannot be an element of a pro-growth policy, as it would instead lead to boom-burst sort of growth. |
| Keywords: | Russia, Capital Flight, New Institutional Economics |
| JEL: | E61 F21 G18 O16 O52 |
| Date: | 2005–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0509007&r=mac |
| By: | D. Duffy (The Economic and Social Research Institute); M.J. Roche (Economics, NUI Maynooth, Ireland) |
| Abstract: | Choosing a mortgage product in the face of labor income risk, interest rate risk and borrowing constraints is one of the most important decisions facing a household. This paper investigates the choice between a variety of fixed rate mortgages and adjustable rate mortgages. We find that households with a high loan-to-value ratio, risky income and high risk aversion are more likely to choose a fixed rate mortgage. Choosing a mortgage product relies market search and information. The paper finds that in general first-time homebuyers and those with a high loan-to-value ratio are more likely to use a mortgage broker. |
| Keywords: | Mortgage choice,First-time homebuyer,Mortgage broker |
| JEL: | E40 G21 R51 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n1520205&r=mac |
| By: | Philippe Bacchetta (Study Center Gerzensee, University of Lausanne, FAME and CEPR); Eric van Wincoop (University of Virginia, NBER) |
| Abstract: | Empirical evidence shows that observed macroeconomic fundamentals have little explanatory power for nominal exchange rates (the exchange rate determination puzzle). On the other hand, the recent \microstructure approach to exchange rates" has shown that most exchange rate volatility at short to medium horizons is related to order flow. In this paper we introduce symmetric information dispersion about future fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence the model implies that (i) observed fundamentals account for little of exchange rate volatility in the short to medium run, (ii) over long horizons the exchange rate is closely related to observed fundamentals, (iii) exchange rate changes are a weak predictor of future fundamentals, and (iv) the exchange rate is closely related to order flow over both short and long horizons. |
| Keywords: | Nominal Exchange Rates; Order Flow; Higher Order Expectations |
| JEL: | F3 F4 G0 G1 E0 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp155&r=mac |
| By: | Josep M. Colomer |
| Abstract: | We present voters' self-placement and 68 political party locations on the left-right dimension in 17 Latin American countries. Innovative calculations are based on data from Latinobarometer annual surveys from 1995 to 2002. Our preliminary analysis of the results suggests that most Latin American voters are relatively highly ideological and rather consistently located on the left-right dimension, but they have very high levels of political alienation regarding the party system. Both voters' self-placement and the corresponding party locations are presently highly polarized between the center and the right, with a significant weakness of leftist or broadly appealing 'populist' positions. |
| Keywords: | Political ideology, left-right dimension, political parties, electoral competition |
| JEL: | E61 H10 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:813&r=mac |
| By: | Philippe Bacchetta (Study Center Gerzensee, University of Lausanne, FAME & CEPR); Eric van Wincoop (University of Virginia, NBER) |
| Abstract: | The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks. |
| Keywords: | forward discount puzzle; excess return predictability; rational |
| JEL: | E44 F31 G1 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:fam:rpseri:rp156&r=mac |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks. |
| JEL: | F3 G1 E4 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11633&r=mac |