|
on Macroeconomics |
|
Issue of 2005‒10‒15
fifty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Shengzu Wang (McGill University); Shen Guo (Concordia University) |
| Abstract: | In this paper we apply a simple macro model to explore and evaluate certain optimal monetary policy rules for China's economy. To be more consistent with the central bank (the People's Bank of China)'s behaviour, we use money supply as a monetary policy instrument rather than the commonly used interest rate. Policy rules are optimal in terms of minimizing the predetermined loss functions, and the parameters of these rules are determined by stochastic simulation. Different forms of policy rule and loss function are considered, especially for exchange rate volatility and money supply volatility. The optimality of monetary policy rules is evaluated by comparing the shifts of policy frontiers. |
| Keywords: | Monetary Policy Rule, Loss Function, Stochastic Simulation, Policy Frontier, China |
| JEL: | C15 E47 E52 |
| Date: | 2005–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510009&r=mac |
| By: | James S. Costain; Michael Reiter |
| Abstract: | We construct and calibrate a general equilibrium business cycle model with unemployment and precautionary saving. We compute the cost of business cycles and locate the optimum in a set of simple cyclical fiscal policies. Our economy exhibits productivity shocks, giving firms an incentive to hire more when productivity is high. However, business cycles make workers' income riskier, both by increasing the unconditional probability of unusually long unemployment spells, and by making wages more variable, and therefore they decrease social welfare by around one-fourth or one-third of 1% of consumption. Optimal fiscal policy offsets the cycle, holding unemployment benefits constant but varying the tax rate procyclically to smooth hiring. By running a deficit of 4% to 5% of output in recessions, the government eliminates half the variation in the unemployment rate, most of the variation in workers'aggregate consumption, and most of the welfare cost of business cycles. |
| Keywords: | Real business cycles, matching, precautionary saving, unemployment insurance, fiscal policy, incomplete markets, heterogeneity, computation |
| JEL: | E24 E32 E62 E63 H21 J64 J65 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:890&r=mac |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | The timelessly optimal monetary policy proposed by Woodford (2003) may be dominated by alternative timeless policies. We provide a formal justification for these alternative policies. We demonstrate why discount rates do not matter and establish that optimizing over the unconditional expectation of the policy criterion function recovers these alternative strategies. |
| Keywords: | Time consistency, unconditional expectation, timeless perspective, optimal monetary policy. |
| JEL: | C61 E30 E52 E58 E61 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0510&r=mac |
| By: | Julen Esteban Pretel (Faculty of Economics, University of Tokyo); Elisa Faraglia (London Business School) |
| Abstract: | This paper studies the effects of a monetary shock on real and nominal variables, such as output, inflation and especially unemployment, within a framework which combines a New Keynesian business cycle model model with microfounded labor market in the style of the search and matching literature. We assume that unemployed workers can lose their skill over time and show that this mechanism helps explain the slugish response of unemployment to monetary shocks observed in the data, while also replicating the behavior of output, inflation and employment. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf380&r=mac |
| By: | Nymoen, Ragnar (Dept. of Economics, University of Oslo) |
| Abstract: | Failures are not rare in economic forecasting, probably due to the high incidence of shocks and regime shifts in the economy. Thus, there is a premium on adaptation in the forecast process, in order to avoid sequences of forecast failure. This paper evaluates a sequence of inflation forecasts in the Norges Bank Inflation Report, and we present automatized forecasts which are unaffected by forecast failure. One conclusion is that the Norges Bank fan-charts are too narrow, giving an illusion of very precise forecasts. The automatized forecasts show more adaptation once shocks have occurred than is the case for the official forecasts. On the basis of the evidence, the recent inflation forecast failure appears to have been largely avoidable. The central bank’s understanding of the nature of the transmission mechanism and of the strenght and nature of the disinflationly shock that hit the economy appear to have played a major role in the recent forecast failure. |
| Keywords: | Inflation forecasts; Monetary policy; Forecast uncertainty; Fan-charts; Structural change; Econometric models. |
| JEL: | C32 C53 E37 E44 E47 E52 E58 |
| Date: | 2005–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_022&r=mac |
| By: | Petra M. Geraats |
| Abstract: | Despite the recent trend towards greater transparency of monetary policy, in many respects central bankers still prefer to speak with mystique. This paper shows that the resulting perception of ambiguity could be desirable. Under the plausible assumption that there is imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial but that it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak. |
| Keywords: | Transparency, monetary policy, communication, transparency misperceptions. |
| JEL: | E52 E58 D82 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0543&r=mac |
| By: | Hanno Lustig; Christopher Sleet; Sevin Yeltekin |
| Abstract: | We identify a novel, fiscal hedging motive that helps to explain why governments issue more expensive, long-term debt. We analyze optimal fiscal policy in an economy with distortionary labor income taxes, nominal rigidities and nominal debt of various maturities. The government in our model can smooth labor tax rates by changing the real return it pays on its outstanding liabilities. These changes require state contingent inflation or adjustments in the nominal term structure. In the presence of nominal pricing rigidities and a cash in advance constraint, these changes are themselves distortionary. We show that long term nominal debt can help a government hedge fiscal shocks by spreading out and delaying the distortions associated with increases in nominal interest rates over the maturity of the outstanding long-term debt. After a positive spending shock, the government raises the yield curve and steepens it. |
| JEL: | E4 E6 G1 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11687&r=mac |
| By: | Naohiko Baba (Financial Markets Department and Institute for Monetary and Economics Studies, Bank of Japan); Motoharu Nakashima (Financial Markets Department, Bank of Japan); Yousuke Shigemi (Secretariat of the Policy Board); Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | Using the interest rates on Negotiable Certificate of Deposit issued by individual banks, we first show that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing Policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf374&r=mac |
| By: | Yasushi Iwamoto (Faculty of Economics, University of Tokyo) |
| Abstract: | Interactions between monetary and fiscal policy depend on the specification of policy variables that fiscal policy uses. However, a general rule is that when monetary policy is capable of dealing with sticky price adjustment, a primary concern of fiscal authority should be to remedy the resource allocation. My regression study using cross-country data shows that in a majority of OECD countries fiscal policy relies on the automatic stabilizer. Japan is a unique case in that it relies heavily on discretionary fiscal policy. However, Japanese policymakers have recently changed their thinking regarding fiscal policy. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf365&r=mac |
| By: | Arief Ramayandi (AJRC - Australia-Japan Research Centre) |
| Abstract: | Among other things, the 1997–98 East Asian financial crisis has led to questioning within the Association of Southeast Asian Nations (ASEAN) about whether the region needs a common currency. This paper aims to discuss the underlying economic issues and prospects, from both a theoretical and a practical point view. The analysis focuses only on the five largest ASEAN nations. Standard criteria suggested by the theory of Optimal Currency Areas are reviewed and applied to the region. The paper then provides a discussion on possible steps that can be pursued to realise currency union. |
| Keywords: | East Asian Financial crisis, monetary cooperation, ASEAN, Optimal Currency Areas, currency union |
| JEL: | E42 E52 E61 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:636&r=mac |
| By: | Adolfson, Malin (Research Department, Central Bank of Sweden); Andersson, Michael K. (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden); Vredin, Anders (Monetary Policy Department, Central Bank of Sweden) |
| Abstract: | There are many indications that formal methods based on economic research are not used to their full potential by central banks today. For instance, Christopher Sims published a review in 2002 where he argued that central banks use models that ”are now fit to data by ad hoc procedures that have no grounding in statistical theory”. There is no organized resistance against formal models at central banks, but the proponents of such models have not always been able to present convincing evidence of the models’ advantages. In this paper we demonstrate how BVAR and DSGE models can be used to shed light on questions that policy makers deal with in practice. We compare the forecast performance of BVAR and DSGE models with the Riksbank’s official, more subjective forecasts. We also use the models to interpret the low inflation rate in Sweden in 2003 - 2004. |
| Keywords: | Bayesian inference; DSGE models; Forecasting; Monetary policy; Subjective forecasting; Vector autoregressions |
| JEL: | E37 E47 E52 |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0188&r=mac |
| By: | Christophe André; Nathalie Girouard |
| Abstract: | Measuring cyclically-adjusted budget balances for OECD countries An important tool in the analysis of fiscal policy is the distinction between structural and cyclical components of the budget balance. This paper describes work undertaken to re-estimate and re-specify the elasticities underlying the Economics Department's calculations of cyclically-adjusted budget balances. Account is taken of tax reforms introduced since the previous updating exercise. A number of methodological innovations have been introduced to better account for the lags between taxes and activity and to ensure greater cross-country consistency in the estimates. The methodology underlying cyclical adjustment of expenditures has also been reviewed. Finally, the country coverage has been extended. The overall results are broadly consistent with the previous set of estimates. The sensitivity of government net lending to a 1 percentage point change in the output gap remains at around 0.5% of GDP for OECD economies on average. <P>Mesurer le solde budgétaire corrigé des fluctuations cycliques pour les pays de l’OCDE La distinction entre les composantes structurelle et cyclique du solde budgétaire est un outil essentiel de l'analyse de la politique budgétaire. Cette étude présente le travail de ré-estimation et de re-modélisation entrepris afin de mettre à jour les élasticités sous-jacentes au calcul par le Département des Affaires Economiques du solde budgétaire corrigé des fluctuations conjoncturelles. Les réformes fiscales mise en œuvre depuis le dernier exercice de mise à jour ont été prises en compte. Un certain nombre d'améliorations méthodologiques ont été introduites afin de mieux tenir compte des délais d'ajustement entre les recettes fiscales et l'activité économique ainsi que pour assurer une meilleure cohérence des estimations entre les pays. La méthodologie utilisée pour l'ajustement cyclique des dépenses a aussi été revue. Finalement, le nombre de pays couvert a été augmenté. Les résultats globaux sont, dans l'ensemble, cohérents avec les estimations précédentes. La sensibilité du solde financier des administrations publiques à un changement d'un point de pourcentage de l'écart de production demeure autour de 0.5% du PIB pour la moyenne des pays de l'OCDE. |
| Keywords: | fiscal policy, automatic stabilisers, public finances, politique budgétaire, stabilisateurs automatiques, cycle économique, finances publiques, Business cycles |
| JEL: | E62 H30 H60 |
| Date: | 2005–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:434-en&r=mac |
| By: | Haan, Jakob de; Inklaar, Robert; Jong-a-Pin, Richard (Groningen University) |
| Abstract: | This survey of business cycle synchronization in the European monetary union focuses on two issue: have business cycles become more similar, and, which factors drive business cycle synchronization. We conclude that business cycles in the euro area have gone through periods of both convergence and divergence. Still, there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased. Higher trade intensity is found to lead to more synchronization, but the point estimates vary widely. The evidence for other factors affecting business cycle synchronization is very mixed. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugccs:200508&r=mac |
| By: | Julen Esteba-Pretel (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper studies the effects of the loss of skills on the persistence of unemployment and other macroeconomic variables. It combines a Real Business Cycle model with a search and matching labor market to explain how the loss of skill of workers and the subsequent decrease in their probability of finding new jobs creates more persistent business cycles. The paper proves that the introduction of this mechanism improves the performance of the model and is able to replicate cross country differences in unemployment and output persistence. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf371&r=mac |
| By: | Luis F Costa; Huw D Dixon |
| Abstract: | We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new 'prosperity plateau,' but contractionary shocks only affect the market power of mature industries. |
| Keywords: | Entry; hysteresis, mark-up |
| JEL: | E62 L13 L16 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:05/30&r=mac |
| By: | Alberto Alesina; Guido Tabellini |
| Date: | 2005–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:784828000000000465&r=mac |
| By: | Robert E. Hall |
| Abstract: | The evolution of the aggregate labor market is far from smooth. I investigate the success of a macro model in replicating the observed levels of volatility of unemployment and other key variables. I take variations in productivity growth and in exogenous product demand (government purchases plus net exports) as the primary exogenous sources of fluctuations. The macro model embodies new ideas about the labor market, all based on equilibrium – the models I consider do not rest on inefficiency in the use of labor caused by an inappropriate wage. I find that non-standard features of the labor market are essential for understanding the volatility of unemployment. These models include simple equilibrium wage stickiness, where the sticky wage is an equilibrium selection rule. A second model based on modern bargaining theory delivers a different kind of stickiness and has a unique equilibrium. A third model posits fluctuations in matching efficiency that may arise from variations over time in the information about prospective jobs among job-seekers. Reasonable calibrations of each of the three models match the observed volatility of unemployment. |
| JEL: | E24 E52 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11684&r=mac |
| By: | Douglas Dacy (University of Texas at Austin); Fuad Hasanov (Oakland University) |
| Abstract: | This paper investigates whether the rate of interest such as the Treasury bill rate or the rate of return such as the return on a household portfolio is more relevant to the household’s intertemporal decision making. In a current era, households are diversifiers (to use Tobin’s 1958 term) and hold portfolios of assets rather than a simple loan. A portfolio of assets earns a composite return accounting for capital gains, taxes, and inflation, and rational agents make spending decisions based on expected total returns on a portfolio rather than on the return on a single asset. The total composite measure we use includes financial assets such as stocks and bonds and a real asset, residential housing. In particular, we estimate the intertemporal elasticity of substitution, namely, how a change in the asset or portfolio return affects household’s consumption growth. The estimates obtained using real after-tax composite return are about 0.15-0.3 and are more robust to linear and nonlinear estimations, different consumption measures, and various time periods than those obtained by using individual asset returns such as the Treasury bill rate. |
| Keywords: | intertemporal elasticity of substitution, intertemporal choice, consumption, housing, portfolio return |
| JEL: | D91 E21 C13 |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510012&r=mac |
| By: | Luiz de Mello |
| Abstract: | This paper reviews recent trends in fiscal performance in Brazil, estimates fiscal reaction functions for the consolidated public sector and different levels of government, and tests for the sustainability of the public debt dynamics. The empirical analysis, based on monthly data for the period 1995-2004, suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets. In addition, the central government appears to follow a spend-and-tax policy: changes in revenue are affected strongly by expenditure, with about two-thirds of changes in primary spending being offset through higher revenue over the long term. Institutions are also found to matter for fiscal sustainability. The responsiveness of sub-national fiscal stance to indebtedness, as well as that of central government revenue to changes in primary spending, appears to have strengthened after 1998, when ceilings on indebtedness were introduced. <P>Estimation des fonctions de réaction budgétaire Cet article examine les tendances récentes des performances budgétaires au Brésil, estime les fonctions de réaction budgétaire pour le secteur public consolidé et les différents niveaux d’administration, et teste la soutenabilité de la dynamique de la dette publique. L'analyse empirique, basée sur des données mensuelles pour la période 1995-2004, suggère que tous les niveaux d’administration réagissent fortement aux changements de l'endettement en ajustant leurs cibles d’excédent budgétaire primaire. En outre, l’administration centrale semble suivre une politique de « dépenses suivi d’impôt »: les changements de revenu sont affectés fortement par les dépenses, avec environ deux tiers des changements de la dépense primaire étant compensée par un plus haut revenu sur le long terme. Les institutions budgétaires sont également importantes en matière de soutenabilité budgétaire. La réaction des administrations locales à l'endettement, ainsi que celle du revenu de l’administration centrale aux changements de la dépense primaire, semble s’être renforcé après 1998, quand des plafonds sur l'endettement ont été introduits. |
| Keywords: | fiscal rules, règles budgétaires, Brazil, Brésil, debt sustainability, fiscal reaction function, soutenabilité de dette, fonction de réaction budgétaire |
| JEL: | E62 H62 H63 |
| Date: | 2005–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:423-en&r=mac |
| By: | Pål Boug, Ådne Cappelen and Torbjørn Eika (Statistics Norway) |
| Abstract: | Several small open economies switched to inflation targeting during the 1990s, thereby giving up various forms of exchange rate targeting in favour of flexible exchange rates. Norway did the same early in 2001, and has thereafter experienced highly varying nominal exchange rates with consumer price inflation dropping far below the target during 2003 and 2004. Knowledge of the degree of exchange rate pass-through to import prices and further to consumer prices is essential for inflation targeting. The literature suggests that pass-through is greater to import prices than to consumer prices, which presumably is related to the role of distributors in the economy. We present empirical evidence on these issues for Norway by estimating import price equations and a dynamic model of the distributors pricing behaviour. Using a large-scale macroeconometric model of the Norwegian economy, we find exchange rate pass-through to import prices to be quite rapid in the short run, while pass-through to consumer prices seems to be modest. We show that, among the numerous channels through which the exchange rate operate, trade margins in the distribution sector act as cushions to exchange rate fluctuations, thereby being one of the main important source for the delay in pass-through. In spite of moderate pass-through to consumer prices, we find inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks. |
| Keywords: | Exchange rate pass-through; pricing behaviour; the distribution sector; econometric modelling and macroeconomic analysis |
| JEL: | C51 C52 E31 F31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:429&r=mac |
| By: | iulia igescu (Global Insight) |
| Abstract: | The dramatic fall in output in eastern Europe in the 90s was a result of the institutional structure imposed by the state - taken here as exogenous - on the production process. Consider therefore an economic system where the state is promoting a policy of 'forced capital formation' to fund a technology which produces higher output. The drawback is that such a system becomes internally unstable: even though economic growth takes place in the short run, in the long run the economy moves into a transition path towards a stable lower income (unless the relationship between the political sector and the economy changes and the state withdraws from the capital formation process). As output loss reached the level of another Great Depression, pecularities of this phenomenon of East Europe can bring new insight into what is triggering great depressions. |
| Keywords: | Great Depression, state, capital formation, growth |
| JEL: | E |
| Date: | 2005–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510008&r=mac |
| By: | Timothy K.M. Beatty, Erling Røed Larsen and Dag Einar Sommervoll (Statistics Norway) |
| Abstract: | Measuring change in the price of housing is an important and notoriously difficult task for national statistical agencies. Different approaches have been attempted, but suffer from known weaknesses. This article suggests dividing housing outlays into consumption and saving. The changes in prices of the consumption component are governed primarily by the purchasing price and the interest rate, and lead us to the construction of a consumption cost index. We show that over the lifespan of the mortgage, under some general assumptions, the price changes most relevant for inflation measurement can be obtained from a housing price index. The main challenge lies in computing weights for the housing consumption index. We demonstrate how this can be done in practice. An empirical example using data from Norway shows that over the 12-month period from June 2003 to June 2004 the official inflation was measured at 1.3%. This did not properly account for a 10.2% increase in house prices. The methodology proposed in this paper estimates the 12-month inflation at 3.4%. |
| Keywords: | asset price inflation; consumer price index; consumption cost; housing prices; inflation measurement; mortgage; rental equivalence; user cost |
| JEL: | D1 E3 E5 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:427&r=mac |
| By: | Bouwman, Kees E.; Jacobs, Jan P.A.M. (Groningen University) |
| Abstract: | Real-time macroeconomic data are typically incomplete for today and the immediate past (‘ragged edge’) and subject to revision. To enable more timely forecasts the recent missing data have to be dealt with. In the context of the U.S. leading index we assess four alternatives, paying explicit attention to publication lags and data revisions. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugccs:200505&r=mac |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper reviews and evaluates the Bank of Japan (BOJ)'s monetary policy during the period 1998-2005. In doing so, it pays particular attention to the development of academic thinking on what central banks can do at or near zero interest rates and its relationship with the actual policy measures adopted by the BOJ. The paper argues that the BOJ has done most of the things recommended by academic economists. The most important of these is expectations management as crystallized in the so-called zero interest rate policy. The academic origin of this policy can be found in the seminal work of Krugman. The paper points out, however, that this fact, unfortunately, remained unnoticed by many, and explores reasons behind. The paper then goes on to survey the empirical literature on the effects of the measures adopted by the BOJ. The literature has found that the zero interest rate policy has had significant effects on the term structure of interest rates and supported the economy. Finally, the paper discusses possible reasons for the failure of such measures to stop the deflation of the economy within a short period of time. It points out some difficulties inherent in the expectations management approach and problems created by the impaired financial system. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf375&r=mac |
| By: | Michael Thorpe |
| Abstract: | China currently maintains an exchange rate fixed against the US dollar and a (relatively) closed capital account, while exercising an independent, controlled interest rate environment. Domestic and international pressures have been mounting for the Chinese government to re-adjust the currency peg or allow more flexibility in the exchange rate and to free up the capital account to foster greater integration with global markets. Given the need for developing a more mature financial system to meet the needs of a growing market economy and with unrestricted foreign bank entry in 2007, there is also a need for less regulated and more market driven interest rates. To the extent that authorities seek to maintain exchange rate stability while easing capital controls, they must forsake monetary independence. This is the so-called macroeconomic policy "trilemma" constraining macroeconomic policy makers generally. The need for continuing reform of China's currently fragile domestic banking system further influences the nature and timing of policy options. This paper reviews recent macroeconomic management performance in China and assesses the options facing policy makers for reform of the financial system given the current environment and subject to the constraint of existing institutional arrangements. |
| Keywords: | China, banking, financial repression, exchange rate, capital |
| JEL: | G2 O16 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0502&r=mac |
| By: | Carlo Favero; Massimiliano Marcellino |
| Abstract: | In this paper we assess the possibility of producing unbiased forecasts for fiscal variables in the euro area by comparing a set of procedures that rely on different information sets and econometric techniques. In particular, we consider ARMA models, VARs, small scale semi-structural models at the national and euro area level, institutional forecasts (OECD), and pooling. Our small scale models are characterized by the joint modelling of fiscal and monetary policy using simple rules, combined with equations for the evolution of all the relevant fundamentals for the Maastricht Treaty and the Stability and Growth Pact. We rank models on the basis of their forecasting performance using the mean square and mean absolute error criteria at different horizons. Overall, simple time series methods and pooling work well and are able to deliver unbiased forecasts, or slightly upward biased forecast for the debt-GDP dynamics. This result is mostly due to the short sample available, the robustness of simple methods to structural breaks, and to the difficulty of modelling the joint behaviour of several variables in a period of substantial institutional and economic changes. A bootstrap experiment highlights that, even when the data are generated using the estimated small scale multi country model, simple time series models can produce more accurate forecasts, due to their parsimonious specification. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:298&r=mac |
| By: | Carmen Díaz-Roldán; Oscar Bajo-Rubio |
| Abstract: | In this paper we analyze the nature of the shocks hitting the EMU member countries over the period 1991-2004, as well as for the two subperiods before and after 1999, i.e., the start of EMU. To this end, we first evaluate the relative importance of symmetric vs. asymmetric shocks, and then extract their temporary component. Our final aim would be assessing the vulnerability of the EMU countries to temporary and asymmetric shocks, which would be the most harmful case for the operation of a monetary union. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdadef:05-08&r=mac |
| By: | Fuad Hasanov (Oakland University) |
| Abstract: | This paper investigates whether the inclusion of housing in a household portfolio is important to the household’s intertemporal decision making. Households hold portfolios of assets rather than a Treasury bill and/or a stock index and make their spending decisions based on expected total returns of an array of assets. The total returns account for capital gains, taxes, and inflation. In addition to financial assets such as stocks and bonds, we incorporate a real asset, residential housing, into a household portfolio. In particular, we estimate the intertemporal elasticity of substitution (IES), that is, how a change in asset or portfolio return affects household’s consumption growth, using a sample of households from the Consumer Expenditure Survey. Since changes in housing return can affect consumption of households over time, we investigate whether the inclusion of housing in the household portfolio provides different IES estimates. Moreover, utilizing a household-level data set, we estimate IES parameters for different groups of assetholders. Our results indicate that the housing return positively affects consumption growth, and housing is an important asset to account for in the household portfolio. |
| Keywords: | intertemporal elasticity of substitution, intertemporal choice, consumption, housing, household portfolio |
| JEL: | D91 E21 C13 |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510011&r=mac |
| By: | Luiz Renato Regis de Oliveira Lima (EPGE/FGV); Raquel Sampaio; Wagner Gaglianone |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:602&r=mac |
| By: | Giovanni Pica (University of Salerno and CSEF) |
| Abstract: | This paper analyzes the long-run effects of capital markets integration on production and wages, explicitly accounting for the impact of deeper economic linkages on labor market institutions. We consider a two-country OLG model where labor market imperfections are modeled as an endogenous wage floor. We first characterize the closed economy and provide conditions for the minimum wage to arise in steady state. We then show that increased integration always provides incentives to reduce labor market rigidities. However, this is not enough to conclude that openness is unambiguously beneficial. |
| Keywords: | Unemployment, Factor mobility, Political economy, Globalization |
| JEL: | E24 F20 F4 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:144&r=mac |
| By: | Tassos Anastasatos (Dept of Economics Univ. of Loughborough); Ian R. Davidson (Business School Univ. of Loughborough) |
| Abstract: | This paper presents formal evidence that currency episodes display heterogeneity in terms of their evolution, their impact on the inflicted economy and their links with financial, political and macroeconomic fundamentals. Limited-dependent variable models for ordered and unordered outcomes along with their heteroskedastic and random effects extensions are applied on a large panel of data comprising 40 years of monthly observations on 23 developed countries. Heterogeneity, complemented by indications of self-fulfilling expectations and noise, suggest that time and region specific predictive approaches and policy responses are more useful than trying to base analysis and policy decisions on more general patterns. Results are established with formal specification tests. |
| Keywords: | Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models. |
| JEL: | F31 C23 C25 E44 G15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_12&r=mac |
| By: | Arcand Jean-Louis (CERDI-CNRS, University of Auvergne & European Development Network); Béatrice d'Hombres (CERDI-CNRS, University of Auvergne & University of Padua) |
| Abstract: | In this paper we consider different explanations for why the coefficient associated with human capital is often negative in growth regressions once country-specific effects are controlled for, whereas the coefficient in question is strongly positive in cross-sectional or panel results based on the pooling estimator. In turn, we explore: (i) additional sources of unobserved heterogeneity stemming from country- specific rates of labor-augmenting technological change, (ii) measurement error in the human capital series being used, and (iii) the lack of variability in the human capital series once the usual covariance transformations are implemented. Remaining unobserved country-specific heterogeneity and measurement error alone are shown to be inadequate explanations. The lack of variability in the human capital series is tackled using a modified version of the Hausman-Taylor (1981) approach whose identifying assumptions are found to be reasonable in the context of the Solow model. |
| Keywords: | Economic growth, human capital, measurement error, panel estimation |
| JEL: | E13 |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510010&r=mac |
| By: | António Caleiro (Department of Economics, University of Évora) |
| Abstract: | As relações que existem entre alguns aspectos económicos, nomeadamente o crescimento, e alguns aspectos políticos, nomeadamente o nível de democracia, foram alvo de algum interesse teórico e também empírico (Alesina e Perotti, 1994; Alesina e Rodrik, 1994; Alesina et al., 1996; Barro, 1996). Neste campo, um aspecto em particular, essencialmente ligado à democracia, como sendo o das relações existentes entre os ciclos partidários e o crescimento económico foi alvo de alguma controvérsia (Alesina, 1992; Alesina e Roubini, 1992; Alesina et al., 1993; Alesina et al., 1997; Gärtner, 1994a; Gärtner, 1999a; Gärtner, 1999b). O principal objectivo da comunicação é, assim, o de clarificar aquela controvérsia, para tal recorrendo a uma fundamentação original da curva de oferta agregada, enquanto paradigma de base aos modelos mais recentes de ciclos partidários. Tal conduzir-nos-á à questão da persistência no produto, a qual se revela de crucial importância para a gestão da política económica com fins, simultaneamente, eleitorais e ideológicos (Gärtner, 1996; Gärtner, 1997b; Gärtner, 1999a; Gärtner, 2000). Como objectivo subsidiário da comunicação, é considerado o caso Português enquanto teste de verificação empírica das eventuais relações entre os níveis de crescimento económico (em valor absoluto ou relativo) que têm vindo a caracterizar Portugal desde 1980 e a ideologia dos partidos que suportaram os diversos governos desde aquela data. |
| JEL: | C52 D72 E23 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:evo:wpecon:15_2005&r=mac |
| By: | Adriana Kugler (University of Houston, Universitat Pompeu Fabra, NBER, CEPR and IZA Bonn); Giovanni Pica (University of Southampton, University of Salerno and CSEF) |
| 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: | unjust dismissal costs, European unemployment, firms' entry and exit, employment volatility |
| JEL: | E24 J63 J65 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1743&r=mac |
| By: | Ansgar Belke (University of Hohenheim and IZA Bonn); Frank Baumgärtner (University of Hohenheim); Friedrich Schneider (University of Linz and IZA Bonn); Ralph Setzer (University of Hohenheim) |
| Abstract: | This paper empirically investigates the differences in the motives of raising privatisation proceeds for a panel of EU countries from 1990 to 2000. More specifically, we test whether privatisations can be mainly interpreted (a) as ingredients of a larger reform package of economic liberalisation in formerly overregulated economies, (b) as a reaction to an increasing macroeconomic problem pressure and (c) as a means to foster growth and increase tax income and relax the fiscal stance with an eye on the demands by integration of economic and financial markets. Whereas we are able to corroborate claim (a) only partly, we gain consistent evidence in favour of claims (b) and (c). |
| Keywords: | European Union, panel analysis, partisan theory, privatisation proceeds, state-owned enterprises |
| JEL: | H42 E62 L33 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1741&r=mac |
| By: | Mark Zbarack; Mark Bergen; Shantanu Dutta; Daniel Levy; Mark Ritson |
| Abstract: | The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms' price-setting activities as "producing" prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these "pricing" production processes. We coin the term "pricing capital" for these investments, and suggest that they can improve the efficiency of the "pricing production" activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level "pricing capital" has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the "pricing capital" to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, "pricing capital" introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital. |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0518&r=mac |
| By: | Tassos Anastasatos (Dept of Economics Univ. of Loughborough); Ian R. Davidson (Business School Univ. of Loughborough) |
| Abstract: | This article provides a general and robust empirical examination of speculative pressure on various exchange rate regimes using an unusually large panel of monthly data for developed countries, analyzed within the framework of Limited-Dependent Variable (LDV) models with various innovations and extensions. In comparison to studies with lower frequency data, significant differences are found in linking crises with macroeconomic, financial and political fundamentals, despite the noise increasing tendency of higher frequency data. Considerable heterogeneity in the events surrounding crises is documented, rendering globally applicable rules for prediction and prevention inappropriate. The findings are robust to different specifications but the definition of crisis has a bearing on its predictability. |
| Keywords: | Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models. |
| JEL: | F31 C23 C25 E44 G15 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_8&r=mac |
| By: | Przemyslaw Kowalski |
| Abstract: | This paper addresses tariff revenue concerns that some countries have been expressing in the context of the current multilateral trade negotiations under the Doha Development Agenda. This paper: discusses methodological issues associated with estimating revenue impacts; provides impact estimates for a sample of developing countries; links the differences in impacts to cross-country differences in existing tariff regimes as well as properties of formulas for tariff cuts; and, discusses efficient tax replacement policies and past experiences. Additionally, the paper presents results of a simulation of the welfare effects of reducing tariffs and simultaneously replacing lost tariff revenues with revenues from consumption tax. It concludes with some policy implications. |
| Keywords: | tariffs, CGE simulation, government revenue, multilateral trade negotiations, tariff reductions formulas |
| JEL: | C68 E61 E62 F13 F14 H20 |
| Date: | 2005–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:oec:traaab:18-en&r=mac |
| By: | Prasad Bidarkota (Department of Economics, Florida International University); J. Huston McCulloch (Department of Economics, Ohio State University) |
| Abstract: | We develop a framework in which information about firm value is noisily observed. Investors are then faced with a signal extraction problem. Solving this would enable them to probabilistically infer the fundamental value of the firm and, hence, price its stocks. If the innovations driving the fundamental value of the firm and the noise that obscures this fundamental value in observed data come from non-Gaussian thick-tailed probability distributions, then the implied stock returns could exhibit volatility clustering. We demonstrate the validity of this effect with a simulation study. |
| Keywords: | stock returns, volatility clusters, GARCH processes, signal extraction, thick-tailed distributions, simulations |
| JEL: | C22 E31 C53 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0304&r=mac |
| By: | Philip Inyeob Ji; Jae H. Kim |
| Abstract: | This paper examines the linkage of real interest rates of a group of Pacific-Basin countries with a focus on East Asia. We consider monthly real interest rates of the US, Japan, Korea, Singapore, and Thailand from 1980 and 2004. The impulse response analysis and half-life estimation are conducted in a multivariate setting, adopting the bias-corrected bootstrap as a means of statistical inference. It is found that the degree of capital market integration has increased after the Asian financial crisis in 1997. The evidence suggests that the crisis has substantially changed the nature of the short run interactions among the real interest rates. Before the crisis, both the US and Japanese capital markets dominated the region. However, after the crisis, the dominance of the Japanese market has completely disappeared, while the US remains as a sole dominant player. |
| Keywords: | Financial crisis, Bias-correction, Bootstrapping, Capital market Integration, Half-life, Impulse response analysis, Vector autoregression. |
| JEL: | F36 E44 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2005-23&r=mac |
| By: | Adolfson, Malin (Research Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden) |
| Abstract: | This paper analyzes the forecasting performance of an open economy DSGE model, estimated with Bayesian methods, for the Euro area during 1994Q1-2002Q4. We compare the DSGE model and a few variants of this model to various reduced form forecasting models such as several vector autoregressions (VAR), estimated both by maximum likelihood and two different Bayesian approaches, and traditional benchmark models, e.g. the random walk. The accuracy of the point forecasts are assessed in a traditional out-of-sample rolling event evaluation using several univariate and multivariate measures. Forecast intervals are evaluated in different ways and the log predictive score is used to summarize the precision in the joint forecast distribution as a whole. We also discuss the role of Bayesian model probabilities and other frequently used low-dimensional summaries, e.g. the log determinant statistic, as measures of overall forecasting performance. |
| Keywords: | Bayesian inference; Forecasting; Open economy DSGE model; Vector autoregressive models |
| JEL: | C11 C32 E37 E47 |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0190&r=mac |
| By: | Brock,W.A.; Durlauf,S.N. (University of Wisconsin-Madison, Social Systems Research Institute) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:att:wimass:200420&r=mac |
| By: | Thierry Warin |
| Abstract: | The purpose of this note is to propose a breakdown of the European concept into different sub-categories, based upon the different stages of the European integration process. In doing so, it is easier to understand the political differences and debate between an allegedly Anglo-Saxon approach and a Continental one. This note challenges the usual definition of the Anglo-Saxon and Continental approaches, and highlights the usual misconceptions and misunderstandings of the European economic goal. |
| Keywords: | Europe, EMU, EU, Schengen Convention, Anglo-Saxon approach, Continental approach |
| JEL: | E5 H0 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0509r&r=mac |
| By: | Dimitrios Tsomocos; Lea Zicchino |
| Abstract: | Not only in the classic Arrow-Debreu model, but also in many mainstream macro models, an implicit assumption is that all agents honour their obligations, and thus there is no possibility of default. That leads to well-known problems in providing an essential role for either money or for financial intermediaries. So, in more realistic models, the introduction of minimal financial institutions, for example default and banks, becomes a logical necessity. But if default involved no penalties, everyone would do so. Hence there must be default penalties to allow for an equilibrium with partial default. What we show here is that there is an equivalence between a general equilibrium model with incomplete markets (GEI) and endogeneous default, and a model with exogenous probabilities of default (PD). The practical, policy implications are that a key function of regulators (via bankruptcy codes and default legislation), or the markets (through default premia) are broadly substitutable. The balance between these alternatives depends, however, on many institutional details, which are not modelled here, but should be a subject for future research. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp548&r=mac |
| By: | Shun-ichiro Bessho (Ministry of Finance Japan - Policy Research Institute); Masayoshi Hayashi (MOF - Ministry of Finance Japan, Policy Research Institute) |
| Abstract: | This paper operationalizes Dahlby's (1998) theoretical analysis on the social marginal cost of public funds (SMCF) with microdata on Japanese prime-age males. Our exercise however, is more than an application. First, we derive the formula for the SMCF that differenciates every individual. Second, we estimate the labour supply function of Japanese prime-age males which no previous studies have appropriately consdiered. Third, taking advantage of our formula, we also calculate the SMCF for sub-groups among out samples. We provide region-specific SMCF and, following Dahlby and Wilson (1994), discuss the desirable direction of regional transfers. we also present an "individual" MCF. |
| Keywords: | taxation, Dahlby, social marginal cost, public funds ,Japan, prime-age males, |
| JEL: | E62 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:640&r=mac |
| By: | Dale T. Mortensen |
| Abstract: | Shimer (2005a) argues that the Mortensen-Pissarides equilibrium search model of unemployment grossly under predicts the size of the response in the job finding rate to a productivity shock. Some of the recent papers inspired by his critique are reviewed and commented on here. Specifically, I suggest that the problem is not procylciality of the wage, as Shimer, Hall (2005), and Hall and Milgrom (2005) argue, or a failure to account fully for the opportunity cost of employment, as Hagedorn and Manovskii (2005) contend. Instead, I show that a properly calibrated variant of the model, one that accounts for capital cost, counter cyclic involuntary separations, and the large flow of workers from job-to-job, can explain the observed volatility of the job finding rate. |
| JEL: | E2 G0 J0 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11692&r=mac |
| By: | Brock,W.A.; Durlauf,S.N. (University of Wisconsin-Madison, Social Systems Research Institute) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:att:wimass:20055&r=mac |
| By: | Alain Béraud (THÉMA - Théorie économique, modélisation et applications - CNRS : UMR7536 - Université de Cergy Pontoise) |
| Abstract: | Cet article étudie les effets sur l'emploi d'une baisse des salaires monétaires et la question de l'existence d'un équilibre de plein emploi. Il présente la position que Keynes a défendue sur ces problèmes et les critiques qui lui furent adressées par Pigou. |
| Keywords: | Keynes; Pigou; chômage; salaire monétaire; equilibre de plein emploi |
| Date: | 2005–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00004808_v1&r=mac |
| By: | Jeong-Joon Lee (Department of Economics, Towson University); Yasuyuki Sawada (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper investigates precautionary saving under liquidity constraints in Pakistan using household panel data. In particular, while we estimates Kimball's (1990) prudence parameter, we deviate from Dynan's (1993) framework by explicitly considering liquidity constraints, as in Zeldes (1989). By doing so,we attempt to diffeerentiate the standard precautionary saving caused by uncertainty from the oneduetoliquidity constraints. Furthermore, endogenous liquidity constraints are considered toresolveis-sues of selection biases. In this study, we document substantial evidence of the presence of precautionary saving in Pakistan. More specifically, the estimated prudence is significantly higher for liquidity-constrainedhouse-holds as compared with unconstrained ones. The results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf377&r=mac |
| By: | Kazumasa Okubo (MOF - Ministry of Finance Japan, Policy research Institute) |
| Abstract: | The nature and the role of the civil service in Japan are sufficiently elusive that analysis of the governmental policy-making process tends to focus on the extremes of party politics or the bureaucratic policy-making process, neither of which, in isolation, can reveal the real decision-making process. Analysis of governmental decision-making must focus more on the relation between politicians and civil servants. To this end, principal-agent analysis is useful, but questions remain as to who is the principal and who the agent. The prevailing assumption is that the Liberal Democratic Party LDP (currently the ruling coalition party) is the principal, and civil servants the agent1. However, since cabinet members are the masters of civil servants, an argument could be made that the prime minister and cabinet members must necessarily be the principal. This is particularly the case when other members of the LDP oppose the policies of the prime minister and cabinet members. In fact, who is the principal has varied from time to time and from event to event and politicians have always competed with each other to be the real principal to the civil servants agent. Despite this, there has been a prevailing misunderstanding that civil servants have enormous power to influence politicians and are able to neglect their minister's instructions. By providing an analysis of the historical development and the nature of the civil service in Japan, this paper attempts to present a more accurate picture of the relationship between politicians and civil servants and to describe the role of the civil service in the decision-making process. It also seeks to explain why, despite their role as agent for whatever principal, civil servants are widely regarded as powerful and reliable but also, in some cases, as culpable and blameworthy. |
| Keywords: | Japan, civil service, policy making, decision-making |
| JEL: | E61 G18 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:govern:638&r=mac |