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on Macroeconomics |
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Issue of 2005‒11‒05
71 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Taiji Harashima (University of Tsukuba & Cabinet Office of Japan) |
| Keywords: | The Great Inflation; Inflation; Persistence; Monetary policy |
| JEL: | E31 E52 E65 N12 |
| Date: | 2005–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510026&r=mac |
| By: | Virgiliu Midrigan (Ohio State University) |
| Abstract: | If firm pricing is state, rather than time-dependent, firms are more likely to change prices whenever aggregate and idiosyncratic shocks reinforce each other and trigger desired price changes in the same direction. The distribution of idiosyncratic shocks across adjusting firms therefore varies over time in response to economy-wide disturbances: in times of, say, monetary expansions, the fraction of adjusting firms that have negative idiosyncratic technology shocks should increase. Using measures of technology shocks derived from production function estimates for four-digit US manufacturing industries, we find that sectoral inflation rates are more responsive to negative, as opposed to positive technology disturbances in periods of higher economy-wide inflation, commodity price increases and expansionary monetary policy shocks. We argue, using a quantitative state-dependent sticky price model calibrated to match key features of the US micro-price data, that these results suggest that pricing is state-dependent in US manufacturing. |
| Keywords: | state-dependent pricing, time-dependent pricing, technology shocks |
| JEL: | E31 E32 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511005&r=mac |
| By: | Cúrdia, Vasco (Princeton University); Finocchiaro, Daria (Institute for International Economic Studies, Stockholm University) |
| Abstract: | Using Bayesian methods, we estimate a small open economy model for Sweden. We explicitly account for a monetary regime change from an exchange rate target zone to flexible exchange rates with explicit inflation targeting. In each of these regimes, we analyze the behavior of the monetary authority and the relative contribution to the business cycle of structural shocks in detail. Our results can be summarized as follows. Monetary policy is mainly concerned with stabilizing the exchange rate in the target zone and with price stability in the inflation targeting regime. Expectations of realignment and the risk premium are the main sources of volatility in the target zone period. In the inflation targeting period, monetary shocks are important sources of volatility in the short run, but in the long run, labor supply and preference shocks become relatively more important. Foreign shocks are much more destabilizing under the target zone than under inflation targeting. |
| Keywords: | Bayesian estimation; DSGE models; target zone; inflation targeting; regime change |
| JEL: | C10 C30 E50 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0740&r=mac |
| By: | Ray Barrell; E Philip Davis |
| Abstract: | Equity prices are major sources of shocks to the world economy and channels for propagation of these shocks. We seek to calibrate macroeconomic effects of falls in share prices and assess appropriate policy responses, using the National Institute Global Econometric Model NiGEM. Based on estimated relationships, falls in US equity prices have significant impacts on global activity; potential for liquidity traps suggest a need for complementary monetary and fiscal policy easing. However, fiscal easing boosts long-term real interest rates and hence moderates one of the automatic shock absorbers provided by the market mechanism. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-12&r=mac |
| By: | Queijo, Virginia (Institute for International Economic Studies, Stockholm University) |
| Abstract: | This paper aims to evaluate the importance of frictions in credit markets for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) and estimate it using Bayesian methods. The model is augmented with frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. My results indicate that financial frictions are relevant in both areas. Using the Bayes factor as criterion, the data favors the model with financial frictions both in the U.S. and the Euro area in five different specifications of the model. Moreover, the size of the financial frictions is larger in the Euro area. |
| Keywords: | DSGE models; Bayesian estimation; financial accelerator |
| JEL: | C11 C15 E32 E40 E50 G10 |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0738&r=mac |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect. |
| Keywords: | Monetary policy ; Econometric models ; Interest rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2005-17&r=mac |
| By: | Antonello D'Agostino (ECARES, Universite' Libre de Bruxelles); Domenico Giannone (ECARES, Universite' Libre de Bruxelles); Paolo Surico (Bank of England & University of Bari) |
| Abstract: | This paper documents a new stylized fact of the U.S. greater macroeconomic stability of the last two decades or so. Using 131 monthly time series, three popular statistical methods and the forecasts of the Federal Reserve's Green book and the Survey of Professional Forecasters, we show that the ability of predicting several measures of inflation and real activity, relative to naive forecasts, declined remarkably across most models and horizons since the mid-1980s. This fact appears to reflect a prominent feature of the recent observations and thus represents a new challenge for competing explanations of the 'Great Moderation' |
| Keywords: | predictive accuracy, macroeconomic stability, forecasting models, sub-sample analysis, Fed Green book. |
| JEL: | E37 E47 C22 C53 |
| Date: | 2005–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510024&r=mac |
| By: | Ali Dib; Louis Phaneuf |
| Abstract: | The hypothesis of intertemporal substitution in labour supply has a history of empirical failure when confronted with aggregate time-series data. The authors show that a two-dimensional labour supply model, adapted to an environment with money as originally proposed by Lucas and Rapping (1969) and Lucas (1972), performs very well. The overidentifying restrictions implied by the model are far from rejected. The estimated parameters of preferences are generally stable and meaningful. Furthermore, the estimated wage elasticities of labour supply are much higher than previously found in the literature. |
| Keywords: | Business fluctuations and cycles; Labour markets; Econometric and statistical methods |
| JEL: | C52 E24 E32 J22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-30&r=mac |
| By: | Glenn D. Rudebusch |
| Abstract: | Estimated monetary policy rules often appear to indicate a sluggish partial adjustment of the policy interest rate by the central bank. In fact, such evidence does not appear to be persuasive, since the illusion of monetary policy inertia may reflect spuriously omitted persistent influences on the setting of policy. Similarly, theoretical arguments do not provide a compelling case for real-world policy inertia. However, empirical evidence on the policy rule obtained by examining expectations of future monetary policy embedded in the term structure of interest rates is very informative and indicates that the actual amount of policy inertia is quite low. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2005-19&r=mac |
| By: | Vasco Cúrdia (Princeton University) |
| Abstract: | Emerging markets are often exposed to sudden stops of capital inflows. What are the effects of monetary policy in such an environment? To answer this question, the paper proposes a model with the typical elements of an emerging market economy. Credit frictions generate balance sheet effects, debt is denominated in foreign currency, production requires an imported input, and households have access to the international capital market only indirectly, through their ownership of leveraged firms. In the model, a sudden stop is generated by a change in the perceptions of foreign lenders, which leads to an increase in the cost of borrowing. The paper then compares the response of the economy to a sudden stop under alternative monetary policy rules. A first result is that the recession is most acute in a fixed exchange rate regime. Taylor rules reacting to inflation and output are more stabilizing. The comparison of policies also suggests that, rather than focus on whether to increase or decrease interest rates, it is more important to influence agents' expectations about future monetary policy. Furthermore, the flexible price equilibrium is attained if the monetary policy is set to completely stabilize the domestic price index. |
| Keywords: | sudden stops, monetary policy, emerging markets, financial crises |
| JEL: | E5 F3 F4 |
| Date: | 2005–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0510025&r=mac |
| By: | Virgiliu Midrigan (Ohio State University) |
| Abstract: | I employ a large set of scanner price data collected in retail stores and document that (i) although the average magnitude of price changes is large, a substantial number of price changes are small in absolute value; (ii) the distribution of non-zero price changes has fat tails; and (iii) stores tend to adjust prices of goods in narrow product categories simultaneously. I extend the standard menu costs model to a multi-product setting in which firms face economies of scale in the technology of adjusting prices. The model, because of its ability to replicate this additional set of micro-economic facts, can generate aggregate fluctuations much larger than those in standard menu costs economies. |
| Keywords: | state-dependent pricing, multi-product firms |
| JEL: | E31 E32 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511004&r=mac |
| By: | Burton Abrams (Department of Economics,University of Delaware); Russell Settle (Department of Economics,University of Delaware) |
| Abstract: | The traditional neoclassical open-economy flexible exchange rate model is expanded to include a “credit channel” by incorporating a bank loan market. The new “credit view” model provides substantially different predictions concerning the neutrality of money and the types of autonomous shocks that might affect the real exchange rate. |
| Keywords: | Credit Channel, Monetary policy, Fixed Exchange Rates, Money Neutrality |
| JEL: | F41 E51 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-04&r=mac |
| By: | Atanas Christev |
| Abstract: | This paper employs cointegration techniques to examine three recent hyperinflationary episodes in transition economies, which, with the exception of Russia (1992-1994), have been largely overlooked in the literature. More specifically, these episodes include Bulgaria during 1995-1997 and Ukraine during 1993-1995. We use the well-known maximum likelihood estimator due to Johansen (1988, 1991) and Stock and Watson's (1993) dynamic ordinary least squares (DOLS) estimator to complement each other and obtain consistent estimates of the semi-elasticity of real money demand with respect to inflation. The empirical results obtained in this study support the Cagan model of money demand in the East European hyperinflation experiences of the 1990s. However, our results do not indicate that the rational expectations hypothesis holds during these episodes. In addition, we also test the hypothesis that monetary policy in these three hyperinflations was conducted with the sole intent of maximizing the inflation tax revenue for the government. |
| Keywords: | Cagan, cointegration, inflation tax, transition economies, stabilizations |
| JEL: | C45 C62 E31 E63 E65 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0507&r=mac |
| By: | Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams |
| Abstract: | We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination. |
| Keywords: | Monetary policy ; Macroeconomics ; Microeconomics |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2005-15&r=mac |
| By: | Michele P. Cavallo |
| Abstract: | Since World War II, about 75 percent of government consumption in the U.S. economy has been spent on labor services. I distinguish the goods and the employment compensation components of government consumption in assessing the effects of fiscal shocks on main macroeconomic variables. Identifying exogenous fiscal shocks with the onset of military buildups, I show that they lead to a significant increase in hours worked and output in the government sector. Allowing for the distinction between the two components of government consumption improves the quantitative performance of the neoclassical model. In particular, the model with government employment does a good job at accounting for the dynamic response of private consumption to a fiscal policy shock. Government employment compensation acts as a transfer payment for households, thereby mitigating the wealth effect on consumption and labor supply associated with fiscal shocks. |
| Keywords: | Government employees ; Employment ; Consumption (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2005-16&r=mac |
| By: | Joydeep Bhattacharya; Joseph Haslag; Antoine Martin |
| Abstract: | This paper addresses whether the Friedman rule can be optimal in an economy in which the Tobin effect is operative. We present an overlapping generations economy with capital in which limited communication and stochastic relocation create an endogenous transaction 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 "anti-Tobin effect" is operative, and the Friedman rule is optimal (that is, stationary-welfare-maximizing) regardless of whether or not there is long-run growth. Under the more general CRRA (constant relative risk aversion) form of preferences, we show that an operative anti-Tobin effect is a sufficient condition for the Friedman rule to be optimal. Also, contrary to models with linear storage technologies, our model shows that zero inflation is not optimal. |
| Keywords: | Inflation (Finance) ; Money supply ; Monetary policy ; Friedman, Milton |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:224&r=mac |
| By: | Adrian Peralta-Alva (University of Miami) |
| Abstract: | A growing literature argues that the Information Technology rev- olution caused the stock market crash of 1973-1974, its subsequent stagnation and eventual recovery. This paper employs general equi- librium theory to test whether this good news hypothesis is consistent with the behavior of US equity prices and with the trends in corpo- rate output, investment and consumption. I …nd it is not. A model based exclusively on good news can make equity prices fall as much as in the data but it must also imply a strong economic expansion right when the US economy stagnated. However, when the observed productivity slowdown in old production methods is incorporated into the model consistency with major macroeconomic aggregates can be achieved and a 20% drop in equity values can be accounted for. (JEL E44, O33, O41) |
| Keywords: | Information Technology Revolution, Stock Market, Productivity Slowdown, Tobin's q, 1974, Crash |
| JEL: | E44 O33 O41 |
| Date: | 2005–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511007&r=mac |
| By: | Haider A Khan (Department of Economics, University of Denver) |
| Abstract: | The purpose of this paper is to analyze sustainability issues of Japan's fiscal policy and then to discuss the debt management policy using theoretical models and numerical studies. We also investigate the desirable coordination of fiscal and monetary authorities toward fiscal reconstruction. We include a potential possibilities of the government bonds in our theoretical model The public bonds, therefore, cannot be sold when the issuance leads the amount of debt outstanding to be more than a certain level. In this respect, the fiscal authority has to take into account the upper limit of stocks of public debt. This possibility of debt default provides the fiscal authority to issue public bonds strategically in an earlier period. A strategic behavior of fiscal authority induces the monetary authority, in a later period, to boost output and raise seigniorage revenues to eliminate the distortion of resource allocation due to the limitation on debt issuance. Therefore, the monetary policy in a later period suffers from an inflation bias from the ax ante point of view. There are two ways to eliminate this distortion toward successful fiscal reconstruction. One of them is to make the monetary authority more conservative than society in the sense that the price stability weight of monetary authority is higher than that of society. The other way of eliminating the distortion of the resource allocation is to design an institutional ceiling on the debt issuance. The direct ceiling can provide a binding constraint of the public bond issuance for the fiscal authority of Japan because it has accumulated the debt outstanding much more than other countries. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf387&r=mac |
| By: | Gerald Epstein |
| Abstract: | In the last two decades, there has been a global sea change in the theory and practice of central banking. The currently dominant “best practice” approach to central banking consists of the following: (1) central bank independence (2) a focus on inflation fighting (including adopting formal “inflation targeting”) and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings). This paper argues that this neo-liberal approach to central banking is highly idiosyncratic in that, as a package, it is dramatically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. Throughout the early and recent history of central banking in the U.S., England, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using “direct methods” of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The neoliberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp104&r=mac |
| By: | Robert Pollin; Andong Zhu |
| Abstract: | This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 – 2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 – 2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 – 18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the OECD countries, no clear pattern emerges at all with either the inflation coefficient or our estimated turning point. With the middle income countries, we return to a consistently positive pattern of inflation coefficients, though none are statistically significant. The turning points range within a narrow band in this sample, between 14 – 16 percent. With the low income countries, we obtain positive and higher coefficient values on the inflation coefficient than with the middle-income countries. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries, that is, to maintain inflation with a 3 – 5 percent band. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp109&r=mac |
| By: | E Philip Davis; CHRISTOS IOANNIDIS; NICOLA SPAGNOLO |
| Abstract: | We evaluate changes in international spillovers of equity price shocks with EMU by estimating BEKK-GARCH models over 1993-98 and 1999-2004. Results are consistent with EMU market integration via sectoral allocation, but not autonomy from the external influence of the US. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-19&r=mac |
| By: | Oldrich Kyn (Boston University); Jiri Slama (Osteuropa Institut, Muenchen); Wolfram Schrettl (Freie Universität Berlin) |
| Abstract: | For some time Marxist economists believed that central planning as applied in the Soviet-type economies could prevent cyclical fluctuation. This view, however changed, when in 1960’s it became quite obvious, that some type of cycle is generated in centrally planned economies as well. Because the mechanism of functioning is different than in market economies, the existing theories of business cycle do not apply. This paper provides empirical tests of the recently developed theories of socialist “growth cycles” or “quasi-cycles”, using data for Czechoslovakia. Two theories of “investment cycles” were tested. The first one, formulated by Oskar Lange was based on the idea that the large amount of investment concentrated in the short time period—as happened during the industrialization in the Soviet Union and Eastern Europe—would have an “reinvestment echo effect” when the obsolete physical capital needs to be replaced. The evidence from Czechoslovakia very clearly demonstrates, that although the need for increased reinvestments may have contributed, it could not have been the main cause of the recessions in economic growth in early 50’ and 60’s. The second theory formulated by Josef Goldman blames the cyclical fluctuations on the very long gestation period between planners’ decisions to invest and the introduction of the newly constructed capital into production. The empirical evidence shows that the average time lag in the investment process is much shorter than ten years that would be needed for this theory to be valid. Finally, a new theory is formulated and empirically tested. It attributes the cycles to a peculiar behavior of the planners, who plan the future growth rates of the economy on the basis of their observation of the actual growth rates in the past. |
| Keywords: | Economic fluctuations, Centraly planned economies, Growth cycles, quasi-cycles, Economic cycles, Socialist economy, Reinvestment cycles, Oskar Lange, Josef Goldman. |
| JEL: | E |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511003&r=mac |
| By: | Boris Cournède |
| Abstract: | The inflation measure used by the European Central Bank excludes housing costs that are borne by home owners even though they make up more than a tenth of household final consumption expenditure in the euro area. Has the exclusion of owner-occupied housing costs driven a wedge between the official harmonised index of consumer prices (HICP) and the cost of living? To answer this question, a measure of the user cost of housing capital has been constructed for every euro area country (except Luxembourg). User costs are measured taking into account property taxes but net of tax breaks that home owners enjoy on mortgage repayments. The user cost measure is combined with the HICP to derive a “broad” inflation estimate. For the sake of comparison, an alternative estimate has been put together using imputed rents. The main conclusion is that owner-occupied housing costs have an impact. Another important conclusion is that the effect of owner-occupied housing costs on inflation varies noticeably with the method used to incorporate them into the price index. The paper finally discusses the choice of the method from the point of view of economic policy makers. "This Working Paper relates to the 2005 OECD Economic Survey of Euro Area (www.oecd.org/eco/surveys/Euroarea)" <P>Prix des logements et inflation dans la zone euro Bien qu’ils représentent plus de dix pour cent de la consommation finale des ménages dans la zone euro, les coûts de logement qui sont supportés par les propriétaires occupants ne sont pas inclus dans l’indicateur d’inflation employé par la Banque centrale européenne. L’exclusion de ces coûts a-t-elle enfoncé un coin entre l’indice des prix à la consommation harmonisé (IPCH) et le coût de la vie ? Pour répondre à cette question, une mesure du coût d’usage du capital a été construite pour les logements occupés pour chacun des pays appartenant à la zone euro (à l’exception du Luxembourg). Il s’agit d’une mesure du coût net d’impôts et de taxes, qui tient compte à la fois des taxes foncières et des allégements d’impôt dont bénéficient les propriétaires occupants. Cette mesure est ensuite adjointe à l’IPCH pour obtenir une évaluation de l’inflation « élargie ». Pour les besoins de la comparaison, une autre estimation a été effectuée en utilisant des loyers imputés. La principale conclusion est que les coûts du logement pour les propriétaires occupants font une différence. Une autre conclusion importante est que l’impact de ces coûts dépend sensiblement de la méthode qui est employée pour les intégrer à l’indice de prix. En conclusion, l'étude examine la question du choix de la méthode du point de vue des opérateurs de la politique économique. "Ce Document de travail se rapporte à l'Étude économique de l'OCDE de Euro area, 2005. (www.oecd.org/eco/etudes/zoneeuro)" |
| Keywords: | housing, logement, ECB, BCE, inflation, inflation, HICP, Eurostat, user cost, imputed rents, IPCH, Eurostat, coût d'usage, loyers imputés |
| JEL: | E30 E31 |
| Date: | 2005–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:450-en&r=mac |
| By: | William Barnett (Department of Economics, The University of Kansas); Yijun He (Washington State University) |
| Abstract: | Euler equation models represent an important class of macroeconomic systems. Our research on the Leeper and Sims Euler equations macroeconomic model reveals the existence of singularity-induced bifurcations, when the model's parameters are within a confidence region about the parameter estimates. Although known to engineers, singularity bifurcation has not previously been seen in the economics literature. We earlier encountered more common forms of bifurcation within the parameter space of the Bergstrom and Wymer continuous time macroeconometric model of the UK economomy. We have found that in each of those models, the point estimates of the parameters are near a bifurcation boundary that intersects the confidence region. Because dynamics are different on each side of a bifurcation boundary, this problem creates a substantial loss in robustness of inferences regarding dynamics. Since singularity bifurcation is more troubling than the types more widely known to economists, we find that the transition in econometrics from earlier structural models to Euler equation models with 'deep' parameters may cause these robustness problems to become more difficult to analyze. |
| Keywords: | bifurcation macroeconometrics dynamics nonlinearity singularity |
| JEL: | C14 C22 E37 E32 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200518&r=mac |
| By: | Ray Barrell; E Philip Davis |
| Abstract: | We assess the impact of equity prices on the level of output in the Europe Union economies and the US using Vector Error Correction (VECM) time series techniques. The distinction between impacts in bank based and equity market based economies is shown to be important, with equity prices having a greater impact on output in market-based economies. Share prices are shown to be largely autonomous in variance decompositions, whilst equity price do have a strong impact on output in the UK and US in their variance decompositions. An analysis of impulse responses suggests that large market based economies have more effective fiscal and monetary policy instruments. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-13&r=mac |
| By: | Antoine Martin |
| Abstract: | The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics a central bank should provide liquidity to the market at a very high rate of interest. This recommendation seems to be in sharp contrast with the policy adopted by the Federal Reserve after September 11 when, for a few days, the federal funds rate was very close to zero. This paper shows that Bagehot's recommendation can be reconciled with the Fed's policy if one recognizes that Bagehot had in mind a commodity money regime in which the amount of reserves available is limited. A high price for this liquidity allows banks that need it most to self-select. In contrast, the Fed has the virtually unlimited ability to temporarily expand the money supply. |
| Keywords: | Money supply ; Monetary policy ; Liquidity (Economics) ; Federal funds rate ; War - Economic aspects |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:217&r=mac |
| By: | Jakub Steiner |
| Abstract: | We build a dynamic global game in which players repeatedly face a similar coordination problem. By choosing a risky action (invest) instead of an outside option (not invest), players risk instantaneous losses as well as payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High expected future payoffs make investment today more risky and therefore harder to coordinate on, which decreases today’s payoff. Expectation of successful coordination tomorrow undermines successful coordination today which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be stationary. The dynamic game inherits the equilibrium uniqueness of static global games. |
| Keywords: | Coordination, crises, cycles and fluctuations, equilibrium Uniqueness, global games. |
| JEL: | C72 C73 D8 E32 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp274&r=mac |
| By: | Andreas Freytag (University of Jena, Faculty of Economics); Donato Masciandaro (Paolo Baffi Centre, Bocconi University, Milan, and Department of Economics, Mathematics and Statistics, University of Lecce) |
| Abstract: | This paper analyses how the central banks role in the monetary institutional setting can affect the unification process of the overall financial supervision architecture. Using indicators of monetary commitment and central bank independence, we claim that these legal proxies show an inverse link with financial supervision unification. Therefore, the trade off still holds between the supervisory and the central bank involvement per se, however, monetary commitment and independence do also matter. In this respect, in an institutional setting characterized by a central bank deeply and successfully involved in supervision, or legally independent, a multi-authority model is likely to occur. |
| Keywords: | Financial Supervision, Single Authority, Central Bank Independence, Monetary Commitment |
| JEL: | E58 G20 G28 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:jen:jenasw:2005-14&r=mac |
| By: | Richard Dennis |
| Abstract: | This paper studies robust control problems when policy is set with commitment. One contribution of the paper is to articulate an approximating equilibrium that differs importantly from that developed in Hansen and Sargent (2003). The paper illustrates how the proposed approximating equilibrium differs from Hansen-Sargent in the context of two New Keynesian business cycle models. A further contribution of the paper is to show that once misspecification is acknowledged commitment is no longer necessarily superior to discretion. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2005-20&r=mac |
| By: | Pasquale Commendatore (Dipartimento di Teoria Economica e Applicazioni, Università di Napoli 'Federico II', I-80138, Napoli Italy) |
| Abstract: | In this paper, we study some of the properties of a discrete-time version of the two-class model of growth and distribution proposed by Pasinetti (1962) and Samuelson and Modigliani (1966) with a concave production function of the CES type. Two distinct groups of agents, workers and capitalists, exist. Following Chiang (1973), we assume that the first group saves out of wages and profits by applying to these income sources propensities to save which are not necessarily equal. Capitalists’ saving originates only from capital income. The model is two-dimensional involving distributive processes that occur not only between factor shares but also between the two groups in the economy. We explore through simulations the large variety of dynamic behaviours that emerge from this formulation. |
| Keywords: | Growth; Income distribution; Complex dynamics; Chaos |
| JEL: | E25 E32 O40 |
| Date: | 2005–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0511006&r=mac |
| By: | Lindbeck, Assar (Institute for International Economic Studies, Stockholm University) |
| Abstract: | The paper discusses a number of threats to the financial sustainability of social spending: increased internationalization of national economies, gradually higher relative costs of producing a number of human services, the “graying” of the population, slower productivity growth in the private sector, low employment rates, and various types of disincentive effects related to the welfare state itself, including moral hazard. I argue that threats from gradually rising costs of providing human services and disincentive effects of welfare-state arrangements, in particular moral hazard and benefit dependency, are more difficult to deal with than the other threats. I also discuss the choice between ad hoc policy reforms and automatic adjustment mechanisms, delegated to administrative bodies, for dealing with these threats. |
| Keywords: | Sustainable fiscal policy; Baumol’s disease; moral hazard; automatic adjustment mechanisms |
| JEL: | E62 H31 H53 |
| Date: | 2005–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0739&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | In this paper we use a statistical procedure which is appropriate to test for deterministic and stochastic (stationary and nonstationary) cycles in macroeconomic time series. These tests have standard null and local limit distributions and are easy to apply to raw time series. Monte Carlo evidence shows that they perform relatively well in the case of functional misspecification in the cyclical structure of the series. As an example, we use this approach to test for the presence of cycles in US real GDP. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-11&r=mac |
| By: | Clara Garcia; PNuria Malet |
| Abstract: | The pressure in the exchange market against a particular currency has been frequently measured as the sum of the loss of international reserves plus the loss of nominal value of that currency. This paper follows the tradition of investigating the interactions between such measure of exchange market pressure (EMP) and monetary policy; but it also questions the usual omission of output growth in the empirical investigations of the interrelations between EMP, domestic credit, and interest rates. The focus of this work is Argentina between 1993 and 2004. As in previous studies, we found some evidence of a positive and double-direction relationship between EMP and domestic credit. But output growth also played a role in the determination of EMP, even more than domestic credit or interest rates. Also, there is some evidence that EMP affected growth negatively. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp99&r=mac |
| By: | Richard D. Barwell; Mark E. Schweitzer |
| Abstract: | This paper analyzes the extent of rigidities in wage setting in Great Britain over the 1980s and 1990s. Our estimation strategy, which generalizes the work of Altonji and Devereux (2000), models the notional wage growth distribution--the distribution of nominal wage growth that would occur in the absence of rigidities in pay--while allowing for the presence of measurement error in the data. The model then allows for the possibility that the nominal wage growth of a fraction of the workforce may be subject to a nominal or real downward rigidity. Our model suggests that real rigidities in wage setting are more prevalent than nominal rigidities, although the incidence of these real wage rigidities has fallen gradually over time. If firms cannot cut real wages in response to negative demand shocks they may resort to laying off workers. Our results support this microfoundation of the wage-unemployment Phillips curve: Workers who are more likely to be protected from wage cuts are also more likely to lose their jobs. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0508&r=mac |
| By: | Sheikh Tareq Selim (Cardiff Business School) |
| Abstract: | This paper studies the Ramsey problem of optimal labor income taxation in a simple model economy which deviates from a first best representative agent economy in three important aspects, namely, flat rate second best tax, monopoly power in intermediate product market, and monopolistic wage setting. There are three key findings: (1) In order to correct for monopoly distortion the Ramsey tax prescription is to set the labor income tax rate lower than its competitive market analogue; (2) Government's optimal tax policy is independent of its fiscal treatment of distributed pure profits; and (3) For higher levels of monopoly distortions Ramsey policy is more desirable than the first best policy. The key analytical results are verified by a calibration which fits the model to the stylized facts of the US economy. |
| Keywords: | Optimal taxation; Monopoly power; Ramsey policy |
| JEL: | D42 E62 H21 H30 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2005/6&r=mac |
| By: | Brahima Coulibaly |
| Abstract: | The economic embargo imposed on South Africa between 1985 and 1993 brought the country closer to financial isolation. This paper interprets the imposition and removal of the embargo as financial autarky and financial integration ‘natural experiments’, and studies the effects on the economy. The aggregate data indicate a decrease in the levels and growth rates of investment, capital, and output during the embargo period relative to the pre-embargo and post-embargo periods. To further rationalize the findings in the aggregate data, we calibrate a neoclassical growth model to the South African economy. During the transition to steady-state, we model the embargo by limiting the country’s ability to borrow for a period corresponding to the duration of the embargo. The derived dynamics for investment, capital, and output support the view of a positive (negative) link between financial integration (isolation) and economic growth. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:839&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange Multiplier procedure with a standard null limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some non-linear functions of labour demand variables such as real oil prices and real interest rates. We also find evidence of a long-memory component. Our results are consistent with a hysteresis model with path dependency rather than a NAIRU model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilisation policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy-making. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-17&r=mac |
| By: | Sydeny C. Ludvigson; Serena Ng |
| Abstract: | Empirical evidence suggests that excess bond returns are forecastable by financial indicators such as forward spreads and yield spreads, a violation of the expectations hypothesis based on constant risk premia. But existing evidence does not tie the forecastable variation in excess bond returns to underlying macroeconomic fundamentals, as would be expected if the forecastability were attributable to time variation in risk premia. We use the methodology of dynamic factor analysis for large datasets to investigate possible empirical linkages between forecastable variation in excess bond returns and macroeconomic fundamentals. We find that several common factors estimated from a large dataset on U.S. economic activity have important forecasting power for future excess returns on U.S. government bonds. Following Cochrane and Piazzesi (2005), we also construct single predictor state variables by forming linear combinations of either five or six estimated common factors. The single state variables forecast excess bond returns at maturities from two to five years, and do so virtually as well as an unrestricted regression model that includes each common factor as a separate predictor variable. The linear combinations we form are driven by both "real" and "inflation" macro factors, in addition to financial factors, and contain important information about one year ahead excess bond returns that is not captured by forward spreads, yield spreads, or the principal components of the yield covariance matrix. |
| JEL: | G10 G12 E0 E4 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11703&r=mac |
| By: | Minqi Li; Andong Zhu |
| Abstract: | This paper examines certain structural macroeconomic relations in the neoliberal global economy. The current global economy rests upon three unsustainable trends: the debt-driven U.S. consumption expansion; China’s excessive investment expansion; and the large and rising U.S. current account deficits. When these trends are eventually reversed or corrected, there could be major upheavals in the world economy. The decline of neoliberalism may pave the way for a new set of economic, political, and social institutions. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp110&r=mac |
| By: | William C. Gruben; John H. Welch |
| Abstract: | We test for hypercrowding out as a signal of market concerns over fiscal dominance in five Latin American countries. Hypercrowding out occurs when fiscally dominated governments’ domestic credit demands are perceived as so intrusive to a nation’s financial system that a move towards fiscal surplus lowers interest rates and increases growth. We sample five Latin American countries to test for these relationships. Judged by the results of vector error correction models, three nations test clearly positive, suggesting market concern despite their recent efforts towards fiscal balance. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddcl:0205&r=mac |
| By: | Michael D. Bordo |
| Abstract: | In this essay I distill the seven major themes in A History of the Federal Reserve which covers the Federal Reserve's record from 1914 to 1951. I conclude with a critique. |
| JEL: | E58 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11714&r=mac |
| By: | Joseph H. Haslag; Antoine Martin |
| Abstract: | We examine models with spatial separation and limited communication that have shown some promise toward resolving the disparity between theory and practice concerning optimal monetary policy; these models suggest that the Friedman rule may not be optimal. We show that intergenerational transfers play a key role in this result, the Friedman rule is a necessary condition for an efficient allocation in equilibrium, and the Friedman rule is chosen whenever agents can implement mutually beneficial arrangements. We conclude that in order for these models to resolve the aforementioned disparity, they must answer the following question: Where do the frictions that prevent agents from implementing mutually beneficial arrangements come from? |
| Keywords: | Monetary policy ; Friedman, Milton ; Econometric models ; Equilibrium (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:225&r=mac |
| By: | Yoonsoo Lee |
| Abstract: | Procyclical productivity plays an important role in many models of aggregate fluctuations. However, recent studies using aggregate data to directly measure technology shocks in the Solow residual find that technology shocks are not procyclical. This paper provides new evidence that, due to countercyclical composition changes between producers, the procyclicality of productivity observed in aggregate data may be understated. Using plant-level microdata, this paper finds that the reallocation of output shares across continuing plants, as well as the entry and exit of plants, creates a countercyclical component in aggregate productivity. This paper shows that such composition changes may cause a downward bias in industry-level estimates of returns to scale. The findings of this paper suggest that, without correcting for the countercyclical effects of reallocations, estimates based on aggregate data may not reflect the true cyclicality of technology shocks, which a representative agent faces over the business cycle. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0509&r=mac |
| By: | James Foreman-Peck (Cardiff Business School) |
| Abstract: | This paper examines whether the states brought together in the Italian monetary union of the nineteenth century constituted an optimum monetary area, either before or after unification. Interest rate shocks indicate close relations between states in northern Italy but negative correlations between the North and the South before unification, suggesting some advantages of continued Southern monetary independence. The proportion of Southern Italian trade with the North was small, in contrast to intra- Northern trade, and therefore monetary independence imposed a light burden. Changes in the wheat market indicate that the South and North after unification (though not probably because of it) increasingly specialised according to their comparative advantages. Coupled with differences in economic behaviour of the Southern economy, this meant that monetary policies appropriate for the North were less so for the South. In the face of agricultural shocks originating in the New World and in France, the South would have gained from depreciating its exchange rate against the North or against the non-Italian world. As it was, nineteenth century Italian monetary union did not create the conditions for its own success, contrary to the findings of Frankel and Rose (1998) for the later twentieth century. |
| JEL: | E42 N23 F15 F33 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2005/4&r=mac |
| By: | James L. Butkiewicz (Department of Economics,University of Delaware) |
| Abstract: | Eugene Meyer was a highly respected financier and government official when he was appointed Governor of the Federal Reserve Board in 1930. Through his force of character, he dominated economic policy making during the last years of Hoover’s administration. He initially found that sizable foreign short-term claims had put the Fed in a precarious position. After reductions in interest rates reduced foreign claims relative to the Fed’s gold reserves, he developed a plan for expansion. His initial plans were constrained by the weak institutional structure of the Fed and the lack of free gold. He obtained legislation creating the Reconstruction Finance Corporation and section 3 of the 1932 Glass-Steagall Act, temporarily allowing use of government securities as collateral for Federal Reserve notes, overcoming the free gold problem. However, when the 1932 open market policy failed to produce an immediate expansion of bank credit, the Federal Reserve Bank governors were able to end additional expansionary policies. Suffering from poor health, political stalemate, and possible sensing Hoover’s ultimate defeat, Meyer’s expansionary efforts effectively came to an end in August 1932. Thus, in spite of strong leadership favoring expansion, the Fed was unable to pursue a sustained expansionary policy. This failure was the direct result of the increased decentralization of power due to the creation of the Open Market Policy Conference in 1930. Foreign claims on the dollar, particularly French claims, were always a serious concern, at times imposing a dominate constraint on policy. The free gold issue was viewed as a real constraint within the Fed. The 1932 open market policy was not a disingenuous ploy to forestall other legislation. It was the direct result of Meyer’s desire to counter the deflationary forces depressing the economy. |
| Keywords: | Central Banking, Economic History |
| JEL: | E5 N |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-01&r=mac |
| By: | Ilias Lekkos (Eurobank Ergasias); Costas Milas (Keele University); Theodore Panagiotidis (Loughborough University) |
| Abstract: | This paper explores the ability of common risk factors to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. The first regime is characterised by a "flat" term structure of US interest rates, while the alternative is characterised by an "upward" sloping US term structure. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models. We find some evidence that the nearest-neighbours and STVAR models predict better than the linear AR and VAR models. However, the evidence is not overwhelming as it is sensitive to swap spread maturity. We also find that within the non-linear class of models, the nearest-neighbours model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. |
| Keywords: | Interest rate swap spreads, term structure of interest rates, regime switching, smooth transition models, nearest-neighbours, forecasting. |
| JEL: | C51 C52 C53 E43 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2005_9&r=mac |
| By: | Ricardo J. Caballero; Eduardo M.R.A. Engel (Dept. of Economics, Yale University); Alejandro Micco |
| Abstract: | Microeconomic flexibility, by facilitating the process of creative-destruction, is at the core of economic growth in modern market economies. The main reason for why this process is not infinitely fast is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its empirical support is rather weak. In this paper we revisit this hypothesis and find strong evidence for it. We use a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destruction process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law. |
| Keywords: | Microeconomic rigidities, creative-destruction, job security regulation, adjustment costs, rule of law, productivity growth |
| JEL: | E24 J23 J63 J64 K00 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:893&r=mac |
| By: | Shu Wu (Department of Economics, The University of Kansas); Yong Zeng |
| Abstract: | This paper develops a tractable dynamic term structure models under jump-diffusion and regime shifts with time varying transition probabilities. The model allows for regime-dependent jumps while both jump risk and regime-switching risk are priced. Closed form solution for the term structure is obtained for an ane-type model under loglinear approximation. |
| Keywords: | Term Structure, Regime Switching, Jump Diffusion, Marked Point Process |
| JEL: | G12 E43 E52 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200520&r=mac |
| By: | Russell Cooper; Hubert Kempf; Dan Peled |
| Abstract: | This paper studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bail out the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the U.S., the European Union and Argentina. |
| Keywords: | Taxation |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0507&r=mac |
| By: | Mohsen Fardmanesh; Seymour Douglas |
| Abstract: | This paper examines the relationship between the official and parallel exchange rates, in three Caribbean countries, Guyana, Jamaica and Trinidad, during the 1985-1993 period using cointegration, Granger causality, and reduced form methods. The official and parallel rates are cointegrated in all three countries, but with significant average disparity between them in Guyana and Trinidad, which unlike Jamaica applied infrequent and large adjustments to their official rates. The causation is bi-directional in the case of Jamaica and uni-directional, with changes in the official rate Granger causing changes in the parallel rate, in the cases of Guyana and Trinidad, reflecting the difference in their official exchange rate policies. Our reduced form estimates indicate that exchange controls, expansionary fiscal and monetary policy, and changes of government mostly have the expected positive effect on the black market premium. After past values of the premium, exchange controls exert the strongest impact on the premium. |
| Keywords: | Foreign Exchange Controls, Black Market Exchange Rate, Black Market Premium, Cointegration, Granger Causality |
| JEL: | F31 |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:876&r=mac |
| By: | David R. Stockman (Department of Economics,University of Delaware); Judy Kennedy (Department of Mathematical Science, University of Delaware.); James A. Yorke (Institute for Physical Science and Technology, University of Maryland, College Park,) |
| Abstract: | Some economic models like the cash-in-advance model of money have the property that the dynamics are ill-defined going forward in time, but well-defined going backward in time. In this paper, we apply the theory of inverse limits to characterize topologically all possible solutions to a dynamic economic model with this property. We show that such techniques are particularly well-suited for analyzing the dynamics going forward in time even though the dynamics are ill-defined in this direction. In particular, we analyze the inverse limit of the cash-in-advance model of money and illustrate how information about the inverse limit is useful for detecting or ruling out complex dynamics. |
| Keywords: | cash-in-advance, chaos, inverse limits, continuum theory. |
| JEL: | C6 E3 E4 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-06&r=mac |
| By: | William H. Branson; Conor N. Healy |
| Abstract: | This paper develops the basis for monetary and exchange rate coordination in Asia as part of a package of monetary integration that could support growth and poverty reduction. This could be achieved directly through coordinated exchange rate stabilization, and indirectly through the implications of this for reserve pooling and investment in an Asian development fund (ADF) and through development of the Asian bond market (ABM). Macro policy coordination could be viewed as a necessary condition for further development of both reserve pooling via the Chiang Mai Initiative (CMI) and of the ABM. The paper analyzes the trade structure of ASEAN and China in terms of both geographic sources of imports and markets for exports, and of the commodity structure of trade. The similarities of the geographic and commodity trade structures across the region are consistent with adoption of a common currency basket for stabilization, and with an argument for monetary integration across the region along the lines of Mundell (1961) on optimum currency areas. The paper constructs currency baskets and real effective exchange rates (REERs) for the countries in the region. Since their trade patterns are quite similar and their policies are already implicitly coordinated, their REERs tend to move together. This means that ASEAN and China are already moving toward integration in practical effect. Explicit movement toward coordination could support surveillance and reserve-sharing under the CMI, and release reserves to be invested in an ADF. |
| JEL: | F33 F41 G15 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11713&r=mac |
| By: | Oldrich Kyn (Boston University); Ludmila Kyn (---) |
| Abstract: | During the 1960s most of the countries of Eastern Europe experienced a visible retardation of economic growth. This paper supports the view of many Eastern as well as Western economists that the retardation was caused primarily by declining rates of growth of the total factor productivity. The rate of growth of the total factor productivity was estimated as a parameter of the macroeconomic production functions. Several other economists who estimated the production functions for East European countries obtained frequently results with low statistical significance because the time series were short and in addition suffered with the high degree of multicollinearity. In a previous papers (Kyn-Kyn ) we tried to demonstrate, that this obstacles can be overcome by estimating the production functions from the pooled cross-section and time series data. By doing so we received economically reasonable and statistically significant estimates of the capital and labor elasticities, and of the rate of technical change for Poland, Czechoslovakia, Hungary, Bulgaria and Rumania. Although the pooling eliminated the multicollinearity, it caused two other problems, namely heteroscedasticity and autocorrelation. In this paper we have applied a step-wise method with data transformation that practically eliminated these problems. Our results confirmed that the average annual rates of growth of the total factor productivity were very high (around 6 per cent) in the case of Czechoslovakia, Bulgaria and Rumania and somewhat lower, but still respectable (3 - 5 per cent) in the case of Poland and Hungary. It is, however, necessary to keep in mind that this estimates are not strictly comparable with the similar estimate for Western countries, because we have used the gross value of industrial production rather than GNP for measuring the output, and only the data for the nationalized part of industry. In the version of the model that allowed for changing rate of growth of total factor productivity over time we found that Czechoslovakia, Poland and Bulgaria experienced a quite considerably declining trend in the rate of change of the total factor productivity while such trend could not have been discovered in Hungary and Rumania. |
| Keywords: | Production Function, Total Factor Productivity, Eastern Europe, Czechoslovakia. Hungary, Poland, Bulgaria, Romania, |
| JEL: | E |
| Date: | 2005–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510025&r=mac |
| By: | Jorge Soares (Department of Economics,University of Delaware) |
| Abstract: | The primary objective of this paper is to highlight the distinct roles of altruism and of self-interest in the political determination of a public education policy. I assess the relative importance of three factors in the determination of the equilibrium level of this policy: altruism, the impact of public funding of education on social security benefits and its impact on factor prices. I then focus on the impact of implementing a social security system on the equilibrium levels of education funding and on welfare. I find that although, in the benchmark economy, the presence of social security might generate support for public funding of education, its overall effect on the well-being of individuals is negative for any level of social security taxation. are particularly well-suited for analyzing the dynamics going forward in time even though the dynamics are ill-defined in this direction. In particular, we analyze the inverse limit of the cash-in-advance model of money and illustrate how information about the inverse limit is useful for detecting or ruling out complex dynamics. |
| Keywords: | Public Education, Voting, General Equilibrium. |
| JEL: | D78 E62 I22 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:05-05&r=mac |
| By: | Stephanie Aaronson; Andrew Figura |
| Abstract: | The movement of hours worked over the business cycle is an important input into the estimation of many key parameters in macroeconomics. Unfortunately, the available data on hours do not correspond precisely to the concept required for accurate inference. We study one source of mismeasurement--that the most commonly used source data measure hours paid instead of hours worked--focusing our attention on salaried workers, a group for whom the gap between hours paid and hours worked is likely particularly large. We show that the measurement gap varies significantly and positively with changes in labor demand. As a result, we estimate that the standard deviations of the workweek and of total hours worked are 25 and 6 percent larger, respectively, than standard measures of hours suggest. We also find that this measurement gap is an unlikely source of the acceleration in published measures of productivity since 2000. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-38&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | In this paper we show that the monthly structure of the US money stock can be specified in terms of a long-memory process, with roots at both the zero and the seasonal monthly frequencies. We use a procedure that enables us to test simultaneously for the roots at all these frequencies. The results show that the root at the long-run or zero frequency plays a much more important role than the seasonal one, though the latter should also be taken into account. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-16&r=mac |
| By: | Felipe Meza; Erwan Quintin |
| Abstract: | Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico’s 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little. |
| Keywords: | Financial crises - Mexico |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0105&r=mac |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | A time-varying parameter framework is suggested for use with real-time multiperiod forecast data to estimate implied forecast equations. The framework is applied to historical briefing forecasts prepared for the Federal Open Market Committee to estimate the U.S. central bank’s ex ante perceptions of the natural rate of unemployment. Relative to retrospective estimates, empirical results do not indicate severe underestimation of the natural rate of unemployment in the 1970s. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-03&r=mac |
| By: | Kenneth D. Garbade; John E. Kambhu |
| Abstract: | The U.S. Treasury announced in August 2005 that it is exploring whether to provide a backstop securities lending facility for U.S. Treasury securities. This paper examines the conceptual basis for such a facility by analogizing the market for borrowing and lending Treasury securities with the market for borrowing and lending money prior to the founding of the Federal Reserve System in 1914. An inelastic supply of currency in the nineteenth century led to periodic suspensions of convertibility of bank deposits; Congress authorized a system of Federal Reserve Banks to address the problem. A similarly inelastic supply of Treasury securities has led to several recent episodes of chronic settlement fails. A backstop lending facility would mitigate the fails problem by allowing the Treasury to act as a lender of last resort of Treasury securities during periods of unusual market stress. |
| Keywords: | Government securities |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:223&r=mac |
| By: | Ricardo J. Caballero; Eduardo M.R.A. Engel (Dept. of Economics, Yale University) |
| Abstract: | Cooper and Willis (2003) is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy. Their case is based on "reproducing" our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs. That is, they supposedly find our results where they should not be found. The three claims on which they base their case are incorrect. Their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied. They also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment. This is incorrect as well, since the 'gap approach' has been derived formally from at least as sophisticated microeconomic models as the one they present. On a more positive note, the correct interpretation of Cooper and Willis's results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations. |
| Keywords: | Adjustment hazard, aggregate nonlinearities, lumpy adjustment, observed and unobserved gaps, quadratic adjustment |
| JEL: | E2 J2 J6 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:883&r=mac |
| By: | Frank T. Denton; Byron G. Spencer |
| Abstract: | Simulation methods are employed to explore the effects of immigration as a control instrument to offset the economic and demographic consequences of low fertility rates and aging population distribution. A neoclassical economic growth model is coupled with a demographic projection model. The combined model is calibrated and used in a series of experiments. The experiments are designed to generate the time paths of a hypothetical but realistic economic-demographic system under alternative assumptions about immigration policy. The government seeks to optimize policy results in the model, according to a specified criterion function. The model is calibrated with Canadian data but some experiments are carried out using initial populations and fertility rates of other countries. |
| Keywords: | immigration, macroeconomy, aging population, low fertility |
| JEL: | E17 J11 J18 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:qseprr:398&r=mac |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | This paper examines the long-run dynamics and the cyclical structure of the US stock market using fractional integration techniques. We implement a version of the tests of Robinson (1994a), which enables one to consider unit roots with possibly fractional orders of integration both at the zero (long-run) and the cyclical frequencies. We examine the following series: inflation, real risk-free rate, real stock returns, equity premium and price/dividend ratio,annually from 1871 to 1993. When focusing exclusively on the long-run or zero frequency, the estimated order of integration varies considerably, but nonstationarity is found only for the price/dividend ratio. When the cyclical component is also taken into account, the series appear to be stationary but to exhibit long memory with respect to both components in almost all cases. The exception is the price/dividend ratio, whose order of integration is higher than 0.5 but smaller than 1 for the long-run frequency, and is between 0 and 0.5 for the cyclical component. Also, mean reversion occurs in all cases. Finally, we use six different criteria to compare the forecasting performance of the fractional (at both zero and cyclical frequencies) models with others based on fractional and integer differentiation only at the zero frequency. The results show that the former outperform the others in a number of cases. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bru:bruedp:05-09&r=mac |
| By: | Virgiliu Midrigan (Ohio State University) |
| Abstract: | Studies of disaggregated international price data document a robust, positive relationship between nominal exchange (NER) volatility and the variability of international relative prices. This relationship is interpreted as evidence that sticky prices rather than trade frictions are the source of the large law of one price deviations across locations. This paper shows that an explicitly micro-founded, menu-cost model predicts a hump-shaped rather than a monotonic relationship between relative price and nominal exchange rate volatility. The hump occurs at higher nominal exchange rate volatilities the less tradeable the goods are. We use this implication of the model to identify the size of the physical barriers that separate nations. Ad valorem trade costs as large as 50 percent are necessary for the model to generate the type of international relative price movements observed in the data. |
| Keywords: | PPP, Law of One Price, menu costs, trade costs |
| JEL: | E30 F41 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0511001&r=mac |
| By: | Marco Bassetto; Thomas J. Sargent |
| Abstract: | We analyze the democratic politics and competitive economics of a ‘golden rule’ that separates capital and ordinary account budgets and allows a government to issue debt to finance only capital items. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. We study an economy with a growing population of overlapping generations of long-lived but mortal agents. Each period, majorities choose durable and nondurable public goods. In a special limiting case with demographics that make Ricardian equivalence prevail, the golden rule does nothing to promote efficiency. But when the demographics imply even moderate departures from Ricardian equivalence, imposing the golden rule substantially improves the efficiency of democratically chosen allocations of public goods. We use some examples calibrated to U.S. demographic data and find greater benefits from adopting the golden rule at the state level or with 19th century demographics than under current national demographics. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-07&r=mac |
| By: | Paul R. Gregory; Valery Lazarev |
| Abstract: | This paper examines structural change in the Russian economy in 1990-2001, as measured by the changing composition of output and consumption, using international panel data sets as a frame of reference. It calculates a series of indexes to determine the extent to which the Russian economy is converging towards market economies. Although the Russian structure of output is becoming increasingly similar to that of upper-middle and the lower tier of high-income countries, the structure of Russian manufacturing is inconsistent with its income level and the extent of labor reallocation remains inadequate. Russia's pattern of consumption remains distorted due to the incomplete price liberalization. |
| Keywords: | Post-Communist Transition, Value Added, Labor Productivity, Composition of GDP, Price Distortions |
| JEL: | E20 P20 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:896&r=mac |
| By: | Ricardo J. Caballero; Eduardo M.R.A. Engel (Dept. of Economics, Yale University); Alejandro Micco |
| Abstract: | We characterize the degree of microeconomic inflexibility in several Latin American economies and find that Brazil, Chile and Colombia are more flexible than Mexico and Venezuela. The difference in flexibility among these economies is mainly explained by the behavior of large establishments, which adjust more promptly in the more flexible economies, especially when accumulated shocks are substantial. We also study the path of flexibility in Chile and show that it declined in the aftermath of the Asian crisis. This decline can account for a substantial fraction of the large decline in TFP-growth in Chile since 1997 (from 3.1 percent per year for the preceding decade, to about 0.3 percent after that). Moreover, if it were to persist, it could permanently shave off almost half of a percent from Chile's structural rate of growth. |
| Keywords: | Microeconomic rigidities, creative-destruction, job flows, restructuring and reallocation, productivity growth |
| JEL: | E2 J2 J6 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:884&r=mac |
| By: | Somesh Kumar Mathur (Jamia Millia Islamia) |
| Abstract: | The study gives the theoretical justification for the per capita growth equations using Solovian model(1956) and its factor accumulation assumptions. The different forms of the per capita growth equation is used to test for 'absolute convergence' and 'conditional convergence' hypotheses and also work out the speed of absolute and conditional convergence for selected countries from 1961-2001.Only EU and East Asian countries together have shown uniform evidence of absolute convergence in all periods. While EU as a region has shown significant evidence of absolute convergence in two periods, 1961-2001 and 1970-2001, there is no convincing statistical evidence in favor of absolute convergence in the last two periods: 1980-2001 and 1990-2001. The speed of absolute convergence in the four periods range between 0.99-2.56 % p.a. (2% for the EU was worked out by Barro and Xavier Sala-i-Martin, 1995, for European regions) for EU while it ranges between 0.57-1.16 % p.a. for the countries in East Asia and EU regions together. However, there is no evidence of convergence among the South Asian countries in all periods and some major CIS republics since 1966.There is however tendency for absolute convergence among countries of South Asia, East Asia and European Union together particularly after the 1980s. Conditional convergence is prevalent among almost all pairs of regions in our sample except East Asian and South Asian nations together. Speed of conditional convergence ranges from 0.2 % in an year to 22%.In the European nations, the speed of conditional convergence works out be nearly 20 % unlike the speed of absolute convergence which hovered around 2 %.Such results would mean that countries in Europe are converging very quickly to their own potential level of incomes per capita but not so quickly to a common potential level of income per capita. |
| Keywords: | Growth equation; absolute convergence; conditional convergence; speed of absolute and conditional convergence; elasticity of output with respect to capital; half life of convergence |
| JEL: | E |
| Date: | 2005–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0510023&r=mac |
| By: | Almuth Scholl |
| Abstract: | This paper analyzes optimal foreign aid policy in a neoclassical framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modelled as a limited enforceable contract. We define conditional aid policy to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that the effectiveness of unconditional aid is low while self-enforcing conditional aid strongly stimulates the economy. However, increasing the welfare of the poor comes at high cost: to ensure aid effectiveness, less democratic political regimes receive permanently larger aid funds. |
| JEL: | E13 F35 O11 O19 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-054&r=mac |
| By: | Thomas F. Crossley; Hamish W. Low |
| Abstract: | This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility. |
| Keywords: | elasticity of intertemporal substitution, Euler equation estimation, demand systems |
| JEL: | D91 E21 D12 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:qseprr:395&r=mac |
| By: | Atanas Christev (CERT, Heriot-Watt University and IZA Bonn); Olga Kupets (National University-Kiev Mohyla Academy and IZA Bonn); Hartmut Lehmann (University of Bologna, CERT, Heriot-Watt University, EROC, Kiev School of Economics, and IZA Bonn) |
| Abstract: | This paper addresses the important issue of the effects of trade liberalization on labor market job flows. It studies the case of Ukraine where we view the sudden openness of the economy to trade as a quasi-natural experiment. We use disaggregated data on manufacturing industries and customs data on trade flows taking account of shifting trade patterns after the disintegration of CMEA trade regime. We provide some first evidence that three-digit NACE sector job flows are predominantly driven by idiosyncratic factors within industries. Other things equal, there is increased labor shedding as larger non-state share in industry relates to less job creation and more job destruction. Trade openness does affect job flows in Ukrainian manufacturing disproportionately according to trade orientation. We find that while trade with CIS decreases job destruction, trade with the EU increases excess reallocation mainly through job creation. |
| Keywords: | job creation, job destruction, trade flows and trade liberalization, Ukraine |
| JEL: | E24 F14 J63 P23 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1826&r=mac |
| By: | Almuth Scholl |
| Abstract: | This paper analyzes the impact of limited enforceable international loans on international risk sharing and trade fluctuations in a two-country two-good endowment economy. Our specification of the punishment threat allows the exclusion from trade to last only finitely many periods and distinguishes between financial autarky and full autarky. Quantitative results show that limited enforceability substantially alters cross-country consumption correlations and the dynamics of net exports. In contrast to existing studies, risk sharing is low for large elasticities of substitution between the domestic and foreign goods. However, it remains challenging to explain the high volatility of the terms of trade empirically observed. |
| JEL: | E32 D52 F34 F41 |
| Date: | 2002–06 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-055&r=mac |