nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒12‒09
ninety-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal discretionary policy and uncertainty about inflation persistence By Richhild Moessner
  2. And if one size fit all after all ? A counterfactual examination of the ECB monetary policy under Duisenberg presidency. By Jérôme Héricourt
  3. Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S. By L. Randall Wray; C. Sardoni
  4. Optimal Monetary and Fiscal Policy in a Currency Union By Jordi Gali; Tommaso Monacelli
  5. A happy "halfway-house"? Medium term inflation targeting in New Zealand By Sam Warburton; Kirdan Lees
  6. Oil Prices, Inflation and Interest Rates in a Structural Cointegrated VAR Model for the G-7 Countries By Matteo Manera; Alessandro Cologni
  7. Central Bank Credibility and Monetary Policy: Evidence from Small Scale Macroeconomic Model of Indonesia By Enrico Tanuwidjaja; Choy Keen Meng
  8. Are Long-Run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For? By Giuseppe Fontana; Alfonso Palacio- Vera
  9. New-Keynesian or RBC Transmission? The Effects of Fiscal Shocks in Labour Markets By Pappa, Evi
  10. Reaction functions in a small open economy: What role for non-traded inflation? By Ana Maria Santacreu;
  11. How should central banks communicate? By Michael Ehrmann; Marcel Fratzscher
  12. Fiscal and monetary policy, unfortunate events, and the SGP arithmetics - Evidence from a growth-gaps model By Edoardo Gaffeo; Giuliana Passamani; Roberto Tamborini
  13. Transparency of Monetary Policy: Theory and Practice By Petra Geraats
  14. Near-rational exuberance By James Bullard; George W. Evans; Seppo Honkapohja
  15. Fiscal Policy as a Stabilisation Device for an Open Economy Inside or Outside EMU By Campbell Leith; Simon Wren-Lewis
  16. Ricardian fiscal regimes in the European Union By António Afonso
  17. Fiscal-Monetary Policy Interactions in the Presence of Unionized Labour Markets By Cukierman, Alex; Dalmazzo, Alberto
  18. Measuring Fiscal Sustainability By Polito, Vito; Wickens, Michael R
  19. Towards a Theory of Firm Entry and Stabilization Policy By Paul R. Bergin; Giancarlo Corsetti
  20. Do Capital Adequacy Requirements Matter for Monetary Policy? By Stephen G. Cecchetti; Lianfi Li
  21. Canaries and Vultures: A Quantitative History of Monetary Mismanagement in Brazil By Pedro H. Albuquerque; Solange Gouvea
  22. Ricardian Fiscal Regimes in the European Union By António Afonso
  23. The Optimality of the Friedman Rule When Some Distorting Taxes Are Exogenous By Alexandre B. Cunha
  24. Electoral Uncertainty, Fiscal Policy and Macroeconomic Fluctuations By Jim Malley; Apostolis Philippopoulos; Ulrich Woitek
  25. Assessing the value of indicators of underlying inflation for monetary policy By Pietro Catte; Torsten Sløk
  26. Where Are We Now? Real-Time Estimates of the Macro Economy By Evans, Martin D.D.
  27. Searching for Non-Monotonic Effects of Fiscal Policy: New Evidence By Benedetti, Marina; Giavazzi, Francesco; Jappelli, Tullio; Pagano, Marco
  28. Modelling and Forecasting Fiscal Variables for the euro Area By Favero, Carlo A; Marcellino, Massimiliano
  29. Brazilian Business Cycles and Growth from 1850 to 2000 By Eurilton Araújo; Luciane C. Carpena; Alexandre B. Cunha
  30. Fiscal Rules and Fiscal Performance in the EU and Japan By von Hagen, Jürgen
  31. An Estimated, New Keynesian Policy Model for Australia By Martin Melecky; Daniel Buncic
  32. Ireland in EMU: More Shocks, Less Insulation? By Honohan, Patrick; Leddin, Anthony J
  33. Keynesian Economics, Monetary Policy and the Business Cycle - New and Old By Cukierman, Alex
  34. Russia's Regions: Income Volatility, Labour Mobility and Fiscal Policy By Kwon, Goohoon; Spilimbergo, Antonio
  35. Communication in Monetary Policy Committees By Jan Marc Berk; Beata K. Bierut
  36. Factor Analysis in a New-Keynesian Model By Beyer, Andreas; Farmer, Roger E A; Henry, Jérôme; Marcellino, Massimiliano
  37. Real-Time Model Uncertainty in the United States: the Fed from 1996-2003 By Ironside, Brian; Tetlow, Robert J.
  38. Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants By Eslava, Marcela; Haltiwanger Jr, John C; Kugler, Adriana D.; Kugler, Maurice
  39. Monetary Policy in the Presence Of Imperfect Observability Of The Objectives Of Central Bankers By Francesco Salsano
  40. Volatility and Development By Koren, Miklós; Tenreyro, Silvana
  41. Sustainable Social Spending By Assar Lindbeck
  42. Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence from Apec and Nafta By Viviana Fernández; Ali M. Kutan
  43. Factor model forecasts for New Zealand By Troy Matheson
  44. Income uncertainty and aggregate consumption By L. Pozzi
  45. Dynamic Controllability with Overlapping targets: A Generalization of the Tinbergen-Nash Theory of Economic Policy By Giovanni Di Bartolomeo; Nicola Acocella; Andrew Hughes Hallett
  46. Generalized Stochastic Gradient Learning By George W. Evans; Seppo Honkapohja; Noah Williams
  47. Total Factor Productivity: An Unobserved Components Approach By Raul Crespo
  48. Precautionary Savings or Working Longer Hours? By Pijoan-Mas, Josep
  49. The pricing behaviour of firms in the euro area : new survey evidence By S. Fabiani; M. Druant; I. Hernando; C. Kwapil; B. Landau; C. Loupias; F. Martins; T. Mathä; R. Sabbatini; H. Stahl; A. Stokman
  50. Pension Reform in Brazil: Transitional Issues in a Model with Endogenous Labor Supply By Sergio G. Ferreira
  51. Inattentive Producers By Ricardo Reis
  52. Tinbergen and Theil Meet Nash: Controllability in Policy Games By Giovanni Di Bartolomeo; Nicola Acocella
  53. A Micro-Macro Model for South Africa: Building and Linking a Microsimulation Model to a CGE Model By Nicolas Hérault
  54. Equilibrium and inefficiency in fixed rate tenders By Christian Ewerhart; Nuno Cassola; Natacha Valla
  55. The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach By Ansgar Belke; Frank Baumgärtner; Friedrich Schneider; Ralph Setzer
  56. Wars, Redistribution and Civilian Federal Expenditures in the US over the Twentieth Century By Beetsma, Roel; Cukierman, Alex; Giuliodori, Massimo
  57. Why is Fiscal Policy often Procyclical? By Alberto Alesina; Guido Tabellini
  58. BAD Taxation: Disintermediation and Illiquidity in a Bank Account Debits Tax Model By Pedro H. Albuquerque
  59. The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period By João Victor Issler; Afonso Arinos de Mello Franco; Osmani Teixeira de Carvalho Guillén
  60. Unemployment, investment and global expected returns: A panel FAVAR approach By Ron Smith; Gylfi Zoega
  61. Jobs and Unemployment in Macroeconomic Theory: A Turbulence Laboratory By Ljungqvist, Lars; Sargent, Thomas J
  62. The unemployment-growth relationship in transition countries By Hubert Gabrisch; Herbert Buscher
  63. Modelling the overall personal income distribution in the USA from 1994 to 2002 By Ivan O. Kitov
  64. Heterogeneity in Consumer Price Stickiness: A Microeconometric Investigation By Fougère, Denis; Le Bihan, Hervé; Sevestre, Patrick
  65. Term Structure Estimation with Survey Data on Interest Rate Forecasts By Kim, Don H.; Orphanides, Athanasios
  66. Risk-Free Bond Prices in Incomplete Markets with Recursive Utility Functions and Multiple Beliefs By Chaiki Hara; Atsushi Kajii
  67. Short-Run Italian GDP Forecasting and Real-Time Data By Golinelli, Roberto; Parigi, Giuseppe
  68. "Real Indeterminacy of Stationary Equilibria in Matching Models with Divisible Money" By Kazuya Kamiya
  69. The Quest for Status and Endogenous Labor Supply. The Relative Wealth Framework By Fisher, Walter H.; Hof, Franz X.
  70. A model for microeconomic and macroeconomic development By Ivan O. Kitov
  71. Immunization Using a Parametric Model of the Term Structure By Jorge Miguel Ventura Bravo; Carlos Manuel Pereira da Silva
  72. "leadership meets soft budget" By Akai Nobuo; Motohiro Sato
  73. FDI, Allocation of Talents and Differences in Regulation By Pica, Giovanni; Rodríguez Mora, José Vicente
  74. On the Measurement of Mismatch By Prof. Dr. Carsten Ochsen
  75. Os Impactos Econômicos da CPMF: Teoria e Evidência By Pedro H. Albuquerque
  76. Financial Markets and Economic Growth in Poland: Simulations with an Econometric Model By Piotr Wdowinski
  77. The New Keynesian Model and the Long-Run Vertical Phillips Curve : Does It Hold for Germany? By Jan Gottschalk; Ulrich Fritsche
  78. Introducing Time-to-Educate in a Job Search Model By Sascha O. Becker
  79. Equilibrium Correlation of Asset Price and Return By Charles Ka Yui Leung
  80. On the Forecasting Properties of the Alternative Leading Indicators for the German GDP : Recent Evidence By Konstantin A. Kholodilin; Boriss Siliverstovs
  81. Consumption Taxes and Redistribution By Correia, Maria Isabel Horta
  82. Rational Inattention: A Solution to the Forward Discount Puzzle By Bacchetta, Philippe; van Wincoop, Eric
  83. Can Globalisation Stop the Decline in Commodities' Terms of Trade? The Prebisch-Singer Hypothesis Revisited" By Andre Varella Mollick; Joao Ricardo Faria; Pedro H. Albuquerque; Miguel A. Leon-Ledesma
  84. Mind your Ps and Qs! Improving ARMA forecasts with RBC priors By Kirdan Lees; Troy Matheson
  85. Human Capital, the Structure of Production, and Growth By Ciccone, Antonio; Papaioannou, Elias
  86. Technological Advance and the Growth in Healthcare Spending By Richard M. H. Suen
  87. UIP, Expectations and the Kiwi By Anella Munro;
  88. Libor Market Model and Gaussian HJM explicit approaches to option on composition By Marc Henrard
  90. Regulation and Economic Performance: Product Market Reforms and Productivity in the OECD By G. Nicoletti; Stefano Scarpetta
  91. All types of inequality are not created equal: divergent impacts of inequality on economic growth By Stephanie Seguino
  92. Zukunft der Arbeit und Arbeit der Zukunft in Deutschland By Prof. Dr. Carsten Ochsen

  1. By: Richhild Moessner (Bank for International Settlements, Basel, Switzerland)
    Abstract: This paper studies optimal discretionary policy with parameter uncertainty about inflation inertia. Optimal policy rules and impulse responses are presented within a hybrid New-Keynesian model estimated for the euro area by Smets (2003). We find that it may be optimal for policy to respond more aggressively to cost-push shocks and real interest rate shocks in the presence of uncertainty about inflation inertia, depending on the form of the central bank’s objective function. Moreover, in the cases where optimal policy is not certainty equivalent, we find that inflation returns slightly more gradually to equilibrium following a shock when the degree of inflation inertia is uncertain.
    Keywords: Monetary policy; inflation persistence; uncertainty..
    JEL: E52 E58
    Date: 2005–11
  2. By: Jérôme Héricourt (TEAM)
    Abstract: How did European Central Bank (ECB) fit the disparate macroeconomic needs of euro zone members? The purpose of this paper consists in providing quantitative answers to this question presenting an original methodology. After estimating unified frameworks of monetary transmission mechanisms for nine euro zone countries, we compute the national evolutions of output gap and inflation since 1999, in a fictitious context where the euro has never been launched. Using a loss function as a standard for macroeconomic stabilization, these simulations are then compared with the actual outcomes over the period 1999-2003. Our major result is that the ECB did a far better stabilization job for euro zone countries than national central banks would have done.
    Keywords: Taylor rules, monetary policy transmission, alternative world, simulations, stabilisation.
    JEL: E52 E58 F47
    Date: 2004–01
  3. By: L. Randall Wray (The Levy Economics Institute & University of Missouri, Kansas City); C. Sardoni (University of Rome “La Sapienza)
    Abstract: In the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the former’s flexibility and capacity to adjust rigidity, and the latter’s extreme caution, and obsession with low inflation. In looking at the foundations of the two banks’ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the U.S. and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and U.S. The two economic areas’ differences must be explained by considering other factors among which the most important is fiscal policy.
    Keywords: monetary policy, federal reserve, European central bank, fiscal policy, aggregate demand, growth
    JEL: E12 E42 E58 E62
    Date: 2005–11–23
  4. By: Jordi Gali; Tommaso Monacelli
    Abstract: We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyze its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending level. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal monetary policy requires that inflation be stabilized at the union level. On the other hand, the relinquishment of an independent monetary policy, coupled with nominal price rigidities, generates a stabilization role for fiscal policy, one beyond the efficient provision of public goods. Interestingly, the stabilizing role for fiscal policy is shown to be desirable not only from the viewpoint of each individual country, but also from that of the union as a whole. In addition, our paper offers some insights on two aspects of policy design in currency unions: (i) the conditions for equilibrium determinacy and (ii) the effects of exogenous government spending variations.
    JEL: E52 F41 E62
    Date: 2005–12
  5. By: Sam Warburton; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: The 2002 Policy Targets Agreement (PTA) between the Reserve Bank of New Zealand and the government asks the Reserve Bank to target inflation "over the medium term" rather than over an annual target. This medium term objective shifts inflation targeting towards a "halfway-house" between inflation targeting and price level targeting. Extending the inflation averaging horizon to the medium term improves the inflation-output tradeoff by influencing inflation expectations. But how long should the medium term be? Characterizing the New Zealand economy with a small new-Keynesian model, we show that the happiest halfway house is located around a two or three year averaging horizon which leads to mild, but non-trivial, improvements in the efficiency of monetary policy.
    JEL: E52 E58 E61
    Date: 2005–10
  6. By: Matteo Manera (University of Milan-Bicocca and Fondazione Eni Enrico Mattei); Alessandro Cologni (Fondazione Eni Enrico Mattei)
    Abstract: Sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries. Moreover, the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries. While several authors have considered the direct channels of transmission of energy price increases, other authors have argued that the economic downturns arose from the monetary policy response to the inflation presumably caused by oil price increases. In this paper a structural cointegrated VAR model has been considered for the G-7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks. Empirical analysis shows that, for most of the countries considered, there seems to be an impact of unexpected oil price shocks on interest rates, suggesting a contractionary monetary policy response directed to fight inflation. In turn, increases in interest rates are transmitted to real economy by reducing output growth and the inflation rate.
    Keywords: Oil price shocks, Monetary policy response, Structural VAR models
    JEL: E31 E32 E52 Q41
    Date: 2005–09
  7. By: Enrico Tanuwidjaja (Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore); Choy Keen Meng (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore)
    Abstract: In this paper, we develop a forward-looking small scale macroeconomic model (SSMM) of the Indonesian economy which is potentially useful for carrying out monetary policy analysis. The Batini-Haldane (1999) model is used as the theoretical underpinning for the development of the model along with the well -known Taylor policy rule (1993). The tracking performance of the model is found to be satisfactory. We conduct deterministic and stochastic simulations to examine the role of the central bank’s credibility in achieving the inflation target and to suggest appropriate monetary policy responses. Policy simulations indicate that it is crucial for the Indonesian authority to address its credibility for Indonesia to achieve a lower inflation rate. Simulations to trace out the inflation-output tradeoff frontier also show that a monetary policy rule that targeted both the inflation and output gap will result in less macroeconomic volatility. We also found that the inclusion of the exchange rate into the monetary policy rule as an additional feedback variable warrants serious consideration in the future course of monetary policy management.
    Keywords: Small Scale Macroeconomic Model, Monetary Policy, Central Bank Credibility, Policy Frontier, Indonesia
    JEL: C15 C51 E17 E52 O53
  8. By: Giuseppe Fontana (University of Leeds, UK); Alfonso Palacio- Vera (Universidad Complutense de Madrid, Spain)
    Abstract: A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long- run price stability—i.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.
    Keywords: monetary policy, new consensus, path dependency, opportunistic approach
    JEL: E5 E52
    Date: 2005–11–23
  9. By: Pappa, Evi
    Abstract: We study the mechanics of transmission of fiscal shocks to labour markets. We characterize a set of robust implications following government consumption, investment and employment shocks in a RBC and a New-Keynesian model and use part of them to identify shocks in the data. In line with the New-Keynesian story, shocks to government consumption and investment increase real wages and employment contemporaneously both in US aggregate and in US state data. The dynamics in response to employment shocks are mixed, but in many cases are inconsistent with the predictions of the RBC model.
    Keywords: labour markets; sign-restrictions; sticky and flexible prices; VARs
    JEL: C11 E12 E32 E62
    Date: 2005–10
  10. By: Ana Maria Santacreu; (Reserve Bank of New Zealand)
    Abstract: I develop a structural general equilibrium model and estimate it for New Zealand using Bayesian techniques. The estimated model considers a monetary policy regime where the central bank targets overall inflation but is also concerned about output, exchange rate movements, and interest rate smoothing. Taking the posterior mean of the estimated parameters as representing the characteristics of the New Zealand economy, I compare the consequences that two alternative reaction functions have on the central bank's loss, for different specifications of its preferences. I obtain conditions under which the monetary authority should respond directly to non-tradable inflation instead of overall inflation. In particular, if preferences are relatively biased towards inflation stabilization, responding directly to overall inflation results in better macroeconomic outcomes. If instead the central bank places relatively more weight on output stabilization, responding directly to non-traded inflation is a better strategy.
    JEL: C51 E52 F41
  11. By: Michael Ehrmann (Correspondence to: European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany)
    Abstract: The paper shows that central bank communication is a key determinant of the market’s ability to anticipate monetary policy decisions and the future path of interest rates. Comparing communication policies by the Federal Reserve, the Bank of England and the ECB since 1999, we find that communicating the diversity of views among committee members about monetary policy lowers the market’s ability to anticipate policy decisions as well as the future path of interest rates. This effect is sizeable, accounting for instance for one third to half of the prediction errors of FOMC policy decisions. By contrast, individualistic communication regarding the economic outlook is found to be beneficial for the Federal Reserve, enabling market participants to better anticipate the future path of interest rates. Thus, it is the collegiality of views on monetary policy but the diversity of views on the economic outlook that enhance the effectiveness of central bank communication.
    Keywords: Communication; monetary policy; committee; effectiveness; economic outlook; Federal Reserve; Bank of England; European Central Bank.
    JEL: E43 E52 E58 G12
    Date: 2005–11
  12. By: Edoardo Gaffeo; Giuliana Passamani; Roberto Tamborini
    Abstract: The recent revision (March 2005) of the Stability and Growth Pact (SGP) has confirmed the 3% deficit/GDP ratio as the pillar of the excessive deficits procedure envisaged by the Maastricht Treaty for member countries of the EMU. Since the deficit/GDP ceiling is still in place, research on its implications for fiscal discipline and macroeconomic stabilization has to be pushed further. We argue that the agenda largely involves empirical matters. In particular, this paper presents an econometric estimate and simulations of a macroeconomic model of Italy and Germany aimed at addressing three issues. First, monetary and fiscal rules intercations are explictly modelled and examined in dynamic setting. Second, consistently with common perception and the new formulation of the SGP, the business cycle and the responses of policy variables are cast in terms of growth gaps, not gaps in levels, with respect to potential. Third, budgetary components (primary expenditure and total tax revenue) are examined as separate fiscal rules, which allows us to track the reaction of the fiscal stance to growth shocks more precisely, to point out several pitfalls in current measures of fiscal ratios to GDP, and suggest more accurate assessment of fiscal stances.
    Keywords: Fiscal policy, Stability and Growth Pact
    JEL: E0 E6
    Date: 2005
  13. By: Petra Geraats
    Abstract: Transparency has become one of the main features of monetary policymaking during the last decade. This paper establishes some stylized facts. In addition, it provides a systematic overview of the practice of monetary policy transparency around the world. It shows much diversity in information disclosure, even for central banks with the same monetary policy framework, including inflation targeting. Nevertheless, the paper finds significant differences in transparency across monetary policy frameworks. The empirical findings are explained using key insights distilled from the theoretical literature. Thus, this paper aims to bridge the gap between the theory and practice of monetary policy transparency.
    Keywords: transparency, monetary policy, central bank communication
    JEL: D82 E58
    Date: 2005
  14. By: James Bullard (Federal Reserve Bank of St. Louis, USA); George W. Evans (University of Oregon, USA); Seppo Honkapohja (University of Cambridge, United Kingdom)
    Abstract: We study how the use of judgement or “add-factors” in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria.
    Keywords: Learning; expectations; excess volatility; bounded rationality; monetary policy.
    JEL: E52 E61
    Date: 2005–11
  15. By: Campbell Leith; Simon Wren-Lewis
    Abstract: Extending Gali and Monacelli (2004), we build an N-country open economy model, where each economy is subject to sticky wages and prices and, potentially, has access to sales and income taxes as well as government spending as fiscal instruments. We examine an economy either as a small open economy under flexible exchange rates or as a member of a monetary union. In a small open economy when all three fiscal instruments are freely available, we show analytically that the impact of technology and mark-up shocks can be completely eliminated, whether policy acts with discretion or commitment. However, once any one of these fiscal instruments is excluded as a stabilisation tool, costs can emerge. Using simulations, we find that the useful fiscal instrument in this case (in the sense of reducing the welfare costs of the shock) is either income taxes or sales taxes. In contrast, having government spending as an instrument contributes very little. In the case of mark-up shocks tax instruments which can offset the impact of the shock directly are highly effective, while other fiscal instruments are less useful. The results for an individual member of a monetary union facing an idiosyncratic technology shock (where monetary policy in the union does not respond) are very different. First, even with all fiscal instruments freely available, the technology shock will incur welfare costs. Government spending is potentially useful as a stabilisation device, because it can act as a partial substitute for monetary policy. Finally, sales taxes are more effective than income taxes at reducing the costs of a technology shock under monetary union. If all three taxes are available, they can reduce the impact of the technology shock on the union member by around a half, compared to the case where fiscal policy is not used. Finally we consider the robustness of these results to two extensions. Firstly, introducing government debt, such that policy makers take account of the debt consequences of using fiscal instruments as stabilisation devices, and, secondly, introducing implementation lags in the use of fiscal instruments. We find that the need for debt sustainability has very limited impact on the use of fiscal instruments for stabilisation purposes, while implementation lags can reduce, but not eliminate, the gains from fiscal stabilisation.
    JEL: E32 E60 F41
    Date: 2005–11
  16. By: António Afonso (European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany)
    Abstract: The prevalence of either Ricardian or non-Ricardian fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, and this is of particular relevance for European Union countries. The purpose of this paper is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Additionally, electoral budget cycles also seem to play a role in fiscal behaviour.
    Keywords: Fiscal regimes; European Union; panel data models.
    JEL: C23 E62 H62
    Date: 2005–11
  17. By: Cukierman, Alex; Dalmazzo, Alberto
    Abstract: This paper develops a framework for studying the interactions between labour unions, fiscal policy, monetary policy and monopolistically competitive firms. The framework is used to investigate the effects of labour taxes, the replacement ratio, labour market institutions and monetary policy-making institutions on economic performance in the presence of strategic interactions between labour unions and the central bank. Given fiscal variables, higher levels of either centralization of wage bargaining, or of central bank conservativeness are associated with lower unemployment and inflation. However the forward shifting of changes in either labour taxes or in unemployment benefits to labours costs is larger the higher are those institutional variables. The paper also considers the effects of those institutions on the choice of labour taxes and of unemployment benefits by governments concerned with the costs of inflation and unemployment, as well as with redistribution to particular constituencies. A main result is that higher levels of centralization and conservativeness induce government to set higher labour taxes if the replacement ratio and the tax wedge are sufficiently small.
    Keywords: central bank conservativeness; collective wage bargaining; competitiveness; inflation; labour taxes; redistribution; unemployment; unemployment benefits
    JEL: E5 E6 H2 J3 J5 L1
    Date: 2005–10
  18. By: Polito, Vito; Wickens, Michael R
    Abstract: We propose an index of the fiscal stance that is convenient for practical use. It is based on a finite time horizon, not on an infinite time horizon like most tests. As it employs VAR analysis it is simple to compute and easily automated. We also show how it is possible to analyse a change of policy within a VAR framework. We use this methodology to examine the effect on fiscal sustainability of a change in policy. We then conduct an empirical examination of the fiscal stances of the US, the UK and Germany over the last 25 or more years, and we carry out a counter-factual analysis of the likely consequences for fiscal sustainability of using a Taylor rule to set monetary policy over this period. Among our findings are that the recent fiscal stances of all three countries are not sustainable, and that using a Taylor rule in the past would have improved the fiscal stances of the US and UK, but not that of Germany.
    Keywords: budget deficits; economic policy; fiscal sustainability; government debt; VAR analysis
    JEL: C22 C53 E62 E63
    Date: 2005–10
  19. By: Paul R. Bergin; Giancarlo Corsetti
    Abstract: This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.
    JEL: E22 E52 L16
    Date: 2005–12
  20. By: Stephen G. Cecchetti; Lianfi Li
    Abstract: Central bankers and financial supervisors often have different goals. While monetary policymakers want to ensure that there are always sufficient lending activities to maintain high and stable economic growth, supervisors work to limit banks. lending capacities in order to prevent excessive risk-taking. To avoid working at cross-purposes, central bankers need to adopt a policy strategy that accounts for the impact of capital adequacy requirements. In this paper we derive an optimal monetary policy that reinforces prudential capital requirements at the same time that it stabilizes aggregate economic activity. We go on to show that policymakers at the Federal Reserve adjust interest rate policy in a way that would neutralize the procyclical impact of bank capital requirements. By contrast, central bankers in Germany and Japan clearly do not act as the theory suggests they should.
    JEL: E52 E58 G21
    Date: 2005–12
  21. By: Pedro H. Albuquerque (Texas A&M International University); Solange Gouvea (Central Bank of Brazil)
    Abstract: During the last two decades of the twentieth century, Brazil went through a sequence of failed stabilization plans that tried to cope with an enduring hyperinflation. This paper uses a money demand model to evaluate monetary policies during those episodes. The consistency between the money supply and the expected conditional money demand growth rates is considered for each plan. It is shown that the unsuccessful programs were marked by excessive liquidity. The results not only suggest that the mismanagement of the monetary aggregates led to the failure of the plans, but also that the excessive liquidity could have been predicted.
    Keywords: Money Demand, Money Supply, Monetary Policy, Inflation, Stabilization, Brazil
    JEL: O23 O54 N16
    Date: 2005–11–23
  22. By: António Afonso
    Abstract: The prevalence of either Ricardian or non-Ricardian fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, and this is of particular relevance for European Union countries. The purpose of this paper is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Additionally, electoral budget cycles also seem to play a role in fiscal behaviour.
    Keywords: fiscal regimes; European Union; panel data models.
    JEL: C23 E62 H62
  23. By: Alexandre B. Cunha (IBMEC Business School - Rio de Janeiro)
    Abstract: The Friedman rule is a feature of second-best policies in several monetary models. We extend this result by establishing that zero nominal interest rates can be optimal even if the Ramsey planner is not able to select many distorting tax rates. However, we show that the optimality of that policy prescription does depend on the set of tax rates the planner is able to choose. We also provide an intuitive way of assessing whether the Friedman rule is optimal for each particular set of tax rates the Ramsey planner is allowed to select.
    Keywords: Friedman rule, optimal monetary policy, exogenous taxes
    JEL: E31 E52 E63 H21
    Date: 2005–11–30
  24. By: Jim Malley; Apostolis Philippopoulos; Ulrich Woitek
    Abstract: In this paper we study the link between elections, fiscal policy and aggregate fluctuations. The set-up is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re-election shocks. The later are incorporated via a two-party model with elections. The main theoretical prediction is that forward-looking incumbents, with uncertain prospects of re-election, find it optimal to follow relatively shortsighted fiscal policies, and that this hurts capital accumulation. Our econometric estimation, using U.S. data, finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes.
    Keywords: political uncertainty, business cycles & growth, optimal policy, hybrid maximum likelihood estimation
    JEL: D90 E60 H10 H50
    Date: 2005
  25. By: Pietro Catte; Torsten Sløk
    Abstract: This paper considers a number of different measures of core inflation and tries to identify those containing the most useful information about future movements in headline inflation rates over the horizons relevant for monetary policy for the United States, the euro area, Japan, the United Kingdom and Canada. The paper shows that the adjusted indicators do considerably better than the headline rate at determining the underlying inflation trend and, being considerably less volatile, can also be used at higher frequencies to provide more timely information. Most of these indicators also contain information relevant to predicting future headline inflation and which is additional to that contained in the headline rate. However, the relative performance of different indicators varies considerably across economies, and in some cases across sample periods. There is evidence that headline inflation tends to converge toward core inflation over time horizons of between 12 and 24 months. However, the estimated model incorporating this relationship between headline and core inflation does rather poorly in out-of-sample tests, althoughout-of-sample performance is much better for other specifications. <P>Evaluer l’utilité des indicateurs de l’inflation sous-jacente pour la politique monétaire Ce document examine un certain nombre de mesures de l’inflation sous-jacente et tente d’identifier celles qui donnent les informations les plus utiles afin d’appréhender les mouvements à venir de l’inflation totale en vue de la politique monétaire pour les États-Unis, la zone euro, le Japon, le Royaume-Uni et le Canada. L’étude montre que ces indicateurs ajustés sont plus efficaces que le taux d’inflation total lorsqu’il s’agit de déterminer la tendance sous-jacente de l'inflation. De plus, étant considérablement moins volatiles, ces indicateurs peuvent aussi être utilisés à des intervalles plus courts afin d’apporter les informations les plus récentes. La plupart de ces indicateurs contiennent aussi des informations pertinentes pour prévoir les taux d’inflation futurs, et qui sont complémentaires à celles contenues dans le taux d’inflation total. Cependant, la performance relative des différents indicateurs varie énormément d’une économie à l’autre, et dans certains cas d’une période à l’autre. On observe que l’inflation totale tend à converger vers l’inflation sous-jacente à un horizon de 12 à 24 mois. Toutefois, le modèle estimé incorporant cette relation entre inflation totale et inflation sous-jacente se révèle plutôt médiocre dans des essais hors échantillon, bien que les résultats hors échantillon soient bien meilleurs dans des autres spécifications.
    Keywords: monetary policy, politique monétaire, inflation, inflation, core inflation, inflation sous-jacente
    JEL: E31
    Date: 2005–11–25
  26. By: Evans, Martin D.D.
    Abstract: This paper describes a method for calculating daily real-time estimates of the current state of the US economy. The estimates are computed from data on scheduled US macroeconomic announcements using an econometric model that allows for variable reporting lags, temporal aggregation, and other complications in the data. The model can be applied to find real-time estimates of GDP, inflation, unemployment or any other macroeconomic variable of interest. In this paper I focus on the problem of estimating the current level of and growth rate in GDP. I construct daily real-time estimates of GDP that incorporate public information known on the day in question. The real-time estimates produced by the model are uniquely suited to studying how perceived developments the macro economy are linked to asset prices over a wide range of frequencies. The estimates also provide, for the first time, daily time series that can be used in practical policy decisions.
    Keywords: forecasting GDP; Kalman filtering; real-time data
    JEL: C32 E37
    Date: 2005–10
  27. By: Benedetti, Marina; Giavazzi, Francesco; Jappelli, Tullio; Pagano, Marco
    Abstract: Data revisions and the availability of a longer sample offer the opportunity to reconsider the empirical findings that suggest that in the OECD countries national saving responds non-monotonically to fiscal policy. The paper confirms that the circumstance most likely to give rise to a non-monotonic response of national saving to a fiscal impulse is a 'large and persistent impulse', defined as one in which the full employment surplus, as a percent of potential output, changes by at least 1.5 percentage points per year over a two-year period. This particular circumstance remains the only statistically significant one even when we allow for non-monotonic responses to arise when public debt is growing rapidly or interest rate spreads are widening. We find that non-monotonic responses are similar for fiscal contractions and expansions. In particular, an increase in net taxes has no effect on national saving during large fiscal contractions or expansions. For government consumption there is a large, albeit in some specifications less then complete, offset during expansions or contractions.
    Keywords: fiscal policy; national saving
    JEL: E21 E62 H31
    Date: 2005–10
  28. By: Favero, Carlo A; Marcellino, Massimiliano
    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.
    Keywords: euro area; fiscal forecasting; fiscal rules; forecast comparison
    JEL: C30 C53 E62
    Date: 2005–10
  29. By: Eurilton Araújo (IBMEC Business School - São Paulo); Luciane C. Carpena (BNDES and IBMEC Business School - Rio de Janeiro); Alexandre B. Cunha (IBMEC Business School - Rio de Janeiro)
    Abstract: We studied the cyclical and growth properties of Brazilian per capita output from 1850 to 2000. Contrary to the experience of some developed countries, we did not find large changes in the volatility of per capita output. However, we obtained evidence that the oscillations in economic activity became more persistent after World War II.
    Keywords: Brazilian per capita GDP, business cycle, growth
    JEL: C22 E32 N10
    Date: 2005–11–30
  30. By: von Hagen, Jürgen
    Abstract: Fiscal rules specify quantitative targets for key budgetary aggregates. In this paper, we review the experience with such rules in Japan and in the EU. Comparing the performance of fiscal policy in the 1980s and 1990s until 2003, we find that the fiscal rule of the 1980s exerted some but not much disciplinary influence on Japanese fiscal policy. The fiscal rule of the Maastricht Treaty had a significant impact on political budget cycles in the EU, but did little to constrain fiscal policy in the large member states. Since the start of the European Monetary Union, the disciplinary effect of the fiscal rule in the EU has vanished. Next, we discuss the importance of budgetary institutions for the effectiveness of fiscal rules. In Europe, a number of countries adopted strong fiscal rules, i.e., a fiscal rule combined with a design of the budget process enabling governments to commit to the rule. We find that strong fiscal rules have been effective. We conclude with some suggestions for the design of a strong fiscal rule in Japan.
    Keywords: fiscal policy; government budgeting; political budget cycles
    JEL: H11 H61 H62
    Date: 2005–11
  31. By: Martin Melecky (University of New South Wales, School of Economics); Daniel Buncic (University of New South Wales, School of Economics)
    Abstract: A two-block open economy model is estimated in this paper using Australian and U.S. data. Evaluation of the estimated model is carried out in relation to a simple closed economy alternative. Namely, we inspect the implied transmission mechanisms, and examine the relative out-of-sample forecasting performance of the closed and open economy models.
    Keywords: DSGE Model, Open Economy, Australia, U.S., Bayesian Estimation.
    JEL: F41 E40 E37 C11
    Date: 2005–11–29
  32. By: Honohan, Patrick; Leddin, Anthony J
    Abstract: Despite anchoring the Irish monetary system to a common zone-wide exchange rate and interest rate, EMU has triggered sizable exchange rate and especially interest rate shocks to the Irish economy (albeit not appreciably greater than those experienced under previous exchange rate regimes). Interest rate movements have deviated widely from what a standard Taylor monetary policy rule would have counseled - though here again the deviations have been no worse in this regard than those of the previous regime. The most important shock has been associated with the large and sustained initial fall in nominal interest rates as EMU began. Through mechanisms which we formally model, the interest rate fall has had a lasting effect on property prices, construction activity and on the capacity of the labour market to absorb sizable net immigration, despite a sharp deterioration in wage competitiveness since 2002. As the long drawn-out impact of this shock subsides, the failure of the wage-bargaining system promptly to claw back the loss of competitiveness resulting from exogenous exchange rate movements is increasingly likely to show up in weaker aggregate employment performance.
    Keywords: asymmetric shocks; European Monetary Union; Ireland
    JEL: E32 E42 F4
    Date: 2005–11
  33. By: Cukierman, Alex
    Abstract: After a brief review of the main differences between New and Old Keynesian economics from the 1960s this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policy-makers and the New Keynesian (NK) notion of this variable which conceptualizes it as the level of output that would have been produced under perfect competition had all prices and wages been flexible. The paper shows that, under monopolistic competition, NK potential output is often more volatile than the level of output produced under sticky prices and wages implying either of the following. Real life policy-makers mistakenly target smooth versions of output or (since actual economies are monopolistically rather than perfectly competitive) the flexible price and wage equilibrium does not necessarily maximize welfare. The paper shows, that depending on the shape of the utility function and of the distribution of productivity shocks either case is possible and proposes a criterion for discriminating between them.
    Keywords: Relative variability of actual and potential output under flexible versus sticky prices and wages; welfare ranking of sticky versus flexible prices and wages under monopolistic competition
    JEL: E3 E4 E5 E6
    Date: 2005–10
  34. By: Kwon, Goohoon; Spilimbergo, Antonio
    Abstract: Russia's regions are heavily exposed to regional income shocks because of an uneven distribution of natural resources and a Soviet legacy of heavily skewed regional specialization. Also, Russia has a limited mobility of labour and lacks fiscal instruments to deal with regional shocks. We assess how these features influence the magnitude and persistence of regional income shocks, through a panel vector auto-regression, drawing on extensive and unique regional data covering the last decade. We find that labour mobility associated with regional shocks is far lower than in the US yet higher than in the EU-15, and that regional expenditures tend to expand in booms and contract in recessions. We discuss institutional factors behind these outcomes and policy implications.
    Keywords: fiscal policy; labour mobility; panel VAR; Russia
    JEL: C33 E62 H77 J61 P52
    Date: 2005–10
  35. By: Jan Marc Berk; Beata K. Bierut
    Abstract: This paper models monetary policy decisions as being taken by an interacting group of heterogeneous policy makers, organized in a MPC. We show that communication between members generally improves the quality of monetary policy by increasing knowledge about uncertain future economic developments. Interestingly, we find that it is sometimes beneficial to restrict communication to a subset of MPC members. We also show that the optimal size of a communicating MPC is generally smaller than otherwise. Compared with expanding the MPC, communication is a cost-e.ective way of increasing the quality of monetary policy.
    Keywords: monetary policy committees; deliberations; voting
    Date: 2005–11
  36. By: Beyer, Andreas; Farmer, Roger E A; Henry, Jérôme; Marcellino, Massimiliano
    Abstract: New-Keynesian models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the validity of commonly used instruments to achieve identification. In this paper we analyse the practical relevance of these problems and we propose remedies to weak identification based on recent developments in factor analysis for information extraction from large data sets. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of the New-Keynesian model.
    Keywords: determinacy of equilibrium; factor analysis; forward-looking output equation; New-Keynesian Phillips curve; rational expectations; Taylor rule
    JEL: E5 E52 E58
    Date: 2005–10
  37. By: Ironside, Brian; Tetlow, Robert J.
    Abstract: We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model’s inception in July 1996 until November 2003. The period of study was one of important changes in the US economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. We also find that previous findings that simple rules are robust to model uncertainty may be an overly sanguine conclusion.
    Keywords: monetary policy; real-time analysis; uncertainty
    JEL: C5 C6 E37 E5
    Date: 2005–10
  38. By: Eslava, Marcela; Haltiwanger Jr, John C; Kugler, Adriana D.; Kugler, Maurice
    Abstract: In this paper, we analyse employment and capital adjustments using a panel of plants from Colombia. We allow for nonlinear adjustment of employment to reflect not only adjustment costs of labour but also adjustment costs of capital, and vice-versa. Using data from the Annual Manufacturing Survey, which include plant-level prices, we generate measures of plant-level productivity, demand shocks, and cost shocks, and use them to measure desired factor levels. We then estimate adjustment functions for capital and labour as a function of the gap between desired and actual factor levels. As in other countries, we find non-linear adjustments in employment and capital in response to market fundamentals. In addition, we find that employment and capital adjustments reinforce each other, in that capital shortages reduce hiring and labour shortages reduce investment. Moreover, we find that the market oriented reforms introduced in Colombia after 1990 increased employment adjustments, especially on the job destruction margin, while reducing capital adjustments. Finally, we find that while completely eliminating frictions from factor adjustments would yield a dramatic increase in aggregate productivity through improved allocative efficiency, the reforms introduced in Colombia generated only modest improvements.
    Keywords: adjustment costs; deregulation; input reallocation; irreversibilities; joint factor adjustment
    JEL: C14 E22 E24 J63 O11
    Date: 2005–10
  39. By: Francesco Salsano (School of Economics, Mathematics & Statistics, Birkbeck College)
    Abstract: The paper presents a theoretical model for analysis of the imperfect observability of central bank preferences by the private sector on the decisions taken by the monetary authority, and therefore on the infation rate. It examines in particular the connection which, in the presence of a time inconsistency problem, arises between the observability of the monetary institution?s goals and its equilibrium strategies. The model yields innovative results from the technical and economic points of view. From the technical point of view, the study of equilibrium strategies in a simple signalling model allows derivation of the equilibrium outcomes of a monetary policy game already examined by D'Amato and Pistoresi (1996) and Sibert (2002), without the restrictions that those authors impose on the basis of the types of monetary institution. It is thus possible to identify the conditions on the model's parameters under which a pure separating equilibrium arises, and the conditions under which there instead exists a hybrid equilibrium in which some types of Central Bankers adopt separating strategies (Vickers 1986; D?Amato and Pistoresi 1996; Sibert 2002) while others adopt pooling strategies similar to those studied by Backus and Driffill (1985). From an economic point of view, the paper shows a number of relations that arise, in equilibrium, between the degree of observability and transparency of the Central Banker's goals and the infation rate set by the Central Banker.
    Keywords: Monetary Policy, Central Bank
    JEL: E31 E58 E61
    Date: 2005–11
  40. By: Koren, Miklós; Tenreyro, Silvana
    Abstract: Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possible reasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii) poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy); and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in. We show how to decompose volatility into these four sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the level of specialization declines with development at early stages, and slowly increases at later stages of development. Third, the volatility of country- specific macroeconomic shocks falls with development. Fourth, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. We argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work.
    Keywords: development; diversification; economic fluctuations; specialization; volatility
    JEL: E32 O11 O14
    Date: 2005–10
  41. By: Assar Lindbeck
    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
  42. By: Viviana Fernández; Ali M. Kutan
    Abstract: Using monthly industrial sector data from January 1971 to March 2004, we test for business cycles convergence among the major APEC members: Japan, South Korea, Malaysia, Mexico, USA, and Canada. In addition, we examine the synchronization of business cycles among Australia, Japan, and South Korea, based on the quarterly data for the 1957-2003 period, as well as among the different economic sectors of the NAFTA countries from January 1970 through March 2004. We apply different techniques to identify business cycles. In particular, we propose a new trend-cycle decomposition method based on wavelet analysis. The results show that convergence of business cycles of Asia-Pacific countries is far from complete, but joining the APEC has increased the mean correlation of industrial production cycles of the member economies. On the other hand, although some economic sectors of the NAFTA countries already exhibited some degree of business cycle co-movement even during pre-NAFTA period, the volatility of pair-wise correlation of business cycles declined during NAFTA. In addition, we conclude that, in general, the transmission of business cycles is relatively slow, and, consequently, business cycles appear to be asynchronous.
    Date: 2005
  43. By: Troy Matheson (Reserve Bank of New Zealand)
    Abstract: This paper focuses on forecasting four key New Zealand macroeconomic variables using a dynamic factor model and a large number of predictors. We compare the (simulated) real-time forecasting performance of the factor model with a variety of other time series models and gauge the sensitivity of our results to alternative variable selection algorithms. We find that the factor model performs particularly well at longer horizons.
    JEL: C32 E47
    Date: 2005–05
  44. By: L. Pozzi (Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))
    Abstract: We investigate the relevance of aggregate and consumer-specific income uncertainty for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of income risk on consumption changes is decomposed into an aggregate and into a consumer-specific part. Empirically, aggregate risk is modelled through a GARCH process on aggregate income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting consumer-specific income risk is supported by the finding that it is negatively affected by received consumer transfers.
    Keywords: income uncertainty, consumption, precaution, state space models, GARCH errors, unobserved component, Bayesian.
    JEL: E21
    Date: 2005–11
  45. By: Giovanni Di Bartolomeo (Univeristy of Rome I and University of Teramo); Nicola Acocella (University of Rome I); Andrew Hughes Hallett (Vanderbilt University and CEPR)
    Abstract: We generalize some recent results developed in static policy games with multiple players, to a dynamic context. We find that the classical theory of economic policy can be usefully applied to a strategic context of difference games: if one player satisfies the Golden Rule, then either all other players’ policies are ineffective with respect to the dynamic target variables shared with that player; or no Nash Feedback Equilibrium can exist, unless they all share target values for those variables. We extend those results to the case where there are also non-dynamic targets, to show that policy effectiveness (a Nash equilibrium) can continue to exist if some players satisfy the Golden Rule but target values differ between players in the non-dynamic targets. We demonstrate the practical importance of these results by showing how policy effectiveness (a policy equilibrium) can appear or disappear with small variations in the expectations process or policy rule in a widely used model of monetary policy.
    Keywords: Policy games, Policy ineffectiveness, Static controllability, Existence of equilibria, Nash feedback equilibrium
    JEL: C72 E52 E61
    Date: 2005–10
  46. By: George W. Evans; Seppo Honkapohja; Noah Williams
    Abstract: We study the properties of generalized stochastic gradient (GSG) learning in forward-looking models. We examine how the conditions for stability of standard stochastic gradient (SG) learning both differ from and are related to E-stability, which governs stability under least squares learning. SG algorithms are sensitive to units of measurement and we show that there is a transformation of variables for which E-stability governs SG stability. GSG algorithms with constant gain have a deeper justification in terms of parameter drift, robustness and risk sensitivity.
    Keywords: adaptive learning, E-stability, recursive least squares, robust estimation
    JEL: C62 C65 D83 E10 E17
    Date: 2005
  47. By: Raul Crespo
    Abstract: This work examines the presence of unobserved components in the time series of Total Factor Productivity, which is an idea central to modern Macroeconomics. The main approaches in both the study of economic growth and the study of business cycles rely on certain properties of the different components of the time series of Total Factor Productivity. In the study of economic growth, the Neoclassical growth model explains growth in terms of technical progress as measured by the secular component of Total Factor Productivity. While in the study of business cycles, the Real Business Cycle approach explains short-run fluctuations in the economy as determined by temporary movements in the production function, which are reflected by the cyclical component of the time series of the same variable. The econometric methodology employed in the estimation of these different components is the structural time series approach developed by Harvey (1989), Harvey and Shephard (1993), and others. An application to the time series of Total Factor Productivity for the 1948-2002 U.S. private non-farm business sector is presented. The pattern described by technical progress in this economy is characterised by important growth for the period immediately after War World II, which reaches its peak at the beginning of the 1960s to decline until the earliest 1980s where it shows a modest rebound. On the other hand, the cyclical component of the series seems to be better described by two cycles with periodicity of six and twelve years, respectively.
    Keywords: Productivity, Business Cycles, Structural Time Series Models, Unobserved Components.
    JEL: E23 E32 C22
    Date: 2005–12
  48. By: Pijoan-Mas, Josep
    Abstract: This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labour market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labour productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption.
    Keywords: incomplete markets; labour supply; precautionary savings
    JEL: C68 D31 E21 J22
    Date: 2005–10
  49. By: S. Fabiani (Banca d’Italia); M. Druant (Banque Nationale de Belgique); I. Hernando (Banco de España); C. Kwapil (Oesterreichische Nationalbank); B. Landau (European Central Bank); C. Loupias (Banque de France); F. Martins (Banco de Portugal); T. Mathä (Banque centrale du Luxembourg); R. Sabbatini (Banca d’Italia); H. Stahl (Deutsche Bundesbank); A. Stokman (De Nederlandsche Bank)
    Abstract: This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time- and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of state-dependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships - as expressed in the theories about explicit and implicit contracts - and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.
    Keywords: price setting, nominal rigidity, real rigidity, inflation persistence, survey data.
    JEL: E30 D40
    Date: 2005–11
  50. By: Sergio G. Ferreira (IBMEC Business School - Rio de Janeiro)
    Abstract: Brazilian PAYG system has been under financial stress and needs to be reformed. I use a computational general equilibrium model, with 55 overlapping generations to simulate macroeconomic and welfare impacts of alternative social security reforms. Transition turns out to have quite different redistributional effects for the generations involved depending on which tax is used to finance it. Under a variety of possible transitional schemes, there is no tax path that is strictly preferred by every generation.
    Keywords: Social Security, Welfare, General Equilibrium, Macroeconomics, Overlapping Generation
    JEL: E62 D58 D91
    Date: 2005–11–25
  51. By: Ricardo Reis
    Abstract: I present and solve the problem of a producer who faces costs of acquiring, absorbing, and processing information. I establish a series of theoretical results describing the producer's behavior. First, I find the conditions under which she prefers to set a plan for the price she charges, or instead prefers to set a plan for the quantity she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behavior of many such producers. I apply these results to a model of inflation. I find that the model can fit the quantitative facts on post-war inflation remarkably well, that it is a good forecaster of future inflation, and that it survives the Lucas critique by fitting also the pre-war facts on inflation moderately well.
    JEL: D92 E31 E20
    Date: 2005–12
  52. By: Giovanni Di Bartolomeo (University of Rome I); Nicola Acocella (University of Rome I)
    Abstract: This paper generalizes the classical theory of economic policy to a static LQ-strategic context between n players. We show how this generalized version of controllability can profitably be used to deal with policy ineffectiveness issues and Nash equilibrium existence.
    Keywords: Policy games, policy ineffectiveness, static controllability, Nash equilibrium existence
    JEL: C72 E52 E61
    Date: 2005–10
  53. By: Nicolas Hérault (Centre d'Économie du Développement (IFReDE-GRES) Université Montesquieu Bordeaux IV and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper describes a newly-built micro-macro model for South Africa. A computable general equilibrium (CGE) model and a microsimulation (MS) model are combined in a sequential approach in order to build an effective tool to assess the effects of various macroeconomic policies and shocks on South African households. The CGE model is used to simulate the macro-changes in the structure of the economy after the policy change or the macro-shock. In a second step, these changes are passed on to the MS model. Micro-macro consistency equations, along with the direct transmission of prices, ensure that macro-changes are fully transmitted from the CGE to the MS model. Given any change in the macroeconomic structure of the economy predicted by the CGE model, the MS model predicts how individual agents modify their behaviours and how their incomes are affected, while accounting for individual heterogeneity.
    Date: 2005–11
  54. By: Christian Ewerhart (Correspondence: Institute for Empirical Research in Economics (IEW), University of Zurich, Winterthurerstrasse 30, 8006 Zurich, Switzerland); Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Natacha Valla (Banque de France, B.P. 140-01, 75049 Paris Cedex 01, France)
    Abstract: The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm.
    Keywords: Fixed rate tenders; rationing; equilibrium; inefficiency.
    JEL: D44 E52
    Date: 2005–11
  55. By: Ansgar Belke; Frank Baumgärtner; Friedrich Schneider; Ralph Setzer
    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: E62 H42 L33
    Date: 2005
  56. By: Beetsma, Roel; Cukierman, Alex; Giuliodori, Massimo
    Abstract: We provide empirical evidence on two, major war-related, regularities of U.S. fiscal policy. First, while during and around World War I there is a positive correlation between defence spending and civil non-defense spending, this correlation becomes negative during World War II. This may be explained by a combination of complementarities between defence and civilian spending that decrease with the size of government in conjunction with marginal tax distortions that increase with government’s size. Second, during and around World War II there are, war-related, ratchets in transfers, veteran spending, taxes and revenues in the following sense. Invariably, the share of taxes and revenues in GDP goes up, and the share of transfers goes down, when the share of defence expenditures goes up. But taxes go down less and transfers go up more per unit change in defence expenditures when those expenditures go down at the war’s conclusion than the amounts by which taxes go up and transfers go down during the buildup in defence expenditures at the beginning of the war effort. There is no evidence of such ratchets during and around World War I. Two, not necessarily mutually exclusive, explanations for these findings are: 1. The substantially higher franchise during World War II interacted with the crisis induced by the war to cause a permanent expansion of the welfare state. 2. The Great Depression permanently changed the norms of social justice and the interaction of this change with the experience of the War led to a more generous welfare state.
    Keywords: civilian spending transfers; defence spending; franchise; ratchet; revenues; taxes; World War I and II
    JEL: E62 E65 N11 N12
    Date: 2005–11
  57. By: Alberto Alesina; Guido Tabellini
    Abstract: Many countries, especially developing ones, follow procyclical fiscal policies, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.
    JEL: H30 H60
    Date: 2005
  58. By: Pedro H. Albuquerque (Texas A&M International University)
    Abstract: This paper uses a dynamic general equilibrium model to study the economic effects of bank account debits (BAD) taxation. Australia and various Latin American countries have levied or levy BAD taxes. Aspects such as financial disintermediation, market illiquidity, and impacts on dividend and interest rates are considered. Part of the BAD tax revenue may be fictitious, due to increased interest payments on government debt. The Brazilian BAD tax (CPMF) experience is evaluated. The empirical analysis confirms some theoretical predictions. Incidence base over GDP appears to be sensitive to the tax rate, possibly engendering a Laffer curve. The tax may also cause real interest rates to increase. Furthermore, the deadweight losses are relatively large, even if revenues are small. The theoretical and empirical results suggest that the BAD tax is not adequate for revenue collection.
    Keywords: Bank Account Debits Tax, BAD Tax, Financial Transactions Tax, FTT, Currency Transaction Tax, CTT, Automated Payment Transaction Tax, APT Tax, CPMF, Disintermediation, Illiquidity
    JEL: H20 E62
    Date: 2005–11–26
  59. By: João Victor Issler (EPGE/FGV); Afonso Arinos de Mello Franco; Osmani Teixeira de Carvalho Guillén
    Date: 2005–12
  60. By: Ron Smith (School of Economics, Mathematics & Statistics, Birkbeck College); Gylfi Zoega (School of Economics, Mathematics & Statistics, Birkbeck College)
    Abstract: We consider the hypothesis that a common factor, global expected returns, drives unemployment and investment in 21 OECD countries over the period 1960-2002. We investigate this hypothesis using a panel-factor augmented-vector autoregression (FAVAR). We first estimate the common factors of unemployment and investment by principal components and show that the first principal component of unemployment is almost identical to that of investment and that they both show the pattern one would expect of a rate of return as indicated by long interest rates. We then estimate panel FAVARs to measure the dynamic impact of the global factors. Investment appears to drive unemployment and – allowing for a moving natural rate of unemployment driven by the global factor – produces much faster adjustment by unemployment.
    Keywords: Investment, unemployment, principal components.
    JEL: J1 E2
    Date: 2005–11
  61. By: Ljungqvist, Lars; Sargent, Thomas J
    Abstract: We use three general equilibrium frameworks with jobs and unemployed workers to study the effects of government mandated unemployment insurance (UI) and employment protection (EP). To illuminate the forces in these models, we study how UI and EP affect outcomes when there is higher 'turbulence' in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs. Matching and search-island models have labour market frictions and incomplete markets. The representative family model with employment lotteries has no labour market frictions and complete markets. The adverse welfare state dynamics coming from high UI indexed to past earnings that were isolated by Ljungqvist and Sargent (1998) are so strong that they determine outcomes in all three frameworks. Another force stressed by Ljungqvist and Sargent (2005), through which higher layoff taxes suppress frictional unemployment in less turbulent times, prevails in the models with labour market frictions, but not in the frictionless representative family model. In addition, the high aggregate labour supply elasticity that emerges from employment lotteries and complete insurance markets in the representative family model makes it impossible to include generous government-supplied unemployment insurance in that model without getting the unrealistic result that economic activity virtually shuts down.
    Keywords: discouraged worker; employment protection; job; matching; search; skills; turbulence; unemployment; unemployment insurance
    JEL: E24 J64
    Date: 2005–11
  62. By: Hubert Gabrisch; Herbert Buscher
    Abstract: Does the disappointingly high unemployment in Central and East European countries reflect non-completed adjustment to institutional shocks from transition to a market economy, or is it the result of high labour market rigidities, or rather a syndrome of too weak aggregate demand and output? In the case of transitional causes, unemployment is expected to decline over time. Otherwise, it would pose a challenge to the European Union, particular in case of accession countries, for it jeopardizes the ambitious integration plans of, and may trigger excessive migration to the Union. In order to find out which hypothesis holds 15 years after transition has started, we analyze the unemploymentgrowth dynamics in the eight new member countries from Central-Eastern Europe. The study is based on country and panel regressions with instrument variables (TSLS). The results suggest to declare the transition of labour markets as completed; unemployment responds to output and not to a changing institutional environment for job creation. The regression coefficients report a high trend rate of productivity and a high unemployment intensity of output growth since 1998. The conclusion is that labour market rigidities do not to play an important role in explaining high unemployment rates. Rather, GDP growth is dominated by productivity progress, while the employment relevant component of aggregate demand is too low to reduce substantially the high level of unemployment.
    Keywords: Unemployment, Okun’s law, Transition
    JEL: E24 J23 P23
    Date: 2005–11
  63. By: Ivan O. Kitov (Russian Academy of Sciences)
    Abstract: Numerical modelling of the personal income distribution (PID) in the USA from 1950 to 2003 is accomplished based on a microeconomic model for the personal income evolution. It is shown that the overall PID demonstrates the existence of some fixed hierarchical income distribution structure in the USA. The PIDs normalized to the total population and corrected for the per capita nominal GDP growth coincide for years from 1994 to 2002. The observed inflation plays a role of some specific mechanism returning the PIDs to the initial shape. The structure of the PID is accurately simulated by using a microeconomic model with some simple assumptions related to the distribution of capabilities to earn money and sizes of earning means – two measurable parameters introduced in the model. The evolution of the overall PID is also well predicted depending on nominal GDP growth from 1994 to 2002.
    Keywords: personal income distribution, mean income, microeconomic modeling, USA, real GDP, macroeconomics
    JEL: D31 E17 J1 O12
    Date: 2005–11
  64. By: Fougère, Denis; Le Bihan, Hervé; Sevestre, Patrick
    Abstract: This paper examines heterogeneity in price stickiness using a large, original, set of individual price data collected at the retail level for the computation of the French CPI. For that purpose, we estimate at a very high level of disaggregation competing-risks duration models that distinguish between price increases, price decreases and product replacements. The main findings are the following: i) cross-product and cross-outlet-type heterogeneity is pervasive, both in the shape of the hazard function and in the impact of covariates; ii) at the product-outlet type level, the baseline hazard function of a price spell is non-decreasing; iii) there is strong evidence of state dependence, especially for price increases.
    Keywords: duration models; hazard function; heterogeneity; sticky prices
    JEL: C41 E31
    Date: 2005–10
  65. By: Kim, Don H.; Orphanides, Athanasios
    Abstract: The estimation of dynamic no-arbitrage term structure models with a flexible specification of the market price of risk is beset by a severe small-sample problem arising from the highly persistent nature of interest rates. We propose using survey forecasts of a short-term interest rate as an additional input to the estimation to overcome the problem. The three-factor pure-Gaussian model thus estimated with the U.S. Treasury term structure for the 1990-2003 period generates a stable estimate of the expected path of the short rate, reproduces the well-known stylized patterns in the expectations hypothesis tests, and captures some of the short-run variations in the survey forecast of the changes in longer-term interest rates.
    Keywords: Dynamic term structure models; expectations hypothesis; interest rate forecasts; survey data; term premia
    JEL: E43 E47 G12
    Date: 2005–11
  66. By: Chaiki Hara (Faculty of Economics and Politics, University of Cambridge); Atsushi Kajii (Institute of Economic Research, Kyoto University)
    Abstract: We consider an exchange economy under uncertainty, in which agentsf utility functions exhibit constant absolute risk aversion, but they may be recursive and the expected utility calculation may be based on multiple subjective beliefs. The risk aversion coefficients, subjective beliefs, subjective time discount factors, initial endowments, and tradeable assets may differ across agents. We prove that the risk-free bond price goes down (and the interest rate goes up) monotonically as the markets become more complete. We find the range of equilibrium bond prices that depends on the primitives of the economy but not on the structures of financial markets.
    Keywords: multiple priors; no trade; dynamic consistency; interim efficiency; rectangularityi
    JEL: D52 D91 E21 E44 G12
    Date: 2004–05
  67. By: Golinelli, Roberto; Parigi, Giuseppe
    Abstract: National accounts statistics undergo a process of revisions over time because of the accumulation of information and, less frequently, of deeper changes, as new definitions, new methodologies etc. are implemented. In this paper we try to characterise the revision process of the data of Italian GDP as published by the national statistical office (ISTAT) in the stream of the noise models literature. The analysis shows that this task can be better accomplished by concentrating on the growth rates of the data instead of the levels. Another issue tackled in the paper concerns the informative content of the preliminary releases vis a vis an intermediate vintage supposed to embody all statistical information (or no longer revisable as far as purely statistical changes are concerned) and the latest vintage of the data, supposed to be the definitive one. The analysis of the news models in differences is based on the comparison of the forecasting performance of the preliminary releases with that of a number of one step ahead forecasts computed from alternative models, ranging from very simple univariate to multivariate specifications based on indicators (bridge models). Results show that, for the intermediate vintage, the preliminary version is the better forecast, while the latest vintage, which embodies statistical as well as definitional revisions, may be better characterised by considering both the preliminary version and the bridge models forecasts.
    Keywords: consistent vintages; predictions of 'actual' GDP; preliminary GDP forecasting; real-time data set for Italian GDP
    JEL: C22 C53 C82 E10
    Date: 2005–10
  68. By: Kazuya Kamiya (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, it is shown that real indeterminacy of stationary equilibria generically arises in most matching models with perfectly divisible fiat money. In other words, the real indeterminacy follows from the condition for stationarity of money holdings, and surprisingly it has nothing to do with the other specifications, e.g., the bargaining procedures, of the models. Thus if we assume the divisibility of money in money search models, it becomes quite difficult to make accurate predictions of the effects of some policies.
    Date: 2005–11
  69. By: Fisher, Walter H. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Hof, Franz X. (Institute for Mathematical Methods in Economics, Research Unit Economics, Vienna University of Technology)
    Abstract: This paper introduces the quest for status into the Ramsey model with endogenous labor supply. We focus our attention on relative wealth preferences. In contrast to relative consumption preferences, they allow for the possibility that agents work too little in the long run, while under both specifications the steady-state levels of consumption and the stock of physical capital exceed their socially optimal counterparts. The initial phase of transitional dynamics is unambiguously characterized by under-consumption and excessive work effort. The social optimum can be replicated by taxing capital income, where the optimal tax rate increases as physical capital accumulates.
    Keywords: Status, Relative consumption, Relative wealth, Endogenous labor supply
    JEL: D62 D91 E21
    Date: 2005–11
  70. By: Ivan O. Kitov (Russian Academy of Sciences)
    Abstract: A comprehensive study of the personal income distribution (PID) in the USA is carried out. Principal characteristics of the PID in USA are established. A microeconomic model of the personal income distribution and evolution with time is developed. The model balances two processes – individual income earning and dissipation of the income. The model accurately predicts the overall PID and its evolution and fine features of the PID in various age and income groups. The results obtained prove that the observed economic growth is a predetermined process
    Keywords: personal income distribution, microeconomic modeling, real GDP, macroeconomics
    JEL: D31 E17 J1 O12
    Date: 2005–11
  71. By: Jorge Miguel Ventura Bravo (Department of Economics, University of Évora); Carlos Manuel Pereira da Silva (ISEG - School of Economics and Management, Technical University of Lisbon)
    Abstract: In this paper, we develop a new immunization model based on a parametric specification of the term structure of interest rates. The model extends traditional duration analysis to account for both parallel and non-parallel term structure shifts that have an economic meaning. Contrary to most interest rate risk models, we analyse both first-order and second-order conditions for bond portfolio immunization and conclude that the key to successful protection will be to build up a bond portfolio such that the gradient of its future value is zero, and such that its Hessian matrix is positive semidefinite. In addition, we provide explicit formulae for new parametric interest rate risk measures and present alternative approaches to implement the immunization strategy. Furthermore, we provide useful expressions for the sensitivity of interest rate risk measures to changes in term structure shape parameters.
    Keywords: Immunization, duration, parametric model, interest rate risk
    JEL: E43 G11
    Date: 2005
  72. By: Akai Nobuo (Institute of Economic Research, Kobe University of Commerce); Motohiro Sato (Hitotsubashi School of International and the Public Policy)
    Abstract: In this paper, it is shown that real indeterminacy of stationary equilibria generically arises in most matching models with perfectly divisible fiat money. In other words, the real indeterminacy follows from the condition for stationarity of money holdings, and surprisingly it has nothing to do with the other specifications, e.g., the bargaining procedures, of the models. Thus if we assume the divisibility of money in money search models, it becomes quite difficult to make accurate predictions of the effects of some policies.
    Date: 2005–12
  73. By: Pica, Giovanni; Rodríguez Mora, José Vicente
    Abstract: This paper presents evidence on the effect of countries proximity in regulation on bilateral FDI flows. By exploiting the OECD International Direct Investment Statistics and data on nationwide regulation levels, we find a significant negative effect of the absolute value of the difference between countries indexes of regulation on the associated bilateral flows of FDIs, controlling for each country regulation level. Motivated by this evidence, we build a model where agents are heterogeneous and differ in their abilities to be entrepreneurs or workers. Entrepreneurs may engage in FDIs, which entails incurring additional fixed costs, one of which is the cost of learning the foreign regulation. In this framework, more similar regulations foster FDI, raise wages, output and productivity. The increase in productivity is the consequence of very efficient foreign entrepreneurs driving out of the market inefficient local firms, improving the allocation of talent in the economy as a whole.
    Keywords: heterogeneous agents; multinational firms; policy harmonization
    JEL: E61 F23 F41
    Date: 2005–10
  74. By: Prof. Dr. Carsten Ochsen (University of Rostock)
    Abstract: This paper introduces and examines a definition of an equilibrium rate of unemployment that can be used as mismatch indicator, too. In contrast to existing indicators this measurement method is based directly on the Beveridge-Curve. An application of the indicator to nine OECD countries leads to diverging results. Most of the considered countries have experienced increasing mismatch in the seventies and decreasing mismatch in the nineties. The latter result is somewhat surprising, since mismatch was expected to be increasing in the nineties. However, the estimates for Germany are against this international trend, due to the fact that mismatch has increased steadily since the middle of the sixties.
    Keywords: Mismatch, Beveridge-Curve, equilibrium unemployment
    JEL: J41 J69 E24
    Date: 2004
  75. By: Pedro H. Albuquerque (Texas A&M International University)
    Abstract: Este trabalho tem como objetivo estudar os impactos econômicos da CPMF na economia brasileira, e para isto está dividido em três blocos. No primeiro a CPMF é analisada sob a ótica da teoria econômica. No segundo é discutida a experiência internacional com impostos similares à CPMF. No terceiro a experiência brasileira é examinada com o auxílio dos dois blocos anteriores. Segundo a teoria econômica, a CPMF causaria a elevação dos juros reais de modo desproporcional a outros impostos, o que seria o resultado da inclusão da rotatividade de ativos em sua base de incidência. Esta deficiência em sua concepção afetaria negativamente, e de forma desproporcional à sua arrecadação, os níveis de capital, produção e salários. Ela também causaria o aumento das despesas do governo com pagamento de juros, o que levaria parte de sua receita a ser fictícia. A CPMF causaria desintermediação e iliquidez nos mercados financeiros, desincentivando o ressurgimento do crédito. A arrecadação comportar-se-ia de acordo com uma curva de Laffer, com elevadas perdas de peso morto, particularmente quando comparadas à pequena receita resultante. Resultados empíricos confirmam que tais conclusões seriam aplicáveis ao caso brasileiro. A teoria econômica, a experiência internacional e a evidência brasileira revelam, portanto, que a CPMF apresenta significativas deficiências como instrumento de arrecadação.
    Keywords: CPMF, ITF, IDB, desintermediação, iliquidez, curva de Laffer
    JEL: H20 E62
    Date: 2005–11–26
  76. By: Piotr Wdowinski
    Abstract: In this paper we present simulations of economic performance of the Polish economy based on a quarterly econometric model. The model consists of 22 stochastic equations, which link the financial market with the real economy. The purpose of the research is to present effects of changes to domestic and foreign interest rates and the EUR/USD exchange rate on economic growth in Poland over the period Q2, 1993 - Q2, 2003.
    Keywords: financial market, economic growth, econometric model, simulation, Poland
    JEL: C30 C50 E60 F10 G10
    Date: 2005
  77. By: Jan Gottschalk; Ulrich Fritsche
  78. By: Sascha O. Becker
    Abstract: Transition patterns from school to work differ considerably across OECD countries. Some countries exhibit high youth unemployment rates, which can be considered an indicator of the difficulty facing young people trying to integrate into the labor market. At the same time, education is a time-consuming process, and enrolment and dropout decisions depend on expected duration of studies, as well as on job prospects with and without completed degrees. One way to model entry into the labor market is by means of job search models, where the job arrival hazard is a key parameter in capturing the ease or difficulty in finding a job. Standard models of job search and education assume that skills can be upgraded instantaneously (and mostly in the form of on-the-job training) at a fixed cost. This paper models education as a time-consuming process, a concept which we call time-to-educate, during which an individual faces the trade-off between continuing education and taking up a job.
    Keywords: job search, education, enrollment, dropouts
    JEL: E24 J31 J41 J64
    Date: 2005
  79. By: Charles Ka Yui Leung
    Abstract: Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed.
    Keywords: rational expectation, price and return, serial and cross correlation, market efficiency, predictability
    JEL: E30 G10 R20
    Date: 2005–11
  80. By: Konstantin A. Kholodilin; Boriss Siliverstovs
  81. By: Correia, Maria Isabel Horta
    Abstract: It is relatively well known that the introduction of consumption taxation as an alternative in the tax code, and as the main source of government revenues, leads to a more efficient tax system. However the conventional wisdom is that the change from the actual tax code, based on taxation of capital and labour income to this consumption-based system, has undesirable distributional consequences. In this work a very simple method is developed to argue that the converse is the most reasonable outcome from that fundamental tax reform. The main difference in relation to the literature comes from the assumed source of household heterogeneity. Additionally it is shown that the inclusion of a tax on consumption allows for redistributive policies with no costs in terms of efficiency.
    Keywords: consumption taxes; equity; fundamental tax reform; heterogeneous agents
    JEL: D63 E62 H20
    Date: 2005–10
  82. By: Bacchetta, Philippe; van Wincoop, Eric
    Abstract: The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks.
    Keywords: excess return predictability; forward discount puzzle; rational inattention
    JEL: E44 F31 G1
    Date: 2005–10
  83. By: Andre Varella Mollick; Joao Ricardo Faria; Pedro H. Albuquerque; Miguel A. Leon-Ledesma
    Abstract: Several empirical studies report the existence of declining terms of trade between commodities and manufactures, supporting the Prebisch-Singer hypothesis. As globalisation leads to greater integration of markets, we ask if in a fully integrated economy the terms of trade will display the same negative trend. Assuming that globalisation would make the world economy behave as the US economy, this paper shows that the US internal real commodities' terms of trade over the 1947-1998 period experienced slowly declining but significant trends. We then test if common factors may be driving the US and international terms of trade in the long-run. The results suggest that both series, particularly those using crude materials in the numerator, share a positive long-run relationship. It follows that international integration plays no role in causing the decreasing trend of the terms of trade.
    Keywords: Economic Integration; Globalisation; Prebisch-Singer
    JEL: E31 F15 F41
    Date: 2005–11
  84. By: Kirdan Lees; Troy Matheson (Reserve Bank of New Zealand)
    Abstract: We utilise prior information from a simple RBC model to improve ARMA forecasts of post-war US GDP. We develop three alternative ARMA forecasting processes that use varying degrees of information from the Campbell (1994) flexible labour model. Directly calibrating the model produces poor forecasting performance whereas a model that uses a Bayesian framework to take the model to the data, yields forecasting performance comparable to a purely statistical ARMA process. A final model that uses theory only to restrict the order of the ARMA process (the ps and qs), but that estimates the ARMA parameters using maximum likelihood, yields improved forecasting performance.
    JEL: C11 C22 E37
    Date: 2005–10
  85. By: Ciccone, Antonio; Papaioannou, Elias
    Abstract: Do high levels of human capital foster economic growth by facilitating technology adoption? If so, countries with more human capital should have adopted more rapidly the skilled-labour augmenting technologies becoming available since the 1970's. High human capital levels should therefore have translated into fast growth in more compared to less human-capital-intensive industries in the 1980's. Theories of international specialization point to human capital accumulation as another important determinant of growth in human-capital-intensive industries. Using data for a large sample of countries, we find significant positive effects of human capital levels and human capital accumulation on output and employment growth in human-capital-intensive industries.
    Keywords: growth; human Capital; structure of production
    JEL: E13 F11 O11
    Date: 2005–11
  86. By: Richard M. H. Suen (University of Rochester)
    Abstract: The second half of the twentieth century recorded a rapid growth in healthcare spending and a significant increase in life expectancy. This paper hypothesizes that technological progress in medical treatment, combined with rising incomes, are the driving forces behind these two trends. Using a stochastic, multi-period overlapping-generations model as the analytical vehicle, this paper shows that the rapid growth in medical spending is not driven by factors associated with market structures or insurance opportunities, but instead by factors underlying the production and accumulation of health. According to this model, improvements in medical treatment and rising incomes can explain all of the increase in medical spending and about 37% of the increase in life expectancy during the second half of the twentieth century.
    Keywords: Technological progress, life expectancy, medical spending, health
    JEL: E13 I12 O11 O33
    Date: 2005–11
  87. By: Anella Munro; (Reserve Bank of New Zealand)
    Abstract: This paper looks at reduced form descriptions of changes in the USD/NZD exchange rate, with emphasis on the interest rate-exchange rate relationship. In the estimated reduced form equations, high domestic short term interest rates relative to foreign interest rates are associated with continued upward pressure on the New Zealand dollar. This effect is most pronounced for the 6-month forward interest differential, and is reinforced by some "inertia" but moderated by deviations from equilibrium as "over or under-valuation" erodes expected returns. Changes in commodity export prices are estimated to have short term effects. Some aspects of the estimated equations are consistent with forward-looking rational expectations, a standard feature of open economy models. Other aspects of the estimated equations suggest random walk exchange rate expectations consistent with Meese and Rogoff (1983). The cross correlation between interest differentials and the exchange rate may be difficult to reconcile with rational expectations. The forecasting performance of a reduced form equation is also assessed.
    JEL: E52 E58 F31 F32
  88. By: Marc Henrard (Bank for International Settlements)
    Abstract: The twin brothers Libor Market and Gaussian HJM models are investigated. A simple exotic option, floor on composition, is studied. The same explicit approach is used for both models. Using an approximation the LLM price is obtained without Monte Carlo simulation. The results of the approximation are very good, with an error well below the uncertainty due to the simulation. The appendices proves the existence of the (modified) normal and shifted log-normal LLM used in the pricing. The link of the latter with the Ho and Lee continuous time model is described.
    Keywords: explicit formula, Libor market model, HJM model, shifted log-normal model, normal model, existence, option on composition
    JEL: G13 E43 C63
    Date: 2005–11–29
  89. By: Mário Centeno; Márcio Corrêa
    Abstract: According to data from the OCDE, almost one third of the total quantity of on-the-job training is worker-provided. The aim of this paper is to study, in a labor market characterized by frictions, the effects of technological progress on the optimal worker-provided on-the-job training. The paper shows that the greater the technological progress rate less is the probability of the worker investing in specific human capital, if the technology is of creative destruction type, and the greater is the probability of the worker investing specific human capital, if the technology is characterized by renovation; whilst the effect over the general human capital investment doesn't exist in both models. The paper also shows that the impact of human capital investments on labor market outcomes depend on the type of investment - either firm or the market oriented. If the investment is totally aimed at the market, we have as a result an increase in the rate of unemployment, whilst if the investment is totally directed at the firm, we have the opposite effect.
    JEL: E24 J24 J63 J64
    Date: 2005
  90. By: G. Nicoletti; Stefano Scarpetta
    Abstract: This paper assesses the implications of past and ongoing reforms in OECD product markets for the labour productivity gap, a key component of cross-country differences in GDP per capita. After a brief review of the theoretical literature, we bring together the results obtained in some of our empirical work over the past few years, discussing econometric approaches and their drawbacks. We then use these results to gauge the likely effect of further reforms. We distinguish effects on capital deepening and technical progress by examining the impact of regulations on investment (domestic and foreign) and multi-factor productivity. We focus on the effects of policies aimed at strengthening private governance (e.g. through privatization) and opening up access to markets where competition is economically viable. The results suggest that pro-competitive reforms tend to increase both investment and multifactor productivity and, through both these channels, they can lead to higher growth in GDP per capita. Ce papier analyse les implications des réformes dans les marchés des biens de la zone OCDE pour un des facteurs qui expliquent les différences internationales dans le PIB par tête : les écarts dans la productivité du travail. Après avoir examiné brièvement la littérature théorique, nous résumons les résultats de quelques unes des études empiriques que nous avons réalisées aux cours des dernières années, tout en discutant les approches économétriques utilisées et leurs limites. Nous utilisons ensuite ces résultats pour évaluer les effets qui pourraient être observés si les réformes étaient poussées plus loin à l’avenir. Nous distinguons les effets des réformes sur l’accroissement de l’intensité en capital et sur le progrès technique en nous appuyant sur trois études qui analysent l’impact de la régulation anti-concurrentielle sur l’investissement (national et de l’étranger) et la productivité multifactorielle. Nous nous concentrons sur les implications quantitatives au niveau macroéconomique des politiques visant à renforcer la gouvernance des entreprises (par exemple par la privatisation) et à éliminer les barrières réglementaires à l’accès dans les marchés où la concurrence est soutenable. Cet examen porte à conclure que les réformes qui accroissent les pressions concurrentielles sur les marchés des biens tendent à augmenter à la fois l’investissement et la productivité multifactorielle. Par ce biais, les réformes peuvent mener à une croissance plus soutenue du PIB par tête dans les pays qui les réalisent.
    Keywords: investment, investissement, panel data, données de panel, regulations, régulation, productivité et croissance, aggregate productivity and growth
    JEL: C23 E22 F21 L5 O4
    Date: 2005–11–22
  91. By: Stephanie Seguino (Department of Economics, University of Vermont)
    Abstract: Evidence of an increase in inequality since the 1970s has motivated research on its relationship to growth and development. The findings of that research are contradictory and inconclusive. One source of these divergent results is that researchers rely on different group measures of inequality. Inequality by gender, household, class, and ethnicity may produce divergent effects on growth since they operate on macroeconomic outcomes via alternative pathways. Further, even within groups, the effect of inequality on growth depends on the measure used. For example, inequalities in capabilities (such as education and health status) may operate differently on growth than inequality in wages and income. This paper explores the different conceptual approaches to measuring between-group and within-group inequality and delineates the sometimes-contradictory pathways by which these measures affect economic growth and development. The typology is applied to the case of East Asia and Latin America.
    Keywords: Gender, ethnicity, inequality, economic growth
    JEL: O4 E12 F16 J15 J16
    Date: 2005–07
  92. By: Prof. Dr. Carsten Ochsen (University of Rostock)
    Abstract: Aufgrund der Tatsache, dass die Arbeitslosenquote Hochqualifizierter in Deutschland in den vergangenen 30 Jahren durchschnittlich 3% betrug, beschäftigt sich dieser Beitrag mit Theorien, die die Heterogenität von Arbeit berücksichtigen. Im Ergebnis kann eine Reduktion der Arbeitskosten die Arbeitslosenquote der Geringqualifizierten nicht substantiell senken. Von Erheblicher Bedeutung ist, dass das skill upgrading der Arbeitsnachfrage in den vergangenen 30 Jahren stärker gewachsen ist, als das des Arbeitsangebotes. Die Zukunft der Arbeit in Deutschland liegt nicht in gering vergüteten Geringqualifiziertentätigkeiten, sondern im Tätigkeitsbereich Hochqualifizierter.
    Keywords: Employment determination, factor substitution, technological progress, trade
    JEL: J23 E25 O33 F16
    Date: 2004

This nep-mac issue is ©2005 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.