nep-mac New Economics Papers
on Macroeconomics
Issue of 2005‒12‒20
48 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A Comparison of Exchange Economies withina Monetary Business Cycle By Benk, Szilárd; Gillman, Max; Kejak, Michal
  2. Optimal Monetary and Fiscal Policy in a Currency Union By Jordi Galí; Tommaso Monacelli
  3. Would price-level targeting destabilise the economy? By Minford, Patrick; Nowell, Eric; Webb, Bruce
  4. Real Wage Rigidities and the New Keynesian Model By Olivier Blanchard; Jordi Galí
  5. Optimal Inflation Stabilization in a Medium-Scale Macroeconomic Model By Stephanie Schmitt-Grohe; Martin Uribe
  6. Technology Shocks and UK Business Cycles By Hashmat Khan; John Tsoukalas
  7. Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects By Benk, Szilárd; Gillman, Max; Kejak, Michal
  8. Opportunistic Monetary Policy: an Alternative Rationalization By Minford, Patrick; Srinivasan, Naveen
  9. Money and Inflation: A Taxonomy By Matias Vernengo
  10. The Role of the Housing Market in Monetary Transmission By Gabor Vadas; Gergely Kiss
  12. Understanding the Effects of Government Spending on Consumption By Jordi Galí; J. David López-Salido; Javier Vallés
  13. International Observations of Monetary Policy Periods By Yamin Ahmad
  15. Should Private Expectations Concern Central Bankers? By Martin Fukac
  16. Reconciling the Effects of Monetary Policy Actions on Consumption Within a Heterogeneous Agent Framework By Yamin Ahmad
  17. New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modelling By Ignazio Angelloni; Luc Aucremanne; Michael Ehrmann; Jordi Galí; Andrew Levin; Frank Smets
  18. Is Monetary Policy in the Eurozone less Effective than in the US? By Paul De Grauwe; Cláudia Costa Storti
  19. Monetary policy and exchange rate interactions in a small open economy By Hilde C. Bjørnland
  20. Savers, Spenders and Fiscal Policy in a Small Open Economy By Egil Matsen; Tommy Sveen; Ragnar Torvik
  21. Univariate Potential Output Estimations for Hungary By Gabor Vadas; Zsolt Darvas
  22. Inflation and Balanced-Path Growth with Alternative Payment Mechanisms By Gillman, Max; Kejak, Michal
  23. Reduced-Rank Identification of Structural Shocks in VARs By Yuriy Gorodnichenko
  24. Money, Credit and Banking By Aleksander Berentsen; Gabriele Camera; Christopher Waller
  25. Inflation Targeting in India: Issues and Prospects By Raghbendra Jha
  26. Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter? By Rasmus Fatum; Barry Scholnick
  27. Real Business Cycle Models: Past, Present and Future By Sergio Rebelo
  28. Flutuar ou não Flutuar: Regimes Cambiais e Choques Externos By Alisson Lopes
  29. Monetary Policy in a Changing International Environment: The Role of Global Capital Flows By Martin Feldstein
  30. Trade union density and inflation performance: evidence from OECD panel data By Christopher Bowdler; Luca Nunziata
  31. Le cycle économique: survol de quelques aspects théoriques By Ludwig van den Hauwe
  32. Agency Costs and Investment Behavior By Dorofeenko, Viktor; Lee, Gabriel S.; Salyer, Kevin D.
  33. Technology, Preference Structure, and the Growth Effect of Money Supply By Jun-ichi Itaya
  34. The inflation-productivity trade-off revisited By George C. Bitros; Epameinondas E. Panas
  35. Real and nominal wage adjustment in open economies By Forslund, Anders; Gottfries, Nils; Westermark, Andreas
  36. Financial System Risk and Flight to Quality By Ricardo Caballero; Arvind Krishnamurthy
  37. Mind the Gap – International Comparison of Cyclical Adjustment of the Budget By Gabor Vadas; Gabor P.Kiss
  38. Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model By Axel Boersch-Supan; Alexander Ludwig; Joachim Winter
  39. Capital Subsidies and Underground Production By Francesco Busato, Bruno Chiarini, Pasquale de Angelis, Elisabetta Marzano
  40. Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income By Ian Dew-Becker; Robert J. Gordon
  41. A Reevaluation of the Effect of Human Capital Accumulation on Economic Growth: Using Natural Disasters as an Instrument By Raymond Robertson; Mark Skidmore; Hideki Toya
  42. Equilibrium Dynamics in Discrete-Time Endogenous Growth Models with Social Constant Returns By Kazuo Mino; Kazuo Nishimura; Koji Shimomura; Ping Wang
  43. On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment By Carmona, Guilherme
  44. Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax By Laurence J. Kotlikoff; Sabine Jokisch
  46. Econometric Accounting of the Australian Corporate Tax Rates: a Firm Panel Example By Feeny, Simon; Gillman, Max; Harris, Mark N.
  47. Pension Contributions as a Commitment device: evidence of sophistication among time-inconsistent households By Patricia Sourdin
  48. How Important is Discount Rate Heterogeneity for Wealth Inequality? By Lutz Hendricks

  1. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper sets out a monetary business cycle model with three alternative exchange technologies, the cash-only, shopping time, and credit production models. The goods productivity and money shocks affect all three models, while the credit model has in addition a credit productivity shock. The paper compares the performance of the models in explaining the puzzles of the monetary business cycle theory. The credit model improves the ability to explain the procyclic movement of monetary aggregates, inflation and the nominal interest rate.
    Keywords: Cash-in-advance; credit production; cycle; inflation
    JEL: E13 E32 E44
    Date: 2005–12
  2. By: Jordi Galí; 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 e¢ cient 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 o¤ers some insights on two aspects of policy design in currency unions: (i) the conditions for equilibrium determinacy and(ii) the e¤ects of exogenous government spending variations.
    Keywords: Monetary union, sticky prices, countercyclical policy, inflation differentials
    JEL: E52 F41 E62
    Date: 2005–10
  3. By: Minford, Patrick (Cardiff Business School); Nowell, Eric; Webb, Bruce (Cardiff Business School)
    Abstract: When indexation is endogenous price level targeting slightly adds to economic stability, contrary to widespread fears to the contrary. The aggregate supply curve flattens and the aggregate demand curve steepens, increasing stability in the face of supply shocks.
    Keywords: Inflation; targeting; price-level rule; Price level target; indexation; monetary regime; endogenous contracts; stationarity; stability
    JEL: E31 E42 E52
    Date: 2005–12
  4. By: Olivier Blanchard; Jordi Galí
    Abstract: Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of non trivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation-unemployment relation found in the data.
    Keywords: Oil price shocks, inflation targeting, monetary policy, inflation inertia
    JEL: E32 E50
    Date: 2005–04
  5. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: This paper characterizes Ramsey-optimal monetary policy in a medium-scale macroeconomic model that has been estimated to fit well postwar U.S.\ business cycles. We find that mild deflation is Ramsey optimal in the long run. However, the optimal inflation rate appears to be highly sensitive to the assumed degree of price stickiness. Within the window of available estimates of price stickiness (between 2 and 5 quarters) the optimal rate of inflation ranges from -4.2 percent per year (close to the Friedman rule) to -0.4 percent per year (close to price stability). This sensitivity disappears when one assumes that lump-sum taxes are unavailable and fiscal instruments take the form of distortionary income taxes. In this case, mild deflation emerges as a robust Ramsey prediction. In light of the finding that the Ramsey-optimal inflation rate is negative, it is puzzling that most inflation-targeting countries pursue positive inflation goals. We show that the zero bound on the nominal interest rate, which is often cited as a rationale for setting positive inflation targets, is of no quantitative relevance in the present model. Finally, the paper characterizes operational interest-rate feedback rules that best implement Ramsey-optimal stabilization policy. We find that the optimal interest-rate rule is active in price and wage inflation, mute in output growth, and moderately inertial.
    JEL: E52 E61 E63
    Date: 2005–12
  6. By: Hashmat Khan (Carleton University); John Tsoukalas (Bank of England)
    Abstract: After a neutral technology shock, hours worked decline in a persistent manner in the UK. This response is robust to a variety of considerations in the recent literature: measures of labour input, level versus differenced hours in the VAR, small and large VARS, long- versus medium- run identification, and neutral versus investment-specific technology shocks. The UK economy, therefore, offers a unique perspective on the response of hours to technology shocks. The large negative correlation between labour productivity and hours is the source of this response. Models with nominal price stickiness, low substitutability between domestic and foreign consumption, and investment-specific shocks appear to be most plausible in interpreting the short-run effects of technology shocks. Quantitatively, however, technology shocks account for under 20% of the business cycle variation in hours and under 30% of business cycle variation in output. These findings suggest that technology shocks may play only a limited role in driving UK business cycles.
    Keywords: Techology shocks, business cycles
    JEL: E24 E32
    Date: 2005–12–12
  7. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper constructs credit shocks using data and the solution to a monetary business cycle model. The model extends the standard stochastic cash-in-advance economy by including the production of credit that serves as an alternative to money in exchange. Shocks to goods productivity, money, and credit productivity are constructed robustly using the solution to the model and quarterly US data on key variables. The contribution of the credit shock to US GDP movements is found, and this is interpreted in terms of changes in banking legislation during the US financial deregulation era. The results put forth the credit shock as a candidate shock that matters in determining GDP, including in the sense of Uhlig (2003).
    Keywords: Business cycle; credit shocks; financial deregulation
    JEL: E32 E44
    Date: 2005–12
  8. By: Minford, Patrick (Cardiff Business School); Srinivasan, Naveen
    Abstract: This paper offers an alternative rationalization for opportunistic behaviour i.e., a gradual disinflation strategy where policymakers react asymmetrically to supply shocks, opting to disinflate only in recessionary period. Specifically, we show that adaptive expectations combined with asymmetry in the Phillips curve of a specific sort together provide an optimizing justification for opportunism. However, the empirical basis for these conditions to be satisfied in the current low-inflation context of most OECD countries remains however to be established.
    Keywords: Deliberate disinflation; Opportunistic disinflation
    JEL: E52 E58
    Date: 2005–12
  9. By: Matias Vernengo
    Abstract: This paper reviews the various explanations for inflation and the relation between inflation and money aggregates. Two analytical distinctions are useful to understand different explanations of inflationary processes of all types. First, and more importantly, theories can be seen as cost-push or demand-pull theories of inflation. Second, the distinction between exogenous and endogenous money supply is important for a proper taxonomy of inflation theories. This second analytical cut results from the fact that there is a clear empirical connection between inflation and monetary stock measures. A tentative taxonomy is presented at the end, allowing an evaluation of the dominant view on money and inflation and the main counter points from a heterodox perspective.
    Keywords: Inflation, Macroeconomic Schools
    JEL: E11 E12 E13 E31
    Date: 2005
  10. By: Gabor Vadas (Magyar Nemzeti Bank); Gergely Kiss (Magyar Nemzeti Bank)
    Abstract: As part of the monetary transmission studies of the Magyar Nemzeti Bank, this paper attempts to analyse the role of the housing market in the monetary transmission mechanism of Hungary. The housing market can influence monetary transmission through three channels, namely, the nature of the interest burden of mortgage loans, asset (house) prices, and the credit channel. The study first summarises the experiences of developed countries, paying special attention to issues arising from the monetary union. It then examines the developments in the Hungarian housing and mortgage markets in the last 15 years, as well as the expected developments and changes attendant to the adoption of the euro. Using panel econometric techniques, the study investigates the link between macroeconomic variables and house prices in Hungary, and the effect of monetary policy on housing investment and consumption through the wealth effect and house equity withdrawal.
    Keywords: Housing, Monetary transmission, Mortgage market, Panel econometrics
    JEL: E52
    Date: 2005–12–15
  11. By: Yifan Hu; Timothy Kam
    Abstract: We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds affect equilibrium allocations, inflation and create an endogenous interest-rate spread. How this new feature alters optimal fiscal-monetary policy in a stochastic sticky-price environment is considered. The trade-off confronting a planner, shown in recent literature, between using inflation surprise and labor-income tax is eradicated by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices, but the planner also creates less distortionary and less volatile income taxes by resorting to taxing the liquidity service of bonds.
    JEL: E42 E52 E63
    Date: 2005–12
  12. By: Jordi Galí; J. David López-Salido; Javier Vallés
    Abstract: Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
    Keywords: Rule-of-thumb consumers, non-Ricardian households, fiscal multiplier, government spending, Taylor rules
    JEL: E32 E62
    Date: 2002–09
  13. By: Yamin Ahmad (Department of Economics, University of Wisconsin - Whitewater)
    Abstract: I identify twenty observations of monetary policy periods within six of the G7 countries, following the spirit of the Narrative Approach used by Romer and Romer (1989). Statistics are used to characterize the state of these economies from the 1970's until 2001. Major historical events and narrative evidence are then used as a guide to identify these monetary policy periods, which re?ect the stance of monetary policy at central banks during those events. The significance of these monetary policy periods are then assessed using an instrumental variables approach. The results find the policy periods to be significant in the majority of the countries.
    Keywords: Monetary Policy Shocks, Identification, Narrative Approach
    JEL: E00 E52 E58
    Date: 2002–05
  14. By: Zavkidjon Zavkiev
    Abstract: This paper attempts to estimate a model of inflation in Tajikistan using the Johanson cointegration approach and single equation error correction model. It also develops a methodology for creating monthly real output series. The paper investigates both the short run dynamic behaviour of inflation and the long run relationship of prices with their determinants. There is evidence that in the long run prices are determined by exchange rate, money, real output and interest rates, and in the short run by values of money growth and inflation, and current and past values of output growth and interest rate changes. The speed of adjustment of prices to their long run equilibria is determined. The results suggest controlling excessive money growth and stabilizing excessive exchange rate fluctuations should be the key ingredients of monetary policy in controlling inflation of the country.
    JEL: E31 C32 O53
    Date: 2005–12
  15. By: Martin Fukac
    Abstract: We analyze the standard New Keynesian economy adjusted by a financial intermediation sector, heterogenous, imperfect knowledge, and adaptive learning. We consider two groups of agents (i) private agents (households, firms, private banks) and (ii) the central bank who differ in their knowledge and expectations. The monetary-policy transmission is non-trivial in this environment. The interest rate directly affecting the decisions of households and firms is influenced by the private banks expectations, and the monetary policy may get distorted. The basic finding suggests the higher knowledge heterogeneity, the less active monetary policy should be in order to stabilize the economy. This contrasts the standard literature with homogenous knowledge and expectations.
    Keywords: Imperfect and heterogeneous knowledge, adaptive learning, monetary policy.
    JEL: E52
    Date: 2005–10
  16. By: Yamin Ahmad (Department of Economics, University of Wisconsin - Whitewater)
    Abstract: This paper incorporates heterogeneous agents into a NNS model with nominal inertia. Heterogeneous households are introduced into NNS models to try and reconcile the movements in interest rates, consumption and inflation. The key findings here are that heterogeneity and wage inertia are needed to help reconcile these observations. Aggregate consumption and its expected growth rate responds much more to myopic households than compared to optimizing households when myopic households set wages one periods in advance. When myopic households set wages in the current period, aggregate consumption and its expected growth rate is found to respond much more to the respective profiles for optimizing households.
    Keywords: Consumption, Aggregation, Interest Rates, Heterogeneity, Monetary Policy
    JEL: E27 E47 E52
    Date: 2004–07
  17. By: Ignazio Angelloni; Luc Aucremanne; Michael Ehrmann; Jordi Galí; Andrew Levin; Frank Smets
    Abstract: This paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modelling. It argues that several of the most commonly used assumptions in micro-founded macro models are seriously challenged by the new findings.
    Keywords: Price setting practices, macro modellling
    JEL: E31 E52
    Date: 2005–09
  18. By: Paul De Grauwe; Cláudia Costa Storti
    Abstract: There is a wide consensus that the existence of structural rigidities in the Eurozone reduces the effectiveness of the ECB’s monetary policies. In order to test this “ECB-handicap” hypothesis, we perform a meta-analysis of the effects of monetary policies in the US and the Eurozone countries. This consists in collecting the estimated transmission coefficients obtained from published econometric studies. Meta-analysis then allows us to control for a number of factors that can affect these estimated coefficients. We conclude that there is no evidence for the hypothesis that the ECB is handicapped in using monetary policies for the purpose of stabilizing output compared to the US.
    JEL: E50 E52 E58
    Date: 2005
  19. By: Hilde C. Bjørnland (University of Oslo and Norges Bank (Central Bank of Norway))
    Abstract: This paper analyses the transmission mechanisms of monetary policy in a small open economy like Norway through structural VARs, paying particular attention to the interdependence between the monetary policy stance and exchange rate movements in the inflation-targeting period. Previous studies of the effects of monetary policy in open economies have typically found small or puzzling effects on the exchange rate; puzzles that may arise due to the recursive restrictions imposed on the contemporaneous interaction between monetary policy and the exchange rate. By instead imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, the interdependence increases considerably. In particular, following a contractionary monetary policy shock, the real exchange rate appreciates immediately and thereafter depreciates back to baseline. Furthermore, output and consumer price inflation fall gradually as expected; thereby also ruling out any price puzzle that has commonly been found in the literature. Results are compared and found to be consistent with among other the findings from an “event study” that focuses on immediate responses in asset prices following a surprise monetary policy decision.
    Keywords: VAR, monetary policy, open economy, identification, event study
    JEL: C32 E52 F31 F41
    Date: 2005–05–15
  20. By: Egil Matsen; Tommy Sveen; Ragnar Torvik
    Abstract: This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endogenous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange-rate dynamics. We also show how “rational” savers may magnify or dampen the responses of “irrational” spenders, and show how this is related to features of the utility functions.
    Keywords: rule-of-thumb consumers, fiscal policy, open economy
    JEL: E21 E62 F41
    Date: 2005
  21. By: Gabor Vadas (Magyar Nemzeti Bank); Zsolt Darvas (Magyar Nemzeti Bank)
    Abstract: Potential output figures are important ingredients of many macroeconomic modelsand are routinely applied by policy makers and global agencies. Despite itswidespread use, estimation of potential output is at best uncertain and dependsheavily on the model. The task of estimating potential output is an even moredubious exercise for countries experiencing huge structural changes, such astransition countries. In this paper we apply univariate methods to estimate andevaluate Hungarian potential output, paying special attention to structural breaks.In addition to statistical evaluation, we also assess the appropriateness of variousmethods by expertise judgement of the results, since we argue that mechanicaladoption of univariate techniques might led to erroneous interpretation of thebusiness cycle. As all methods have strengths and weaknesses, we derive a singlemeasure of potential output by weighting those methods that pass both thestatistical and expertise criteria. As standard errors, which might be used forderiving weights, are not available for some of the methods, we base our weightson similar but computable statistics, namely on revisions of the output gap for alldates by recursively estimating the models. Finally, we compare our estimated gapswith the result of the only published Hungarian output gap measure of Darvas-Simon (2000b), which is based on an economic model.
    Keywords: ombination, detrending, new EU members, OCA, output gap, revision
    JEL: E32 C22
    Date: 2005–12–15
  22. By: Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience. A negative inflation-growth relation is explained, including a striking non-linearity found repeatedly in empirical studies. A set of Tobin (1965) effects are also explained and, further, linked in magnitude to the growth effects through the interest elasticity of money demand. Undisclosed previously, this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism.
    Keywords: Human capital; cash-in-advance; interest-elasticity; credit production
    JEL: O42 E31 E22
    Date: 2005–12
  23. By: Yuriy Gorodnichenko (University of Michigan)
    Abstract: This paper integrates imposing a factor structure on residuals in vector autoregressions (VARs) into structural VAR analysis. Identification, estimation and testing procedures are discussed. The paper applies this approach to the well-known problem of studying the effects of monetary policy in open economy VAR models. The use of factor structure in identifying structural shocks is shown to resolve three long-standing puzzles in VAR literature. First, the price level does not increase in response to a monetary tightening. Second, the exchange rate appreciates on impact and then gradually depreciates. Hence, no price level and exchange rate puzzles are found. Third, monetary policy shocks are much less volatile than suggested by standard VAR identification schemes. In addition, the paper suggests that the apparent weak contemporaneous cross-variable responses and strong own responses in structural VARs can be an artifact of identifying assumptions and vanish after imposing a factor structure on the shocks.
    Keywords: Vector autoregressions, identification, factor structure, monetary policy
    JEL: E52 C32
    Date: 2005–12–15
  24. By: Aleksander Berentsen; Gabriele Camera; Christopher Waller
    Abstract: In monetary models in which agents are subject to trading shocks there is typically an ex-post inefficiency in that some agents are holding idle balances while others are cash constrained. This inefficiency creates a role for financial intermediaries, such as banks, who accept nominal deposits and make nominal loans. We show that in general financial intermediation improves the allocation and that the gains in welfare arise from paying interest on deposits and not from relaxing borrowers’ liquidity constraints. We also demonstrate that increasing the rate of inflation can be welfare improving when credit rationing occurs.
    Keywords: money, credit, rationing, banking
    JEL: D90 E40 E50
    Date: 2005
  25. By: Raghbendra Jha
    Abstract: Inflation targeting (henceforth IT) has emerged as a significant monetary policy framework in both developed and transition economies. It has been in place for a decade or more in a number of countries - with around 20 central banks adopting it as their basic monetary policy framework. Some authors have argued that for transition economies undergoing sustained financial liberalization and integration in world financial markets IT is an attractive monetary policy framework. Consequently there is some pressure for such economies to adopt IT as a core element in their monetary policy frameworks. The present paper evaluates the case for IT in India. It begins with stating, almost from first principles, the objectives of monetary policy in India. I argue that inflation control cannot be an exclusive concern of monetary policy in a country such as India with a substantial poverty problem. The rationales for IT is then spelt out as are some nuances of the practical implementation of IT. The paper provides some evidence on the effects of IT in developed and transition economies and argues that although IT may have been responsible for maintaining a low inflation regime it has not brought down the inflation rate itself substantially. Further, the volatility of exchange rate and output movements in transition countries adopting IT has been higher than in developed market economies. The paper then discusses India’s experience with using rules-based policy measures (nominal targets) and elaborates on the reasons (as espoused in the extant literature) why India is not ready for IT. It is further shown that even if the Reserve Bank of India wanted to, it could not pursue IT since the short-term interest rate (the principal policy tool used to affect inflation in countries working with IT) does not have significant effects on the rate of inflation. The paper concludes by listing monetary policy options for India at the current time.
    Date: 2005
  26. By: Rasmus Fatum (School of Business, University of Alberta); Barry Scholnick (School of Business, University of Alberta)
    Abstract: This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.
    Keywords: expectations; monetary policy; federal funds futures; exchange rates
    JEL: E52 F31 G14
    Date: 2005–11
  27. By: Sergio Rebelo (Northwestern University, NBER, and CEPR.)
    Abstract: In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research.
    Date: 2005–12
  28. By: Alisson Lopes (Universidade Federal do Ceará)
    JEL: E
    Date: 2005–12–14
  29. By: Martin Feldstein
    Abstract: The Feldstein-Horioka study of 1980 found that OECD countries with high saving rates had high investment rates and vice versa, contrary to the traditional theory of global capital market integration. This capital market segmentation view, which has been verified in various studies over the past several decades, has important implications for tax and monetary policy. More recently, Alan Greenspan and John Helliwell have shown that the link between domestic saving and domestic investment became substantially weaker after the mid-1990s. The research reported in the current paper suggests that this is true of the smaller OECD countries but not of the larger ones. When observations are weighted by each country's GDP, the savings-investment link (i.e., the savings retention coefficient) remains relatively high. This paper also examines the recent capital flows to the United States. The Treasury International Capital (TIC) reports are generally misunderstood. When they are properly interpreted, they do not indicate that they U.S. has an excess of capital flows to finance the current account deficit. The TIC data also cannot be relied on the distinguish private and government sources of the capital flow. The persistence of these flows is therefore uncertain. The paper discusses the implications for monetary and fiscal policy of the changes in capital flows that may be happening.
    JEL: E0 F0
    Date: 2005–12
  30. By: Christopher Bowdler (Nuffield college); Luca Nunziata (University of Padua)
    Abstract: This paper examines the impact of union membership rates on inflation in OECD countries. A positive effect of union density is estimated, even after controlling for fixed effects and time dummies. Additional institutional characteristics, for example union coordination, employment protection laws and central bank independence, do not affect inflation directly in a panel setting, but do influence the size of the unionisation coefficient via interaction terms. The results are robust to controlling for potential common causes such as oil price shocks and the political stance of the government, and to using GMM/IV techniques to handle possible endogeneity biases.
    JEL: E31 J51
    Date: 2005–12
  31. By: Ludwig van den Hauwe
    Abstract: In recent times the field of macroeconomics has witnessed a renaissance of classical capital-based macroeconomics. Furthermore an institutional reorientation has taken place within several subdisciplines of economics (new institutional economics). An integration of these strands of thought may yield a coherent framework for approaching the study of business cycles.
    JEL: E
    Date: 2005–12–12
  32. By: Dorofeenko, Viktor (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Lee, Gabriel S. (Department of Real Estate, University of Regensburg and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Salyer, Kevin D. (Department of Economics, University of California)
    Abstract: How do differences in the credit channel affect investment behavior in the U.S. and the Euro area? To analyze this question, we calibrate an agency cost model of business cycles. We focus on two key components of the lending channel, the default premium associated with bank loans and bankruptcy rates, to identify the differences in the U.S. and European financial sectors. Our results indicate that the differences in financial structures affect quantitatively the cyclical behavior in the two areas: the magnitude of the credit channel effects is amplified by the differences in the financial structures. We further demonstrate that the effects of minor differences in the credit market translate into large, persistent and asymmetric fluctuations in price of capital, bankruptcy rate and risk premium. The effects imply that the Euro Area's supply elasticities for capital are less elastic than the U.S.
    Keywords: Agency costs, Credit channel, Investment behavior, E.U. Area
    JEL: E4 E5 E2
    Date: 2005–12
  33. By: Jun-ichi Itaya (Graduate School of Economics and Business Administration, Hokkaido UniversityAuthor-Name: Kazuo Mino; Graduate School of Economies, Osaka University)
    Abstract: This paper studies the growth effect of money supply in the presence of increasing returns and endogenous labor supply. By using a simple model of endogenous growth with a cash-in-advance constraint, it is shown that the growth effect of money supply depends on the specifications of preference structures as well as on the production technology. Either if the production technology exhibits strong non-convexity or if the utility function has a high elasticity of intertemporal substitution, then there may exist dual balanced-growth equilibria and the impact of a change in money growth depends on which steady state is realized in the long run. It is also shown that there is no systematic relationship between the growth effect of money supply and local determinacy of the balanced growth path.
    Keywords: monetary growth, indeterminacy, increasing returns, non-separable utility.
    JEL: E31 E52 O42
    Date: 2005–12
  34. By: George C. Bitros (Athens University of Economics & Business); Epameinondas E. Panas (Athens University of Economics & Business)
    Abstract: Our aim in this paper is threefold. First, to test the robustness of the relation between total factor productivity growth and inflation to the specification of the estimating model; second, to test the stability of their relationship in the short run and in the long run, and third, to investigate the direction of causality between these two variables. To accomplish the first objective, we esti-mate a generalized Box-Box cost function using data from the two-digit Standard Industrial Clas- sification of manufacturing industries in Greece during the period 1964- 1980. The results show that: a) the acceleration of inflation from 1964- 1972 to 1973-1980 reduced total factor productiv-ity growth in a way that was both statistically significant and sizeable, and b) even when the ef-fect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. With respect to the second objective, somewhat to our surprise, we find that the inflation-productivity trade-off prevails even in the long run. And, fi-nally, regarding the third objective, it emerges that in the great majority of two-digit manufactur-ing industries the causality runs from inflation to productivity. On these grounds we conclude that for a precise estimation of the relationship under consideration it is imperative to sort out the three effects involved, do so by adopting the most general flexible functional form for the cost function, and run the appropriate stability and causality tests.
    Keywords: inflation; productivity; scale economies; technical change; generalized Box-Cox cost function; stability; causality
    JEL: E31 O47
    Date: 2005–12–16
  35. By: Forslund, Anders (IFAU - Institute for Labour Market Policy Evaluation); Gottfries, Nils (Department of Economics, Uppsala University); Westermark, Andreas (Department of Economics, Uppsala University)
    Abstract: How are wages set in an open economy? What role is played by demand pressure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the medium term evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for aggregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.
    Keywords: Wage formation; efficiency wage; turnover; bargaining; rent sharing; nominal wage rigidity; exchange rate policy; competitiveness
    JEL: E52 F33 F41 J31 J51 J63 J64
    Date: 2005–12–05
  36. By: Ricardo Caballero; Arvind Krishnamurthy
    Abstract: We present a model of flight to quality episodes that emphasizes financial system risk and the Knightian uncertainty surrounding these episodes. In the model, agents are uncertain about the probability distribution of shocks in markets different from theirs, treating such uncertainty as Knightian. Aversion to this uncertainty generates demand for safe financial claims. It also leads agents to require financial intermediaries to lock-up capital to cover their own markets' shocks in a manner that is robust to uncertainty over other markets. These actions are wasteful in the aggregate and can trigger a financial accelerator. A lender of last resort can unlock private capital markets to stabilize the economy during these episodes by committing to intervene should conditions worsen.
    JEL: E30 E44 E5 F34 G1
    Date: 2005–12
  37. By: Gabor Vadas (Magyar Nemzeti Bank); Gabor P.Kiss (Magyar Nemzeti Bank)
    Abstract: Cyclically adjusted budget balance (CAB) is a widely cited and widely used concept in the evaluationof fiscal situations. The key idea behind it involves the identification of potential levels of economic variables.There are two recently used methods: the aggregate approach and the unconstrained disaggregateapproach. In this paper we apply them on USA, Japan and 25 EU member countries to demonstratethat both approaches could be the source of considerable bias. While the aggregate approachcannot cope with different shocks, the unconstrained disaggregate method involves systematic biasand do not contain theoretical consideration. In order to avoid these distortions we present an alternativeframework, which is able to incorporate the advantages of both approaches. Combining arbitraryoutput gap and constrained multivariate HP filter induces theoretically motivated disaggregation wherewe also exploit the implication of production function parameterisation. We found that the price effectresulting from the composition effect of different deflators could play an important role in evaluation ofthe fiscal position. To display the importance of composition effect we analyse the cyclical componentsof Finnish, Hungarian and Italian budget balances more in detail.
    Keywords: cyclically adjusted budget deficit, price gap, business cycles, constrained multivariate HP filter
    JEL: H62
    Date: 2005–12–15
  38. By: Axel Boersch-Supan; Alexander Ludwig; Joachim Winter
    Abstract: Population aging and pension reform will have profound effects on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most counries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fast-aging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.
    JEL: E27 F21 G15
    Date: 2005–12
  39. By: Francesco Busato, Bruno Chiarini, Pasquale de Angelis, Elisabetta Marzano (Dept. of Economics, School of Economics and Management, University of Aarhus, Denmark; Università di Napoli Parthenope)
    Abstract: In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et alii (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios
    Keywords: tax evasion, moonlighting, capital subsidies, underground production
    JEL: E22 H25 H26
    Date: 2005–10
  40. By: Ian Dew-Becker; Robert J. Gordon
    Abstract: A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10 percent. In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This paper revives research on wage adjustment and produces a dynamic interactive model of price and wage adjustment that explains movements of labor's share of income. What caused rising income inequality? Economists have placed too much emphasis on "skill-biased technical change" and too little attention to the sources of increased skewness at the very top, within the top 1 percent of the income distribution. We distinguish two complementary explanations, the "economics of superstars," i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.
    JEL: D31 D33 D63 E31
    Date: 2005–12
  41. By: Raymond Robertson (Department of Economics, Macalester College); Mark Skidmore (Department of Economics, University of Wisconsin - Whitewater); Hideki Toya (Faculty of Economics, Nagoya City University)
    Abstract: Theoretic growth models and microeconomic evidence suggest that human capital accumulation is an important determinant of per capita income growth. However, outliers, measurement errors, and incorrect specifications may have affected early macroeconomic studies that found a weak relationship between growth and human capital accumulation. While recent studies addressing these problems are beginning to show larger positive effects, the potential endogeneity of human capital accumulation has received relatively little attention. In this paper, we demonstrate that endogeneity is significant and find that natural disasters are a good instrument for changes in schooling. Our resulting instrumental variable estimates are larger than our OLS estimates and are generally larger than those in previous studies. Our analysis also provides some limited evidence of human capital externalities.
    Date: 2005–08
  42. By: Kazuo Mino (Faculty of Economics, Osaka University); Kazuo Nishimura (Kyoto University); Koji Shimomura (Kobe University); Ping Wang (Washington University in St. Louis and NBER)
    Abstract: The existing literature establishes possibilities of local determinacy and dynamic indeterminacy in continuous-time two-sector models of endogenous growth with social constant returns. The necessary and sufficient condition for local determinacy is that the factor intensity rankings of the two sectors are consistent in the private/physical and social/value sense. The necessary and sufficient condition for dynamic indeterminacy is that the final (consumable) good sector is human (pure) capital intensive in the private sense but physical (consumable) capital intensive in the social sense. This paper re-examines the dynamic properties in a discrete-time endogenous growth framework and finds that conventional propositions obtained in continuous time need not be valid. It is shown that the established necessary and sufficient conditions on factor intensity rankings for local determinacy and dynamic indeterminacy are neither sufficient nor necessary, as the magnitudes of time preference and capital depreciation rates both play essential roles.
    Keywords: Sectoral Externalities, Endogenous Growth, Dynamic Determinacy/Indeterminacy.
    JEL: E32 J24 O40
    Date: 2005–12
  43. By: Carmona, Guilherme
    Abstract: In a version of the Diamond and Dybvig [6] model with aggregate uncertainty, we show that there exists an equilibrium with the following properties: all consumers deposit at the bank, all patient consumers wait for the last period to withdraw, and the bank fails with strictly positive probability. Furthermore, we show that the probability of a bank failure remains bounded away from zero as the number of consumers increases. We interpret such an equilibrium as reflecting a bank run, defined as an episode in which a large number of people withdraw their deposits from a bank, forcing it to fail. Our results show that we can have equilibrium bank runs with consumers poorly informed about the true state of nature, a sequential service constraint, an infinite marginal utility of consumption at zero, and without consumers panic and sunspots. We therefore think that aggregate risk in Diamond-Dybvig-like environments can be an important element to explain bank runs.
    Date: 2004
  44. By: Laurence J. Kotlikoff; Sabine Jokisch
    Abstract: America's aging coupled with high and growing old age health and pension benefits augers for much higher payroll taxes, with potentially damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model, which closely captures projected changes in U.S. demographics. The FairTax offers a potential alternative to this dismal economic future. The FairTax proposes to replace the federal payroll tax, personal income tax, corporate income tax, and estate tax (not modeled here) with a progressive consumption tax delivered in the form of a federal retail sales tax plus a rebate. According to our simulation model, these policy changes would almost double the U.S. capital stock by the end of the century and raise long-run real wages by 19 percent compared to the base case alternative. They would also preclude a doubling of the highly regressive payroll tax. Indeed, the poorest members of each cohort experience remarkably large welfare gains from the FairTax. To be specific, today's elderly poor are predicted to experience a 13 to 14 percent welfare gain. In contrast, their middle class counterparts enjoy a 1 to 2 percent gain, and their richest counterparts experience a .5 to 1 percent welfare loss. Poor baby boomers experience 8 percent gains, while middle- and upper-income boomers experience either very small welfare losses or small gains. Once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohorts. For example, the poorest members of the generation born in 1990 enjoy a 16 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 27 percent improvement in their well being. For middle class members of this birth group, there's an 11 percent welfare gain. And for the richest members of the group, the gain is 5 percent. The remarkable point here is the size of the gains from the reform relative to the losses. Yes, some initial high- and middle-income households are made worse off, but their welfare losses are minor compared with the gains available to future generations, particularly the poorest members of future generations. While our model is highly stylized, it suggests that the FairTax offers a real opportunity to improve the U.S. economy's performance and the wellbeing of the vast majority of Americans. The winners from this reform, primarily those who are least well off, experience very major gains, and the losers experience only minor losses.
    JEL: H2
    Date: 2005–12
  45. By: Arturo Vasquez Cordano (OSINERG)
    Abstract: This paper tests and confirms the hypothesis that retail and wholesale Diesel 2 prices respond more quickly to increases than to decreases in wholesale and crude oil prices, respectively. Among the possible sources of this asymmetry, we find: production / inventory adjustment lags, refining adjustments, market power of some sellers, searching costs, among others. By analyzing price transmission at different points of the distribution chain, this paper attempts to shed light on these theories for the Peruvian oil industry. Wholesale prices for Diesel 2 show asymmetry in responding to crude oil price changes, which may refl ect inventory adjustment effects. Asymmetry also appears in the response that retail prices give to wholesale price changes, presumably indicating short-run local market power among retailers or the existence of searching costs.
    Keywords: Price-response asymmetry, oil, Diesel 2 prices, impulse response analysis
    JEL: D43 E31 L71
    Date: 2005–12–11
  46. By: Feeny, Simon; Gillman, Max (Cardiff Business School); Harris, Mark N.
    Abstract: The paper presents an econometric accounting of the effective corporate tax rate in Australia for the years 1993 to 1996. The estimation is a panel of Australian firms that uses a specially gathered financial data base. Using fixed and random effects, the model specifies that the statutory tax rate is estimated as the constant term of the model. An ability to find an estimated statutory tax rate that is close to the actual rate suggests a certain confidence in the estimated effects of the others factors affecting the effective tax rate. The results show importance for interest expenses, depreciation allowances, debt/asset structures, and the foreign ownership of firms. There is support for an Australian role as a preferential tax location.
    Keywords: Effective tax rate; accounting model; panel data; random and fixed effects
    JEL: H25 E62
    Date: 2005–12
  47. By: Patricia Sourdin (The University of Adelaide)
    Abstract: Sophisticated agents with self-control problems value commitment devices that constrain future choices. Using Australian household data, I test whether these households value commitment devices in the form of illiquid pension contributions. Applying various probabilistic choice models, the results confirm the conjecture that households with problems of self-control are more likely to invest in illiquid pensions while less likely to hold very liquid forms of assets.
    Keywords: commitment device; pensions; intertemporal choice
    JEL: D91 H31 E21
    Date: 2005–12–12
  48. By: Lutz Hendricks
    Abstract: This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.
    Keywords: wealth inequality, preference heterogeneity
    JEL: E20
    Date: 2005

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