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on Macroeconomics |
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Issue of 2006‒01‒01
101 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Kai Christoffel (European Central Bank); Tobias Linzert (European Central Bank and IZA Bonn) |
| Abstract: | In this paper we incorporate a labor market with matching frictions and wage rigidities into the New Keynesian business cycle model. In particular, we analyze the effect of a monetary policy shock and investigate how labor market frictions affect the transmission process of monetary policy. The model allows real wage rigidities to interact with adjustments in employment and hours affecting inflation dynamics via marginal costs. We find that the response of unemployment and inflation to an interest rate innovation depends on the degree of wage rigidity. Generally, more rigid wages translate into more persistent movements of aggregate inflation. Moreover, the impact of a monetary policy shock on unemployment and inflation depends also on labor market fundamentals such as bargaining power and the flows in and out of employment. |
| Keywords: | monetary policy, matching models, labor market search, inflation persistence, real wage rigidity |
| JEL: | E52 J64 E32 E31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1896&r=mac |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | Milton Friedman's contributions to macroeconomics are evaluated, with particular emphasis given to: the central role played by his work on the consumption function, money and monetary history in undermining "Keynesian" economics; the connection between his treatment of the macro-economy as an essentially dynamic system and his preference for policy rules; and the ambiguity of his views on the potential of the expectations-augmented Phillips curve to become the "missing equation" in his macro-economics. His longer run influence on both the actual conduct of monetary policy and the development of macro-economic theory is also assessed. |
| Keywords: | Friedman; macroeconomics; money; inflation; monetary policy; consumption; Keynesianism; monetarism |
| JEL: | B22 E20 E30 E40 E50 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:200511&r=mac |
| By: | Leonardo Gambacorta (Bank of Italy, Economic Research Department); Simonetta Iannotti (Bank of Italy, Supervision and Regulation Department) |
| Abstract: | This paper examines the velocity and asymmetry in the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), it analyses the pass-through of changes in the money market rates to retail bank interest rates in Italy in the period 1985-2002. The main results of the paper are: 1) the speed in adjustment of bank interest rates to monetary policy changes have significantly increased after the introduction of the 1993 Consolidated Law on Banking; 2) interest rate adjustment, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run; 3) banks adjust their loan (deposit) rate at a faster rate during period of monetary tightening (easing); 4) this asymmetry has almost vanished since the nineties. |
| Keywords: | monetary policy transmission, interest rates, asymmetries, liberalization |
| JEL: | E43 E44 E52 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_566_05&r=mac |
| By: | Tommaso Monacelli; Jordi Galí |
| 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. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:300&r=mac |
| By: | Fabià Gumbau-Brisa |
| Abstract: | This paper looks at the implications of heterogeneous beliefs for inflation dynamics. Following a monetary policy shock, inflation peaks after output, is inertial, and can be characterized by a Hybrid Phillips Curve. It presents a novel channel through which systematic monetary policy can affect the degree of inflation persistence. It does so by altering the effective extent of strategic complementarities in pricing, and hence the role of higher-order expectations in the equilibrium. In particular, stronger inflation targeting reduces the impact of uncertainty on the economy and therefore the degree of inertia. It is possible to calibrate at around 25 percent the fraction of relevant information processed every period by the private sector. The imperfect common knowledge framework does not require any exogenous shocks to create heterogeneity. Despite the fact that prices can be adjusted at no cost in every period, there are nominal rigidities, and monetary policy has real effects. |
| Keywords: | Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-16&r=mac |
| By: | Zsolt Darvas (Corvinus University, Budapest); Andrew K. Rose (György Szapáry; Magyar Nemzeti Bank) |
| Abstract: | Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht “convergence criteria,” used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust. |
| Keywords: | European; monetary; union; policy; Maastricht; criteria; optimum; Mundell. |
| JEL: | F42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2005/03&r=mac |
| By: | David B. Gordon; Eric M. Leeper |
| Abstract: | Economists generally believe that countercyclical fiscal policies have stabilizing effects that work through automatic stabilizers and discretionary actions. Analyses underlying this conventional wisdom focus on intratemporal margins: how employment and personal income respond in the short run to changes in government expenditures and taxes. But in economic downturns, countercyclical policies increase government indebtedness, raising future debt service obligations. These new expenditure commitments must be financed by some mix of higher taxes, lower spending, or higher money growth in the future. Expectations of how future policies will adjust change current savings rates and the efficacy of countercyclical policies. It is thus possible for responses to expected future policies to exacerbate and prolong recessions. This paper highlights these expectations effects. Connecting the theory to U.S. data we find: (1) through this expectations channel, countercyclical policies may create a business cycle when there would be no cycle in the absence of countercyclical policies; (2) nontrivial fractions of variation in investment and velocity can be explained by variation in macro policies alone---without any nonpolicy sources of fluctuation; and (3) persistence in key macro variables can arise solely from expectations of policy. |
| JEL: | E32 E62 E63 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11869&r=mac |
| By: | Péter Benczúr (Magyar Nemzeti Bank); Attila Rátfai (Central European University, Budapest) |
| Abstract: | We carry out a detailed analysis of quarterly frequency dynamics in macroeconomic aggregates in twelve countries of Central and Eastern Europe. The facts we document include the variability and persistence in and the co-movement among output, and other major real and nominal variables. We find that consumption is highly volatile and government spending is procyclical. Gross fixed capital formation is highly volatile. Net exports are countercyclical. Imports are procyclical, much more than exports. Exports are most procyclical and persistent in open countries. Labor market variables are all highly volatile. Employment is lagging, and often procyclical. Real wages are dominantly procyclical. Productivity is dominantly procyclical and coincidental. Private credit is procyclical and dominantly lagging the cycle. The CPI is countercyclical, and is weakly leading or coincidental. The cyclicality of inflation is unclear, but its relative volatility is low. Net capital flows are mostly leading and procyclical and exhibit low persistence. Nominal interest rates are in general smooth and persistent. The nominal exchange rate is more persistent than the real one. Overall, we find that fluctuations in CEE countries are larger than in industrial countries, and are of similar size than in other emerging economies. This is particularly true about private consumption. The co-movement of variables, however, shows a large degree of similarity. A notable exception is government spending: unlike in industrial economies, it is rather procyclical in transition economies. The findings also indicate that Croatia and the accession group show broadly similar cyclical behavior to industrial countries. The most frequent country outliers are Bulgaria, Romania and Russia, especially in labor market, price and exchange rate variables. Excluding these countries from the sample makes many of the observed patterns in cyclical dynamics quite homogenous. |
| Keywords: | Business Cycle Facts, Central and Eastern Europe |
| JEL: | E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2005/02&r=mac |
| By: | Roc Armenter; Martin Bodenstein |
| Abstract: | Lack of commitment in monetary policy leads to the well known Barro-Gordon inflation bias. In this paper, we argue that two phenomena associated with the time inconsistency problem have been overlooked in the exchange rate debate. We show that, absent commitment, independent monetary policy can also induce expectation traps-that is, welfare-ranked multiple equilibria-and perverse policy responses to real shocks-that is, an equilibrium policy response that is welfare inferior to policy inaction. Both possibilities imply higher macroeconomic volatility under flexible exchange rates than under fixed exchange rates. |
| Keywords: | Foreign exchange rates ; Equilibrium (Economics) ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:230&r=mac |
| By: | Andrew Stone (Reserve Bank of Australia); Troy Wheatley (Reserve Bank of Australia); Louise Wilkinson (Reserve Bank of Australia) |
| Abstract: | Almost a decade ago David Gruen and Geoff Shuetrim constructed a small macroeconomic model of the Australian economy. A comprehensive description of this model was subsequently provided by Beechey <em>et al</em> (2000). Since that time, however, the model has continued to evolve. This paper provides an update on the current structure of the model and the main changes which have been made to it since Beechey <em>et al</em>. While the details of the model have changed, its core features have not. The model remains small, highly aggregated, empirically based, and non-monetary in nature. It also retains a well-defined long-run steady state with appropriate theoretical properties, even though its primary role is to analyse short-run macroeconomic developments. |
| Keywords: | Australian economy; macroeconomic model; monetary policy |
| JEL: | E10 E17 E31 E37 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2005-11&r=mac |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? This paper discusses the difficulties in disentangling these two effects. |
| Keywords: | Petroleum products - Prices ; Monetary policy ; Business cycles |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0510&r=mac |
| By: | K. Azim Ozdemir |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0507&r=mac |
| By: | Roc Armenter; Martin Bodenstein |
| Abstract: | We provide a tractable model to study monetary policy under discretion. We restrict our analysis to Markov equilibria. We find that for all parametrizations with an equilibrium inflation rate of about 2 percent, there is a second equilibrium with an inflation rate just above 10 percent. Thus, the model can simultaneously account for the low and high inflation episodes in the United States. We carefully characterize the set of Markov equilibria along the parameter space and find our results to be robust, suggesting that expectation traps are more than just a theoretical curiosity. |
| Keywords: | Equilibrium (Economics) ; Inflation (Finance) ; Rational expectations (Economic theory) ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:229&r=mac |
| By: | Peter N. Ireland |
| Abstract: | This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1- 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2-1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target. |
| Keywords: | Inflation (Finance) ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-13&r=mac |
| 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 nontrivial 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: | Keynesian economics ; Monetary policy ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-14&r=mac |
| By: | Linda S. Goldberg; Michael W. Klein |
| Abstract: | The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high-frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro area and on the euro-dollar exchange rate suggest that the market's perception of the policy stance of the ECB evolved significantly during the first six years of the Bank's operation, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the U.S. yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve. |
| Keywords: | Banks and banking, Central ; Inflation (Finance) ; Monetary policy ; European Central Bank |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:231&r=mac |
| By: | Michael Woodford |
| Abstract: | A notable change in central banking over the past 15 years has been a world-wide movement toward increased communication by central banks about their policy decisions, the targets that they seek to achieve through those decisions, and the central bank's view of the economy's likely future evolution. This paper considers the role of such communication in the successful conduct of monetary policy, with a particular emphasis on an issue that remains controversial: to what extent is it desirable for central banks to comment on the likely path of short-term interest rates? After reviewing general arguments for and against central-bank transparency, the paper considers two specific contexts in which central banks have been forced to consider how much they are willing to say about the future path of interest rates. The first is the experiment with policy signaling by the FOMC in the U.S., using the statement released following each Committee meeting, since August 2003. The second is the need to make some assumption about future policy when producing the projections (for future inflation and other variables) that are central to inflation-forecast targeting procedures, of the kind used by the Bank of England, the Swedish Riksbank, the Reserve Bank of New Zealand, and others. In both cases, it is argued that increased willingness to share the central bank's own assumptions about future policy with the public has increased the predictability of policy, in ways that are likely to have improved central bank's ability to achieve their stabilization objectives. |
| JEL: | E52 E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11898&r=mac |
| By: | Troy Davig; Eric M. Leeper |
| Abstract: | Recurring change in a monetary policy function that maps endogenous variables into policy choices alters both the nature and the efficacy of the Taylor principle---the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation. A monetary policy process is a set of policy rules and a probability distribution over the rules. We derive restrictions on that process that satisfy a long-run Taylor principle and deliver unique equilibria in two standard models. A process can satisfy the Taylor principle in the long run, but deviate from it in the short run. The paper examines three empirically plausible processes to show that predictions of conventional models are sensitive to even small deviations from the assumption of constant-parameter policy rules. |
| JEL: | E52 E62 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11874&r=mac |
| By: | Thomas A Lubik (Reserve Bank of New Zealand) |
| Abstract: | This paper studies the transmission of business cycles and the sources of economic fluctuations in Australia and New Zealand by estimating a Bayesian DSGE model. The theoretical model is that of two open economies that are tightly integrated by trade in goods and assets. They can be thought of as economically large relative to each other, but small with respect to the rest of the world. The two economies are hit by a variety of country-specific and world-wide shocks. The main findings are that the pre-eminent driving forces of Antipodean business cycles are worldwide technology shocks and foreign, i.e. rest-of-the-world, expenditure shocks. Domestic technology shocks and monetary policy shocks appear to play only a minor role. Transmission of policy shocks is asymmetric, and neither central bank is found to respond to exchange rate movements. The model can explain 15 percent of the observed exchange rate volatility. |
| JEL: | C11 C51 C52 E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2005/06&r=mac |
| By: | Sharon Kozicki; Peter Tinsley |
| Abstract: | The sensitivity of bond rates to macro variables appears to vary both over time and over forecast horizons. The latter may be due to differences in forward rate term premiums and in bond trader perceptions of anticipated policy responses at different forecast horizons. Determinacy of policy transmission through bond rates requires a lower bound on the average responsiveness of term premiums and anticipated policy responses to inflation. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-06&r=mac |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-51&r=mac |
| By: | Roberto Ricciuti |
| Abstract: | This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and partial equilibrium experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists. |
| Keywords: | macroeconomics, experiments. |
| JEL: | C91 C92 E20 E40 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:004&r=mac |
| By: | Melike Altinkemer |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0404&r=mac |
| By: | Juan Francisco Rubio-Ramírez; Daniel Waggoner; Tao Zha |
| Abstract: | This paper develops a new and easily implementable necessary and sufficient condition for the exact identification of a Markov-switching structural vector autoregression (SVAR) model. The theorem applies to models with both linear and some nonlinear restrictions on the structural parameters. We also derive efficient MCMC algorithms to implement sign and long-run restrictions in Markov-switching SVARs. Using our methods, four well-known identification schemes are used to study whether monetary policy has changed in the euro area since the introduction of the European Monetary Union. We find that models restricted to only time-varying shock variances dominate the other models. We find a persistent post-1993 regime that is associated with low volatility of shocks to output, prices, and interest rates. Finally, the output effects of monetary policy shocks are small and uncertain across regimes and models. These results are robust to the four identification schemes studied in this paper. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-27&r=mac |
| By: | William Whitesell |
| Abstract: | Most inflation-targeting central banks express their inflation objective in terms of a range for a single official inflation measure but generally have not clarified the meaning of the ranges and their implications for policy responses. In formulating policy, all central banks monitor multiple inflation indicators. This paper suggests an alternative approach to communicating an inflation goal: announcing point-values, rather than ranges, for a few key reference measures of inflation that are used in making policy. After reviewing and extending relevant theoretical and empirical studies, the paper argues that the alternative approach could more accurately reflect the concerns of policymakers and provide a better accountability structure for monetary policy performance. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-62&r=mac |
| By: | A. Hakan Kara |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0301&r=mac |
| By: | Michael Woodford |
| Abstract: | The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. The proposed method offers a way of avoiding the assumption that the central bank can count on private-sector expectations coinciding precisely with whatever it plans to do, while at the same time also avoiding the equally unpalatable assumption that the central bank can precisely model private-sector learning and optimize in reliance upon a precise law of motion for expectations. The main qualitative conclusions of the rational-expectations analysis of optimal policy carry over to the weaker assumption of near-rational expectations. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. |
| JEL: | D81 D84 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11896&r=mac |
| By: | Gábor P. Kiss (Magyar Nemzeti Bank); Gábor Vadas (Magyar Nemzeti Bank) |
| Abstract: | Cyclically adjusted budget balance (CAB) is a widely cited and widely used concept in the evaluation of 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 disaggregate approach. In this paper we apply them on USA, Japan and 25 EU member countries to demonstrate that both approaches could be the source of considerable bias. While the aggregate approach cannot cope with different shocks, the unconstrained disaggregate method involves systematic bias and do not contain theoretical consideration. In order to avoid these distortions we present an alternative framework, which is able to incorporate the advantages of both approaches. Combining arbitrary output gap and constrained multivariate HP filter induces theoretically motivated disaggregation where we also exploit the implication of production function parameterisation. We found that the price effect resulting from the composition effect of different deflators could play an important role in evaluation of the fiscal position. To display the importance of composition effect we analyse the cyclical components of Finnish, Hungarian and Italian budget balances more in detail. |
| Keywords: | cyclically adjusted budget deficit, price gap, business cycles, constrained multivariate HP filter |
| JEL: | H62 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2005/04&r=mac |
| By: | Hakan Kara |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0415&r=mac |
| By: | Gauti B. Eggertsson |
| Abstract: | This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and-even more important-announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations. |
| Keywords: | Depressions ; Gold standard ; Price levels ; Rational expectations (Economic theory) ; Economic policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:234&r=mac |
| By: | Lorenz Goette (University of Zurich and CEPR and IZA Bonn); David Huffman (IZA Bonn) |
| Abstract: | This chapter argues that the neglect of emotion in economic models explains their inability to predict important aspects of the labor market. We focus on one example: firms frequently cut real wages, increasing nominal wages by less than the inflation rate, but they very seldom cut nominal wages. This pattern suggests that workers exhibit a special resistance to nominal wage cuts, which is hard to explain if they are purely rational as assumed in standard economic models. We argue that resistance to nominal wage cuts is best understood in terms of a model where salient features of a situation trigger emotional responses and sway judgment of the entire situation. Since a cut in the nominal wage leads to a very salient reduction in pay, we argue that the reaction of workers is dominated by emotions. On the other hand, an increase in the nominal wage may produce a more deliberative evaluation, because there is no immediately salient feature. The individual needs to compare the inflation rate to the wage change before it becomes clear whether the change increases or decreases utility, thus producing a more measured response. We present evidence from experiments showing that self-reported emotions respond strongly to nominal wage cuts, but not to decreases in the real wage achieved through increasing the nominal wage by less than the inflation rate. Although emotions may benefit individual workers, by strengthening their bargaining position and preventing wage cuts, they may also lead to worse outcomes, in the form of higher unemployment. |
| Keywords: | wage rigidity, affect, emotions, money illusion, loss aversion |
| JEL: | E24 E31 E32 B49 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1895&r=mac |
| By: | Fatih Ozatay |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0511&r=mac |
| By: | K. Azim Ozdemir; Paul Turner |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0412&r=mac |
| By: | Ricardo de O. Cavalcanti; Ed Nosal |
| Abstract: | In this paper, we present a simple random-matching model in which different seasons translate into different propensities to consume and produce. We find that the cyclical creation and destruction of money is beneficial for welfare under a wide variety of circumstances. Our model of seasons can be interpreted as providing support for the creation of the Federal Reserve System, with its mandate of supplying an elastic currency for the nation. |
| Keywords: | Monetary policy ; Money supply |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0511&r=mac |
| By: | Stéphane Hallegatte (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées, CNRM - Centre National de Recherches Météorologiques); Michael Ghil (Plateforme Environnement de l'ENS, Department of Atmospheric and Oceanic Sciences and Institute of Geophysics and Planetary Physics); Patrice Dumas (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées, Plateforme Environnement de l'ENS); Jean-Charles Hourcade (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales;Ecole Nationale du Génie Rural des Eaux et des Forêts;Ecole Nationale des Ponts et Chaussées) |
| Abstract: | This paper is motivated by the rising interest in assessing the effect of disruptions in resources and environmental conditions on economic growth. Such an assessment requires, ultimately, the use of truly integrated models of the climate and economic systems. For these purposes, we have developed a Non-Equilibrium Dynamic Model (NEDyM) by introducing investment dynamics and nonequilibrium effects into a Solow growth model. NEDyM can reproduce various economic regimes, such as manager- or shareholder-driven economies, and permits one to examine the effects of disruptions on the economy, given either an assumption of steady-state growth or an assumption of business cycles with transient disequilibrium. We have applied NEDyM to an idealized economy that resembles in certain respects the 15-state European Union in 2001. The key parameter in NEDyM is investment flexibility. For certain values of this parameter, the model reproduces classical business cycles with realistic characteristics; in particular, NEDyM captures the cycles' asymmetry, with a longer growth phase and more rapid contraction. The cyclical behavior is due to the investment profit instability and is constrained by the increase in labor costs and the inertia of production capacity. For somewhat greater investment flexibility, the model exhibits chaotic behavior, because a new constraint intervenes, namely limited investment capacity. The preliminary results presented here show that complex behavior in the economic system may be due entirely, or at least largely, to deterministic, intrinsic factors, even if the economic long-term equilibrium is neo-classical in nature. In the chaotic regime, moreover, slight shocks such as those due to natural or man-made catastrophes may lead to significant changes in the economic system. |
| Keywords: | Macroeconomic dynamics; Nonequilibrium modeling; Business cycles; Investment flexibility |
| Date: | 2005–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00007196_v1&r=mac |
| By: | Eric T. Swanson |
| Abstract: | The literature on optimal monetary policy typically makes three major assumptions: (1) policymakers' preferences are quadratic, (2) the economy is linear, and (3) stochastic shocks and policymakers' prior beliefs about unobserved variables are normally distributed. This paper relaxes the third assumption and explores its implications for optimal policy. The separation principle continues to hold in this framework, allowing for tractability and application to forward-looking models, but policymakers' beliefs are no longer updated in a linear fashion, allowing for plausible nonlinearities in optimal policy. We consider in particular a class of models in which policymakers' priors about the natural rate of unemployment are diffuse in a region around the mean. When this is the case, it is optimal for policy to respond cautiously to small surprises in the observed unemployment rate, but become increasingly aggressive at the margin. These features of optimal policy match statements by Federal Reserve officials and the behavior of the Fed in the 1990s. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2005-24&r=mac |
| By: | Arturo Estrella; Anthony P. Rodrigues |
| Abstract: | The econometrics literature contains a variety of two-sided tests for unknown breakpoints in time-series models with one or more parameters. This paper derives an analogous one-sided test that takes into account the direction of the change for a single parameter. In particular, we propose a sup t statistic, which is distributed as a normalized Brownian bridge. The method is illustrated by testing whether the reaction of monetary policy to inflation has increased since 1959. |
| Keywords: | Time-series analysis ; Monetary policy ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:232&r=mac |
| By: | Adam Copeland; George Hall |
| Abstract: | We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks. |
| JEL: | D21 D42 E22 E23 L11 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11870&r=mac |
| By: | Marlene Amstad; Andreas M. Fischer |
| Abstract: | This paper analyzes the pass-through from import prices to consumer price index (CPI) inflation in real time. Our strategy follows an event-study approach that compares inflation forecasts before and after import price releases. Inflation forecasts are modeled using a dynamic factor procedure that relies on daily panels of Swiss data. We find strong evidence that monthly import price releases provide important information for CPI inflation forecasts, and that the behavior of updated forecasts is consistent with a time-varying pass-through. The robustness of this latter result is supported by an alternative CPI measure that excludes price components subject to administered pricing as well as by panels capturing difference levels of information breadth. Finally, our empirical findings cast doubt on a prominent role for sticky prices in the low pass-through findings. |
| Keywords: | Consumer price indexes ; Imports - Prices ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:228&r=mac |
| By: | Mark A. Wynne |
| Abstract: | This paper provides an estimate of the measurement bias in the Harmonised Index of Consumer Prices (HICP) that the European Central Bank uses to define price stability in the euro area. The estimate is based on a comparison of the rate of increase in consumer prices as measured by the HICP and the responses to a question about recent changes in the cost of living on the European Commission’s monthly Harmonised Consumer Survey (HCS). I find that the HICP may overstate the true rate of inflation by about 1.0 to 1.5 percentage points a year. |
| Keywords: | Euro ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:05-09&r=mac |
| By: | Antonio Fatás |
| Abstract: | This paper reviews the arguments in favor of excluding investment from fiscal policy constraints (the adoption of a “golden rule”). The paper starts by reviewing the goals and motivations of fiscal policy rules. From this analysis, it is clear that answering the question of whether investment should be excluded from those constraints can only be done once the goals and logic of those constraints are made clear. The strongest arguments in favor of a “golden rule” are those of transparency and intergenerational fairness. Other arguments, such as the possibility that public investment pays for itself, do not receive strong empirical support. The paper concludes that for a policy rule to be sustainable and have enough political and public support, it is necessary to have a proper, transparent and, therefore, different accounting treatment for investment. Whether this implies that investment should be completely excluded from fiscal policy constraints is left as an open question. <P>Les arguments en faveur de règles sophistiquées d’équilibre budgétaires sont-ils légitimes? Cet article analyse les arguments en faveur de l'exclusion de l'investissement des contraintes de politique budgétaire (adoption d'une « règle d’or »). Il commence par passer en revue les buts et les motivations des règles de politique budgétaire. Il en ressort qu'avant de pouvoir répondre à la question de savoir si oui ou non l'investissement doit être exclu de ces contraintes, il est essentiel que les buts et la logique qui les sous-tendent soient clairement énoncés. Les arguments les plus solides en faveur d'une "règle d'or" sont ceux de la transparence et de l'équité transgénérationnelle. D'autres arguments, tels que le fait que l'investissement s'autofinancerait, ne reçoivent pas beaucoup de validation empirique. L’auteur en conclut que pour qu'une règle budgétaire soit soutenable et reçoive suffisamment de soutien des acteurs politiques et de la population, il est nécessaire que l'investissement fasse l'objet d'un traitement comptable spécifique, transparent et par conséquent différent. La question de savoir si cela implique que l'investissement soit complètement exclu des contraintes de politique budgétaire reste une question ouverte. |
| Keywords: | fiscal policy, politique budgétaire, cycle économique, fiscal rules, règles budgétaires, business cycles |
| JEL: | E32 H30 |
| Date: | 2005–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:466-en&r=mac |
| By: | Adi Brender; Allan Drazen |
| Abstract: | Conventional wisdom is that good economic conditions or expansionary fiscal policy help incumbents get re-elected, but this has not been tested in a large cross-section of countries. We test these arguments in a sample of 74 countries over the period 1960-2003. We find no evidence that deficits help reelection in any group of countries -- developed and less developed, new and old democracies, countries with different government or electoral systems, and countries with different levels of democracy. In developed countries, especially old democracies, election-year deficits actually reduce the probability that a leader is reelected, with similar negative electoral effects of deficits in the earlier years of an incumbent's term in office. Higher growth rates of real GDP per-capita raise the probability of reelection only in the less developed countries and in new democracies, but voters are affected by growth over the leader's term in office rather than in the election year itself. Low inflation is rewarded by voters only in the developed countries. The effects we find are not only statistically significant, but also quite substantial quantitatively. We also suggest how the absence of a positive electoral effect of deficits can be consistent with the political deficit cycle found in new democracies. |
| JEL: | D72 E62 H62 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11862&r=mac |
| By: | Gauti B. Eggertsson |
| Abstract: | This paper details the microfoundations of the model presented in Staff Report no. 234, "Great Expectations and the End of the Depression." It defines the Markov perfect equilibrium formally in the nonlinear model, discusses in some detail the approximation method used and the order of accuracy of this approximation, and gives proofs of two propositions not proved in Staff Report no. 234. In addition, this paper states a proposition that shows the equivalence between the linear quadratic approximation in Staff Report no. 234 and a first order approximation to the exact nonlinear conditions of the government in the Markov perfect equilibrium defined here. |
| Keywords: | Econometric models ; Equilibrium (Economics) ; Rational expectations (Economic theory) ; Price levels |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:235&r=mac |
| By: | Robert J. Tetlow; Peter von zur Muehlen |
| Abstract: | In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-58&r=mac |
| By: | Karen E. Dynan; Douglas W. Elmendorf; Daniel E. Sichel |
| Abstract: | The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-54&r=mac |
| By: | Gianni La Cava (Reserve Bank of Australia) |
| Abstract: | This paper examines the factors that drive corporate investment in Australia using a panel of listed companies covering the period from 1990 to 2004. Real sales growth is found to be a significant determinant of corporate investment. The user cost of capital, which incorporates both debt and equity financing costs, also appears to be an important determinant. The paper also explores the effects of cash flow on investment, allowing for the possibility that the availability of internal funding could significantly affect the investment of financially constrained firms. Cash flow is found to affect investment, though the effects appear more complicated than previously reported in empirical research using Australian data. One innovation of this study is that it distinguishes financially distressed firms from financially constrained firms. The presence of financially distressed firms appears to bias downwards the sensitivity of investment to cash flow. Once separate account has been taken of firms experiencing financial distress, and in contrast to theory, cash flow is found to matter for the investment of both financially constrained and unconstrained firms. Interestingly, the estimated degree of sensitivity appears to be roughly the same for both groups. |
| Keywords: | investment; user cost of capital; panel data |
| JEL: | E22 E44 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2005-12&r=mac |
| By: | Gabor Vadas (Magyar Nemzeti Bank) |
| Abstract: | One of the most important aspects of consumer surveys is the computation of the consumer confidence index, which aims to provide accurate figures on the financial position and outlook of households as well as their intention concerning future consumption and savings. . Although the motion of the consumer confidence index is of interest to both policymakers and economic forecasters, it is not obvious whether the sub-questions included in the surveys and the published composite index derived from such questions can measure exactly what survey makers are curious to know. In this study we examine the properties and forecasting capability of the Hungarian consumer confidence index published by GKI Economic Research Plc. We argue that some questions are unable to measure what they theoretically should. However, others are useful in forecasting the consumption expenditure of Hungarian households. Our results suggest that, in addition to macro variables, the consumer confidence index contains information over and above macro variables. |
| Keywords: | consumer confidence index, consumption, forecast |
| JEL: | D1 E21 E27 |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0512006&r=mac |
| By: | Suparna Chakraborty (Baruch College, CUNY) |
| Abstract: | After decades of slow growth since Independence from the British Raj, Indian economy registered its own small miracle, when growth rate of GDP per capita surpassed the long term growth rate of many advanced economies. What caused this miracle? In this paper, we search for an answer in the neoclassical growth model. We use productivity as measured by Solow residual as our exogenous shock. Our idea is to quantitatively measure to what extent ‡fluctuations in productivity can account for observed ‡uctuations in macro economic aggregates in India. We find that exogenous fl‡uctuations in productivity can well account for fl‡uctuations in output during the boom periods of 1982 to 1988 and 1993 to 2002. However, fluctuations in productivity alone results in a much worse drop in ouput during 1988 to 1993 than observed in the economy. |
| Keywords: | technology, growth accounting, neoclassical growth, calibration, transition dynamics, India |
| JEL: | E |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512013&r=mac |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE 2005) and Smets and Wouters (JEEA 2003). We first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest rate feedback rules. We find that many of the prescriptions derived from the DSGE model are robust to model misspecification. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-26&r=mac |
| By: | Marco Arnone (Catholic University of Milan); Diego Scalise (Catholic University of Milan) |
| Abstract: | This paper builds on the Blanchard and Giavazzi (2003) model of deregulation. We concentrate on product market to construct a framework explaining in a more nuanced way the redistributive effects of deregulation between sectors and within the same sector, and possible oppositions to this policy by firms and workers. In a general equilibrium framework, we introduce two sectors(regulated and unregulated), heterogeneity in firms' productivity, and a…fixed cost of entry. In such a context effects of deregulation policies can be ambiguous depending on some parametric restrictions, and sometime counterproductive. As a result, deregulation policies are not always welfare improving: a deregulation action will succeed in increasing competition and reducing mark up when the economy is already partially deregulated (sufficiently high level of competition), but may achieve the opposite outcome when it is highly regulated. Additionally, we study the choice of the best policy instrument and the optimal sequencing in the use of instruments. |
| JEL: | E61 L43 |
| Date: | 2005–12–25 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512015&r=mac |
| By: | Paul Castillo (London School of Economics & Central bank of Peru); Diego Winkelried (St John�s College, University of Cambridge) |
| Abstract: | The most salient feature of financial dollarization, and the one that causes more concern to policymakers, is its persistence: even after successful macroeconomic stabilizations, dollarization ratios often remain high. In this paper we claim that this persistence is connected to the fact that the participants in the dollar deposit market are fairly heterogenous, and so is the way they form their optimal currency portfolio. We develop a simple model when agents differ in their ability to process information, which turns out to be enough to generate persistence upon aggregation. We find empirical support for this claim with data from three Latin American countries and Poland. |
| Keywords: | Dollarization, individual heterogeneity, persistence, aggregation |
| JEL: | C43 E50 F30 |
| Date: | 2005–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512014&r=mac |
| By: | Ilker Domac |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0306&r=mac |
| By: | John Cornwall (Department of Economics, Dalhousie University) |
| Abstract: | The main objective of the paper is to extend the basic model of Keynes's General Theory to explain medium and long-run economic performance in developed capitalist economies. In this way we seek to deepen our understanding of the macro economic processes that account for differences in macro performance over time and between economies at similar stages of their economic development. It naturally starts from a conviction that Keynes's original model of short-run economic fluctuations is the appropriate foundation for further macroeconomic research. In the process of extending the traditional Keynesian model we frequently compare our views with those of the mainstream macroeconomic theory. |
| Date: | 2005–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:dal:wparch:2005-02&r=mac |
| By: | Alberto Martin |
| Abstract: | We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:916&r=mac |
| By: | Huberto M. Ennis |
| Abstract: | I study the effects of inflation on the purchasing behavior of buyers in an economy where money is essential for certain transactions (as in Lagos and Wright, 2005). A long-standing intuition in this subject is that when inflation increases, agents try to spend their money holdings more speedily. The standard framework fails to capture this kind of effect (Lagos and Rocheteau, 2005). I propose a simple modification of the model in which trading of goods and rebalancing of money holdings happen less frequently. In such a framework, I show that higher inflation induces buyers to search for transactions more intensively and buy goods of worse quality. The modification proposed also sheds new light on the connection between the search-theoretic and the inventory-theoretic models of money. |
| Keywords: | Inflation (Finance) ; Money |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:05-10&r=mac |
| By: | Leslie McGranahan; Anna Paulson |
| Abstract: | We use data from the Consumer Expenditure Survey from 1980-2003 combined with item specific Consumer Price Index data to calculate monthly chain- weighted inflation measures for thirteen different demographic groups and for the overall urban population from 1981-2004. We find that the inflation experiences of the different groups are very highly correlated with and similar in magnitude to the inflation experiences of the overall urban population. Over the sample period, cumulative inflation for the groups ranged from 224% to 242% as compared to inflation for the overall population of 230%. The group with the largest deviation from overall inflation consists of households where the head or spouse is 65 or over. These households had cumulative inflation 5% higher than the average. We also find that the variability of inflation is higher for vulnerable populations and lower for advantaged populations. In particular, we calculate that the standard deviation of inflation declines with educational attainment. This is the result of higher expenditure shares among the less educated on necessities with more variable prices, including food and energy. However, this difference in variability is fairly modest. The inflation rate of the least educated is 3.0% more variable than inflation for all urban households. We conclude that inflation is principally an aggregate shock and that the CPI-U does a reasonable job of measuring the inflation experience of the demographic groups that we investigate. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-20&r=mac |
| By: | Alan Ahearne; Finn Kydland; Mark A. Wynne |
| Abstract: | We argue that Ireland experienced a great depression in the 1980s comparable in severity to the better known and more studied depression episodes of the interwar period. Using the business cycle accounting framework of Chari, Kehoe and McGrattan (2005), we examine the factors that lead to the depression and the subsequent recovery in the 1990s. We calculate efficiency, labor, investment and government wedges, and evaluate the contribution of each to the downturn and subsequent recovery. We find that the efficiency wedge on its own can account for a significant portion of the downturn, but predicts a stronger recovery in output. The labor wedge also helps account for what happened during the depression episode. We also find that the investment wedge played no role in the depression. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:05-10&r=mac |
| By: | Essama-Nssah, B. |
| Abstract: | Developing countries face a host of macroeconomic challenges in the desig n and implementation of development strategies and policies. The importance of the underlying poverty and distributional issues creates a need for relevant and reliable ways of tracking the social impact of shocks and policies. This paper describes and demonstrates the use of a stylized framework for simulating the poverty implications of the Dutch disease, a change in the terms of trade and budgetary policy. The basic approach is to embed a Lorenz model of the size distribution of economic welfare in a general equilibrium model of an open economy. It is observed that, while aggregate welfare and poverty effects may be negligible, the structural and distributional impacts tend to be significant. The latter drive the political economy of policymaking and point to the need for an analytical framework that accounts for both the structural richness of the economy and the heterogeneity of the stakeholders |
| Keywords: | Economic Theory & Research,Pro-Poor Growth and Inequality,Inequality,Rural Poverty Reduction,Consumption |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3788&r=mac |
| By: | Andrea Vaona; Stefano Schiavo |
| Abstract: | Two major findings of the empirical literature on the connec- tion between inflation and output growth is that their relationship is non linear and that there exists a threshold inflation level be- low which inflation has a positive impact on growth and above which inflation has a negative impact on growth. In this paper we adopt a semiparametric estimator and we show that the first finding holds true even dropping the specification assumptions typical of parametric models. We also show that a threshold level does exist and it is around 10% for developed countries and 15% for developing ones. However, below the threshold level inflation does not appear to have a positive impact on growth, rather it does not have any substantial effect on it. |
| Keywords: | Inflation, Growth |
| JEL: | E31 O49 C14 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0520&r=mac |
| By: | Russell Cooper; Hubert Kempf; Dan Peled |
| Abstract: | This paper studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bail out the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the U.S., the European Union and Argentina. |
| Keywords: | Taxation |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:05-07&r=mac |
| By: | Liuren Wu; Frank Xiaoling Zhang |
| Abstract: | This paper presents an internally consistent analysis of the economic determinants of the term structure of credit spreads across different credit rating classes and industry sectors. Our analysis proceeds in two steps. First, we extract three economic factors from 13 time series that capture three major dimensions of the economy: inflation pressure, real output growth, and financial market volatility. In the second step, we build a no-arbitrage model that links the dynamics and market prices of these fundamental sources of economic risks to the term structure of Treasury yields and corporate bond credit spreads. Via model estimation, we infer the market pricing of these economic factors and their impacts on the whole term structure of Treasury yields and credit spreads. ; Estimation shows that positive inflation shocks increase both Treasury yields and credit spreads across all maturities and credit rating classes. Positive shocks on the real output growth also increase the Treasury yields, more so at short maturities than at long maturities. The impacts on the credit spreads are positive for high credit rating classes, but become negative and increasingly so at lower credit rating classes. The financial market volatility factor has small positive impacts on the Treasury yield curve, but the impacts are strongly positive on the credit spreads, and increasingly so at longer maturities and lower credit rating classes. ; Finally, when we divide each rating class into two industry sectors: financial and corporate, we find that with in each rating class, the credit spreads in the financial sector are on average wider and more volatile than the spreads in the corporate sector. Estimation further shows that the term structure of credit spreads in the financial sector is more responsive to shocks in the economic factors. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-59&r=mac |
| By: | Shah, Anwar |
| Abstract: | A resurgence of recent interest in fiscal federalism has been a source of concern among macroeconomic stabilization experts. They argue that a decentralized fiscal system poses a threat to macroeconomic stability as it is incompatible with prudent monetary and fiscal management. The author addresses these concerns by taking a simple neo-institutional economics with an econometric analysis perspective. His analysis concludes that, contrary to a common misconception, fiscal decentralization is associated with improved fiscal performance and better function ing of internal common markets. Fiscal policy coordination represents an important challenge for federal systems. In this context, fiscal rules and institutions provide a useful framework but not necessarily a solution to this challenge. Fiscal rules binding on all levels can help sustain political commitment in countries having coalitions or fragmented regimes in power. Coordinating institutions help in the use of moral suasion to encourage a coordinated response. Industrial countries ' experiences also show that unilaterally imposed federal controls and constraints on subnational governments typically do not work. Instead, societal norms based on fiscal conservatism such as the Swiss referenda and political activism of the electorate play important roles. Ultimately capital markets and bond-rating agencies provide more effective discipline on fiscal policy. In this context, it is important not to backstop state and local debt and not to allow ownership of the banks by any level of government. Transparency of the budgetary process and institutions, accountability to the electorate, and general availability of comparative data encourages fiscal discipline. Fiscal decentralization poses significant challenges for macroeconomic management. These challenges require careful design of monetary and fiscal institutions to overcome adverse incentives associated with the " common property " resource management problems or with rent seeking behavior. Experiences of federal countries indicate significant learning and adaptation of fiscal systems to create incentives compatible with fair play and to overcome incomplete contracts. This explains why that decentralized fiscal systems appear to do better than centralized fiscal systems on most aspects of monetary and fiscal policy management and transparent and accountable governance. |
| Keywords: | Banks & Banking Reform,Economic Stabilization,Public Sector Economics & Finance,Economic Theory & Research,Financial Intermediation |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3786&r=mac |
| By: | Hakan Kara; Hande Kucuk Tuger |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0512&r=mac |
| By: | Yuksel Gormez; Christopher Houghton Budd |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0303&r=mac |
| By: | David C. Mills, Jr. |
| Abstract: | I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents' incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-55&r=mac |
| By: | Robert Shimer |
| Abstract: | This paper develops a dynamic model of mismatch. Workers and jobs are randomly assigned to labor markets. Each labor market clears at each instant but some labor markets have more workers than jobs, hence unemployment, and some have more jobs than workers, hence vacancies. As workers and jobs move between labor markets, some unemployed workers find vacant jobs and some employed workers lose or leave their job and become unemployed. The model is quantitatively consistent with the comovement of unemployment, job vacancies, and the rate at which unemployed workers find jobs over the business cycle. It can also address a variety of labor market phenomena, including duration dependence in the job finding probability and employer-to-employer transitions, and it helps explain the cyclical volatility of vacancies and unemployment. |
| JEL: | E24 J63 J64 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11888&r=mac |
| By: | Guillaume Rocheteau; Peter Rupert; Karl Shell; Randall Wright |
| Abstract: | We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0513&r=mac |
| By: | Michelle L. Barnes; Jose A. Lopez |
| Abstract: | The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the Capital Asset Pricing Model (CAPM) and compare them using econometric and materiality criteria. Our results suggest that the benchmark CAPM applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line-of-business concentration. Thus, a standard implementation of the benchmark CAPM provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business. |
| Keywords: | Capital assets pricing model ; Payment systems |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:05-2&r=mac |
| By: | Guillaume Vandenbroucke |
| Abstract: | During the first half of the 20th century the workweek in the United States declined, and the distribution of hours across wage deciles narrowed. At the same time, the distribution of wages narrowed too. The hypothesis proposed is (i) Households have access to an increasing number of leisure activities which enhance the value of non-market time; (ii) The rise of education accounts for the narrowing of the wage and hours distributions. Such mechanisms, embedded into a neoclassical growth model, quantitatively account for the observations. The rise in wages is the main contributor to the decline in hours. The decline in the price of leisure goods is second in importance, yet its contribution is large. |
| Keywords: | Hours worked, leisure, home production, technological progress |
| JEL: | E24 J22 O11 O33 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-40&r=mac |
| By: | Tony Cavoli (School of Economics, University of Adelaide); Ramkishen S. Rajan (School of Public Policy, George Mason University) |
| Abstract: | This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997-98. The simple analytical model reveals that persistent uncovered interest differentials and consequent capital inflows may be a consequence of complete sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows and the extent to which they are sterilized and uncovered interest rate differentials (UIDs) in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1 to 1997:5. |
| Keywords: | Capital flows, East Asia, interest rates, monetary sterilization, reserves |
| JEL: | F30 F32 F41 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0518&r=mac |
| By: | Yuksel Gormez; Forrest Capie |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0302&r=mac |
| By: | Ana Maria Herrera; Pinar Ozbay |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0501&r=mac |
| By: | Cihan Yalcin; Spiros Bougheas; Paul Mizen |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0407&r=mac |
| By: | Mark Aguiar; Erik Hurst |
| Abstract: | Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middleaged, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 percent. From this elasticity and observed shopping intensity, we impute the shopper’s opportunity cost of time, which peaks in middle age at a level roughly 40 percent higher than that of retirees. Using this measure of the price of time and observed time spent in home production, we estimate the parameters of a home production function. We find an elasticity of substitution between time and market goods in home production of close to 2. Finally, we use the estimated elasticities for shopping and home production to calibrate an augmented lifecycle consumption model. The augmented model predicts the observed empirical patterns quite well. Taken together, our results highlight the danger of interpreting lifecycle expenditure without acknowledging the changing demands on time and the available margins of substituting time for money. |
| Keywords: | Consumption (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:05-3&r=mac |
| By: | Leonardo Bartolini; Spence Hilton; Alessandro Prati |
| Abstract: | We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds-Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous research indicating that these two markets are segmented, showing them to be well integrated even at high (intraday) frequency. We document several patterns in the behavior of federal funds-Eurodollar spreads, including liquidity effects from trading volume on yield spreads' volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the (much larger) dollar money market as a whole. |
| Keywords: | Federal funds market (United States) ; Euro-dollar market ; Liquidity (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:227&r=mac |
| By: | Travis D. Nesmith |
| Abstract: | This paper analyzes the necessary and sufficient conditions for solving money-in-the-utility-function models when contemporaneous asset returns are uncertain. A unique solution to such models is shown to exist under certain measurability conditions. Stochastic Euler equations, whose existence is normally assumed in these models, are then formally derived. The regularity conditions are weak, and economically innocuous. The results apply to the broad range of discrete-time monetary and financial models that are special cases of the model used in this paper. The method is also applicable to other dynamic models that incorporate contemporaneous uncertainty. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-52&r=mac |
| By: | Refet S. Gürkaynak (Bilkent University); Justin Wolfers (University of Pennsylvania CEPR, NBER and IZA Bonn) |
| Abstract: | In September 2002, a new market in "Economic Derivatives" was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are similar to survey-based forecasts although the market-based measures somewhat more accurately predict financial market responses to surprises in data. These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and compare this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement). We also assess the accuracy of market-generated probability density forecasts. A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and that these markets are remarkably well calibrated. Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market. |
| Keywords: | economic derivatives, macroeconomic forecasting, uncertainty, disagreement, prediction markets, density forecasting |
| JEL: | C23 D21 J50 L13 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1899&r=mac |
| By: | Yongfu Huang |
| Abstract: | This paper studies the fundamental determinants of cross-country differences in finnancial development. Two prominent tools for addressing model uncertainty, Bayesian Model Averaging and Automatic Model Selection using PcGets, are jointly applied to investigate the financial development effects of a wide range of variables taken from various sources. The analysis suggests that the level of financial development in a country is determined by its institutional quality, macroeconomic policies, and geographic characteristics, as well as the level of income and cultural characteristics. |
| Keywords: | Financial development, Model uncertainty, Bayesian Model Averaging, PcGets |
| JEL: | O16 E44 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:05/580&r=mac |
| By: | Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein |
| Abstract: | Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become ‘expensive’ relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has ‘standard preferences’ and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the ‘volatility smirk’ can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. We identify a realistic calibration of the model that simultaneously matches the empirical properties of dividends, the equity premium, the prices of both at-the-money and deep out-of-the-money puts, and the level of the risk-free rate. A more challenging question (that to our knowledge has not been previously investigated) is whether one can explain within a standard preference framework the stark regime change in the volatility smirk that has maintained since the 1987 market crash. To this end, we extend the model to a Bayesian setting in which the agent updates her beliefs about the average jump size in the event of a jump. Note that such beliefs only update at crash dates, and hence can explain why the volatility smirk has not diminished over the last eighteen years. We find that the model can capture the shape of the implied volatility curve both pre- and post-crash while maintaining reasonable estimates for expected returns, price-dividend ratios, and risk-free rates. |
| JEL: | G21 G28 P51 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11861&r=mac |
| By: | Aristeidis Samitas (University of Aegean); Dimitris Kenourgios (University of Athens) |
| Abstract: | This paper investigates whether current and future domestic and international macroeconomic variables can explain long and short run stock returns in four “new” European countries (Poland, Czech Republic, Slovakia and Hungary). “Old” western European countries (U.K., France, Italy and Germany) are included in the empirical analysis, whilst USA is considered as a “foreign global influence”. Using the present value model of stock prices and a complete range of cointegration and causality tests, it is found that “new” European stock markets are not perfectly integrated with foreign financial markets, while domestic economic activity and the German factor are more influential on these stock markets than the American global factor. |
| Keywords: | Stock returns; macroeconomic factors; present value model; Central-Eastern (“New”) stock markets; “Old” European stock markets; USA. |
| JEL: | G15 |
| Date: | 2005–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512022&r=mac |
| By: | Giuseppe Bruno (Bank of Italy, Economic Research Department); Ernesto Maurizio Ordine (Bank of Italy, Isernia Branch); Antonio Scalia (Bank of Italy, Monetary and Exchange Rate Policy Department) |
| Keywords: | Bidding Behaviour, auctions, open market operations, money market, liquidity management Abstract: We perform a panel analysis of bidding in the Eurosystem auctions, using individual data that include the bidder code, size, nationality and membership in a banking group. We find that an increase in interest rate volatility lowers the probability of bidding, but induces bidders to shade rates less. Large bidders participate more regularly, while group bidders demand larger amounts, showing an aptitude to act as liquidity brokers. Our findings support the transnational bank hypothesis (Freixas- Holthausen, 2005): banks with a multinational profile use their informational advantage to arbitrage out the differences in interest rates across countries, thus fostering money market integration. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_562_05&r=mac |
| By: | Ilker Domac; Eray M. Yucel |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0307&r=mac |
| By: | Valerio Crispolti (Bank of Italy, Economic Research Department); Daniela Marconi (Bank of Italy, Economic Research Department) |
| Abstract: | In this paper we investigate two potential channels of international technology transfer towards developing countries: trade and foreign direct investments. We study the extent to which, through these channels, research and development expenditures (R&D) performed by advanced countries affect total factor productivity (TFP) levels in a panel of 45 developing countries over the period 1980-2000. Paying particular attention to the potential spillovers effects stemming from human capital, we estimate a TFP equation using the FMOLS technique. Our findings show that both channels induce substantial technology transfer across countries. In addition each developing country, for a given amount of foreign R&D, enjoys bigger spillovers the higher its educational level. |
| Keywords: | Technology transfer, Economic growth, Trade, FDI |
| JEL: | O47 F12 F21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_564_05&r=mac |
| By: | James Dow; Itay Goldstein; Alexander Guembel |
| Abstract: | A fundamental role of financial markets is to gather information on firms’ investment opportunities, and so help guide investment decisions in the real sector. We argue in this paper that firms’ overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred from producing information. We discuss several commitment devices firms can use to facilitate information production. We show that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2005fe18&r=mac |
| By: | Cagri Sarikaya; Fethi Ogunc; Dilara Ece; Hakan Kara; Umit Ozlale |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0503&r=mac |
| By: | Fatih Ozatay |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0509&r=mac |
| By: | Ilker Domac; Kyle Peters; Yevgeny Yuzefovichî |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0304&r=mac |
| By: | Badri Narayanan G (Indira Gandhi Institute of Development Research) |
| Abstract: | In recent years, employment has fallen in the organised textile sector despite an aggregate rise in output and capital. This paper analyses the role of various factors that influence employment using 3-digit classification of Indian textile industry from 1973-74 to 1997-98. Our results document that the fall in employment can be explained in terms of rise in wages, output shocks, lack of capital utilisation and trade restrictiveness pertaining to Multi Fibre Arrangement (MFA). Environmental regulations enhance employment in the sub-sectors that are most likely to be influenced by them. The results are robust to dierent measures of capital, its utilisation and disaggregation to statelevel. We also illustrate that in a post-MFA regime, employment in the sector is bound to increase owing to absence of trade restrictions and prospects of huge investment in general and in complying with environmental regulations, though the labour regulations might affect the magnitude of that increase. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2005-005&r=mac |
| By: | Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil); Walter Novaes (PUC/RJ) |
| Abstract: | Between 1999 and 2002, Brazil's Central Bank sold expressive amounts of dollar indexed debt and foreign exchange swaps. This paper shows that in periods of high volatility of the exchange rate, first semester of 1999 and second semester of 2002, the Central Bank of Brazil increased the foreign exchange hedge, but the financial institutions used this to reduce their foreign exchange exposure. In contrast, increases in foreign hedge during periods of low volatility of the exchange rate were transferred to the productive sector. |
| Keywords: | foreign exchange swaps, central bank interventions, foreign exchange risk |
| JEL: | E58 E52 F31 |
| Date: | 2005–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:ibr:dpaper:2005-13&r=mac |
| By: | Knill, April M. |
| Abstract: | The author examines the impact of foreign portfolio investment on the financial constraints of small firms. Using a dataset of over 195,000 firm-year observations across 53 countries, she examines the impact of foreign portfolio investment on capital issuance and firm growth across countries and firm characteristics, in particular size. After controlling fo r firm-, industry-, and country-level characteristics such as change in foreign exchange rate, share of market capitalization, relative interest rates, and investment climate, she finds that foreign portfolio investment helps to bridge the gap between the amounts of financing small firms require and that which they can access through the capital markets. Specifically, the author finds that foreign portfolio investment is associated with an increased ability to issue publicly traded securities for small firms in all nations, regardless of property rights development. Since small firms often rely heavily on bank lending, she also tests for potential increases in credit for small firms using the bank lending theory of monetary transmission. Results show significantly decreased short-term debt and increased long-term debt, supporting the contention that bank debt maturity to these firms has increased. This transition to longer-term debt could also be a result of the increased public debt securities these firms are more able to access. The overall increased access to capital only leads to value-enhancing growth at the firm level in nations with more developed property rights, underscoring the significance of a good financial system that minimizes information asymmetry as well as corruption, and enhances liquidity as well as property rights. |
| Keywords: | Investment and Investment Climate,Economic Theory & Research,Banks & Banking Reform,Financial Intermediation,Capital Flows |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3796&r=mac |
| By: | Cedric Tille |
| Abstract: | A growing body of research emphasizes the direct impact of exchange rate movements on the value of U.S. foreign assets. Because a substantial amount of U.S. assets are denominated in foreign currencies, a depreciation of the dollar leads to large capital gains. First, we present a detailed decomposition of the U.S. balance sheet, which exhibits substantial leverage in terms of currencies and across asset categories. The United States holds 50 percent of GDP in foreign-currency assets and is long in FDI (foreign direct investment) and equity positions and short in debt and banking positions. Then, we incorporate these features of international financial integration in a simple general equilibrium model and analyze how they affect the international transmission of monetary shocks. We find that financial integration is a central component of the model, with the valuation gains from an exchange rate depreciation leading to a welfare effect that is at least as large as that stemming from nominal rigidities alone but possibly much larger. We characterize how interdependence is affected by the composition of the portfolio across asset categories and how structural features of the model interact with financial integration. |
| Keywords: | Foreign exchange ; Macroeconomics ; International finance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:226&r=mac |
| By: | Michael D. Bordo; Christopher M. Meissner |
| Abstract: | What is the role of foreign currency debt in precipitating financial crises? In this paper we compare the 1880 to 1913 period to recent experience. We examine debt crises, currency crises, banking crises and the interrelation between these varieties of crises. We pay special attention to the role of hard currency debt, currency mismatches and debt intolerance. We find fairly robust evidence that high exposure to foreign currency debt does not necessarily lead to a high chance of having a debt crisis, currency crisis, or a banking crisis. A key finding is some countries do not suffer from great financial fragility despite high exposure to original sin. In the nineteenth century, the British offshoots and Scandinavia generally avoided severe financial meltdowns while today many advanced countries have high original sin but have had few financial crises. The common denominator in both periods is that currency mismatches matter. A strong reserve position or high exports relative to hard currency liabilities helps decrease the likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We discuss the robustness of these results and make some general comparisons based on this evidence from over 60 years of intense international capital market integration. |
| JEL: | N1 N2 E5 F3 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11897&r=mac |
| By: | Giancarlo Corsetti; Luca Dedola; Sylvain Leduc |
| Abstract: | This paper develops a quantitative, dynamic, open-economy model which endogenously generates high exchange rate volatility, whereas a low degree of pass-through stems from both nominal rigidities (in the form of local currency pricing) and price discrimination. We model real exchange rate volatility in response to real shocks by reconsidering and extending two approaches suggested by the quantitative literature (one by Backus Kehoe and Kydland [1995], the other by Chari, Kehoe and McGrattan [2003]), within a common framework with incomplete markets and segmented domestic economies. Our model accounts for a variable degree of ERPT over different horizons. In the short run, we find that a very small amount of nominal rigidities--consistent with the evidence in Bils and Klenow [2004--lowers the elasticity of import prices at border and consumer level to 27% and 13%, respectively. Still, exchange rate depreciation worsens the terms of trade -- in accord with the evidence stressed by Obstfeld and Rogoff [2000]. In the long run, exchange-rate pass-through coefficients are also below one, as a result of price discrimination. The latter is an implication of distribution services, which makes the goods demand elasticity market specific. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:845&r=mac |
| By: | Olcay Yucel Emir; Fatih Ozatay; Gulbin Sahinbeyoglu |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0508&r=mac |
| By: | Katarina Juselius (Department of Economics, University of Copenhagen); Javier Ordóñez (Jaume I University, Spain) |
| Abstract: | This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed some light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful, implying that the increase of wages in the tradable sector, and subsequently in the nontradable sector, should not be allowed to exceed the growth in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. A real appreciation, as a result of high growth rates during the catching-up period, is likely to be harmful for real growth and employment. |
| Keywords: | Balassa-Samuelson effect; nominal and real convergence; unemployment dynamics; purchasing power parity; cointegrated VAR |
| JEL: | C32 E24 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0529&r=mac |
| By: | Farley Grubb |
| Abstract: | The War for Independence left the National Government deeply in debt. The spoils from winning that war also gave it an empire of land. So, post-1783, was the National Government solvent? Was its net asset position, land assets minus debt liabilities, positive or negative? Evidence is gathered to answer this question by constructing a yearly time series of its net asset position, including time series of the subcomponents of that position, from 1784 through 1802. The answer to this question may help explain the constraints that determined why the National Debt was funded in the particular way that it was. The results from the data series constructed indicate that the National Government was solvent, had more than enough land assets to cover its debt liabilities, in this period but only if it maintained the default on the Continental Dollar (its non-interest-bearing debt). To do this and not ruin its creditworthiness it had to distinguish, legally and in the marketplace, between its interest-bearing and its non-interest-bearing debt. It did this, in part, by only paying interest and no principal on its debts and by curtailing direct swaps of land for debt. |
| JEL: | E62 F34 G18 H60 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11868&r=mac |
| By: | Jürgen Essletzbichler |
| Abstract: | This paper summarizes the theoretical arguments from evolutionary theory and ecological economics to put the trade-off between regional economic diversity and regional economic growth on stronger theoretical foundations. Hypotheses are tested using an empirical model that links regional economic diversity to stability and growth using data on 177 BEA areas of the continental United States during the period (1975-2002). |
| Keywords: | evolutionary economics, ecological economies, diversity, stbility, regional growth |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:egu:wpaper:0513&r=mac |
| By: | Hande Kucuk; Burc Tuger |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0402&r=mac |
| By: | Richard Dutu; Ed Nosal; Guillaume Rocheteau |
| Abstract: | This paper develops a model of currency circulation under asymmetric information. Agents are heterogeneous and trade in bilateral matches. Coins are intrinsically valuable and are available in two weights, light and heavy. We characterize the equilibrium under complete information and under imperfect information about the quality of coins. We deter- mine a set of conditions under which the two currencies circulate and are traded according to di¤erent terms of trade. We study how output, welfare, and the velocity of currency are a¤ected by the recognizability of coins. We show that society.s welfare increases as coins become more easily recognizable. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0512&r=mac |
| By: | Frode Brevik; Stefano d'Addona |
| Abstract: | Building on Veronesi (2000), we investigate the relationship between the quality of information on the state of the economy and the equity risk premium. We analyze the driving forces of the premium in a regime-switching setup where agents have Epstein-Zin preferences, finding a remarkably rich relation between the required risk premium and the quality of information available to investors. In particular, relaxing the strict relationship between investors' elasticity of intertemporal substitution (EIS) and their degree of risk aversion (RA) embedded in a power utility function enables us to demonstrate how the required equity premium is determined by their interplay. As conjectured in the existing literature, we demonstrate that investors with a high EIS will require less excess returns for holding stocks if they are provided with better information on the state of the economy. More interestingly, and not predicted in the literature, we find that this will also hold for investors with a moderate EIS if they are sufficiently risk averse. |
| JEL: | E32 E37 G10 G12 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2005:2005-24&r=mac |
| By: | El Hadji Fall (EUREQua) |
| Abstract: | This paper develops a simple model of optimal growth with renewable resource and endogenous discounting. Relaxing the time-additivity preference hypothesis allows to make endogenous the rate of time preference and to reconsider the dynamics of models with concave resource. The possibility of multiples equilibria with thresholds is examinated in this setup. It is also underlined the importance of initial conditions, particularly in terms of environmental resource, on the long run dynamic of economies. |
| Keywords: | Renewable resource, growth, endogenous discounting, multiple equilibria. |
| JEL: | D90 D63 C62 E6 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:v05084&r=mac |