nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒01‒24
169 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Debt Non-Neutrality, Policy Interactions, and Macroeconomic Stability By Ludger Linnemann; Andreas Schabert
  2. Optimal Monetary and Fiscal Policy in a Currency Union By Galí, Jordi; Monacelli, Tommaso
  3. Discretionary Policy, Multiple Equilibria, and Monetary Instruments By Schabert, Andreas
  4. Discretionary Policy, Multiple Equilibria, and Monetary Instruments By Andreas Schabert
  5. The Impact of Labor Markets on the Transmission of Monetary Policy in an Estimated DSGE Model By Kai Christoffel; Keith Kuester; Tobias Linzert
  6. Real Wage Rigidities and the New Keynesian Model By Blanchard, Olivier J; Galí, Jordi
  8. What Caused the Decline in U. S. Business Cycle Volatility? By Gordon, Robert J
  9. Pitfalls of monetary policy under incomplete information: imprecise indicators and real indeterminacy By Eugenio Gaiotti
  10. An Unobserved Components Model of the Monetary Transmission Mechanism in a Small Open Economy By Francis Vitek
  11. Endogenous Stabilization in Open Democracies By David kiefer
  12. What does the Bank of Japan do to East Asia? By Bartosz Mackowiak
  13. Information variables for monetary policy in a small structural model of the euro area By Francesco Lippi; Stefano Neri
  14. The 1975-78 Anti-Inflation Program in Retrospect By John Sargent
  15. Forecasting the central bank’s inflation objective is a good rule of thumb By Marie Diron; Benoît Mojon
  16. Distortionary taxation, debt, and the price level By Andreas Schabert; Leopold von Thadden
  17. Real Business Cycle Models: Past, Present and Future By Rebelo, Sérgio
  18. Deflationary Expansion: an Overshooting Perspective to the Recent Business Cycle in China By Gang Gong; Justin Yifu Lin
  19. Robust Optimal Policy in a Forward-Looking Model with Parameter and Shock Uncertainty By Marc Giannoni
  20. Towards a Theory of Firm Entry and Stabilization Policy By Bergin, Paul R; Corsetti, Giancarlo
  21. An Unobserved Components Model of the Monetary Transmission Mechanism in a Closed Economy By Francis Vitek
  22. Forecasting ECB monetary policy - accuracy is (still) a matter of geography By Helge Berger; Michael Ehrmann; Marcel Fratzscher
  23. Inflation convergence and divergence within the European Monetary Union By Fabio Busetti; Lorenzo Forni; Andrew Harvey; Fabrizio Venditti
  24. The Effects of Exogenous Oil Supply Shocks on Output and Inflation: Evidence from the G7 Countries By Kilian, Lutz
  25. The timing of central bank communication By Michael Ehrmann; Marcel Fratzscher
  26. The 'Sense and Nonsense of Maastricht' Revisited: What Have We Learnt About Stabilization In EMU? By Buiter, Willem H
  27. A better way to account for fiat money at the Central Bank By Thomas Colignatus
  28. Travelling Along the Third Way. A Swedish Model of Stabilisation, Equity and Growth By Erixon, Lennart
  29. International Transmission Effects of Monetary Policy Shocks: Can Asymmetric Price Setting Explain the Stylized Facts? By Caroline Schmidt
  30. Endogenous monetary policy with unobserved potential output By Alex Cukierman; Francesco Lippi
  31. Quantitative Analyse der Auswirkungen wirtschaftspolitischer Massnahmen auf die Einkommensverteilung und das «neue magische Viereck» in der Schweiz By Jochen Hartwig
  32. The 1920s and the 1990s in Mutual Reflection By Gordon, Robert J
  33. Measuring Asymmetric Stochastic Cycle Components in U.S. Macroeconomic Time Series By Siem Jan Koopman; Kai Ming Lee
  34. Disinflation, fiscal sustainability, and labor market adjustment in Turkey By Yeldan, Erinc; Verghis, Mathew; Jensen, Henning Tarp; Agenor, Pierre-Richard
  35. Attila Csajbók - András Rezessy : Hungary's euro zone entry date: what do the markets think and what if they change their minds? By Attila Csajbók; András Rezessy
  36. Has the Stability and Growth Pact stabilised? Evidence from a panel of 12 European countries and some implications for the reform of the Pact By Carlos José Fonseca Marinheiro
  37. The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period By João Victor Issler; Afonso Arinos de Mello Franco; Osmani Teixeira de Carvalho Guillén
  38. Financial structure and the transmission of monetary shocks: preliminary evidence for the Czech Republic, Hungary and Poland By Alessio Anzuini; Aviram Levy
  39. Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms By Eugenio Gaiotti; Alessandro Secchi
  40. The Elusive Costs and the Immaterial Gains of Fiscal Constraints By Canova, Fabio; Pappa, Evi
  41. Estimation and Evaluation of a Segmented Markets Monetary Model By John Landon-Lane; Filippo Occhino
  42. Cyclical asymmetry in fi scal policy, debt accumulation and the Treaty of Maastricht By Fabrizio Balassone; Maura Francese
  43. Monetary policy with heterogenous agents and credit constraints. By Yann Algan; Xavier Ragot
  44. Establishing Credibility: Evolving Perceptions of the European Central Bank By Linda S. Goldberg; Michael W. Klein
  45. Wavelet variance and correlation analyses of output in G7 countries By Marco Gallegati; Mauro Gallegati
  46. Micro Evidence on the Adjustment of Sticky-Price Goods: It's How Often, Not How Much By Götte, Lorenz; Minsch, Rudolf; Tyran, Jean-Robert
  47. Estimating the Effect of Hungarian Monetary Policy within a Structural VAR Framework By Balázs Vonnák
  48. Time-Varying Pass-Through from Import Prices to Consumer Prices: Evidence from an Event Study with Real-Time Data By Amstad, Marlene; Fischer, Andreas M
  49. The real effect of inflation with credit constraints. By Xavier Ragot
  50. Forecasting Core Inflation in Canada: Should We Forecast the Aggregate or the Components? By Frédérick Demers; Annie De Champlain
  51. Optimal Fiscal Policy over the Business Cycle By Filippo Occhino
  52. Global versus Country-Specific Shocks and International Business Cycles By Michel Normandin; Bruno Powo Fosso
  53. Monetary policy and stock prices: theory and evidence By Stefano Neri
  54. Interest rate rules, inflation and the Taylor principle: An analytical exploration. By Jean-Pascal Bénassy
  55. How much of the Macroeconomic Variation in Eastern Europe is Attributable to External Shocks? By Bartosz Mackowiak
  56. Policy Volatility, Institutions and Economic Growth By Fatás, Antonio; Mihov, Ilian
  57. Is time ripe for a currency union in emerging East Asia? The role of monetary stabilisation By Marcelo Sánchez
  58. Turning-point indicators from business surveys: real-time detection for the euro area and its major member countries By Alberto Baffigi; Antonio Bassanetti
  59. Fiscal policy, monopolistic competition, and finite lives By Heijdra,Ben J.; Ligthart,Jenny E.
  60. Inflation Dynamics and the New Keynesian Phillips Curve: An Identification-Robust Econometric Analysis By Jean-Marie Dufour; Lynda Khalaf; Maral Kichian
  61. Exploring the international linkages of the euro area - a global VAR analysis By Stéphane Dées; Filippo di Mauro; M. Hashem Pesaran; L. Vanessa Smith
  62. Debt stabilizing fiscal rules By Philippe Michel; Leopold von Thadden; Jean-Pierre Vidal
  63. Inattentive Producers By Reis, Ricardo
  64. Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together? By Paul de Grauwe; Francesco Paolo Mongelli
  65. International Capital Flows and U.S. Interest Rates By Francis E. Warnock; Veronica C. Warnock
  66. Stock Markets and Business Cycle Comovement in Germany Before World War I: Evidence from Spectral Analysis By Ritschl, Albrecht; Uebele, Martin
  67. Evaluating the Performance of the Search and Matching Model By Yashiv, Eran
  68. Assessing the Sources of Changes in the Volatility of Real Growth By Stephen G. Cecchetti; Alfonso Flores-Lagunes; Stefan Krause
  69. Evaluating the Performance of the Search and Matching Model By Eran Yashiv
  70. Estimating the immediate impact of monetary policy shocks on the exchange rate and other asset prices in Hungary By András Rezessy
  71. Business cycle non-linearities and productivity shocks By Paolo Piselli
  72. Why Have Aggregate Skilled Hours Become So Cyclical Since the Mid-1980's? By CASTRO, Rui; COEN-PIRANI, Daniele
  73. Pareto Efficiency vs. the Ad Hoc Standard Monetary Objective An Analysis of Inflation Targeting By David Eagle
  74. Liquidity effects in non Ricardian economies. By Jean-Pascal Bénassy
  75. Potential Output Estimations for Hungary: A Survey of Different Approaches By Szilárd Benk; Zoltán M. Jakab; Gábor Vadas
  76. Macroeconomic Performance and Inequality: Brazil 1983-94 By Manoel F. Meyer Bittencourt
  77. Sustainability of Portuguese Fiscal Policy in Historical Perspective By Carlos José Fonseca Marinheiro
  78. Driving factors behind O/N interbank interest rates – the Hungarian experiences By Szilárd Erhart
  79. Partial Current Information and Signal Extraction in a Rational Expectations Macroeconomic Model: A Computational Solution. By Lungu, Laurian; Matthews, Kent; Minford, Patrick
  80. Evolution of trade patterns in the new EU member states By Jerome Henry; Pablo Hernandez de Cos; Sandro Momigliano
  81. The Distribution of Money Balances and the Non-Neutrality of Money By Aleksander Berentsen; Gabriele Camera; Christopher Waller
  82. On Prosperity and Posterity: The Need for Fiscal Discipline in a Monetary Union By Carsten Detken; Vítor Gaspar; Bernhard Winkler
  83. Il credito commerciale: problemi e teorie By Massimo Omiccioli
  84. Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy By Nicoletta Batini; Alejandro Justiniano; Paul Levine; Joseph Pearlman
  85. Credit chains and the propagation of financial distress By Frederic Boissay
  86. The pricing behaviour of Italian firms: new survey evidence on price stickiness By Silvia Fabiani; Angela Gattulli; Roberto Sabbatini
  87. Characterizing macroeconomic shocks in the CEECs By Oscar Bajo-Rubio; Carmen Díaz-Roldán
  88. Macroeconomics Uncertainty and Banks' Lending Decisions: The Case of Italy By Mario Quagliariello
  89. Real versus financial frictions to capital investment By Nihal Bayraktar; Plutarchos Sakellaris; Philip Vermeulen
  90. VARMA versus VAR for Macroeconomic Forecasting By George Athanasopoulos; Farshid Vahid
  91. Financial Repression, Tax Evasion and Long-Run Monetary and Fiscal Policy Trade-Off in an Endogenous Growth Model with Transaction Costs By Patrick Villieu; Alexandru Minea
  92. L’introduzione dell’euro e la divergenza tra infl azione rilevata e percepita By Paolo Del Giovane; Roberto Sabbatini
  93. Towards European monetary integration - the evolution of currency risk premium as a measure for monetary convergence prior to the implementation of currency unions By Fernando González; Simo Launonen
  94. Money, Interest Rate and Stock Prices: New Evidence from Singapore and The United States By Wong Keung-Wing; Habibullah Khan; Jun Du
  95. The Different Extent of Privatisation Proceeds in EU Countries: A Preliminary Explanation Using a Public Choice Approach By Ansgar Belke; Frank Baumgartner; Friedrich Schneider; Ralph Setzer
  96. Do ECB's Statements Steer Short-Term and Long-Term Interest Rates in the Euro Zone ? By Marie Musard-Gies
  97. A disaggregated framework for the analysis of structural developments in public finances By Jana Kremer; Claudia Rodrigues Braz; Teunis Brosens; Geert Langenus; Sandro Momigliano; Mikko Spolander
  98. Getting real about inequality : evidence from Brazil, Colombia, Mexico, and Peru By Serven, Luis; Lopez, Humberto; Goni, Edwin
  99. Can Risk Aversion in Firms Reduce Unemployment Persistence? By Ali Choudhary; Paul Levine
  100. State of the Bangladesh Economy in FY06: Early Signals and Immediate Outlook By Debapriya Bhattacharya
  101. Studying the Labor Market with the Job Openings and Labor Turnover Survey By R. Jason Faberman
  102. Real Business Cycle Theory and the Great Depression : The Abandonment of the Absentionist Viewpoint By Michel, DE VROEY; Luca, PENSIEROSO
  103. Does trade credit substitute for bank credit? By Guido De Blasio
  104. Rebalancing Growth in China: A Three-Handed Approach By Blanchard, Olivier J; Giavazzi, Francesco
  105. Intangible Capital and Economic Growth By Carol A. Corrado; Charles R. Hulten; Daniel E. Sichel
  106. On the Stability of the Wealth Effect By Fernando Alexandre; Pedro Bação; Vasco J. Gabriel
  107. How the Eurosystem’s Treatment of Collateral in its Open Market Operations Weakens Fiscal Discipline in the Eurozone (and what to do about it) By Buiter, Willem H; Sibert, Anne
  108. Heterogeneous Labor, Labor Market Frictions and Employment Effects of Technological Change. Theory and Empirical Evidence for the U.S. and Europe By Jens Rubart
  109. Bank interest rate pass-through in the euro area: a cross country comparison By Christoffer Kok Sorensen; Thomas Werner
  110. A Panel Cointegration Analysis of the Relation between Private and Government Consumption By Eriksson , Åsa
  111. Monetary union with voluntary participation By William Fuchs; Francesco Lippi
  112. Optimal Fiscal Policy When Migration is Feasible By Filippo Occhino
  113. From Full Employment to the Natural Rate of Unemployment: A Survey By Thierry Warin
  114. Information, habits, and consumption behavior - evidence from micro data By Mika Kuismanen; Luigi Pistaferri
  115. The Impact of Central Bank FX Interventions on Currency Components By Michel Beine; Charles S. Bos; Sebastian Laurent
  116. Consensus Formation in Monetary Policy Committees By Christopher Spencer
  117. The fiscal theory of the price level puzzle: A non Ricardian view. By Jean-Pascal Bénassy
  118. CEE Banking Sector Co-Movement: Contagion or Interdependence? By Terhi Jokipii; Brian Lucey
  119. A cost-of-living dynamic price index, with an application to indexing retirement accounts By Reis, Ricardo
  120. Do capital gains affect consumption? Estimates of wealth effects from Italian households’ behavior By Luigi Guiso; Monica Paiella; Ignazio Visco
  121. The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models By Bjorn A. Hauksson
  122. Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA By Matthews, Kent; Minford, Patrick; Naraidoo, Ruthira
  123. Verzerrungen von Konsumentenpreisindizes und ihr Einfluss auf das «reale» Wirtschaftswachstum – dargestellt am Beispiel der USA By Jochen Hartwig; Bernd Schips
  124. Social mobility and endogenous cycles in redistribution By Francesco Zollino
  125. Exchange Rate Smoothing in Hungary By Péter Karádi
  126. Ireland in EMU: more shocks, less insulation? By Patrick Honohan; Anthony Leddin
  127. Centralization of wage bargaining and the unemployment rate: revisiting the hump-shape hypothesis By Lorenzo Forni
  128. Does wealth affect consumption? Evidence for Italy By Monica Paiella
  129. Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk By Refet Gurkaynak; Justin Wolfers
  130. Are emerging market currency crises predictable? A test By Tuomas A. Peltonen
  131. On misusing National Accounts data for governance purposes By Jochen Hartwig
  132. Existence of competitive equilibrium in a single-sector growth model with heterogeneous agents and endogenous leisure. By Cuong Le Van; Manh Hung Nguyen
  133. Aggregate business fixed investment By Björn A. Hauksson
  134. Explaining the Aggregate Price Level with Keynes’s Principle of Effective Demand By Jochen Hartwig
  135. Stock market returns and economic activity: evidence from wavelet analysis By Marco Gallegati
  136. Economic and VAR Shocks: What Can Go Wrong? By Jesús Fernández-Villaverde; Juan F. Rubio-Ramíre; Thomas J. Sargent
  137. The Impact of Monetary Union on EU-15 Sovereign Debt Yield Spreads By Marta Gómez-Puig
  138. Keynes versus the Post Keynesians on the Principle of Effective Demand By Jochen Hartwig
  139. Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income By Dew-Becker, Ian; Gordon, Robert J
  140. A Tax-Based Estimate of the Elasticity of Intertemporal Substitution By Jonathan Gruber
  141. Wage Formation and the Relation between Real Wages and Unemployment in Sweden By Eriksson, Åsa
  142. Population Aging in Canada: Software for Exploring the Implications for the Labour Force and the Productive Capacity of the Economy By Frank T. Denton; Christine H. Feaver; Byron G. Spencer
  143. Macroeconometric Modelling with a Global Perspective By M. Hashem Pesaran; Ron Smith
  144. Business Employment Dynamics: Tabulations by Employer Size By Shail J. Butani; Richard L. Clayton; Vinod Kapani; James R. Spletzer; David M. Talan; George S. Werking Jr.
  145. Pricing behavior and the comovement of productivity and labor: evidence from firm-level data By Domenico J. Marchetti; Francesco Nucci
  147. Macroeconomics and Forest Sustainability in the Developing World By Sedjo, Roger
  148. Messprobleme bei der Ermittlung des Wachstums der Arbeitsproduktivität – dargestellt anhand eines Vergleichs der Schweiz mit den USA By Jochen Hartwig
  149. Money Pumps in the Market By Ariel Rubinstein; Rani Spiegler
  150. Assessing debt sustainability in emerging market economies using stochastic simulation methods By Karam, Philippe; Hostland, Dou g
  151. The Japan–Australia Partnership in the Era of the East Asian Community: Can they Advance Together? By Takashi Terada
  152. Sobre reforma do Pacto de Estabilidade e Crescimento: Flexibilizar para cumprir? By Miguel Lebre de Freitas
  153. Growth in euro area labour quality By Guido Schwerdt; Jarkko Turunen
  154. Wirtschaftliche Auswirkungen von Lohnerhöhungen in der Detailhandelsbranche By Daniel Lampart; Andres Frick
  155. Equilibrium dynamics in an aggregative model of capital accumulation with heterogeneous agents and elastic labor. By Cuong Le Van; Manh Hung Nguyen; Yiannis Vailakis
  156. Cost Heterogeneity and the Potential Savings from Market-Based Policies By Stavins, Robert; Newell, Richard
  157. Gli effetti della riforma fiscale: nuova IRE e potenziali scenari a confronto By Maurizio CIASCHINI; Claudio SOCCI; Enzo VALENTINI
  158. C-CAPM Without Ex Post Data By Söderlind, Paul
  159. Explaining the Diversity of Industry Investment Responses to Uncertainty Using Long Run Panel Survey Data By Ciaran Driver; Paul Temple; Giovanni Urga
  160. Inter-Regional Redistribution in Sweden: A Survey of the Literature and a Call for Further Enquiry By Almenberg, Johan
  161. Overconfidence, Subjective Perception and Pricing Behavior By Pierpaolo Benigno; Anastasios Karantounias
  162. Total Factor Productivity and the Mongolian Transition By Antonio G. Chessa; Marije C. Schouwstra
  163. The Long Run Impact of Bombing Vietnam By Edward Miguel; Gerard Roland
  164. Quality Adjustment for Spatially-Delineated Public Goods: Theory and Application to Cost-of-Living Indices in Los Angeles By Banzhaf, H. Spencer
  165. Trade balance and terms of trade in U.S.: a time-scale decomposition analysis By Luca De Benedictis; Marco Gallegati
  166. Distribution Risk and Equity Returns By Jean-Pierre DANTHINE; John B. DONALDSON; Paolo SICONOLFI
  167. A Wavelet Analysis of MENA Stock Markets By Marco Gallegati
  168. Explaining the Variation in Empirical Estimates of Tax Elasticities of Foreign Direct Investment By Ruud A. de Mooij; Sjef Ederveen
  169. Regional Policy from a Supra-Regional Perspective By Ugo FRATESI

  1. By: Ludger Linnemann (University of Cologne); Andreas Schabert (Faculty of Economics and Econometrics, University of Amsterdam)
    Abstract: We study the consequences of non-neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky. Assuming transaction services of government bonds, Ricardian equivalence fails because public debt has a negative impact on its marginal rate of return and thus on private savings. Stability of equilibrium sequences requires a stationary evolution of real public debt, which steers inflation expectations and rules out endogenous fluctuations. Under anti-inflationary monetary policy regimes, macroeconomic fluctuations tend to decrease with the share of tax financing, which justifies tight debt constraints. In particular, a balanced budget policy stabilizes the economy under cost-push shocks, such that output and inflation variances can be lower than in a corresponding case where debt is neutral.
    Keywords: Government debt; fiscal and monetary policy rules; stabilization policy; equilibrium uniqueness
    JEL: E32 E63 E52
  2. By: Galí, Jordi; Monacelli, Tommaso
    Abstract: We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyse 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.
    Keywords: countercyclical policy; inflation differentials; monetary union; sticky prices
    JEL: E52 E62 F41
    Date: 2005–12
  3. By: Schabert, Andreas
    Abstract: This paper examines monetary policy implementation in a sticky price model. The central bank’s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money transfers. These equilibria can be associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation tends to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank’s plan can uniquely be implemented in a history dependent way by money transfers, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity.
    Keywords: equilibrium indeterminacy; history dependence; Monetary policy implementation; money growth policy; optimal discretionary policy
    JEL: E32 E51 E52
    Date: 2005–12
  4. By: Andreas Schabert (Faculty of Economics and Econometrics, Universiteit van Amsterdam)
    Abstract: This paper examines monetary policy implementation in a sticky price model. The central bank's plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money injections. These equilibria are associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation is found to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank's plan can uniquely be implemented in a history dependent way by money injections, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity.
    Keywords: Monetary policy implementation; optimal discretionary policy; history dependence; equilibrium indeterminacy; money growth policy
    JEL: E52 E51 E32
    Date: 2005–10–21
  5. By: Kai Christoffel (European Central Bank); Keith Kuester (Goethe University, Frankfurt); Tobias Linzert (European Central Bank and IZA Bonn)
    Abstract: Real wages are a key determinant of marginal costs. The latter themselves are a driving force of inflation. We ask how wages and labor market shocks feed into the inflation process. We model search and matching frictions in the labour market in an otherwise standard New- Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the mid 70s to present. In our framework, we find that labor market structure is important for the evolution of the business cycle, and for monetary policy in particular. Yet labor market shocks are not important information for the conduct of stabilization policy.
    Keywords: labor market, wage rigidity, bargaining, Bayesian estimation
    JEL: E52 E58 J64
    Date: 2005–12
  6. By: Blanchard, Olivier J; Galí, Jordi
    Abstract: Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of non-trivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation-unemployment relation found in the data.
    Keywords: inflation inertia; inflation targeting; monetary policy; oil price shocks
    JEL: E32 E50
    Date: 2005–12
  7. By: Martin Menner
    Abstract: Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. We extend the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyze the monetary propagation mechanism and contrast the model .s implications with US business cycle stylized facts. With empirically plausible adjustment costs the model features a persistent propagation of monetary shocks and is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment. We find that monetary policy shocks are unlikely to be an important source of business cycle fluctuations but discover another dimension where money matters: the very frictions that make money essential shape also the responses of variables to real shocks.
    Date: 2005–10
  8. By: Gordon, Robert J
    Abstract: This paper investigates the sources of the widely noticed reduction in the volatility of American business cycles since the mid 1980s. Our analysis of reduced volatility emphasizes the sharp decline in the standard deviation of changes in real GDP, of the output gap, and of the inflation rate. The primary results of the paper are based on a small three-equation macro model that includes equations for the inflation rate, the nominal Federal Funds rate, and the change in the output gap. The development and analysis of the model goes beyond the previous literature in two directions. First, instead of quantifying the role of shocks-in-general, it decomposes the effect of shocks between a specific set of supply shock variables in the model’s inflation equation, and the error term in the output gap equation that is interpreted as representing 'IS' shifts or 'demand shocks'. It concludes that the reduced variance of shocks was the dominant source of reduced business-cycle volatility. Supply shocks accounted for 80 percent of the volatility of inflation before 1984 and demand shocks the remainder. The high level of output volatility before 1984 is accounted for roughly two-thirds by the output errors (demand shocks) and the remainder by supply shocks. The output errors are tied to the paper’s initial decomposition of the demand side of the economy, which concludes that three sectors residential and inventory investment and Federal government spending, account for 50 percent in the reduction in the average standard deviation of real GDP when the 1950-83 and 1984-2004 intervals are compared. The second innovation in this paper is to reinterpret the role of changes in Fed monetary policy. Previous research on Taylor rule reaction functions identifies a shift after 1979 in the Volcker era toward inflation fighting with no concern about output, and then a shift in the Greenspan era to a combination of inflation fighting along with strong countercyclical responses to positive or negative output gaps. Our results accept this characterization of the Volcker era but find that previous estimates of Greenspan-era reaction functions are plagued by positive serial correlation. Once a correction for serial correlation is applied, the Greenspan-era reaction function looks almost identical to the pre-1979 Burns reaction function! Thus the issue in assessing monetary policy regimes comes down to Volcker vs. non-Volcker. Full model simulations show that the Volcker reaction function, if applied throughout the 1965-2004 period, would have delivered substantially higher pre-1984 output volatility than the Burns-Greenspan alternative with the corresponding benefit of a permanent reduction in the inflation rate by fully five percentage points per annum. Compared to the succession of three reaction functions actually in effect, application of the Volcker reaction function prior to 1979 would have deepened the 1975 recession but made the 1982 recession milder, since by then inflation would have been partly conquered. The paper concludes by disputing the view that better monetary policies had any role in the reduced volatility of the business cycle - the Greenspan policies did not need to fight against inflation because there was no inflation, thanks to the reversal of supply shocks from an adverse to a beneficial direction, and thanks to a reduction in the size of the output errors or 'IS' shifts.
    Keywords: Demand shocks; government spending; Inventory change; monetary policy; Phillips curve; residential construction; supply shocks
    JEL: E0 E21 E22 E31 E50
    Date: 2005–12
  9. By: Eugenio Gaiotti (Banca d'Italia)
    Abstract: The paper examines the link between the precision of the available monetary policy indicators and the determinacy of equilibrium in a forward-looking macroeconomic model with partial information and an optimizing central bank. When the information on endogenous variables is not precise enough, the central bank acts too timidly; there is a possibility of self-fulfilling fluctuations in inflation and output. It is argued that, unless they are very precise, projections of output or inflation over the relevant horizon cannot be the only criterion for determining monetary policy actions. Rules which include a sufficient reaction to nominal variables may be necessary to supply an anchor for prices, even when the policymaker intends to consider all relevant information. Appointing a “conservative” central banker may also induce a less timid response to signs of inflation or deflation, even when their interpretation is difficult. In contrast, relying too much on measures of exogenous variables, such as potential output, can be counter-productive, because it could induce an attitude that is not responsive enough to inflation or deflation.
    Keywords: Monetary policy, information variables, incomplete information
    JEL: E52 E58
    Date: 2004–03
  10. By: Francis Vitek (University of British Columbia)
    Abstract: This paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a small open economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts.
    Keywords: Monetary policy analysis; Inflation targeting; Small open economy; Unobserved components model; Indicators of inflationary pressure; Monetary transmission mechanism; Forecast performance evaluation
    JEL: E52 F41 F47
    Date: 2005–12–27
  11. By: David kiefer
    Abstract: In the new Keynesian theory of endogenous stabilization governments react quickly to lean against the macroeconomic wind. In open economies policymaking is complicated by concern about the trade balance. We extend the political business cycle model by assuming that governments have objectives with respect to macroeconomic performance with respect three indicators (growth, inflation and the net exports), but are constrained by an augmented Phillips curve and the inverse relation between net exports and domestic output. As long as adaptive expectations replace rational ones, econometric tests support this characterization of the political-economic equilibrium, and suggest how it is conditioned by political ideology and central bank independence.
    Keywords: Political business cycle, open economy, adaptive expectations
    JEL: E52 E63 F41
    Date: 2006–01
  12. By: Bartosz Mackowiak
    Abstract: In recent policy debates some have argued that expansionary monetary policy in Japan can increase real output in Japan and in Japan´s neighbors, while others have warned that it is a beggar-thy-neighbor policy. In this paper we estimate structural vector autoregressions to assess the effects of Japanese monetary policy shocks. We find that the effects of Japanese monetary policy shocks on macroeconomic variation in East Asia have been modest and difficult to reconcile with the beggar-thy-neighbor view. We estimate that the Asian crisis was preceded by expansionary monetary policy shocks in Japan, but we fail to find support for the view that these shocks contributed to the crisis.
    Keywords: Structural vector autoregression, sign restrictions, monetary policy shocks, spillover effects, beggar-thy-neighbor, Japan, East Asia
    JEL: F41 E3 E52
    Date: 2005–12
  13. By: Francesco Lippi (Banca d'Italia); Stefano Neri (Banca d'Italia)
    Abstract: This paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour cost indicator, which contains information on potential output that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy show that considerable importance is attributed to interest-rate smoothing, greater than to output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than suggested by typical parametrizations of New-Keynesian models.
    Keywords: monetary policy, Kalman filter, inflation, output gap
    JEL: E5
    Date: 2004–07
  14. By: John Sargent
    Abstract: The author provides an overview of the 1975–78 Anti-Inflation Program (AIP), in a background document prepared for a seminar organized by the Bank of Canada to mark the AIP's 30th anniversary. After reviewing Canada's experience with, and policy response to, inflation in the decade preceding the introduction of the AIP, the author sets out the elements of the AIP's monetary and fiscal policy, and prices and incomes controls. He then compares the program's inflation objectives with the actual course of inflation and aggregate demand during, and immediately after, the AIP. Drawing on existing analyses of the program's monetary and fiscal policy and controls elements, the author discusses why the program's specific targets and general objectives were not met. He concludes, with the benefit of hindsight, that-while external factors contributed to the failure to meet objectives-monetary and fiscal policy were not suc h as to give the AIP a strong chance of fully succeeding. The program's controls element has generally been assessed more favourably, although certain specifics of the controls design can be questioned. The author briefly considers parallels with recent retrospective considerations of monetary and fiscal policy over the same period in the United States. He also attempts to draw some general lessons from the AIP experience and, more generally, from the 1970s experience. Given that the AIP was an early attempt at a form of inflation targeting, these include lessons that may be relevant to current policy with respect to inflation.
    Keywords: Credibility; Fiscal policy; Inflation and prices; Inflation targets; Monetary policy framework; Monetary policy implementation
    JEL: E31 E52 E63 E64 E65
    Date: 2005
  15. By: Marie Diron (Brevan Howard Asset Management); Benoît Mojon (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper first shows that the forecast error incurred when assuming that future inflation will be equal to the inflation target announced by the central bank is typically at least as small and often smaller than forecast errors of model-based and published inflation forecasts. It then shows that there are substantial benefits in having rule-of-thumb agents who simply trust that the central bank will deliver its pre-announced inflation objective.
    Keywords: Monetary policy, credibility, inflation targeting, inflation forecast.
    JEL: E5
    Date: 2005–12
  16. By: Andreas Schabert (University of Amsterdam, Department of Economics, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: This paper considers the nominal and real determinacy of equilibria under an exogenously specified path of interest rates in an economy in which taxation is either lump-sum or distortionary. Under lump-sum taxation, we confirm the well-known finding that equilibria display nominal (in)determinacy if the primary surplus is exogenous (endogenous). Under distortionary taxation, this classification is no longer relevant. Nominal determinacy is always ensured since distortionary taxes establish a link between the allocation and the sequences of taxes and debt and, hence, the price level, regardless of whether the primary surplus is exogenous or endogenous. Distortionary taxation, however, increases the scope for real indeterminacy. As a general feature, the real (in)determinacy of equilibria depends on the interaction of fiscal and monetary policies, i.e. on the sequences of taxes, debt, and interest rates. If, for example, fiscal policy runs a balanced budget the central bank should set the nominal interest rate in a way consistent with long-run deflation in order to ensure real determinacy. This finding is different from a balanced-budget policy under lump-sum taxes where no such qualification with respect to the interest rate needs to be made.
    Keywords: Monetary and fiscal policy, distortionary taxes, price level determination, balanced budget policy.
    JEL: E31 E63
    Date: 2006–01
  17. By: Rebelo, Sérgio
    Abstract: In this paper I review the contribution of real business cycles models to our understanding of economic fluctuations, and discuss open issues in business cycle research.
    Keywords: business cycles; productivity; recessions
    JEL: E1 E3
    Date: 2005–12
  18. By: Gang Gong (School of Economics and Managment, Tsinghua University); Justin Yifu Lin (China Center of Economic Research, Peking University)
    Abstract: Deflationary expansion has puzzled economists both in and outside China. We study this business cycles phenomenon within a model of discrete time dynamics. We find that deflationary expansion could be possible if driven by an overshooting in investment and if the state of the economy maintains high rate of growth. This expression is consistent with the recent time series variation of some key macroeconomic variables. The high steady state of growth could be explained by the current insttutional environment of China.
    Keywords: Deflationary Expansion, Overshooting , Business Cycle, China, growth, discrete time dynamics
    JEL: C62 E32 E50 P24
    Date: 2005–11
  19. By: Marc Giannoni
    Abstract: This paper characterizes a robust optimal policy rule in a simple forward-looking model, when the policymaker faces uncertainty about model parameters and shock processes. We show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty. Thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations. However uncertainty may amplify the degree of "super-inertia" required by optimal monetary policy. We finally discuss the sensitivity of the results to alternative assumptions.
    JEL: C61 D81 E42 E52
    Date: 2006–01
  20. By: Bergin, Paul R; Corsetti, Giancarlo
    Abstract: This paper explores the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.
    Keywords: market dynamics; monetary policy; productivity
    JEL: E22 E52 L16
    Date: 2005–12
  21. By: Francis Vitek (University of British Columbia)
    Abstract: This paper develops and estimates an unobserved components model for purposes of monetary policy analysis in a closed economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a closed economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts.
    Keywords: Monetary policy analysis; Unobserved components model; Indicators of inflationary pressure; Monetary transmission mechanism; Forecast performance evaluation
    JEL: E37 E52
    Date: 2005–12–27
  22. By: Helge Berger (Free University Berlin, Department of Economics, Boltzmannstr. 20, 12161 Berlin, Germany & CESifo.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank,Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: Monetary policy in the euro area is conducted within a multi-country, multicultural, and multi-lingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the ECB? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent.
    Keywords: monetary policy; ECB; forecast; geography; history; heterogeneity; Taylor rule; learning; transmission; survey data; communication.
    JEL: E52 E58 G14
    Date: 2006–01
  23. By: Fabio Busetti (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy); Lorenzo Forni (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy); Andrew Harvey (University of Cambridge, Department of Applied Economics, Sidgwick Avenue, Cambridge CB3 9DE, United Kingdom); Fabrizio Venditti (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy)
    Abstract: We study the convergence properties of inflation rates among the countries of the European Monetary Union over the period 1980-2004. Given the Maastricht agreements and the adoption of the single currency, the sample can be naturally split into two parts, before and after the birth of the euro. We study convergence in the first sub-sample by means of univariate and multivariate unit root tests on inflation differentials, arguing that the power of the tests is considerably increased if the Dickey-Fuller regressions are run without an intercept term. Overall, we are able to accept the convergence hypothesis over the period 1980-1997. We then investigate whether the second sub-sample is characterized by stable inflation rates across the European countries. Using stationarity tests on inflation differentials, we find evidence of diverging behaviour. In particular, we can statistically detect two separate clusters, or convergence clubs: a lower inflation group that comprises Germany, France, Belgium, Austria, Finland and a higher inflation one with Spain, Netherlands, Greece, Portugal and Ireland. Italy appears to form a cluster of its own, standing in between the other two.
    Keywords: Absolute Convergence, Inflation Differentials, Stability, Unit Root Tests.
    JEL: C12 C22 C32 E31
    Date: 2006–01
  24. By: Kilian, Lutz
    Abstract: Using state-of-the-art methods, this study estimates and compares the effects of exogenous shocks to global oil production on seven major industrialized economies. The main findings are: (1) There is a fair degree of similarity in the real growth responses. An exogenous oil supply disruption typically causes a temporary reduction in real GDP growth that is concentrated in the second year after the shock. (2) Inflation responses are more varied. The median CPI inflation response peaks after three to four quarters. There is clear evidence that exogenous oil supply disruptions need not generate sustained consumer price inflation. Evidence of sustained inflation (as in the case of Germany) therefore must reflect a favorable institutional environment. (3) The evidence of stagflationary responses is strongest for Germany, Japan and Canada, whereas for the US, the UK and Italy there is little or no evidence of stagflationary responses to oil supply shocks. (4) As measured by cumulative inflation and real growth responses, some countries such as Italy, France and Japan have fared well when faced with exogenous oil supply disruptions, whereas others such as Germany have not. (5) A counterfactual historical exercise suggests that the evolution of CPI inflation in the G7 countries would have been similar overall to the actual path even in the absence of exogenous shocks to oil production, consistent with a monetary explanation of inflation. There is no evidence that the 1973/74 and 2002/03 oil supply shocks had a substantial impact on real growth in any G7 country, but for some G7 countries the 1978/79, 1980, and 1990/91 shocks had some impact.
    Keywords: counterfactual; dynamic effects; exogeneity; inflation; oil supply; real GDP growth and stagflation
    JEL: E31 E32
    Date: 2005–12
  25. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper explores whether there are systematic patterns as to when members of the decision-making committees of the Federal Reserve, the Bank of England and the European Central Bank communicate with the public, and under what circumstances such communication has the ability to move financial markets. The findings suggest that communication is generally seen as a tool to prepare markets for upcoming decisions, as it becomes more intense before committee meetings, and particularly so prior to interest rate changes. At the same time, markets react more strongly to communication prior to policy changes. Other instances where communication becomes more intense, or where financial markets become more responsive are also identified; even though these are more specific to the individual central banks, they are consistent with differences in the central banks’ monetary policy strategies and communication policies.
    Keywords: Communication; central bank; monetary policy; timing.
    JEL: E43 E52 E58 G12
    Date: 2005–12
  26. By: Buiter, Willem H
    Abstract: This paper revisits the paper 'Excessive deficits: sense and nonsense in the Treaty of Maastricht', co-authored with Giancarlo Corsetti and Nouriel Roubini and published during 2003 in Economic Policy. The first section of the paper addresses the problem that the exchange rate and inflation criteria for EMU membership contained in the Treaty of Maastricht may well prevent two or more of the new EU members that now participate in ERM2 from becoming full EMU members as soon as they have spent the required two years in the ERM purgatory. This despite the fact that there are no fundamental economic obstacles to their successful participation in monetary union. I propose that, if an inflation convergence condition for EMU membership is deemed necessary, it be formulated in terms of the maximum permitted excess of a candidate country's inflation rate of traded goods prices over the average rate of price inflation of traded goods prices in the Eurozone. Revisiting the Excessive Deficit Procedure turns out to be attending a wake. The reforms of the Pact adopted in March 2005 effectively killed it. I argue that the death of this Pact is not a tragedy. While individual nation states are well-advised to adopt intelligent rules for their public debt and deficits to ensure fiscal-financial sustainability of the state and to enhance macroeconomic stability, the case for the supranational imposition, monitoring and enforcement of public debt and deficit rules is weak, except in one respect - one not addressed by the Pact. Effective demand spillovers in a world with nominal price and wage rigidities can lead to first-order welfare losses. The Pact, in its old or its new incarnation, does not address these issues as it prescribes or proscribes behaviour one country at a time, without reference to economic policy actions and other economic developments in the rest of the EMU or EU. The Pact is not designed to ensure coordinated fiscal policy in the E(M)U, let alone coordinated monetary and fiscal policy in the E(M)U. There is nothing in it that ensures that the E(M)U-wide fiscal stance and fiscal-monetary mix is appropriate given economic developments in the rest of the world and given the monetary-fiscal policy mix in the other key national and regional economies. From the perspective of the Principle of Subsidiarity, the Pact was therefore subject to both a Type 1 and a Type 2 error. It addressed (albeit ineffectively) matters of national fiscal sustainability and national macroeconomic stabilisation that ought to have been handled at the national level. It failed to address the appropriate Europe-wide fiscal stance and monetary-fiscal policy mix for which a supranational approach might have been desirable.
    Keywords: excessive deficit procedure; fiscal sustainability; macroeonomic stabilization; Stability and Growth Pact
    JEL: E52 E63 F33 F41 F42
    Date: 2005–12
  27. By: Thomas Colignatus (Thomas Cool Consultancy & Econometrics)
    Abstract: Proper monetary accounting rules are: (1) Central Banks should conform to the practice of the US Federal Reserve to distinguish its Balance Sheet from its Statement of Conditions. (2) Fiat money should not appear as a liability in a Balance Sheet. (3) The Central Bank should not record more government bonds than required for open market operations. Surplus bonds should be accounted as being void (on loan from the government who should destroy them). If these rules are not observed, a wrong measure of government debt arises, distorting the requirements for policy making.
    Keywords: Fiat Money, Money, Central Bank, Government Debt, Seigniorage, Inflation Tax, Gold Standard, Accounting
    JEL: A00
    Date: 2005–12–31
  28. By: Erixon, Lennart (Dept. of Economics, Stockholm University)
    Abstract: The Swedish economic policy to combine full employment and equity with price stability and economic growth was developed by two trade union economists shortly after World War II. Through the use of extensive employment policy measures, a tight fiscal policy and a wage policy of solidarity, the Rehn-Meidner model represents a unique third way between Keynesianism and monetarism. This essay analyses the application and performance of the Rehn-Meidner model in Sweden. Although never consistently applied, it is possible to distinguish a golden age for the model from the late 1950s to the early 1970s. In the 1970s and the 1980s, governments abandoned the restrictive macroeconomic means of the model and were thus unable to combine low rates of unemployment with low inflation and high economic growth. Since the early 1990s, Sweden has not met the requirement of full employment in the Rehn-Meidner model. Recent declarations by the EU to prioritise full employment once again but without giving up the objectives of price stability and growth legitimise a renewed <p> interest in the model.
    Keywords: Swedish model; Rehn-Meidner model; third way; labour market policy; solidarity wage policy; productivity growth; fiscal policy; unemployment; inflation
    JEL: E24 E31 E62 J23 J31 J62 O23
    Date: 2005–12–01
  29. By: Caroline Schmidt (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: How does an unexpected domestic monetary expansion a.ect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these «stylized facts» if we allow for international asymmetries in the price-setting behavior of firms. If U.S. firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad.
    Keywords: Local-currency pricing, Producer-currency pricing, New Open Economy Macroeconomics, International transmission effects of monetary policy
    JEL: F41 E52
    Date: 2005–03
  30. By: Alex Cukierman (Tel-Aviv University and Center, Tilburg University); Francesco Lippi (Banca d'Italia)
    Abstract: This paper characterizes endogenous monetary policy when policymakers are uncertain about the extent to which movements in output and inflation are due to changes in potential output or to cyclical demand and cost shocks. We refer to this informational limitation as the “information problem” (IP). Main results of the paper are: 1. Policy is likely to be excessively loose (restrictive) for some time when there is a large decrease (increase) in potential output in comparison with a full information benchmark. 2. Errors in forecasting potential output and the output gap are generally serially correlated. These ndings provide a partial explanation for the inflation of the seventies and the price stability of the nineties. 3. A quantitative assessment, based on an empirical model of the US economy developed by Rudebusch and Svensson (1999), indicates that during and following periods of large changes in potential output the IP significantly affects the dynamics of inflation and output. 4. The increase in the Fed’s conservativeness between the seventies and the nineties, and a more realistic appreciation of the uncertainties surrounding potential output in the second period, imply that the IP problem had a stronger impact in the seventies than in the nineties.
    Keywords: monetary policy, potential output, filtering, inflation, output gap
    JEL: E5
    Date: 2004–06
  31. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: Macroeconometric policy simulation models allow for an analysis, and, above all, for a quantification of the effects different economic policies have on the various variables that represent the economy. Despite the seminal ‘Lucas critique’ levelled against them, these models are still widely used, especially within policy-making institutions such as, e.g., central banks. In this paper, a model constructed by the author for the Swiss economy is used to explain, and to quantify the impact of fiscal, monetary, wage and social policies on the functional and personal distribution of income on the one hand, and on the four main objectives of contemporary economic policy on the other. These are: a high GDP growth, low inflation and unemployment, and a low or zero public deficit (the latter replacing the original fourth objective codified, e.g., in the German Stability Act of 1967, which was external balance). Our approach will enable us to answer questions like: Which income group suffers most from a hike in the short term interest rate?, Should a large public spending project better be financed by increasing the VAT rate or the income tax rate?, and How much could the aggregate social security contribution rate be lowered if the formula used for calculating the alignment of retirement pensions was changed?
    Keywords: Income distribution, ‘magic square’, macroeconometric model, policy simulation, Switzerland
    JEL: C51 C53 E17 E52 E61 E62 E63 E64 E65
    Date: 2004–08
  32. By: Gordon, Robert J
    Abstract: This paper develops a new analysis of the U. S. economy in the 1920s that is illuminated by contrasts with the 1990s, and it also re examines the causes of the Great Depression. In both the 1920s and the 1990s the acceleration of productivity growth linked to the delayed effects of previously invented 'general purpose technologies' stimulated an increase in fixed investment that became excessive and proved to be unsustainable, while the productivity acceleration helps to account for low inflation in both decades. The uncanny parallel of the stock market boom, bubble, and collapse in 1995-2001 as in 1924-1930, reminds us that business cycles emerge from the complex interplay of multiple factors, not just one. Common elements between the two decades are overshadowed by differences, including the much larger share of agricultural output in the 1920s, the weakness of farm prices throughout the decade, and the role of collapsing farm prices in the pervasive post-1929 downward shift in aggregate demand. Another partly related difference was a high volatility of inventory accumulation that reflected the larger share of agriculture and manufacturing in the economy of the 1920s. Failures of public policy in the 1920s included the absence of deposit insurance, the unit-banking regulations that prevented the diversification of financial risk across regions, and the low margin requirements that exacerbated swings in stock market prices. Further, the 1920s witnessed the advent of protectionism and the sharp curtailment of immigration. The stability of the American economy after the 2000-01 collapse of investment and the stock market proves that good public policy matters, going beyond the narrowly defined operations of monetary and fiscal policy. Such highly diverse policies as banking regulation, deposit insurance, margin rules, reduction of tariffs, and loose restrictions on immigration all combine to make today's American economy more stable and less fragile than in the 1920s.
    Keywords: bubble; consumption; Great Depression; investment; overinvestment; Productivity; Stock Market
    JEL: E0 E21 E22 E32 N00 N12
    Date: 2005–12
  33. By: Siem Jan Koopman (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam); Kai Ming Lee (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
    Abstract: To gain insights in the current status of the economy, macroeconomic time series are often decomposed into trend, cycle and irregular components. This can be done by nonparametric band-pass filtering methods in the frequency domain or by model-based decompositions based on autoregressive moving average models or unobserved components time series models. In this paper we consider the latter and extend the model to allow for asymmetric cycles. In theoretical and empirical studies, the asymmetry of cyclical behavior is often discussed and considered for series such as unemployment and gross domestic product (GDP). The number of attempts to model asymmetric cycles is limited and it is regarded as intricate and nonstandard. In this paper we show that a limited modification of the standard cycle component leads to a flexible device for asymmetric cycles. The presence of asymmetry can be tested using classical likelihood based test statistics. The trend-cycle de! composition model is applied to three key U.S. macroeconomic time series. It is found that cyclical asymmetry is a prominent salient feature in the U.S. economy.
    Keywords: Asymmetric business cycles; Unobserved Components; Nonlinear state space models; Monte Carlo likelihood; Importance sampling
    JEL: C13 C22 E32
    Date: 2005–08–15
  34. By: Yeldan, Erinc; Verghis, Mathew; Jensen, Henning Tarp; Agenor, Pierre-Richard
    Abstract: This paper analyzes the effects of monetary policy and fiscal adjustment on output and unemployment in Turkey. The model on which the analysis is based accounts for rural-urban migration, a large urban informal sector, flexible exchange rates, a dollarized banking system, and interactions between default risk on government liabilities, credibility, and inflation expectations. The short- and long-run effects of a rise in official interest rates and tax increases are analyzed. The results highlight the importance of accounting for the link between default risk and credibility in understanding the real and financial effects of macroeconomic adjustment.
    Keywords: Labor Markets,Economic Theory & Research,Banks & Banking Reform,Public Sector Economics & Finance,Economic Stabilization
    Date: 2006–01–01
  35. By: Attila Csajbók (Magyar Nemzeti Bank); András Rezessy (Magyar Nemzeti Bank)
    Abstract: This article investigates the potential impact of a shift in market expectations about a country’s eurozone entry date on long-term yields and the spot exchange rate in a simple uncovered interest parity (UIP) framework. The results suggest that the size of the reactions depend on how far the entry date is postponed, how far current inflation is from the Maastricht-satisfying level, and whether the credibility of the central bank’s target inflation path is sensitive to changes in the expected entry date. In the empirical part, the authors apply the framework for Hungary and draw some policy conclusions for the timing of ERM II entry.
    Keywords: monetary policy, monetary union, expectations, euro zone entry, uncovered interest parity.
    JEL: E42 E52 F33 F42
    Date: 2005
  36. By: Carlos José Fonseca Marinheiro (Universidade de Coimbra and GEMF)
    Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP is being accused of being too rigid and of forcing pro-cyclicality in fiscal policy. We test the impact of the SGP rules on the cyclical properties of fiscal policy for a panel of 12 European countries. We conclude that contrary to what might have been expected the euro fiscal rules have reinforced the counter-cyclicality of fiscal policy. However, the results also show that the SGP is not being applied symmetrically over the cycle, leading to insufficient fiscal consolidation during economic upswings. This explains the recent difficulties of Portugal, Germany and France in complying with SGP requirements. Based on these conclusions we argue for the creation of independent national technical committees that would define an appropriate deficit target on an annual basis.
    Keywords: Fiscal policy, stabilisation, EMU, Stability and Growth Pact reform.
    JEL: E62 H62
    Date: 2005–12
  37. By: João Victor Issler (Graduate School of Economics - EPGE, Getulio Vargas Foundation); Afonso Arinos de Mello Franco (Graduate School of Economics - EPGE, Getulio Vargas Foundation); Osmani Teixeira de Carvalho Guillén (IBMEC Business School - Rio de Janeiro and Banco Central do Brasil)
    Abstract: Lucas (1987) has shown the surprising result that the welfare cost of business cycles is quite small. Using standard assumptions on preferences and a fully-fledged econometric model we computed the welfare costs of macroeconomic uncertainty for the post-WWII era using the multivariate Beveridge-Nelson decomposition for trends and cycles, which considers not only business-cycle uncertainty but also uncertainty from the stochastic trend in consumption. The post-WWII period is relatively quiet, with the welfare costs of uncertainty being about 0 .9% of per-capita consumption. Although changing the decomposition method changed substantially initial results, the welfare cost of uncertainty is qualitatively small in the post-WWII era - about $175.00 a year per-capita in the U.S. We also computed the marginal welfare cost of macroeconomic uncertainty using this same technique. It is about twice as large as the welfare cost - $350.00 a year per-capita.
    Keywords: welfare costs of business cycles, Beveridge-Nelson decomposition
    JEL: E32 C32 C53
    Date: 2006–01–02
  38. By: Alessio Anzuini (Banca d'Italia); Aviram Levy (Banca d'Italia)
    Abstract: The paper analyses the financial structure of the private sector in the Czech Republic, Hungary and Poland and assesses its implications for the monetary transmission mechanism. The financial accounts of these countries provide a picture of a private sector which is predictably financially less mature than the EU average: the corporate sector relies significantly on non-market financial liabilities (such as trade credits and non-traded shares) and bears a substantial exchange rate risk; the household sector is less sophisticated both in terms of financial assets, whose composition is tilted towards bank deposits, and liabilities, the volume of which is still negligible. VAR system estimates conducted separately on each acceding country suggest that, despite the inferior financial development of these countries, the co-movement of macroeconomic variables conditional on a monetary policy shock is similar across countries and not dissimilar to what is found in the more advanced economies.
    Keywords: Financial structure, identified VAR, monetary policy shock, price puzzle.
    JEL: C30 E44 E52 F41
    Date: 2004–07
  39. By: Eugenio Gaiotti (Banca d'Italia); Alessandro Secchi (Banca d'Italia)
    Abstract: The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases (the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.
    Keywords: monetary transmission, cost channel, working capital
    JEL: E52 E31
    Date: 2004–12
  40. By: Canova, Fabio; Pappa, Evi
    Abstract: We study whether and how fiscal restrictions alter the business cycle features macrovariables for a sample of 48 US states. We also examine the 'typical' transmission properties of fiscal disturbances and the implied fiscal rules of states with different fiscal restrictions. Fiscal constraints are characterized with a number of indicators. There are similarities in second moments of macrovariables and in the transmission properties of fiscal shocks across states with different fiscal constraints. The cyclical response of expenditure differs in size and sometimes in sign, but heterogeneity within groups makes point estimates statistically insignificant. Creative budget accounting is responsible for the pattern. Implications for the design of fiscal rules and the reform of the Stability and Growth Pact are discussed.
    Keywords: business cycles; excessive debt; fiscal restrictions; US states
    JEL: E3 E5 H7
    Date: 2005–12
  41. By: John Landon-Lane (Rutgers University); Filippo Occhino (Rutgers University)
    Abstract: This paper develops a heterogeneous agents segmented markets model with endogenous production and a monetary authority that follows a Taylor-type interest rate rule. The model is estimated using Markov chain Monte Carlo techniques and is evaluated as a framework suitable for empirical monetary analysis. We find that the segmented markets friction significantly improves the statistical out-of-sample prediction performance of the model, and generates delayed and realistic impulse response functions to monetary policy shocks. In addition, we find that the estimates of the Taylor rule are stable across the pre-1979 and post-1982 periods in our sample, while the volatilities of the structural shocks faced in the pre-1979 period are substantially higher than in the post-1982 period.
    Keywords: Segmented Markets; Markov chain Monte Carlo; Taylor rule; Monetary policy shocks;
    JEL: C11 C52 E52
    Date: 2005–06–13
  42. By: Fabrizio Balassone (Banca d'Italia); Maura Francese (Banca d'Italia)
    Abstract: In this paper we present a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors. Applying this framework to a sample of 16 OECD countries, we find evidence of significant asymmetry in the reaction of fiscal policy to positive and negative cyclical conditions, with budgetary balances deteriorating in contractions and not improving in expansions. This asymmetry appears to have contributed significantly to debt accumulation. We find no evidence that EU fiscal rules have reduced the ability of governments to conduct stabilisation policy between 1992 and 2000.
    Keywords: stabilization, fiscal policy, government debt, fiscal rules
    JEL: E62 H6
    Date: 2004–12
  43. By: Yann Algan; Xavier Ragot
    Abstract: This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households.
    Date: 2005
  44. By: Linda S. Goldberg; Michael W. Klein
    Abstract: The credibility of a central bank’s anti-inflation stance, a key determinant of its success, may reflect institutional structure or, more dynamically, the history of policy decisions. The first years of the European Central Bank (ECB) provide a natural experiment for considering whether, and how, central bank credibility evolves. In this paper, we present a model demonstrating how the high-frequency response of asset prices to news reflects market perceptions of the anti-inflation stance of a central bank. Empirical tests of this model on high frequency data, regressing both the change in the slope of the German yield curve and the change in the euro/dollar exchange rate on the surprise component of price news, suggest significant instability in the market’s perception of the policy stance of the ECB during its first five years of operation. Estimated smoothed paths of the coefficients linking news to asset prices show that these coefficients change with policies undertaken by the ECB. In contrast, there is no evidence of parameter instability for the response of the slope of the United States yield curve to price news during this period, suggesting no comparable evolution in the market perceptions of the commitment to inflation fighting by the Federal Reserve.
    Keywords: Central Banking, European Central Bank, Federal Reserve, inflation, exchange rate, credibility, yield curve
    JEL: F3 E5 E6
    Date: 2005–12–15
  45. By: Marco Gallegati (DEA, Università Politecnica delle Marche, Italy); Mauro Gallegati (DEA, Università Politecnica delle Marche, Italy)
    Abstract: In this paper we apply the wavelets methodology to the analysis of the industrial production index of the G-7 countries between 1961:1-2005:5. The analysis is performed using a multi-scaling approach which decomposes the variance of the industrial production index and the covariance between the industrial production indices of two countries on a scale-by-scale basis through a non-orthogonal variant of the classical discrete wavelet transform, i.e. the maximal overlap discrete wavelet transform (MODWT). Wavelet variance analysis does not provide evidence of an international patterns of moderation in output volatility, as the moderation of output volatility occurred after the early eighties is confirmed only for the Euro-area countries plus Japan. Moreover, wavelet correlation analysis different correlation patterns at the different time-scale components and, that, with some exceptions, the linkages between countries are mostly significant only at the business cycle time scales, with the strongest relationships between the Anglo countries (particularly Canada and US), France and Germany, Japan and the Euro- zone countries, with Italy displaying the closest links with France.
    Keywords: time-scale decomposition analysis, wavelets, business cycle fluctuations
    JEL: E31 E32
    Date: 2005–12–27
  46. By: Götte, Lorenz; Minsch, Rudolf; Tyran, Jean-Robert
    Abstract: We use a unique panel data set to analyse price setting in restaurants in Switzerland 1977-93, for items known to have sticky prices. The macroeconomic environment during this time period allows us to examine how firms adjust prices at low (0%) and fairly high (7%) inflation. Our results indicate that firms strongly react to inflation in the timing of their price adjustment: hazard of price changes is increasing with time and becomes steeper at higher inflation rates. However, we find little evidence that the amount by which they change the price responds to the inflation rate.
    Keywords: inflation; nominal inertia; sticky prices
    JEL: B49 D21 E30 E31
    Date: 2005–12
  47. By: Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: A standard approach in measuring the effect of monetary policy on output and prices is to estimate a VAR model, characterise somehow the monetary policy shock and then plot impulse responses. In this paper I attempt to do this exercise with Hungarian data. I compare two identification approaches. One of them involves the ‘sign restrictions on impulse responses’ strategy applied recently by several authors. I also propose another approach, namely, imposing restrictions on implied shock history. My argument is that in certain cases, especially in the case of the Hungarian economy, the latter identification scheme may be more credible. In order to obtain robust results I use two datasets. To tackle possible structural breaks I make alternative estimates on a shorter sample as well. The main conclusions are the followings: (1) although the two identification approaches produced very similar results, imposing restrictions on history may help to dampen counterintuitive reaction of prices; (2) after 1995 a typical unanticipated monetary policy contraction (a roughly 25 basis points rate hike) resulted in an immediate 1 per cent appreciation of the nominal exchange rate (3) followed by a 0.3% lower output and 0.1-0.15% lower consumer prices; (4) the impact on prices is slower than on output; it reaches its bottom 4-6 years after the shock, resembling the intuitive choreography of sticky-price models; (5) using additional observations prior to 1995 makes identification more difficult indicating the presence of a marked structural break.
    Keywords: structural VAR, monetary transmission mechanism, identification, sign restriction, monetary policy shocks
    JEL: C11 C32 E52
    Date: 2005
  48. By: Amstad, Marlene; Fischer, Andreas M
    Abstract: This paper analyzes the pass-through from import prices to CPI inflation in real time. Our strategy follows an event-study approach, which compares inflation forecasts before and after import price releases. Inflation forecasts are modelled 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 behaviour of updated forecasts is consistent with a time-varying pass-through. The robustness of this latter result is underpinned in two ways: an alternative CPI measure that excludes price components subject to administered pricing and as well as panels capturing different levels of information breadth. Besides implying a time-varying pass-through, our empirical findings cast doubt on a prominent role of sticky prices for the low pass-through findings.
    Keywords: common factors; daily panels; pass-through
    JEL: E52 E58
    Date: 2005–12
  49. By: Xavier Ragot
    Abstract: The article presents a new channel through which inflation affects real variables. In a simple liquidity constraint model where money enters the utility function of infinitely living households, it is proven that credit constraints create heterogeneity in money demand. Because of this, long run inflation affects the real interest rate and wealth inequalities even when there is no redistributive effect, no distorting fiscal policy, and no substitution between leisure and working time. This result is proven for a general class of utility and production functions. In a simple calibration exercise, an increase in inflation from 2% to 3% increases the capital stock by 0.12% and raises wealth inequality.
    Date: 2005
  50. By: Frédérick Demers; Annie De Champlain
    Abstract: The authors investigate the behaviour of core inflation in Canada to analyze three key issues: (i) homogeneity in the response of various price indexes to demand or real exchange rate shocks relative to the response of aggregate core inflation; (ii) whether using disaggregate data helps to improve the forecast of core inflation; and (iii) whether using monthly data helps to improve quarterly forecasts. The authors show that the response of inflation to output-gap or real exchange rate shocks varies considerably across the components, although the average response remains low; they also show that the average response has decreased over time. To forecast monthly inflation, the use of disaggregate data is a significant improvement over the use of aggregate data. However, the improvements in forecasts of quarterly rates of inflation are only minor. Overall, it remains difficult to properly model and forecast monthly core inflation in Canada.
    Keywords: Econometric and statistical methods; Inflation and prices
    JEL: E37 C5
    Date: 2005
  51. By: Filippo Occhino (Rutgers University)
    Abstract: How should taxes, government expenditures, the primary and fiscal surpluses and government liabilities be set over the business cycle? We assume that the government chooses expenditures and taxes to maximize the utility of a representative household, utility is increasing in government expenditures, only distortionary labor income taxes are available, and the cycle is driven by exogenous technology shocks. We first consider the commitment case, and characterize the Ramsey equilibrium. In the case that the utility function is constant elasticity of substitution between private and public consumption and separable between the composite consumption good and leisure, taxes, government expenditures and the primary surplus should all be constant positive fractions of production, and both government liabilities and the fiscal surplus should be positively correlated with production. Then, we relax the commitment assumption, and we show how to determine numerically whether the Ramsey equilibrium can be sustained by the threat to revert to a Markov perfect equilibrium. We find that, for realistic values of the preferences discount factor, the Ramsey equilibrium is sustainable.
    Keywords: Fiscal Policy; Commitment; Ramsey Equilibrium; Time-consistency; Sustainable equilibrium;
    JEL: E62
    Date: 2005–05–05
  52. By: Michel Normandin; Bruno Powo Fosso
    Abstract: This paper documents the relative importance of global and country-specific shocks for international business cycles. For this purpose, we rely on a symmetric two-country, dynamic, general-equilibrium model with costly, incomplete, international financial markets. We also relate exogenous technologies and government expenditures to unobservable common and idiosynchratic components, and apply a Kalman filter to extract the associated global and country-specific shocks. We show that the baseline parametrization of the model, including all shocks, closely matches the cyclical fluctuations of key macroeconomic variables for the United States and a non-US aggregate over the post-1975 period. We then experiment alternative parametrizations, isolating the effects of each shock, and find that country-specific technology shocks constitute a prime determinant of international business cycles. Also, global technology shocks have marginal contributions, whereas global and country-specific government-expenditure shocks have negligible effects on cyclical fluctuations.
    Keywords: General Equilibrium, Kalman Filter, Symmetric Economies
    JEL: F32 F41 C32
    Date: 2006
  53. By: Stefano Neri (Banca d'Italia)
    Abstract: The objective of this paper is to evaluate the effects of monetary policy shocks on stock market indices in the G-7 countries and Spain using the methodology of structural VARs. A model is estimated for each country and the effects of monetary policy shocks are evaluated by means of impulse responses. A contractionary shock has a negative and temporary effect on stock market indices. There is evidence of a significant cross-country heterogeneity in the persistence, magnitude and timing of the responses. A limited participation model with households trading in stocks is set up and the responses of stock prices to a monetary policy shock under different rules are evaluated. The model is able to account for the empirical response of stock prices to monetary policy shocks under different policy rules.
    Keywords: monetary policy; stock prices; structural VAR; limited participation model
    JEL: C32 E52 G12
    Date: 2004–07
  54. By: Jean-Pascal Bénassy
    Abstract: The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the "Taylor principle", according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.
    Date: 2005
  55. By: Bartosz Mackowiak
    Abstract: We decompose by origin the sources of the variation in real aggregate output and aggregate price level in the Czech Republic, Hungary and Poland. We find that a sizable fraction of the variation is attributable to external shocks, especially so for aggregate price level. We show that euroarea interest rate shocks can account for a significant fraction of the external spillover effects. We conclude that theoretical models of advanced transition economies and policy rules for these economies should feature a prominent role for external shocks.
    Keywords: Vector autoregression, Granger causal priority, transition economies, external shocks
    JEL: F41 E3 O11 P2
    Date: 2005–10
  56. By: Fatás, Antonio; Mihov, Ilian
    Abstract: There is a significant controversy among academics and policy-makers about whether policies matter for economic growth. Recently, Acemoglu et al. (2003) and Easterly (2004) have presented empirical evidence against the commonly held view that policies play an important role in the process of economic development. Their key conclusion is that macroeconomic policies (monetary, fiscal and trade) have an explanatory power for the cross-country variation in growth rates and income per capita only because they serve as proxies for institutions. While we confirm their results using levels of policy variables (inflation and government spending), we present evidence that policy volatility exerts a strong and direct negative impact on growth. In a cross-section of 91 countries, policy volatility emerges as a key determinant of macroeconomic performance. An increase in the volatility of fiscal policy corresponding to one standard deviation in the sample reduces long-term economic growth by about 0.75 percentage points. Political institutions have a role to play to the extent that they shape policy outcomes.
    Keywords: fiscal policy; growth; institutions; macroeconomic volatility
    JEL: E60 H11 O11 O57
    Date: 2005–12
  57. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper assesses the prospects for monetary integration between Emerging East Asian (EEA) economies. Our empirical analysis is based on a simple analytical framework for currency unions of small open economies, with a focus on the conduct of monetary policy in the presence of different types of shocks. Our empirical analysis looks at a number of supply-side characteristics of EEA countries, distinguishing between aggregate and tradable sector structural features. Moreover, we discuss the evidence on the cross-country variation of disturbances hitting the region. Our study indicates that, at present, EEA economies exhibit a high degree of cross-country supply diversity, while there is no compelling evidence that shocks are highly correlated across the region.
    Keywords: East Asia, emerging economies, currency union, stabilisation.
    JEL: E52 E58 F33 F40
    Date: 2005–12
  58. By: Alberto Baffigi (Banca d'Italia); Antonio Bassanetti (Banca d'Italia)
    Abstract: We present tools for real-time detection of turning points in the industrial production growth-cycle of the euro area and its four largest economies. In particular, we apply a multivariate hidden Markov model to national survey results – i.e. to the earliest information about current economic developments - in order to estimate the probability of expansionary and recessionary phases. The balances of opinions used as inputs of the model are selected by ranking them according to their degree of commonality with respect to the cyclical fluctuations of the industrial sector, as estimated with the Generalized Dynamic Factor Model. The indicators appear reliable and stable.
    Keywords: business cycle, hidden Markov model, business surveys
    JEL: E32 E37
    Date: 2004–06
  59. By: Heijdra,Ben J.; Ligthart,Jenny E. (Tilburg University, Center for Economic Research)
    Abstract: The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier; (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect; (iii) short-run output multipliers under lump-sum tax financing are smaller than long-run output multipli-ers if labor supply is elastic; and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output; and (ii) negative long-run output multipliers.
    Keywords: output multipliers;Yaari-Blanchard model;overlapping generations;monopolistic competition;love of variety;temporary fiscal shocks; fiscal policy
    JEL: E12 E63 L16
    Date: 2005
  60. By: Jean-Marie Dufour; Lynda Khalaf; Maral Kichian
    Abstract: The authors use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips curve (NKPC) equation. They focus on Galí and Gertler's (1999) specification, for both U.S. and Canadian data. Two variants of the model are studied: one based on a rational-expectations assumption, and a modification to the latter that uses survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behaviour, and (iii) the frequency of price adjustment. Overall, the authors find that there is some support for the hybrid NKPC for the United States, whereas the model is not suited to Canada. Their findings underscore the need for employing identification-robust inference methods in the estimation of expectations-based dynamic macroeconomic relations.
    Keywords: Econometric and statistical methods; Inflation and prices
    JEL: C13 C52 E31
    Date: 2005
  61. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Filippo di Mauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); M. Hashem Pesaran (University of Cambridge, Faculty of Economics, Sidgwick Avenue, Cambridge, CB3 9DD, United Kingdom.); L. Vanessa Smith (University of Cambridge, Cambridge Endowment for Research in Finance, CB3 9DD Cambridge, United Kingdom)
    Abstract: This paper presents a quarterly global model linking individual country vector errorcorrecting models in which the domestic variables are related to the country-specific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period 1979-2003. It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole to test the structural stability of the regression coefficients and error variances, and to establish confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the paper also considers the use of the GVAR for "structural" impulse response analysis.
    Keywords: Global VAR (GVAR), Global interdependencies, global macroeconomic modeling, impulse responses.
    JEL: C32 E17 F47
    Date: 2005–12
  62. By: Philippe Michel; Leopold von Thadden (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Jean-Pierre Vidal (European Central Bank,Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: Unstable government debt dynamics can typically be corrected by various fiscal instruments, like appropriate adjustments in government spending, public transfers, or taxes. This paper investigates properties of state-contingent debt targeting rules which link stabilizing budgetary adjustments around a target level of long-run debt to the state of the economy. The paper establishes that the size of steady-state debt is a key determinant of whether it is possible to find a rule of this type which can be implemented under all available fiscal instruments. Specifically, considering linear feedback rules, the paper demonstrates that there may well exist a critical level of debt beyond which this is no longer possible. From an applied perspective, this finding is of particular relevance in the context of a monetary union with decentralized fiscal policies. Depending on the level of long-run debt, there might be a conflict between a common fiscal framework which tracks deficit developments as a function of the state of the economy and the unrestricted choice of fiscal policy instruments at the national level.
    Keywords: Fiscal regimes, Overlapping generations
    JEL: E63 H62
    Date: 2006–01
  63. By: Reis, Ricardo
    Abstract: I present and solve the problem of a producer who faces costs of acquiring, absorbing, and processing information. I establish a series of theoretical results describing the producer's behaviour. First, I find the conditions under which she prefers to set a plan for the price she charges, or instead prefers to set a plan for the quantity she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behaviour of many such producers. I apply these results to a model of inflation. I find that the model can fit the quantitative facts on post-war inflation remarkably well, that it is a good forecaster of future inflation, and that it survives the Lucas critique by fitting also the pre-war facts on inflation moderately well.
    Keywords: inattentiveness; inflation; pricing under uncertainty; production; sticky information
    JEL: D92 E20 E31
    Date: 2005–12
  64. By: Paul de Grauwe (Leuven University); Francesco Paolo Mongelli (European Central Bank)
    Abstract: This paper brings together several strands of the literature on the endogenous effects of monetary integration: i.e., whether sharing a single currency may set in motion forces bringing countries closer together. The start of the European Economic and Monetary Union (EMU) has spurred a new interest in this debate. There are four areas that we analyse in this context: the endogeneity of economic integration, in which we look primarily at evidence on prices and trade; the endogeneity of financial integration or equivalently insurance schemes that can be provided by capital markets; the endogeneity of symmetry of shocks and (similarly) at synchronisation of outputs; and the endogeneity of product and labour market flexibility. The paper presents a conceptual framework within which to illustrate such endogeneities. We present diverse arguments and, where possible, explore the incipient empirical literature focussing on the euro area. On the whole, concerning EMU, our preliminary conclusion is one of moderate optimism. The different endogeneities that exist in the dynamics towards optimum currency areas are at work. How strong these endogeneities are and how quickly they do their work remains to be seen.
    Keywords: Optimum Currency Area, Economic and Monetary Integration and EMU
    JEL: E42 F13 F33 F42
    Date: 2005–12
  65. By: Francis E. Warnock; Veronica C. Warnock
    Abstract: Abstract: Foreign flows have an economically large and statistically significant impact on longterm interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications.
    Keywords: bond yields, Japan, China
    JEL: E43 E44 F21
    Date: 2005–12–15
  66. By: Ritschl, Albrecht; Uebele, Martin
    Abstract: This paper examines the comovement of the stock market and of real activity in Germany before World War I under the efficient market hypothesis. We employ multivariate spectral analysis to compare rivaling national product estimates to stock market behaviour in the frequency domain. Close comovement of one series with the stock market enables us to decide between various rivaling business cycle chronologies. We find that business cycle dates obtained from deflated national product series are severely distorted by interference with the implicit price deflator. Among the nominal series, the income estimate of Hoffmann (1965) correlates best with the stock market, while the tax based estimate of Hoffmann and Müller (1959) is too smooth especially before 1890. We find impressive comovement between the stock market and nominal wages, a sub-series of Hoffmann's income estimate. We can show that a substantial part of this nominal wage series is driven by data on real investment activity. Our findings confirm the traditional business cycle chronology for Germany of Burns and Mitchell (1946), and lead us to discard later attempts to date the business cycle.
    Keywords: business cycle chronology; efficient market hypothesis; Imperial Germany; spectral analysis
    JEL: E32 E44 N13
    Date: 2005–12
  67. By: Yashiv, Eran
    Abstract: Does the search and matching model fit aggregate US labour market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some significant failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data 'fit' the model, i.e. what are the data which are relevant to be explained by the model? The analysis shows that the model fits certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, the negative co-variation of unemployment and vacancies, and the behaviour of the worker job finding rate. A key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate. The latter is a major component of the rate discounting the future value of the job-worker match. The paper offers a workable, empirically-grounded version of the model for the analysis of aggregate US labour market dynamics.
    Keywords: business cycles; labour market flows; matching; search; US labour market; vacancies
    JEL: E24 E32 J32 J63
    Date: 2005–12
  68. By: Stephen G. Cecchetti; Alfonso Flores-Lagunes; Stefan Krause
    Abstract: In much of the world, growth is more stable than it once was. Looking at a sample of twentyfive countries, we find that in sixteen, real GDP growth is less volatile today than it was twenty years ago. And these declines are large, averaging more than fifty per cent. What accounts for the fact that real growth has been more stable in recent years? We survey the evidence and competing explanations and find support for the view that improved inventory management policies, coupled with financial innovation, adopting an inflation targeting scheme and increased central bank independence have all been associated with more stable real growth. Furthermore, we find weak evidence suggesting that increased commercial openness has coincided with increased output volatility.
    JEL: E32 E44
    Date: 2006–01
  69. By: Eran Yashiv (LSE (visiting), Tel Aviv University and IZA Bonn)
    Abstract: Does the search and matching model fit aggregate U.S. labor market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some significant failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data “fit” the model, i.e. what are the data which are relevant to be explained by the model? The analysis shows that the model fits certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, the negative co-variation of unemployment and vacancies, and the behavior of the worker job finding rate. A key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate. The latter is a major component of the rate discounting the future value of the job-worker match. The paper offers a workable, empirically-grounded version of the model for the analysis of aggregate U.S. labor market dynamics.
    Keywords: search, matching, U.S. labor market, vacancies, labor market flows, business cycles
    JEL: E24 E32 J32 J63
    Date: 2006–01
  70. By: András Rezessy (Magyar Nemzeti Bank)
    Abstract: The paper estimates the immediate impact of Hungarian monetary policy on three classes of asset prices: the exchange rate of the forint vis-à-vis the euro, spot and forward government bond yields and the index of the Budapest Stock Exchange. The endogeneity problem is treated with the method of identification through heteroskedasticity as described by Rigobon and Sack (2004). The results suggest a significant impact on the exchange rate in one day i.e. an increase in the policy rate leads to an appreciation of the domestic currency, which is in line with the classic intuition. The effect increases markedly when the estimation is carried out with a two-day window suggesting the inefficiency of markets in incorporating monetary policy decisions in asset prices in a short period of time. Monetary policy affects spot yields positively, but the effect gradually dies out as the horizon gets longer. This can be explained with the impact on forward yields, as the results suggest a positive impact on short-term and a negative impact on long-term forward yields meaning that a surprise change in the policy rate leads to a rotation of the forward curve. The method does not provide interpretable and significant results for the stock exchange index.
    Keywords: Monetary transmission mechanism, Asset prices, Exchange rate, Yield curve, Stock market, Identification, Heteroskedasticity.
    JEL: E44 E52
    Date: 2005
  71. By: Paolo Piselli (Banca d'Italia)
    Abstract: The recent empirical evidence documenting the presence of asymmetries in business cycles represents a challenge for the standard equilibrium models of real business cycle. These models successfully explain most first and second moments of the actual time series, but cannot replicate non-linear features of the data, unless a non-linear innovation is introduced. This paper aims at investigating the possible non-linearity in the technology shock, the basic innovation in Real Business Cycle models. In order to measure the unobservable technology shock, we derive some alternative measures of total factor productivity such as revenue-based and cost-based Solow residual and we also control for cyclical factor utilisation. We test for non-linearities and model a nonlinear SETAR model for the productivity shock as a natural extension of the autoregressive linear process, the standard way of representing technology shocks. Our findings suggest that, although the standard Solow residual turns out to be linear, the other measures of technology shock appear non-linear, as soon as non-technological cyclical components are ruled out.
    Keywords: Solow residual, technology shock, non-linear models, linearity test
    JEL: C22 C52 E32
    Date: 2004–07
  72. By: CASTRO, Rui; COEN-PIRANI, Daniele
    Abstract: This paper documents and discusses a dramatic change in the cyclical behavior of aggregate hours worked by individuals with a college degree (skilled workers) since the mid-1980’s. Using the CPS outgoing rotation data set for the period 1979:1-2003:4, we find that the volatility of aggregate skilled hours relative to the volatility of GDP has nearly tripled since 1984. In contrast, the cyclical properties of unskilled hours have remained essentially unchanged. We evaluate the extent to which a simple supply/demand model for skilled and unskilled labor with capital-skill complementarity in production can help explain this stylized fact. Within this framework, we identify three effects which would lead to an increase in the relative volatility of skilled hours: (i) a reduction in the degree of capital-skill complementarity, (ii) a reduction in the absolute volatility of GDP (and unskilled hours), and (iii) an increase in the level of capital equipment relative to skilled labor. We provide empirical evidence in support of each of these effects. Our conclusion is that these three mechanisms can jointly explain about sixty percent of the observed increase in the relative volatility of skilled labor. The reduction in the degree of capital-skill complementarity contributes the most to this result.
    Keywords: Macroeconomics, Business Cycles, Volatility, Skilled Hours, Skill Premium, Catal- Skill Comementarity
    JEL: E24 E32 J24 J31
    Date: 2005
  73. By: David Eagle (Eastern Washington University)
    Abstract: The standard ad hoc monetary objective function creates a bias in favor of inflation targeting. Instead, this paper uses the Pareto criterion to assess inflation targeting (IT), price-level targeting (PLT), and nominal-income targeting (NIT). The effect that unanticipated inflation or deflation benefits one party to a nominal contract while hurting the other party is an effect that cannot be captured in a model with a representative consumer or identical consumers. To capture this effect, this paper analyses models with diverse consumers in a pure-exchange economy without storage. When nominal aggregate demand (NAD) is stochastic but real aggregate supply (RAS) is not, PLT Pareto dominates IT. This is because IT perpetuates price errors and hence nominal aggregate demand errors, while PLT tries to return to the original targeted price path. By perpetuating these errors, IT perpetuates the welfare losses, whereas PLT corrects so to help reduce these welfare losses in the future. When RAS is also stochastic, nominal contracts under NIT can lead to Pareto efficiency when consumers have average relative risk aversion, non-stochastic endowment-to-RAS ratios, and no utility shocks. Under the same assumptions IT and PLT lead to Pareto inefficiencies because they force the payers of nominal contracts to guarantee the real value of those payments to the receivers. In essence this transfers RAS risk from the receivers of the nominal obligations to payers of the nominal obligations. However, this transfer of risk would only be appropriate if all payers of nominal obligations had below average relative risk aversion and all receivers had above average relative risk aversion, a situation that rarely will hold.
    Keywords: Pareto efficiency, inflation targeting, price-level targeting, nominal-income targeting, monetary objective function
    JEL: E
    Date: 2005–12–29
  74. By: Jean-Pascal Bénassy
    Abstract: It has often been found difficult to generate a liquidity effect (i.e. a negative effect of monetary injections on the nominal interest rate) in the traditional "Ricardian" stochastic dynamic model with a single infinitely lived household. We show that moving to a non Ricardian environment where new agents enter the economy in each period allows to generate such a liquidity effect.
    Date: 2005
  75. By: Szilárd Benk (Magyar Nemzeti Bank); Zoltán M. Jakab (Magyar Nemzeti Bank); Gábor Vadas (Magyar Nemzeti Bank)
    Abstract: This paper is a comprehensive analysis of Hungary’s potential output. Since the concept of potential output is not unique, we present various interpretations of potential GDP, along with a large set of techniques for estimating it. Various estimates are presented and robustness analyses are performed. Finally, an illustrative scenario is outlined for the forthcoming few years.
    Keywords: potential output, output gap, production function, business cycle, filtering.
    JEL: E32 C22 C32
    Date: 2005
  76. By: Manoel F. Meyer Bittencourt (University of Bristol / UK)
    Abstract: We examine how macroeconomic performance, mainly in the role of inflation, affected earnings inequality during the 1980’s and early 90’s in regional Brazil. The evidence shows that the high and volatile inflation rates existent at the time, combined with incomplete indexation coverage, had a regressive and significant effect on inequality. The results, based on panel time series T>N data and analysis, are robust for different concepts of inflation, inequality measures, estimators and specifications. Hence, sound macroeconomic policies, which keep inflation low and stable in the long run, are to be a necessary first step of any policy implemented to alleviate high inequality, and improve welfare in Brazil.
    Keywords: Inequality, inflation, indexation coverage, minimum wage
    JEL: D31 E31 O11
    Date: 2005–11–16
  77. By: Carlos José Fonseca Marinheiro (Universidade de Coimbra and GEMF)
    Abstract: This paper analyses the sustainability of Portuguese public finances, making use of a long dataset with more than a full century of observations. The use of such a long dataset is appropriate because both unit root and cointegration tests require a long period of data. The sustainability testing procedure is based on unit root and cointegration tests. We find considerable evidence in favour of sustainability for the 1903-2003 period. The overall conclusion of sustainability for the 1903-2003 period is not maintained for the more recent 1975-2003 period, which is characterised by the largest GDP deficit ratios of our sample. This latter period appears to signal a shift to an unsustainable path in Portuguese fiscal policy. Hence, our results suggest that fiscal consolidation efforts must, in fact, be continued in Portugal.
    Keywords: Fiscal sustainability, sustainability of public debt, intertemporal budget constraint, government deficits and debt, Portugal
    JEL: E60 H60
    Date: 2005–12
  78. By: Szilárd Erhart (Magyar Nemzeti Bank)
    Abstract: This study examines overnight (O/N) interest rates which constitute the short end of the yield curve and the factors which have an impact on such rates. The MNB, unlike several other central banks, does not have a direct overnight interest rate target; it does, however, limit the divergence of O/N interest rates from its policy rate with the settings of its operational framework. First, the MNB’s regulations on compulsory reserves allow banks to apply averaging in the reserve maintenance period, which reduces overnight interest rate volatility. Second, the interest rate corridor – determined by MNB’s collateralised loan and deposit – limits the maximum fluctuation band of overnight interbank interest rates. The study finds that the role of reserve averaging to reduce yield fluctuations is imperfect, as a clear seasonal pattern is observed in the intra-maintenance period evolution of overnight rates. The frequency of cumulative front-loading and excess reserves is significantly higher than the frequency of reserve deficit. Therefore, the level of overnight interest rates tends to remain below the policy rate and drop towards the interest rates of overnight central bank deposits at the end of the maintenance period. Moreover, statistical analysis finds evidence that the impact of liquidity withdrawing shocks are typically greater – approximately twice as much – as of those injecting liquidity. This phenomenon could be explained by the volatility of autonomous liquidity factors, especially that of the government accounts, which is particularly high on VAT payment days. Institutional settings (credit limits, limitation of maximum deviation from reserve requirements, high interbank concentration) curtail the potential of the interbank market to efficiently distribute liquidity over the entire system, which may also explain the asymmetric liquidity management characteristics of Hungarian banks.
    Keywords: overnight rate, central bank instruments, operational framework, averaging, reserve requirements.
    JEL: G14 E42 E52
    Date: 2005
  79. By: Lungu, Laurian (Cardiff Business School); Matthews, Kent (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: Previous attempts at modelling current observed endogenous financial variables in a macroeconomic model have concentrated on only one observed endogenous variable - namely the short-term rate of interest. The solution method for dealing with more than one observed endogenous variable has thus far been computationally intractable. This paper applies a general search algorithm to a macroeconomic model with an observed interest rate and exchange rate to solve the signal extraction problem. The informational advantage of applying the signal extraction algorithm to all the current observed endogenous variables is examined in terms of the implication for policy from the misperceptions of specific macroeconomic shocks.
    Keywords: Rational Expectations; Partial Current Information; Signal Extraction; Macroeconomic modelling
    JEL: E37
    Date: 2006–01
  80. By: Jerome Henry (European Central Bank); Pablo Hernandez de Cos (Banco de Espana); Sandro Momigliano (Banca d'Italia)
    Abstract: This paper reviews the existing empirical evidence on the short-term impact on prices of fiscal variables and assesses it against new results from harmonised simulations, conducted with six well-established econometric models used by the ECB and five national central banks (NCBs) of the Eurosystem. The outcome is also compared with results from the European Commission and the OECD models. Overall, a broad consensus appears on the impact on prices of changes in individual government budget items in the euro area. In all cases, changes in government demand and in direct taxes paid by households have a limited impact on prices in the first year while, in contrast, changes in indirect taxes and employers’ social security contributions have a relatively large impact. The second year results show that the effects on prices usually take some time to materialise fully; in particular, they often become large for the public consumption shock.
    Keywords: Euro area, model simulations, fiscal policy, prices
    JEL: E17 E31 E62
    Date: 2004–10
  81. By: Aleksander Berentsen; Gabriele Camera; Christopher Waller
    Abstract: Recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade. Given quasi-linear preferences, this makes the distribution of money degenerate which keeps the models simple but precludes discussion of distributional effects of monetary policy. We generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically. We show that unexpected, symmetric lump-sum money injections may increase short-run output and welfare, while asymmetric injections may increase long-run output and welfare.
    Keywords: distribution, no-neutrality, money balance
    JEL: A12
  82. By: Carsten Detken (European Central Bank); Vítor Gaspar (European Central Bank); Bernhard Winkler (European Central Bank)
    Abstract: We show how in a Blanchard-Yaari, overlapping generations framework, perfect substitutability of government bonds in Monetary Union tempts governments to exploit the enlarged common pool of savings. In Nash equilibrium all governments increase their bond financed transfers to current generations (prosperity effect) at the expense of future generations (posterity effect). The resulting deficit bias occurs even if one assumes that before Monetary Union countries had eliminated their deficit bias by designing appropriate domestic institutions. The paper provides a rationale for an increased focus on fiscal discipline in Monetary Union, without the need to assume imperfect credibility of existing Treaty provisions or to refer to extreme situations involving sovereign default. We draw on existing empirical evidence to argue that the degree of government bond substitutability within the European Monetary Union is an order of magnitude larger than in the global economy.
    Keywords: fiscal spillover effects, common pool, overlapping generations, bond market integration, fiscal discipline, fiscal rules, European Monetary Union
    JEL: D62 E61 E63
    Date: 2005–12
  83. By: Massimo Omiccioli (Banca d'Italia)
    Abstract: This paper presents a survey of the literature on the determinants of inter-firm credit and on its implications for the transmission mechanism of monetary policy. Theoretical explanations for trade credit can be divided in two categories: a) theories based on real functions performed by trade credit; b) theories based on transaction and financial motivations. The former category includes theories that interpret the supply of trade credit as a tool to achieve a variety of marketing objectives (to build customer relationships, as a guarantee for product quality, as a mechanism for price discrimination, as a response to demand variability). The latter category includes theories that consider trade credit as a tool to reduce transaction costs (as a substitute for money) or as a financial alternative to bank credit or to other forms of financing. The paper also examines the macroeconomic implications of these theories, with special reference to the relations between trade credit and monetary policy. Conclusions set forward some hypotheses for research, by looking at preliminary evidence on European countries, which are characterised by strong differences in the length of payment terms that led to the adoption of an EC Directive on combating late payment in commercial transactions.
    Keywords: credito commerciale, dilazioni di pagamento, politica monetaria
    JEL: G32 L14 E52
    Date: 2004–06
  84. By: Nicoletta Batini (International Monetary Fund); Alejandro Justiniano (International Monetary Fund); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University)
    Abstract: This paper provides a first attempt to quantify and at the same time utilize estimated measures of uncertainty for the design of robust interest rate rules. We estimate several variants of a linearized form of a New Keynesian model using quarterly US data. Both our theoretical and numerical results indicate that Inflation-Forecast-Based (IFB) rules are increasingly prone to the problem of indeterminacy as the forward horizon increases. As a consequence the stabilization performance of optimized rules of this type worsens too. Robust IFB rules can be designed to avoid indeterminacy in an uncertain environment, but at an increasing utility loss as rules become more forward-looking.
    Keywords: robustness, Taylor rules, inflation-forecast-based rules, indeterminacy
    JEL: E52 E37 E58
    Date: 2004–09
  85. By: Frederic Boissay (European Central Bank, DG-Research, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany)
    Abstract: The purpose of this paper is to analyze how shocks propagate through a network of firms that borrow from, and lend to, each other in a trade credit chain, and to quantify the effects of financial contagion across firms. I develop a theoretical model of financial contagion, in which the default of one firm may cause a chain reaction such that its creditors also get into financial difficulties, even though they are sound in the first place. I calibrate and simulate the model using US annual data over the period 1986-2004. At the microeconomic level, I find that, when customers of a sound firm are financially distressed, then this firm gets into financial difficulties with probability that ranges from 4.1% to 12.8% (depending on the business cycle and the underlying economic scenario). Looking at the macroeconomic level, I find that defaults on trade debts lower aggregate GDP by at least 0.4%. During the second half of the 90’s, these deadweight losses doubled and reached a high of 0.9% to 2.3% of GDP (depending on the underlying economic scenario) before the recession of 2001. The results of the simulations also suggest that financial contagion across businesses had been 25% higher during the last recession than during the recession of the early 90’s.
    Keywords: Financial contagion, trade credit, business fluctuations.
    JEL: E32 G29 G33
    Date: 2006–01
  86. By: Silvia Fabiani (Banca d'Italia); Angela Gattulli (Banca d'Italia); Roberto Sabbatini (Banca d'Italia)
    Abstract: This study examines price setting behaviour of Italian firms on the basis of the results of a survey conducted by Banca d’Italia in early 2003 on a sample of around 350 firms belonging to all economic sectors. Prices are mostly fixed following standard mark-up rules, although customer-specific characteristics have a role, in particular in manufacturing and services where price discrimination across customers matters. Rival prices mostly affect price-setting strategies in industrial firms. In reviewing their prices, firms follow either statedependent rules or a combination of time and state-dependent ones. Concerning the frequency of price adjustments, a considerable degree of stickiness emerges both at the stage in which firms evaluate their pricing strategies and the stage in which they actually implement the price change. In 2002 most firms changed their price only once. Three alternative explanations of nominal rigidity are ranked highest by the firms interviewed: explicit contracts, tacit collusive behaviour and the perception of the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the adjustment (positive vs negative) and the source of the shock (demand vs supply). Real rigidities – captured by the degree of market competition, customers’ search costs, the sensitivity of profits to changes in demand – play an important role in determining this asymmetry. Moreover, whereas cost shocks impact more when prices have to be raised than when they have to be reduced, demand decreases are more likely to induce a price change than demand increases.
    Keywords: nominal rigidity, real rigidity, price-setting, inflation persistence, survey data.
    JEL: E30 D40
    Date: 2004–07
  87. By: Oscar Bajo-Rubio; Carmen Díaz-Roldán
    Abstract: In this paper we analyze the nature of the shocks hitting the CEECs over the recent years. To this end, we first evaluate the relative importance of symmetric vs. asymmetric shocks, and then extract their temporary component. Our final aim would be assessing the vulnerability of the CEECs to temporary and asymmetric shocks, which would be the most harmful case for the operation of a monetary union. Finally, a comparison with the case of the current EMU members is also presented.
  88. By: Mario Quagliariello
    Abstract: This paper discusses the role that macroeconomic uncertainty plays in banks’ choices regarding the optimal asset allocation. Following the portfolio model proposed by Baum et al. (2005), the paper aims at disentangling how Italian banks choose between loans and risk-free assets when the uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of Italian banks’ investment decisions, also after controlling for other factors. In periods of increasing turmoil, bank-specific ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.
    Keywords: Bank, business cycle, uncertainty, lending decisions, GARCH
    JEL: E44 G21 G28
    Date: 2006–01
  89. By: Nihal Bayraktar (Pennsylvania State University Harrisburg, Middletown, PA 17057, United States); Plutarchos Sakellaris (Athens University of Economics and Business, and IMOP, correspondence Department of Economics, AUEB, Patission 76, 10434 Athens, Greece.); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: We formulate and estimate a structural model of firm investment behavior that specifies the exact channel through which financial frictions bite. The model also allows for the existence of both convex andnon-convex costs to adjusting capital. Essentially, we move beyond simply testing and rejecting a neoclassical model without frictions. Our quantitative estimates show that both real and financial frictions have an important effect on firm investment dynamics.
    Keywords: Investment, adjustment costs, financing constraints.
    JEL: E22
    Date: 2005–12
  90. By: George Athanasopoulos; Farshid Vahid
    Abstract: In this paper, we argue that there is no compelling reason for restricting the class of multivariate models considered for macroeconomic forecasting to VARs given the recent advances in VARMA modelling methodology and improvements in computing power. To support this claim, we use real macroeconomic data and show that VARMA models forecast macroeconomic variables more accurately than VAR models.
    Keywords: Forecasting, Identification, Multivariate time series, Scalar components, VARMA models.
    JEL: C32 C51
    Date: 2006–01
  91. By: Patrick Villieu (LEO - Laboratoire d'économie d'Orleans - - CNRS : FRE2783 - Université d'Orléans); Alexandru Minea (LEO - Laboratoire d'économie d'Orleans - - CNRS : FRE2783 - Université d'Orléans)
    Abstract: In this paper, we study maximizing long-run economic growth trade-off in monetary and fiscal policies in an endogenous growth model with transaction costs. We show that both monetary and fiscal policies are subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, maximizing-growth government must choose relatively high seigniorage (respectively income taxation), if "tax evasion" and "financial repression" coefficients are high (respectively low). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax-rate, as result of maximizing-growth strategies in different structural enviroments (notably concerning tax evasion and financial repression). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts.
    Keywords: Endogenous growth ; threshold effects ; monetary policy ; fiscal policy ; public deficit ; policy mix ; tax evasion ; financial repression ; financial development
    Date: 2006–01–19
  92. By: Paolo Del Giovane (Banca d'Italia); Roberto Sabbatini (Banca d'Italia)
    Abstract: Following the introduction of euro banknotes and coins many Italians perceived a much sharper increase in the price level than the moderate rise registered by the National Institute of Statistics. The paper shows that the apparent contradiction between the public’s perceptions and officially measured inflation stems mainly from the fact that the former often refer to phenomena not captured by the inflation rate calculated for the average basket of goods and services for the whole population. The rise in perceived inflation can be largely explained by the generally stronger influence that large, upward, and frequently observed price movements exert on consumers’ perceptions, together with the actual behaviour of prices in the period following the currency changeover, which saw many price changes, with larger increases for the more frequently purchased products and exceptional rises for some items. The reciprocal influence between inflation perceptions and the media’s unusually extensive coverage of price developments on the occasion of the changeover also appears to have been important. Lastly, the perception of a substantial loss of purchasing power, especially on the part of the least-well-off households, can be traced to economic phenomena that do not bear directly on official inflation but which it is hard for households to consider separately, such as the evolution of incomes and increases in the price of housing, not included in the official index.
    Keywords: inflazione, euro, percezioni
    JEL: E31 D12 A14
    Date: 2004–12
  93. By: Fernando González (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Simo Launonen (SEB Merchant Banking, Unioninkatu 30, P. O. Box 630, 00101 Helsinki, Finland)
    Abstract: We assess monetary convergence preceding the implementation of the EuropeanMonetary Union (EMU) through Kalman filtering estimates of the risk premium of eleven forward exchange rates of European and non-European currencies. Since all participating currencies are in effect identical from inception of a currency union, the convergence process to such an identical status should be reflected in the participating currencies' risk premiums prior to monetary union implementation. Starting from this assumption, we show the paths followed by the participating currencies towards monetary union. We find that the co-movements of risk premiums among the preceding European Monetary System (EMS) currencies differ across time periods but display a tendency to convergence to the German mark’s risk premium up to EMU implementation. The paper also shows a clear pattern of asymmetry of the participating currencies in relation to the German mark.
    Keywords: Currency unions, European Monetary Union, foreign exchange risk premium.
    JEL: F02 F31 F33 F36 G15 G18
    Date: 2005–12
  94. By: Wong Keung-Wing (Department of Economics, National University of Singapore); Habibullah Khan (Graduate School of Business, Universitas21Global); Jun Du (Department of Economics, National University of Singapore)
    Abstract: This paper examines the long-term as well as short-term equilibrium relationships between the major stock indices and selected macroeconomic variables (such as money supply and interest rate) of Singapore and the United States by employing the advanced time series analysis techniques that include cointegration, Johansen multivariate cointegrated system, fractional cointegration and Granger causality. The cointegration results based on data covering the period January 1982 to December 2002 suggest that Singapore’s stock prices generally display a long- run equilibrium relationship with interest rate and money supply (M1) but a similar relationship does not hold for the United States. To capture the short-run dynamics of the relationship, we replicate the same experiments with different subsets of data representing shorter time periods. It is evident that stock markets in Singapore moved in tandem with interest rate and money supply before the Asian Crisis of 1997, but this pattern was not observed after the crisis. In the United States, stock prices were strongly cointegrated with macroeconomic variables before the 1987 equity crisis but the relationship gradually weakened and totally disappeared with the emergence of Asian Crisis that also indirectly affected the United States. The results of fractional cointegration and the Johansen multivariate system are consistent with the earlier cointegration result that both Singapore and US stock markets did possess equilibrium relationship with M1 and interest rate at the early days. However, the stability of the systems was disturbed by a series of well-known financial turbulence in the past two decades and eventually weakened for Singapore and completely disappeared for the U.S. This may imply that monetary authority may take action to respond to the asset price turbulence in order to maintain the stability of monetary economy and thus break the existing equilibrium between stock markets and macroeconomic variables like interest rate and M1. Another possible explanation is that the market became more efficient after 1997 Asian crisis. Finally, the results of Granger causality tests uncover some systematic causal relationships implying That stock market performance might be a good gauge for Central Bank’s monetary policy adjustment.
  95. By: Ansgar Belke; Frank Baumgartner; Friedrich Schneider; Ralph Setzer
    Abstract: This paper empirically investigates the differences in the motives of raising privatisation proceeds for a panel of EU countries from 1990 to 2000. More specifically, we test whether privatisations can be mainly interpreted (a) as ingredients of a larger reform package of economic liberalisation in formerly overregulated economies, (b) as a reaction to an increasing macroeconomic problem pressure and (c) as a means to foster growth and increase tax income and relax the fiscal stance with an eye on the demands by integration of economic and financial markets. Whereas we are able to corroborate claim (a) only partly, we gain consistent evidence in favour of claims (b) and (c).
    Keywords: European Union; panel analysis; partisan theory; privatisation proceeds; state-owned enterprises
    JEL: H42 E62 L33
    Date: 2006–01
  96. By: Marie Musard-Gies (LEO - Laboratoire d'économie d'Orleans - - CNRS : FRE2783 - Université d'Orléans)
    Abstract: In this paper, we aim at testing whether press conferences held after the meeting of the ECB's monetary policy council steer market short- and long-term interest rates in the euro zone. To meet this goal, we "codify" the statements according to whether they are neutral, hawkish, or dovish. We show, using a principal components analysis of euro-zone (short- and long-term) interest rates that the euro-zone's market rates, react significantly to the bias in statements, and more particularly to changes in statements from one meeting to the next. If we study separately the reaction of short- and long-term interest rates to change in statements, the short end of the yield curve reacts more sharply to statements than the long segment. We show that the effect of statements peaks on interest rates with a maturity of six or twelve months and is smaller for the longer maturities. Using non-parametric tests confirms our previous results.
    Keywords: Communication ; Transparency ; Monetary Policy ; European Central Bank.
    Date: 2006–01–06
  97. By: Jana Kremer (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany.); Claudia Rodrigues Braz (Banco de Portugal, Av. Almirante Reis, 71, 1150-012 Lisbon, Portugal); Teunis Brosens (De Nederlandsche Bank, Westeinde 1, NL-1017 ZN Amsterdam, The Netherlands.); Geert Langenus (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Sandro Momigliano (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.); Mikko Spolander (European Central Bank,Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: In this paper, we present a disaggregated framework for the analysis of past and projected structural developments in the most relevant revenue and expenditure categories and the fiscal balance. The framework, in particular, distinguishes between the effects of discretionary fiscal policy and of macroeconomic and other developments and is sufficiently standardised to be used in multi-country studies. Here, it is applied to Belgium, Finland, Germany, Italy, the Netherlands and Portugal over the period 1998 to 2004. During this period the structural primary balance ratio clearly worsened in all countries except Finland. In Belgium, Italy and the Netherlands, both revenue and expenditure contributed to the deterioration of the structural primary balance. In Germany the large deterioration in revenue was partially offset by the decline in the structural primary expenditure ratio, while the opposite was true for Portugal. The analysis highlights the various factors that contributed to these developments.
    Keywords: Structural budget balance, fiscal forecasting and monitoring, fiscal indicators transmission; survey data; communication.
    JEL: H20 H50 H60 E69
    Date: 2006–01
  98. By: Serven, Luis; Lopez, Humberto; Goni, Edwin
    Abstract: Consumption baskets vary across households and inflation rates vary across goods. As a result, standard consumer price index (CPI) inflation may provide a misleading measure of the inflation actually faced by poor households, more so the more unequal the distribution of aggregate consumption across households. Likewise, changes in observed nominal consumption inequality may be very different from those in true inequality, that is, that measured using household-specific CPIs. The authors explore empirically these issues using household data covering nine episodes from four Latin American countries (Brazil, Colombia, Mexico, and Peru). They find that in these countries standard CPI inflation typically reflects the inflation rate faced by a rich consumer located in the 80 to 90 percentile of the distribution of consumption expenditure. In most episodes the authors also find that inflation was anti-rich-that is, the inflation faced by the richest consumers was higher than the inflation faced by the poorest consumers. As a result of this bias, the observed increases in nominal inequality generally exceed the actual changes in real inequality. These results are robust to correcting for quality change bias in the CPI, to the use of alternative price indices, and to the use of alternative inequality measures.
    Keywords: Markets and Market Access,Economic Theory & Research,Access to Markets,Inequality,Consumption
    Date: 2006–01–01
  99. By: Ali Choudhary (University of Surrey); Paul Levine (University of Surrey)
    Abstract: This paper contributes to the growing literature that attempts to explain unemployment persistence. We show that when the economy is struck by a negative transitory (or permanent) demand or supply shock, firms can find their way back quicker to the pre-shock (or new) employment levels if they are risk-averse. The reason is that risk aversion in firms creates a self-adjusting mechanism whereby cautious firms adjust hiring and wage-setting decisions to try to regain the pre-shock employment levels and minimize fluctuations in profits. Therefore, perhaps surprisingly, risk aversion in firms is seen as a stabilizing macroeconomic force that reduces unemployment inertia.
    Keywords: Unemployment, Persistence, Risk Aversion
    JEL: E24 E27
    Date: 2004–09
  100. By: Debapriya Bhattacharya
    Abstract: This report has been prepared as part of CPD’s ongoing assessment of macro-economic performance of Bangladesh under CPD’s programme titled Independent Review of Bangladesh’s Development (IRBD). Based on data and information on the dynamics of major macroeconomic variables during July-December 2005, the analysis attempts to trace and track the movements of key macro economic performance indicators including in such areas as: public finance, monetary and financial sector, real economy and external balance. The discussion is contextualized by recalling the initial conditions of FY06 and budgetary measures envisaged to deal with the macroeconomic challenges of FY06. In presenting the analysis of some of the recent trends in the economy the review takes note of the robust trends in terms of private sector investment, good prospects of food grain production, moderate growth of exports and buoyant flow of remittances. However, in the absence significant rise in the net flow of foreign aid and mobilization of domestic resources, the report apprehends that quality of fiscal balance may deteriorate further in the coming months. The report points out that without augmentation of foreign aid flow, high export growth and sustained remittance flow the external balance may experience severe pressure in the second half of the fiscal year. The report highlights some of the emerging trends in the economy which may frustrate the overall economic growth prospect and undercut macroeconomic stability during the period of electoral transition. The interim IRBD 2006 report presents elements of a plausible scenario in view of the emerging situation. Thus the government is likely to accelerate its spending in the coming months under both revenue and ADP accounts. There is a possibility of slowdown in the private sector investment as well. The report makes a number of suggestions to address the policy challenges emanating from rising inflation, high interest rate, dwindling reserves and deteriorating balance of payment (BOP).
    Keywords: Bangladesh, macro, economy, performance, economic
    Date: 2006–01
  101. By: R. Jason Faberman (U.S. Bureau of Labor Statistics)
    Abstract: The Job Openings and Labor Turnover Survey (JOLTS) is a new data source of the Bureau of Labor Statistics that estimates monthly vacancies, hires, and separations. It has quickly become a useful tool for studying the labor market. This chapter summarizes its aggregate and micro-level evidence, including the relations of vacancies and worker flows to unemployment and other measures of labor market conditions. The chapter also discusses the implications of this evidence and the potential of the data for future research.
    Keywords: Vacancies; Beveridge Curve; Labor Turnover; Labor Market Search;
    JEL: E24 E32 J63
    Date: 2005–12
  102. By: Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Luca, PENSIEROSO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: Is the Great Depression amenable to real business cycle theory ? In the 1970s and 1980s Lucas and Prescott took an abstentionist stance. They admitted that, because of its exceptional character, an explanation of the Great Depression was beyond the grasp of the equilibrium approach to the business cycle. However while Lucas stuck to this view, we show that Prescott changed his mind at the end of the 1990s breaking his earlier self-imposed restraint. In this paper we document this evolution of opinion and produce a first assessment of real business cycle models of the Great Depression. We claim that the fact of having consctructed an equilibrium model of the Great Depression constitutes a methodological breakthrough. However, as far as substance is concerned, we argue that the contribution of real business cycle literature on the Great Depression is slim, and does not gain the upper hand over the works of economic historians. We conclude suggesting that historical episodes may exist for which the modelisation method of real business cycle theory is inferior to the ‘tick’ sort of analysis that is proper to econoic historians.
    Keywords: Great Depression, New Classical Marcroeconomics, Real Business Cycle Theory, Equilibrium, Unemployment
    JEL: B22 N10 E32
    Date: 2005–11–15
  103. By: Guido De Blasio (Banca d'Italia)
    Abstract: The paper examines micro data on Italian manufacturing firms’ inventory behavior to test the Meltzer (1960) hypothesis according to which firms substitute trade credit for bank credit during periods of monetary tightening. It finds that their inventory investment is constrained by the availability of trade credit. As for the magnitude of the substitution effect, however, this study finds that it is not sizable. This is in line with the micro theories of trade credit and the evidence on actual firm practices, according to which credit terms display modest variations over time.
    Keywords: trade credit, monetary policy, manufacturing firms
    JEL: E51 E52 E65
    Date: 2004–06
  104. By: Blanchard, Olivier J; Giavazzi, Francesco
    Abstract: Our paper is an attempt to define the contours of the right macroeconomic strategy for China. In a nutshell, we believe that the package includes a decrease in saving, with a focus on private saving, an increase in the supply of services, in particular health services, and an appreciation of the RMB. This is why we refer to this strategy as a 'three-handed approach': action on the fiscal and budgetary front, accompanied by currency revaluation. We start by asking how the Chinese economy got to where it is - what the strategy has been since the beginning of the reforms, and what the main characteristics of the economy are today. We then ask what is the desirable path for the future, and which are the main policy tradeoffs implied by such a path. Finally, we put the various pieces together to describe what we believe is a consistent policy package.
    Keywords: China; economic development; international economics
    JEL: E2 O53
    Date: 2005–12
  105. By: Carol A. Corrado; Charles R. Hulten; Daniel E. Sichel
    Abstract: Published macroeconomic data traditionally exclude most intangible investment from measured GDP. This situation is beginning to change, but our estimates suggest that as much as $800 billion is still excluded from U.S. published data (as of 2003), and that this leads to the exclusion of more than $3 trillion of business intangible capital stock. To assess the importance of this omission, we add capital to the standard sources-of-growth framework used by the BLS, and find that the inclusion of our list of intangible assets makes a significant difference in the observed patterns of U.S. economic growth. The rate of change of output per worker increases more rapidly when intangibles are counted as capital, and capital deepening becomes the unambiguously dominant source of growth in labor productivity. The role of multifactor productivity is correspondingly diminished, and labor's income share is found to have decreased significantly over the last 50 years.
    JEL: O47 E22
    Date: 2006–01
  106. By: Fernando Alexandre (University of Minho); Pedro Bação (University of Coimbra); Vasco J. Gabriel (University of Surrey)
    Abstract: Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.
    Keywords: Parameter instability; Markov switching; Consumption; Wealth effect
    JEL: E21 E44 G10
    Date: 2005–06
  107. By: Buiter, Willem H; Sibert, Anne
    Abstract: Market interest rates on sovereign debt issued by the 12 Eurozone national governments differ very little from each other, despite the credit ratings of these governments ranging from triple A to single A, and despite significant differences among their objective indicators of fiscal-financial sustainability. We argue that this market failure is at least in part due to a policy failure: the operational practices of the European Central Bank and the rest of the Eurosystem in its collateralised open market operations convey the message that the Eurosystem views the debt of the 12 Eurozone sovereigns as equivalent. The euro-denominated debt instruments of all twelve Eurozone governments are deemed to be eligible for use as collateral in collateralised lending by the Eurosystem. They are in addition allocated to the same (highest) liquidity category (Tier One, Category 1) as the debt instruments of the Eurosystem itself and subject to the lowest 'valuation haircut' (discount on the market value). Haircuts also increase with the remaining time to maturity. This discourages the use as collateral of longer maturity debt which would be more likely to reveal differences in sovereign default risk. We propose that the size of the haircut on each debt instrument be related inversely to its credit rating. A further re-enforcement of the market’s ability to penalise and constrain unsustainable budgetary policies would be to declare the sovereign debt of nations that violate the conditions of the Stability and Growth Pact to be ineligible as collateral in Eurosystem Repos.
    Keywords: collateralised loans; Eurosystem; sovereign default risk
    JEL: E58 E63 G12
    Date: 2005–12
  108. By: Jens Rubart (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: During the last two decades the so called IT revolution has led to a diverse pattern of growth and employment in OECD countries. In particular, anglo-saxon economies like the U.S. or the U.K. exhibited high rates of economic performance and low unemployment rates, whereas continental European countries showed low economic growth and high unemployment rates. Based on the findings of Lindquist (2004) that the relative demand for workers of different skills (measured by the variation of educational wage differences) varies significantly over the business cycle, we develop a dynamic general equilibrium model which accounts for skill biased technology shocks as well as for the employment record of labor which is divided into different categories of skills. Furthermore, the labor market is characterized by search and matching frictions which allows us to analyze different kinds of institutional settings which determine the negotiated wage rates as well as the demand for labor of the respective skill group. In particular, the latter assumption enables us to control for stylized facts of continental European labor markets. By confronting our theoretical results to empirical evidences it is shown that labor market frictions are necessary to reproduce empirical findings as the lagged response of output, wages and employment after unanticipated shocks to technology.
    Keywords: DGE Model, Heterogenous Labor, Skill Biased Technological Change, Search Unemployment
    JEL: E32 J21 J23 J24 J31 J41
    Date: 2006–01
  109. By: Christoffer Kok Sorensen (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: The present paper investigates the pass-through between market interest rates and bank interest rates in the euro area. Compared to the large interest rate pass-through literature the paper mainly improves upon two points. First, a novel data set, partially based on new harmonised ECB bank interest rate statistics is used. Moreover, the market rates are selected in a way to match the maturities of bank and market rates using information provided by the new statistics. Secondly, new panel-econometric methods are applied to test for heterogeneity in the pass-through process. The paper shows a large heterogeneity in the pass-through of market rates to bank rates between euro area countries and finally possible explanations of the heterogeneity are discussed.
    Keywords: Interest rate pass-through; euro area countries; panel cointegration
    JEL: E43 G21
    Date: 2006–01
  110. By: Eriksson , Åsa (Department of Economics, Lund University)
    Abstract: This paper analyses the relation between private and government consumption in 23 OECD countries between 1970 and 2001. In particular it addresses the issue of whether government consumption is a substitute for or a complement to private consumption. The empirical analysis is made with panel cointegration analysis, using the newly developed CUSUM cointegration test by \cite{westerlund05}. The method is extended by using a bootstrap technique to control for cross-sectional dependence. The results show that government consumption is a complement to private consumption for most of the countries and a substitute for only a few of the countries.
    Keywords: Private consumption; Government consumption; Panel cointegration
    JEL: C33 E21 E62
    Date: 2005–12–21
  111. By: William Fuchs (Stanford University); Francesco Lippi (Banca d'Italia)
    Abstract: A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible but requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we identify conditions under which such arrangement may dominate a coordinated system with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents’ incentives to leave the union by tilting both current and future policy in their favor. This contrasts with the static nature of optimal policy when participation is exogenously assumed and implies that policy in the union is not exclusively guided by area-wide developments but does occasionally take account of member countries’ national developments. Second we show that there might exist states of the world in which the union breaks apart, as occurred in some historical episodes. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union.
    Keywords: monetary union, limited commitment
    JEL: C7 E5 F33
    Date: 2004–07
  112. By: Filippo Occhino (Rutgers University)
    Abstract: This paper investigates how the feasibility of migration affects governments' optimal fiscal policies. We assume that households migrate towards economies where their welfare is higher, governments choose taxes and public expenditures to maximize a weighted sum of the households' welfare, welfare is increasing in public expenditures, and only distortionary labor income taxes are available. In isolated economies, the optimal fiscal policy implies that some households are net fiscal contributors, while other households are net fiscal beneficiaries. When households can migrate, however, governments compete for the households which are net fiscal contributors, and modify the fiscal policy in their favor, lowering their taxes and net fiscal contribution, and increasing their welfare. The magnitude of the effect increases with the sensitivity of migration to welfare. In the limiting case of free mobility, all households are zero net fiscal contributors.
    Keywords: Optimal fiscal policy; Ramsey equilibrium; Migration; Fiscal competition; Mobility;
    JEL: E62
    Date: 2005–08–17
  113. By: Thierry Warin
    Abstract: On its face, unemployment seems to be a concept easy to grasp. But when one looks closer, the intricacies are numerous and assump-tions are multiple. Nowadays, the New Classical School is a bit closer to New Keynesianism than ever before. It still has a strong footprint in Monetarism, since in the long run, there is no interest in stabilizing an economy. But unlike the Classical school, the New Classical School concedes that in the short run things are much more complicated. If Keynes was right when he said, “in the long run, we are all dead,” one may even conclude that the New Classi-cal School is far more Keynesian than it first appears.
    Keywords: full employment, underemployment, unemployment, natural rate hypothesis, natural rate of unemployment
    JEL: E4 E5 E6 H3 N0
    Date: 2006–01
  114. By: Mika Kuismanen (Research Department, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Luigi Pistaferri (Stanford University, Department of Economics, 579 Serra Mall, Stanford, CA 94305-6072, U.S.A.)
    Abstract: Most of the empirical literature on consumption behaviour over the last decades has focused on estimating Euler equations. However, there is now consensus that data-related problems make this approach unfruitful, especially for answering policy relevant issues. Alternatively, many papers have proposed using the consumption function to forecast behaviour. This paper follows in this tradition, by deriving an analytical consumption function in the presence of intertemporal non-separabilities, "superior information", and income shocks of different nature, both transitory and permanent. The results provide evidence for durability, and show that people are relatively better at forecasting short-term rather than long-term shocks.
    Keywords: Consumption, Superior Information, Durability, Habit Persistence, Panel Data.
    JEL: D11 D12 D82 E21
    Date: 2006–01
  115. By: Michel Beine (University of Luxemburg, and Free University of Brussels); Charles S. Bos (Vrije Universiteit Amsterdam); Sebastian Laurent (University of Namur, and CORE)
    Abstract: This paper is the first attempt to assess the impact of official FOREX interventions of the three major central banks in terms of the dynamics of the currency components of the major exchange rates (EUR/USD and YEN/USD) over the period 1989-2003. We identify the currency components of the mean and the volatility processes of exchange rates using the recent Bayesian framework developed by Bos and Shephard (2004). Our results show that in general, the concerted interventions tend to affect the dynamics of both currency components of the exchange rate. In contrast, unilateral interventions are found to primarily affect the currency of the central bank present in the market. Our findings also emphasize a role for interventions conducted by these central banks on other related FOREX markets.
    Keywords: Central banks; interventions; exchange rates; stochastic volatility; state space
    JEL: C11 C32 E58 F31
    Date: 2005–11–10
  116. By: Christopher Spencer (University of Surrey)
    Abstract: Building on Blinder and Wyplosz (2005) this paper presents a formal mechanism which potentially explains how autocratically collegiate, genuinely collegiate and individualistic monetary policy committees (MPCs) are able to reach a consensus. Drawing on the theory of Markov chains, I adopt a bounded-rational approach, and demonstrate how individuals are able to forge agreement, even when interest rate preferences are initially diverse. I show how consensus is reached when (i) career concerns are present and (ii) when members hold different opinions about the usefulness of others’ information. An overriding conclusion which emerges is that it is possible to populate MPCs with people who hold very different views about the economy and still reach an agreement. Further, although MPCs should be populated by people who are willing to listen to the opinions of others, the degree to which members are willing to listen to each other has ramifications for the type of decision which is reached.
    Keywords: Monetary Policy Committee, consensus formation, bounded-rationality
    Date: 2005–06
  117. By: Jean-Pascal Bénassy
    Abstract: The fiscal theory of the price level says that the price level can be made determinate if the government uses fiscal policies such that government liabilities explode unless the price in the first period is at the "right" level. The policy implications are disturbing, as they call for rather adventurous fiscal policies. We show that these disturbing policy implications are specific to the "Ricardian" models that have been used to develop the theory. By moving to "non Ricardian" models we see that price determinacy is consistent with reasonable fiscal policies.
    Date: 2005
  118. By: Terhi Jokipii; Brian Lucey
    Abstract: This paper examines banking and financial sector return co-movements between the three largest Central and Eastern European countries to have recently joined the European Union, namely the Czech Republic, Hungary and Poland. In order to build up an understanding of the soundness and stability of the banking systems of these new member states, we try to determine whether it is contagion, or interdependence that is driving the co-movements between these markets. Employing various different tests of propagation and controlling for own-country news and other fundamentals, we find evidence of cross-border banking sector contagion and determine that it is regional rather than international shocks that are driving the market movements.
    Keywords: Contagion, Macroeconomic news, Banking sector, Stock returns
    Date: 2005–12–15
  119. By: Reis, Ricardo
    Abstract: If a consumer wishes to protect her retirement account from the risk of price changes in order to sustain a stable standard of living, then what price index should the account be indexed to? This paper constructs a dynamic price index (DPI) that answers this question. Unlike the existing theory on price indices (which is static and certain), the DPI measures the cost of living for a consumer who lives for many periods and faces uncertainty. The first contribution of this research is to define this price index and study its theoretical properties. The DPI: is homogeneous of degree 1 with respect to all prices, is forward-looking with respect to price shocks, responds more to permanent vis-à-vis transitory price changes, includes asset prices with a potentially large weight, and distinguishes between durable and non-durable goods prices. The second contribution of the paper is to construct a DPI for the United States from 1970 to 2004. It gives an account of the cost of living in the U.S. that is strikingly different from the one provided by the CPI. The DPI is less persistent, more volatile, and a large part of its movements are driven by changes in the prices of houses and bonds.
    Keywords: Consumer price index; Cost-of-living index; inflation; retirement accounts
    JEL: C43 D91 E31 J26
    Date: 2005–12
  120. By: Luigi Guiso (Università degli Studi di Sassari); Monica Paiella (Bank of Italy); Ignazio Visco (Bank of Italy)
    Abstract: We use detailed data on housing prices in Italy available for a large number of years and with a fine geographical breakdown to compute capital gains and losses on the most widespread asset among consumers, housing, and inquire whether changes in housing values affect consumption. We find that consumer expenditures do react to capital gains, with a marginal propensity to consume out of real value changes of housing wealth of about 0.02. Reactions are different across types of consumers: while homeowners increase consumption when house prices increase, with a marginal propensity of about 0.035, the renters’ response to the higher house cost tends to be that of increased savings. For the owners of listed stocks the response to capital gains is difficult to estimate with statistical precision, even if, for the limited sample of owners of these assets, its negative sign may be indicative of prevailing substitution over income effects.
    Keywords: wealth effects, consumption, housing, stock ownership
    JEL: D12 E21 E44
    Date: 2005–06
  121. By: Bjorn A. Hauksson
    Abstract: I show that the empirical impulse response of the real exchange rate is hump-shaped. This fact can explain why a number of recent authors have been unable to match the persistence of the real exchange rate using sticky-price business cycle models driven by monetary shocks. The key failure of the models used in the recent literature is that they yield monotonic impulse responses for the real exchange rate. While it is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate, models that yield hump-shaped impulse responses for the real exchange rate can easily match the empirical persistence of the real exchange rate. I present a two-country sticky-price business cycle model that yields humpshaped responses for the real exchange rate in response to a number of different disturbances. This model can match the half-life of the real exchange rate as well as and the humped shape of its impulse response.
    Date: 2005–11
  122. By: Matthews, Kent (Cardiff Business School); Minford, Patrick (Cardiff Business School); Naraidoo, Ruthira
    Abstract: The 1930s in the UK and USA is remembered as the decade of mass unemployment. We develop a model of equilibrium unemployment based on the Meltzer and Richard (1981) model of redistribution financed by distortionary taxation. This model is extended to the UK and the US interwar period to provide a theory of an endogenous natural rate of unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks; and further evidence is obtained by structural estimates for the UK.
    Keywords: Equilibrium unemployment; political economy; 'vicious' and 'virtuous' circles; threshold model; bootstrapping
    JEL: E24 C10
    Date: 2006–01
  123. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)); Bernd Schips (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The paper reviews the sources of «Upward bias» and «Downward bias» in the USConsumer Price Index (CPI) and discusses the changes the Bureau of Labor Statistics has introduced in order to eliminate them. The remaining biases are quantified. Also, the question is raised how much the changes to the CPI have lifted the growth rates of «real» US-GDP upward. It is shown that the divergence in growth rates between the US and the European Union since 1997 can be explained almost entirely in terms of differing statistical methods.
    Keywords: Consumer Price Index, Economic Growth, Statistical bias, Statistical artifacts, United States
    JEL: C43 C82 E31 O47 O51
    Date: 2004–11
  124. By: Francesco Zollino (Banca d'Italia)
    Abstract: By allowing median voter’s location and preferred policy to change over time, a variety of redistributive policies results in the long-run with no unique relationship to inequality. Single outcome depends on the interaction between the pure economic structure and policy action in determining wealth distribution over time. The standard positive correlation between redistribution and inequality is confirmed when the pattern of social mobility, potentially prevailing in a free market, proves robust to public action. Otherwise the non-linear relationship found in recent literature is confirmed. With balanced intensity of backward and upward mobility in free market, policy cycles endogenously arise, with inequality shrinking and enlarging periodically and counter-cyclically.
    Keywords: social mobility, political cycle, credit rationing, redistributive policy
    JEL: D31 E62 I38 O41 P16
    Date: 2004–07
  125. By: Péter Karádi (New York University, USA)
    Abstract: The paper proposes a structural empirical model capable of examining exchange rate smoothing in the small, open economy of Hungary. The framework assumes the existence of an unobserved and changing implicit exchange rate target. The central bank is assumed to use interest rate policy to obtain this preferred rate in the medium term, while market participants are assumed to form rational expectations about this target and influence exchange rates accordingly. The paper applies unobserved variable method – Kalman filtering – to estimate this implicit exchange rate target, and simultaneously estimate an interest rate rule and an exchange rate equation consistent with this target. The results provide evidence for exchange rate smoothing in Hungary by providing an estimated smooth implicit exchange rate target development and by showing significant interest rate response to the deviation of the exchange rate from this target. The method also provides estimates for the ceteris paribus exchange rate effects of expected and unexpected interest rate changes.
    Keywords: exchange rate smoothing, interest rate rules, Kalman filter
    JEL: E52 F31 F41
    Date: 2005
  126. By: Patrick Honohan; Anthony Leddin
    Abstract: Despite anchoring the Irish monetary system to a common zone-wide exchange rate and interest rate, EMU has triggered sizable exchange rate and especially interest rate shocks to the Irish economy (albeit not appreciably greater than those experienced under previous exchange rate regimes). Interest rate movements have deviated widely from what a standard Taylor monetary policy rule would have counseled – though here again the deviations have been no worse in this regard than those of the previous regime. The most important shock has been associated with the large and sustained initial fall in nominal interest rates as EMU began. Through mechanisms which we formally model, the interest rate fall has had a lasting effect on property prices, construction activity and on the capacity of the labour market to absorb sizable net immigration, despite a sharp deterioration in wage competitiveness since 2002. As the long drawn-out impact of this shock subsides, the failure of the wage-bargaining system promptly to claw back the loss of competitiveness resulting from exogenous exchange rate movements is increasingly likely to show up in weaker aggregate employment performance.
    Date: 2005–12–15
  127. By: Lorenzo Forni (Banca d'Italia)
    Abstract: Is there a relation between wage bargaining institutions and unemployment? The humpshape hypothesis”, first introduced by Calmfors and Driffill (1988), states that countries with highly centralized and highly decentralized wage bargaining processes have a superior performance in terms of unemployment than countries with an intermediate degree of centralization. Calmfors and Driffill’s results were obtained on a sample including data from 1962 up to 1985. This paper shows that the claimed superiority in terms of unemployment of centralized countries over intermediate ones during the ’60s and the ’70s depended upon their high levels of government expenditure and public sector employment. The evidence shows that from the beginning of the ’80s the expansion of the public sector in centralized countries slowed down considerably and, at the same time, the correlation between the degree of centralization and unemployment weakened. This evidence helps reconcile recent findings of poor correlations between measures of economic performance and indexes of bargaining systems with Calmfors and Driffill’s original results. The paper concludes by questioning the compatibility of the reported evidence with the theoretical framework proposed by CD to explain the hump-shape hypothesis.
    Keywords: wage negotiations, unemployment rate, public employment
    JEL: E24 E62 H50
    Date: 2004–06
  128. By: Monica Paiella (Banca d'Italia)
    Abstract: This paper analyses the dynamics of Italian household wealth over the 1990s and assesses the strength of the wealth effects on consumption, using as a benchmark the United States. In a period of sharply rising asset prices, Italian household net worth rose significantly, but on the whole individuals were net buyers of assets and they appear to have realized, directly or indirectly, only a small portion of the capital gains accrued on their wealth. This is consistent with the lack of evidence of important direct wealth effects on consumption. Financial wealth effects turn out to be small because Italian households are not large scale owners of financial assets, even though their marginal propensity to consume out of financial wealth lies within the range commonly reported for the US and other industrialized countries. By contrast, housing market effects are small, even smaller than financial market effects, despite widespread homeownership, because the marginal propensity to consume out of real assets is very low. The propensity to consume out of financial wealth has tended to diminish as pension reforms have reduced household pension wealth. On the other hand, the propensity to consume out of real wealth has increased as financial deregulation and the intensification of competition among financial institution have eased credit constraints for households.
    Keywords: household saving behavior, housing wealth, financial wealth, capital gains, marginal propensity to consume out of wealth
    JEL: D12 E21 E44
    Date: 2004–07
  129. By: Refet Gurkaynak; Justin Wolfers
    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.
    JEL: C5 C82 D8 E3 E4 G15
    Date: 2006–01
  130. By: Tuomas A. Peltonen (European Central Bank, Postfach 16 03 19, 60066 Frankfurt am Main, Germany)
    Abstract: This paper analyzes the predictability of emerging market currency crises by comparing the often used probit model to a new method, namely a multi-layer perceptron artificial neural network (ANN) model. According to the results, both models were able to signal currency crises reasonably well in-sample, but the forecasting power of these models out-ofsample was found to be rather poor. Only in the case of Russian (1998) crisis were both models able to signal the crisis well in advance. The results reinforced the view that developing a stable model that can predict or even explain currency crises is a challenging task.
    Keywords: Currency crises, emerging markets, artificial neural networks.
    JEL: F31 E44 C25 C23 C45
    Date: 2006–01
  131. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: According to KENDRICK (1996, p. 1), National Accounts have become “an indispensable tool for macroeconomic analysis, projections, and policy formulation”. The paper elaborates on this statement, addressing policy domains that rely heavily on National Accounts data. Yet – useful as they are – National Accounts can also be misused in the context of governance. The most common misapplication of National Accounts relates to the field of international comparisons. For instance, according to National Accounts data, the U.S. have outperformed all other high-income economies over the course of the 90s and up through the new millennium. In many European countries, public debate centres on the question how to devise ‘structural reforms’ in order to make the set-up of the respective economy more similar to that of the United States. Arguably, the main impact of National Accounts on governance can be found here. Still, there are large differences in the ways National Accounts calculations are carried out even among European countries, let alone between Europe and the U.S. The paper discusses several such differences, showing that the divergence in growth rates between the U.S. and the EU since 1997 can be explained almost entirely in terms of differing statistical methods.
    Keywords: National Accounts, governance, inflation and growth comparisons, deflation methods, statistical artefacts
    JEL: C43 C82 E31 O47 O57
    Date: 2005–03
  132. By: Cuong Le Van (CERMSEM); Manh Hung Nguyen (CERMSEM)
    Abstract: We prove the existence of competitive equilibrium in a single-sector dynamic economy with heterogeneous agents and elastic labor supply. The method of proof relies on exploiting the existence of Lagrange multipliers in infinite dimensional spaces and the link between Pareto-optima and competitive equilibria.
    Keywords: Optimal growth model, Lagrange multipliers, single-sector growth model, competitive equilibrium, elastic labor supply.
    JEL: C61 C62 D51 E13 O41
    Date: 2005–10
  133. By: Björn A. Hauksson
    Abstract: An aggregate business fixed investment error correction model (ECM) is estimated with Icelandic data. The user cost of capital increased considerably in the 1980s as capital markets in Iceland were liberalised and interest rates were adjusting. From the 1990s and onwards, however, the user cost has been decreasing steadily. And the relative price of business investment has been downward trending since the 1980s. A high Q ratio over the period portrays an increased demand for capital. The first order condition of capital for profits which is derived for a constant elasticity of substitution production function has minor long-run role for the user cost. Investment and capital, and investment, value added and the user cost do, however, give expected estimates of cointegration coefficients. In the short-run dynamics of the ECM, gearing, Q and profit ratios move with investment. Official figures show an unprecedented capital decrease in the 1990s in Iceland. The possibility of mismeasured technology investment is explored briefly.
    Date: 2005–09
  134. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The conventional wisdom about Keynes’s Principle of Effective Demand is that it states something about quantities. It is widely held that the Principle determines the levels of output and employment in a world not governed by Say’s Law. This paper argues that the Principle of Effective Demand goes beyond this to explain not only ‘real’ activity levels but also the aggregate price level. A variant of the Post Keynesian D/Z-model is brought together with Marxian reproduction schemes to derive this result.
    Keywords: Effective demand, multiplier, Post Keynesianism, D/Z-model, reproduction schemes
    JEL: B14 B22 E20 E31
    Date: 2004–11
  135. By: Marco Gallegati (Department of Economics, Università Politecnica delle Marche)
    Abstract: In this paper we investigate the relationship between stock market returns and economic activity by using signal decomposition techniques based on wavelet analysis. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the DJIA stock price index and the industrial production index for US over the period 1961:1- 2005:3 and using the definitions of wavelet variance, wavelet correlation and cross-correlations analyze the association as well as the lead/lag relationship between stock prices and industrial production at the different time scales. Our results show that stock market returns tends to lead the level of economic activity but only at the highest scales (lowest frequencies), corresponding to periods of 16 months and longer, and that the periods by which stock returns lead output increase as the wavelet time scale increases.
    Keywords: stock market, industrial production, wavelet analysis
    JEL: C32 E44
    Date: 2005–12–27
  136. By: Jesús Fernández-Villaverde; Juan F. Rubio-Ramíre; Thomas J. Sargent
    Date: 2005–12–31
  137. By: Marta Gómez-Puig
    Abstract: With European Monetary Union (EMU), there was an increase in the adjusted spreads (corrected from the foreign exchange risk) of euro participating countries' sovereign securities over Germany and a decrease in those of non-euro countries. The objective of this paper is to study the reasons for this result, and in particular, whether the change in the price assigned by markets was due to domestic factors such as credit risk and/or market liquidity, or to international risk factors. The empirical evidence suggests that market size scale economies have increased since EMU for all European markets, so the effect of the various risk factors, even though it differs between euro and non-euro countries, is always dependent on the size of the market.
  138. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The American Post Keynesians – those who attach importance to the ‘Big P’ and the absence of a dash between ‘post’ and ‘Keynesian’ – claim to be Keynes’s most literal interpreters, or the ‘truest’ Keynesians (HOLT ET AL., 1998, p. 17). This paper compares the Post Keynesian interpretation of the Principle of Effective Demand, i.e. the D/Z-model, with Keynes’s own presentation in Chapter 3 of the General Theory – and finds substantial differences. A reinterpretation of the D/Z-model is offered that would bring it into line with Chapter 3.
    Keywords: Effective demand, D/Z-model
    JEL: B22 E12 E20 E31
    Date: 2004–06
  139. By: Dew-Becker, Ian; Gordon, Robert J
    Abstract: A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts by creating a direct link between macro productivity growth and the micro evolution of the income distribution. We show that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10% of the income distribution, leaving little left over for the bottom 90%. Half of this inequality effect is attributable to gains of the 90th percentile over the 10th percentile; the other half is due to increased skewness within the top 10%. In addition to its micro analysis, this paper also asks whether faster productivity growth reduces inflation, raises nominal wage growth, or raises profits. We find that an acceleration or deceleration of the productivity growth trend alters the inflation rate by at least one-for-one in the opposite direction. This paper revives research on wage adjustment and produces a dynamic interactive model of price and wage adjustment that explains movements of labour's share of income. What caused rising income inequality? Economists have placed too much emphasis on 'skill-biased technical change' and too little attention to the sources of increased skewness at the very top, within the top 1% of the income distribution. We distinguish two complementary explanations, the 'economics of superstars,' i.e., the pure rents earned by sports and entertainment stars, and the escalating compensation premia of CEOs and other top corporate officers. These sources of divergence at the top, combined with the role of deunionization, immigration, and free trade in pushing down incomes at the bottom, have led to the wide divergence between the growth rates of productivity, average compensation, and median compensation.
    Keywords: income inequality; income tax data; productivity growth; wage and price econometrics
    JEL: D31 D33 D63 E31 I30 J30
    Date: 2005–12
  140. By: Jonathan Gruber
    Abstract: One of the most important behavioral parameters in macroeconomics is the elasticity of intertemporal substitution (EIS). Starting with the seminal work of Hall (1978), researchers have used an Euler equation framework to estimate the EIS, relating the growth rate of consumption to the after-tax interest rate facing consumers. This large literature has, however, produced very mixed results, perhaps due to an important limitation: the impact of the interest rate on consumption or savings is identified by time series movements in interest rates. Yet the factors that cause time series movements in interest rates may themselves be correlated with consumption or savings decisions. I address this problem by using variation across individuals in the capital income tax rate. Conditional on observable characteristics of individuals, tax rate movements cause exogenous shifts in the after-tax interest rate. Using data on total non-durable consumption from the Consumer Expenditure Survey over two decades, I estimate a surprisingly high EIS of 2. This finding is robust to a variety of specification checks.
    JEL: H2 E2 E6
    Date: 2006–01
  141. By: Eriksson, Åsa (Department of Economics, Lund University)
    Abstract: This paper examines the determinants of the wage level and the relation between the wage level and unemployment in Sweden between 1982 and 2002, using a cointegrated VAR approach. The long-run relation between wages and unemployment is found to be negative. There is also evidence of large deviations between the development in real wages and the development in productivity, in that the growth in real wages exceeds the growth in labour productivity. The results indicate that rigidities are present in the Swedish labour market and that these rigidities may cause higher unemployment. Furthermore, trade unions are found to have a large influence on the wage formation process.
    Keywords: Wage formation; Unemployment; Cointegration; Common Trends
    JEL: C32 E24
    Date: 2005–12–21
  142. By: Frank T. Denton; Christine H. Feaver; Byron G. Spencer
    Abstract: This report has two purposes: (1) to introduce a new version of the MEDS (Models of the Economic Demographic System) software; and (2) to apply it in a series of illustrative projections. The software is designed to illustrate the medium- to longer-term responses of the Canadian population and economy to a wide range of factors on either the demographic side, such as changes in rates of fertility, migration, and mortality, or the economic side, such as changes in the rate of technical progress or the educational attainment of young people or of new immigrants. "Standard" projections are provided, together with nineteen alternative projections. (For some illustrative projections, see The range of projections indicates the breadth of applications for which MEDS has been designed. It serves also to provide some quantitative measures of the likely demographic and economic consequences of population aging, and indicates the scope for evaluating policy initiatives by means of simulation.
    Keywords: macroeconomic projections, economic-demographic system
    JEL: E10 E17
    Date: 2005–12
  143. By: M. Hashem Pesaran; Ron Smith
    Abstract: This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann andWeiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, xit, and then consistently combined to form a Global VAR (GVAR). It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where xit variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. This approach has been used in a wide variety of contexts and for a wide variety of purposes. The paper also provides some new results.
    Keywords: Global VAR (GVAR), DSGE models, VARX
    JEL: C32 E17 F42
  144. By: Shail J. Butani (U.S. Bureau of Labor Statistics); Richard L. Clayton (U.S. Bureau of Labor Statistics); Vinod Kapani (U.S. Bureau of Labor Statistics); James R. Spletzer (U.S. Bureau of Labor Statistics); David M. Talan (U.S. Bureau of Labor Statistics); George S. Werking Jr. (U.S. Bureau of Labor Statistics)
    Abstract: The gross job gains and gross job loss statistics from the BLS Business Employment Dynamics (BED) program measure the large gross job flows that underlie the quarterly net change in employment. In the fourth quarter of 2004, employment grew by 869,000 jobs. This growth is the sum of 8.1 million gross job gains from opening and expanding establishments, and 7.2 million gross job losses from contracting and closing establishments. The new BED data have captured the attention of economists and policymakers across the country, and these data are becoming a major contributor to our understanding of employment growth and business cycles in the U.S. economy. Following the initial release of the BED data in September 2003, the BED data series expanded in May 2004 with the release of industry statistics. The BLS then began work on tabulations by size class. The production of size-class statistics is a complex task involving several economic and statistical issues. Although it is trivial to classify a business into a size class in any given quarter, it is difficult to classify a business into a size class for a longitudinal analysis of employment growth. Several different classifications exist, and many of these possible classifications have appealing theoretical and statistical properties. Furthermore, these alternative classification methodologies result in sharply different portraits of employment growth by size class. In this article, we discuss the alternative statistical methodologies that the BLS considered for creating size class tabulations from the Business Employment Dynamics data. Our primary focus is on four methodologies: quarterly base-sizing, annual base-sizing, mean-sizing, and dynamic-sizing. We discuss the evaluation criteria that BLS considered for choosing its official size class methodology.
    Keywords: gross job gains; gross job losses; business employment dynamics; size-class statistics; dynamic-sizing
    JEL: J23 J60
    Date: 2005–12
  145. By: Domenico J. Marchetti (Banca d'Italia); Francesco Nucci (Universita' di Roma La Sapienza)
    Abstract: Recent contributions have suggested that technology shocks have a negative short-run effect on labor input, contrary to the predictions of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of stickyprice models, while others have either augmented flexible-price models in a number of ways or disputed the empirical finding itself. In this paper we estimate a number of alternative measures of TFP growth for a representative sample of Italian manufacturing firms and find a negative impact of productivity shocks on labor input. Furthermore, by relying on the firmlevel reported frequency of price reviews, we find that the contractionary effect is strong for firms with stickier prices, but it is weaker or not significant for firms with more flexible prices, consistently with the prediction of sticky-price models.
    Keywords: Productivity shocks, Labor input, price stickiness
    JEL: D24 E32
    Date: 2004–12
  146. By: Carmen Broto; Esther Ruiz
    Abstract: In this paper we consider a model with stochastic trend, seasonal and transitory components with the disturbances of the trend and transitory disturbances specified as QGARCH models. We propose to use the differences between the autocorrelations of squares and the squared autocorrelations of the auxiliary residuals to identify which component is heteroscedastic. The finite sample performance of these differences is analysed by means of Monte Carlo experiments. We show that conditional heteroscedasticity truly present in the data can be rejected when looking at the correlations of observations or of standardized residuals while the autocorrelations of auxiliary residuals allow us to detect adequately whether there is heteroscedasticity and which is the heteroscedastic component. We also analyse the finite sample behaviour of a QML estimator of the parameters of the model. Finally, we use auxiliary residuals to detect conditional heteroscedasticity in monthly series of inflation of eight OECD countries. We conclude that, for most of these series, the conditional heteroscedasticity affects the transitory component while the long-run and seasonal components are homoscedastic. Furthermore, in the countries where there is a significant relationship between the volatility and the level of inflation, this relation is positive, supporting the Friedman hypothesis.
    Date: 2006–01
  147. By: Sedjo, Roger (Resources For the Future)
    Abstract: Governments often use fiscal, exchange rate, monetary policy as well as export promotion tax increases, privatization, and land reform as part of comprehensive adjustments packages for addressing economic imbalances, balance of payments, and structural weaknesses. Such approaches, however, have come under heavy criticism for failing to recognize the social and environmental costs associated with them. Critics have argued that economic growth, trade liberalization, and increased primary product exports increase pressure on many sectors, including the agricultural and forestry land use sectors. This paper examines a number of these types of external shocks. This paper makes two arguments. First, from a theoretical economic perspective, although in many cases structural adjustment programs can be expected to affect the domestic forest sector, in other cases they will not. Second, even when there is an impact on the forest, it need not be detrimental to environmental and ecosystem values. A sustainable forest system needs to provide wood, local environmental products and services, and global ecological services, but individual forests can specialize in some of these.
    Keywords: forests, sustainability, macroeconomics, trade, exchange rates, structural adjustment
  148. By: Jochen Hartwig (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The paper summarises and advances arguments made earlier by staff members of the Swiss Institute for Business Cycle Research in the current debate over the reasons for growth in Switzerland being weak. It is shown that the assessment of the speed of productivity growth crucially depends on how one chooses to measure both labour input and value added. Using the most adequate measures for both variables, and concentrating on the period between 1980 and 1997, we obtain a productivity growth for Switzerland that has been significantly higher than in the U.S. Since 1997, the U.S. have outperformed Europe in general and Switzerland in particular according to a widely held view. We show this view to rely – at least in part – on statistical artefacts. Approximately 0.5 percentage points of the annual growth rates of U.S. GDP (and hence labour productivity) result from revisions to deflation methods which have been introduced in the U.S. since 1998. Switzerland, however, has not introduced such revisions (or has not extrapolated backwards their impacts on the deflators). All in all, our results should help to put into perspective public concern over Swiss growth rates being behind those of other countries.
    Keywords: Productivity measurement, deflation methods, statistical artifacts, USA, Switzerland
    JEL: C43 C82 E31 O47 O57
    Date: 2005–05
  149. By: Ariel Rubinstein; Rani Spiegler
    Date: 2005–12–31
  150. By: Karam, Philippe; Hostland, Dou g
    Abstract: The authors apply stochastic simulation methods to assess debt sustainability in emerging market economies and provide probability measures for projections of the external and public debt burden over the medium term. The vulnerability of public debt to adverse shocks is determined by a number of interrelated factors, including the volatility of output, financial fragility, the endogenous response of the risk premium, and sudden stops in private capital flows. The vulnerability of external debt is sensitive to the determination of the exchange rate and to the pricing of traded goods. The authors show that fiscal policy can act in a preemptive manner to prevent the debt burden from rising significantly over the medium term. This requires flexibility in fiscal planning, which many emerging market economies lack. Emerging market economies therefore face a difficult tradeoff between managing the risk of a debt crisis and pursuing other important fiscal policy objectives.
    Keywords: Economic Theory & Research,Strategic Debt Management,Settlement of Investment Disputes,Macroeconomic Management,External Debt
    Date: 2006–01–01
  151. By: Takashi Terada (National University of Singapore)
    Abstract: This paper aims to examine the implications of the rise of East Asian regionalism for the Australia-Japan partnership. In particular, it investigates whether both nations can sustain their partnership, which evolved around Asia Pacific regionalism over the last few decades, by exploring the upsurge of Japan’s interest in East Asian regionalism and examining characteristics of Australia’s foreign policy under the Howard government, which lacked a regionalist approach in its first three terms but has shown a keener interest in furthering relations with East Asian countries and promoting East Asian regionalism since late 2004.
    Keywords: East Asia, Australia-Japan partnership, regionalist approach, trade liberalisation
    JEL: E6 O19 F13 F14
    Date: 2005–11
  152. By: Miguel Lebre de Freitas (Universidade de Aveiro e NIPE)
    Abstract: In this article, we argue that the EMS experience, of introducing elements of flexibility, so as to overcome the initial rigidity, without deviating from the fundamental aim, may provide a relevant model for the revision of the Stability and Growth Pact (SGP). Although the specific limits being adopted are questionable, the SGP contains the necessary ingredients for an efficient budgetary rule. In particular, it assures long run discipline, allowing at the same time for short term flexibility. Setting limits to the government debt and the overall deficit, the SGP accounts reasonably for the intergenerational equity, without interfering in the level and in the composition of government expenditures, matters that shall be instead subject to democratic scrutiny. Given the merits of the rule and the recognition that, to a large extent, the current difficulties are episodic and related to the unique nature of the regime shift, we argue that a more flexible interpretation of the Excessive Deficits Procedure during the transition period may constitute an effective way of accommodating the current circumstances. Neste artigo argumentamos que a experiência do Sistema Monetário Europeu, de introduzir elementos de flexibilidade como forma de contornar a rigidez inicial, sem no entanto descurar o objectivo fundamental, constitui um modelo relevante para a revisão do Pacto de Estabilidade e de Crescimento (PEC). Apesar de os limites concretos serem discutíveis, o PEC contém os ingredientes necessários a uma regra orçamental eficiente. Nomeadamente, assegura disciplina a longo prazo proporcionando flexibilidade a curto prazo. Ao fixar limites para o défice e dívida globais, o PEC acautela razoavelmente a equidade entre gerações, sem no entanto interferir ao nível da composição da despesa, matéria essa que, em última análise, deve ser objecto de controlo democrático. Tendo em conta o mérito da regra e também o facto de, em larga medida, as dificuldades associadas à sua aplicação estarem relacionadas com o fenómeno pontual da mudança de regime, uma interpretação mais flexível do Procedimento de Défices Excessivos durante o processo de transição pode constituir uma forma eficaz de acomodar a presente situação.
    Keywords: Política Orçamental, Pacto de Estabilidade e Crescimento, União Monetária Europeia.
    JEL: H60 E60 F33
    Date: 2005–12
  153. By: Guido Schwerdt (European University Institute, Department of Economics, Villa San Paolo, Via della Piazzuola 43, 50133 Florence, Italy); Jarkko Turunen (European Central Bank, DG-Economics, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: Composition of the euro area workforce evolves over time and in response to changing labour market conditions. We construct an estimate of growth in euro area labour quality over the period 1983-2004 and show that labour quality has grown on average by 0.6% year-on-year over this time period. Labour quality growth was significantly higher in the early 1990s than in the 1980s. This strong increase was driven by an increase in the share of those with tertiary education and workers in prime age. Growth in labour quality moderated again towards the end of the 1990’s, possibly reflecting the impact of robust employment growth resulting in the entry of workers with lower human capital. Labour quality growth has on average accounted for nearly one third of euro area labour productivity growth. The results point to a significant decline in the contribution of total factor productivity to euro area growth.
    Keywords: Human capital, labour quality, total factor productivity, growth accounting.
    JEL: E24 J24 O47
    Date: 2006–01
  154. By: Daniel Lampart (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)); Andres Frick (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: For some time now, Swiss trade unions have been demanding a substantial increase of the wages in the lowest income segments, especially in the retail and catering service industries. At present, increases for the sales personell in the retail industry stand in the forefront of trade union interest. Depending on the share of the wage sum affected, such pay increases can have a significant impact on prices, employment and the composition of the retail industry. Moreover, these effects are not limited to the retail industry itself, but would have repercussions on the rest of the economy (e.g. on consumer prices in general). The project consisted in quantifying these effects with the help of a small econometric model. Besides comparing the states before and after the wage shock, the adjustment dynamics between the two states are depicted. The main results are, that employment in the retail industry bears the brunt of the adjustment, whereas prices are little affected. A qualitative assessment of the effects on the structure of the industry rounds off the paper. The study was commissioned by the trade union Unia.
    Keywords: Wage shock, retail industry, retail model
    JEL: E24 J3 J5
    Date: 2005–12
  155. By: Cuong Le Van (CERMSEM); Manh Hung Nguyen (CERMSEM); Yiannis Vailakis (CERMSEM)
    Abstract: The paper extends the canonical representative agent Ramsey model to include heterogeneous agents and elastic labor supply. The welfare maximization problem is analyzed and shown to be equivalent to a non-stationary reduced form model. An iterative procedure is exploited to prove the supermodularity of the indirect utility function. Supermodularity is subsequently used to establish the convergence of optimal paths.
    Keywords: Single-sector growth model, heterogeneous agents, elastic labor supply.
    JEL: C62 D51 E13
    Date: 2005–12
  156. By: Stavins, Robert; Newell, Richard (Resources For the Future)
    Abstract: Policy makers and policy analysts are frequently faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional command-and-control approaches. We develop rules-of-thumb that can be employed with minimal amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. Our hope is that these simple formulae can aid policy analysts and policy makers in the early stages of exploring alternative policy instruments by helping them identify approaches that merit greater attention and more detailed analysis. We illustrate the use of the rules-of-thumb with an application to nitrogen oxides control in the eastern United States.
  157. By: Maurizio CIASCHINI; Claudio SOCCI; Enzo VALENTINI
    Abstract: L'analisi della riforma relativa alle aliquote IRE non puo' limitarsi alla descrizione del solo risparmio fiscale per le diverse categorie di percettori di reddito. L'aspetto rilevante di tale manovra dovrebbe essere il rilancio dell'economia attraverso un sostegno alla domanda finale. L'attenzione dovrebbe spostarsi quindi sui possibili effetti economici, che possono essere considerati in termini disaggregati, sia per le attivita' produttive sia per i settori istituzionali. Tale strumento dovrebbe avere effetti sulla produzione industriale, mediante il reddito che genera la nuova domanda finale dei settori istituzionali. Nell'analisi che segue si utilizzera' un modello multisettoriale di tipo esteso, cioe' in grado di descrivere l'intero flusso circolare del reddito, per valutare l'impatto sulla produzione industriale della riforma IRE e si proporranno potenziali scenari alternativi al fine di valutare modalita' differenti d'intervento a parita' di risorse utilizzate.
    Keywords: IRE, cambiamenti strutturali, matrice di contabilit… sociale
    JEL: C67 D31 D57 E62
    Date: 2005–02
  158. By: Söderlind, Paul
    Abstract: Survey and option data are used to take a new look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data (CBOE's VIX) indicates that investors overestimate the volatility of equity returns. Both facts reduce the puzzle. However, data on beliefs about output volatility (Survey of Professional Forecasters) shows marked overconfidence. On balance, the equity premium is somewhat less of a puzzle than in ex post data.
    Keywords: CBOE VIX; equity premium puzzle; Livingston survey; Survey of Professional Forecasters
    JEL: E13 E32 G12
    Date: 2005–12
  159. By: Ciaran Driver (Tanaka Business School, Imperial College, London); Paul Temple (University of Surrey); Giovanni Urga (Cass Business School, London)
    Abstract: This paper presents an empirical study of the channels of influence from uncertainty to fixed investment suggested by real options theory. Using panel data from the Confederation of British Industry (CBI) Industrial Trends Survey, we report OLS estimates of the impact of uncertainty on investment where the regressors are augmented by cross-sectional averages of the dependent variable and of the individual specific regressors, as recently suggested by Pesaran (2004). The cross-industry pattern of results is checked for consistency with the pattern predicted by real options theory, using a specially constructed data set of industrial characteristics. We find that irreversibility is able to predict the pattern detected, but only when combined with a measure of the information advantage of delay. There is also evidence for expansion options effects; industries with high R&D and advertising intensities tend to have positive uncertainty effects.
    Keywords: Investment, Industry, Irreversibility, Real Options, Uncertainty
    JEL: E22 C23
    Date: 2005–02
  160. By: Almenberg, Johan (Stockholm School of Economics)
    Abstract: The Swedish system for inter-regional redistribution is examined from a political economy perspective and a growth perspective. A number of recent Swedish studies of this system are examined. Political economy concerns are found to be adequately represented in academic studies of this system, while lacking, at least explicitly, in all the major relevant government reports. Growth implications of extensive inter-regional redistribution are found to be relatively neglected in both academic studies and government reports. In particular, the short-circuiting of labour mobility (and hence the impairment of long-term structural adjustment) is examined at both micro- and macroeconomic levels. It is concluded that extensive inter-regional redistribution is likely to have considerable effects on labour mobility. The author argues that this almost entirely overlooked effect is an important consideration in evaluating the costs and benefits of inter-regional redistribution, and calls for further enquiry into the matter.
    Keywords: Inter-regional redistribution; fiscal federalism; political economy; growth; labour force mobility
    JEL: D72 D78 E60 H11 H31 H71 H77 O18 R23 R58
    Date: 2006–01–11
  161. By: Pierpaolo Benigno; Anastasios Karantounias
    Abstract: We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the economy. However, we allow firms to obtain information by paying a fixed cost. We find two important implications: i) overconfident firms are less inclined to acquire information; ii) prices might exhibit excess volatility driven by non-fundamental disturbances. We use our model to match some facts related to recent empirical evidence on disaggregated price data for the US economy.
    JEL: D4 D8 E3
    Date: 2006–01
  162. By: Antonio G. Chessa (University of Amsterdam); Marije C. Schouwstra (University of Amsterdam)
    Abstract: Total Factor Productivity (TFP)is often used on the macro-economic level as an indicator of changes in efficiency of a country. In many transition economies TFP is seen to have been negative the last decade of the plan economy and starts increasing and become positive after a (quite a) few years of transition. Many authors conclude that this is a gain in efficiency due to the structural changes –such as privatisation and liberalisation – carried out in order to establish a market economy in those countries. In the case of Mongolia, not only non-viable enterprises closed down, but many possibly viable enterprises with potential closed down as well. This raises the question whether changes in TFP were really attributable to increases in efficiency. To investigate this, the mathematical properties of TFP are analysed in order to generate new insights into the development of TFP in Mongolia. Simulations are performed to see what happens with TFP if not the le! ast efficient, but a certain percentage of enterprises in a (closed) economy randomly close down. The robustness of Total Factor Productivity of Mongolia was tested not only for errors in all estimated values but also for measurement errors in the data. It was concluded that in many commonly occurring cases it is not necessary to estimate alpha; that a random closure of enterprises fits the data of Mongolia much more closely than closing only the least efficient enterprises; and that measurement errors in the data influence the estimated TFP significantly.
    Keywords: transition; development; TFP; total factor productivity; Mongolia; measurement errors; simulation; Cobb-Douglas production function; sensitivity analysis; efficiency
    JEL: O C15 E2 P2
    Date: 2005–09–22
  163. By: Edward Miguel; Gerard Roland
    Abstract: We investigate the impact of U.S. bombing on later economic development in Vietnam. The Vietnam War featured the most intense bombing campaign in military history and had massive humanitarian costs. We use a unique U.S. military dataset containing bombing intensity at the district level (N=584). We compare the heavily bombed districts to other districts controlling for baseline demographic characteristics and district geographic factors, and use an instrumental variable approach exploiting distance to the 17th parallel demilitarized zone. U.S. bombing does not have a robust negative impact on poverty rates, consumption levels, infrastructure, literacy or population density through 2002. This finding suggests that local recovery from war damage can be rapid under certain conditions, although further work is needed to establish the generality of the finding in other settings.
    JEL: E2 O5 P5 H7
    Date: 2006–01
  164. By: Banzhaf, H. Spencer (Resources For the Future)
    Abstract: This paper illustrates how public goods may be incorporated into a cost-of-living index. When public goods are weak complements to a market good, quality-adjusted prices for the market good capture all the welfare information required. They are also consistent with a Laspeyres index that maintains the bound on a true cost-of-living index. The paper recovers this information from a discrete-choice model, using a simulation routine to solve for the appropriate price adjustments. These concepts are applied to the case of housing, education, crime, and air quality in Los Angeles for 1989 to 1994. Over a period of time when they are improving, incorporating pubic goods into the index lowers the estimated change in the cost of living by 0.5 to 2.6 percentage points. In other years, when public goods diverge, the estimated annual adjustment differs by model, with a range of -0.2 to +1.3 percentage points.
    Keywords: air quality, discrete choice models, green accounting, nonmarket valuation, price inde
    JEL: C51 D12 D60 E31 H40 R10
  165. By: Luca De Benedictis (University of Macerata, Italy); Marco Gallegati (DEA, Università Politecnica delle Marche, Italy)
    Abstract: The aim of this paper is to provide evidence on the nature of the relationship between the terms of trade and the trade balance for US on a scale-by-scale basis using wavelet analysis. Thus, after decomposing the two variables into their time-scale components using to the maximum overlap discrete wavelet transform (MODWT) we analyze the time scale relationships between the terms of trade and the trade balance through the wavelet correlation analysis, and nonparametric regression models(GAMs). Wavelet correlation analysis indicates that, if the association between the trade balance and the terms of trade depends mainly on the elasticity of substitution between foreign and domestic goods, the Armington elasticities may be di¤erent across scales, and in particular, tend to get larger as the time horizon of the agents increases. Moreover, the long-run relationship between the trade balance and the terms of trade from the nonparametric …tted functions seems to provide support to the existence of the Harberger-Laursen-Metzler e¤ect .
    Keywords: trade variables, wavelet correlation analysis, generalized additive models
    JEL: C12 C22 E30 F10
    Date: 2005–12–27
  166. By: Jean-Pierre DANTHINE (University of Lausanne, FAME and CEPR); John B. DONALDSON (Columbia University); Paolo SICONOLFI (Columbia University)
    Abstract: In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share varia- tions represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.
    Keywords: Income shares; Distribution risk; equity premium; limited market participation
    JEL: E3 G1
    Date: 2005–11
  167. By: Marco Gallegati (Department of Economics, Università Politecnica delle Marche)
    Abstract: In this paper we revisit the issue of integration of emerging stock markets with each other and with the developed markets over different time horizons using weekly stock indices data from June 1997 until March 2005 of the five major MENA equity markets (Egypt, Israel, Jordan, Morocco and Turkey) and applying the discrete wavelet decomposition analysis. We decompose the weekly stock market returns of the main indices of the MENA countries into different time scale components using the non-decimated discrete wavelet transform and then analyze the time- scale relationship between the stock market indices of some developed areas (SP and Eurostoxx) and those of the MENA countries. The results from wavelet correlation analysis both among MENA stock markets and between these markets and some major stock markets suggests that MENA stock markets are nor regionally nor internationally integrated.
    Keywords: stock market returns, comovements, wavelet correlation analysis
    JEL: C22 E31 G12
    Date: 2005–12–27
  168. By: Ruud A. de Mooij (Faculty of Economics, Erasmus Universiteit Rotterdam); Sjef Ederveen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This study aims to explain the variation in empirical estimates in the literature on the elasticity of foreign direct investment with respect to company tax levels. To that end, we extend the meta analysis of De Mooij and Ederveen (2003) by considering an alternative classification of the literature, including new studies that have recently become available, and by paying more systematic attention to various control variables in primary studies. We find that the type of capital data and tax data exert a systematic impact on reported elasticities. Also controlling for openness and agglomeration tendencies appears to significantly affect the elasticity values.
    Keywords: Corporate taxation; Foreign direct investment; meta analysis; semi-elasticity
    JEL: E2 F2 H2
    Date: 2005–12–06
  169. By: Ugo FRATESI
    Abstract: This paper introduces a new 2-country 4-region model in order to study the possible trade-offs arising between national efficiency and interregional equity, differentiating for different strengths of agglomeration economies and different regional productivities. In this static model the national policy maker can affect entrepreneurship through the set-up costs of firms. It is evidenced that, for countries composed of identical regions, spatially dispersed allocations of public productive expenditure are more efficient with low agglomeration economies whereas spatially concentrated allocations are more efficient with high agglomeration economies. As the regions become different, however, unbalanced allocations of public productive expenditure;towards the most advanced region become more efficient also in case of relatively weak agglomeration economies, until, for regions sufficiently different, the most efficient allocation of public productive expenditure is always to;concentrate it in the most advanced territories. For this reason, if some sort of lump-sum compensating mechanisms are available, short-sighted national policy makers, not taking into account long-run growth and factor mobility, can rationally decide to support the competitiveness of the already more-productive regions and transfer income to the lagging ones, a behaviour which is shown to have significant similarities with two real cases.
    Keywords: agglomeration economics, interregional equity, national efficiency, regional policy
    JEL: E61 H79 R13 R58
    Date: 2005–11

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