nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒02‒12
forty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Bank interest rate pass-through in the euro area: a cross country comparison By Florin Ovidiu Bilbiie; André Meier; Gernot J. Müller
  2. Hungarian Inflation Dynamics By Júlia Lendvai
  3. The simple geometry of transmission and stabilization in closed and open economies By Giancarlo Corsetti; Paolo Pesenti
  4. Identifying the New Keynesian Phillips Curve By James M. Nason; Gregor W. Smith
  5. Why Central Banks Should Not Burst Bubbles By Adam S. Posen
  6. The properties of cycles in South African financial variables and their relation to the business cycle By Willem H Boshoff
  7. Towards a theory of firm entry and stabilization policy By Paul Bergin; Giancarlo Corsetti
  8. British Interest Rate Convergence between the US and Europe: A Recursive Cointegration Analysis By Enzo Weber
  9. Monetary policy and exchange rate interactions in a small open economy By Bjørnland, Hilde C.
  10. Openness and the case for flexible exchange rates By Giancarlo Corsetti
  11. Twin Deficits: Squaring Theory, Evidence and Common Sense By Giancarlo Corsetti; Gernot J. Müller
  12. Forecasting Economic Aggregates by Disaggregates By Hendry, David F; Hubrich, Kirstin
  13. VAR Modeling for Dynamic Semiparametric Factors of Volatility Strings By Ralf Brüggemann; Wolfgang Härdle; Julius Mungo; Carsten Trenkler
  14. Sticky Prices and Indeterminacy By Mark Weder
  16. Assessing ECB?s Credibility During the First Years of the Eurosystem: A Bayesian Empirical Investigation By Gianni Amisano; Marco Tronzano
  17. Empirical Comparison of Sticky Price and Sticky Information Models By Oleg Korenok
  18. From Transition Crises to Macroeconomic Stability? Lessons from a Crises Early Warning System for Eastern European and CIS Countries By Kristina Kittelmann; Marcel Tirpak; Rainer Schweickert; Lúcio Vinhas de Souza
  19. Financial Development and Inequality: Brazil 1985-99 By Manoel F. Meyer Bittencourt
  20. Transfer Problem Dynamics: Macroeconomics of the Franco-Prussian War Indemnity By Michael B. Devereux; Gregor W. Smith
  21. Lessons from Italian Monetary Unification By James Foreman-Peck
  22. The Logic of Compromise: Monetary bargaining in Austria-Hungary 1867-1913 By Flandreau, Marc
  24. DSGE Models of High Exchange-Rate Volatility and Low Pass-Through By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  25. Structural Vector Autoregressions with Nonnormal Residuals By Markku Lanne; Helmut Luetkepohl
  26. Does the Quality of Industrial Relations Matter for the Macro Economy? A Cross-Country Analysis Using Strikes Data By John T. Addison; Paulino Teixeira
  27. Estimating key macroeconomic relationships at the undergraduate level: Taylor rule and Okun’s Law examples By Miles B. Cahill
  28. Cigarette Tax Revenues and Tobacco Control in Japan By Junmin Wan
  29. Human capital, R&D, and competition in macroeconomic analysis. By Eric Canton; Bert Minne; Ate Nieuwenhuis; Marc van der Steeg
  30. Models and methods for economic policy; 60 years of evolution at CPB. By Henk Don; Johan Verbruggen
  31. Employment Protection, Product Market Regulation and Firm Selection By Winfried Koeniger; Julien Prat
  32. Public sector efficiency: evidence for new EU member states and emerging markets By António Afonso; Ludger Schuknecht; Vito Tanzi
  33. Five Lisbon highlights; the economic impact of reaching these targets. By George Gelauff; Arjan Lejour
  34. Composite Leading Indicators for Major OECD Non-Member Economies: Brazil, China, India, Indonesia, Russian Federation, South Africa By Olivier Brunet; Ronny Nilsson
  35. Competition, Innovation and Growth with Limited Commitment By Ramon Marimon; Vincenzo Quadrini
  36. Indirect Effects of an Aid Program: The Case of Progresa and Consumption By Manuela Angelucci; Giacomo De Giorgi
  37. Real GDP in Pre-War East Asia: A 1934-36 Benchmark Purchasing Power Parity Comparison with the U.S. By Kyoji Fukao; Debin Ma; Tangjun Yuan
  38. BUDGET INFLEXIBILITY By Juan Carlos Echeverry; Leopoldo Fergusson; Pablo Querubín
  39. Trends in poverty and inequality since the political transition By Servaas van der Berg; Ronelle Burger; Rulof Burger; Megan Louw; Derek Yu
  40. Investing in European Stock Markets for High-Technology Firms By Christian Pierdzioch; Andrea Schertler

  1. By: Florin Ovidiu Bilbiie (Nuffield College, New Road, OX1 1NF, Oxford, United Kingdom.); André Meier (International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA.); Gernot J. Müller (Goethe University Frankfurt, Department of Economics, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany)
    Abstract: Using vector autoregressions on U.S. time series for 1957-1979 and 1983-2004, we find government spending shocks to have stronger e¤ects on output, consumption, and wages in the earlier sample. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Speci?cally, we estimate the structural parameters of the model for both samples by matching impulse responses. Model-based counterfactual experiments suggest that increased asset market participation accounts for some of the changes in fiscal transmission. However, the key quantitative factor appears to be the more active monetary policy of the Volcker-Greenspan period.
    Keywords: Government Spending; Asset Market Participation; Fiscal Policy; Monetary Policy; DSGE; Vector Autoregression; Minimum Distance Estimation
    JEL: E21 E62 E63
    Date: 2006–01
  2. By: Júlia Lendvai (University of Namur, Economics Department.)
    Abstract: This paper estimates traditional and New Phillips curves for Hungary over the sample period 1995Q1 to 2004Q1. It presents the first structural Phillips curve estimations for a New EU Member State economy. We find that Hungarian inflation dynamics can be reasonably well described by a standard New Hybrid Phillips curve and by its open economy extension specifying imported goods as intermediate production goods. Our estimation results indicate that Hungarian inflation is significantly more inertial than Euro area inflation. Hungarian inflation inertia appears to be the result of pervasive backward looking price setting behaviour, while prices seem to be reset more frequently than in the Euro area. At the same time, Hungarian inflation dynamics is comparable to that of countries characterized by a relatively high average inflation rate.
    Keywords: New Keynesian Phillips curve, Inflation dynamics, Open economy.
    JEL: E31 E32
    Date: 2005
  3. By: Giancarlo Corsetti; Paolo Pesenti
    Abstract: This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies.Classification-JEL: E31, E52, F42
    Keywords: optimal monetary policy, nominal rigidities, exchange rate pass-through, international cooperation
    Date: 2005
  4. By: James M. Nason (Federal Reserve Bank of Atlanta); Gregor W. Smith (Queen's University)
    Abstract: Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under GMM and traces this syndrome to a lack of persistence in either exogenous variables or shocks. We employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, we revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward-looking inflation dynamics.
    Keywords: Phillips curve, Keynesian, identification, inflation
    JEL: E31 C32
    Date: 2005–01
  5. By: Adam S. Posen (Institute for International Economics)
    Abstract: Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system’s structure and stability—in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source.
    Keywords: bubbles, asset prices, monetary policy, central banks
    JEL: E44 G18 E52 E58
    Date: 2006–01
  6. By: Willem H Boshoff (Department of Economics, Stellenbosch University)
    Abstract: Linkages between the financial and real sectors of the economy have been studied extensively over the past twenty years to enhance business cycle forecasting on the one hand and improve portfolio allocation on the other. The broad aim of the paper is to investigate the relationship between cycles in the real economy and cycles in several financial variables from the South African money, bond and stock markets for the period from 1986 onwards. The paper will aim to describe the properties of cycles in such financial variables, where cycles were derived using a dating algorithm similar to that used to determine business cycle turning points. This method is consistent with the Burns and Mitchell tradition of business cycle analysis, but in contrast with the dominant approach in academic research, i.e. deviation cycles relying on time-series detrending. Consequently, the paper will attempt to relate phases in the cycles of financial variables with business cycle phases to establish which variables satisfy preliminary requirements for leading indicators of the business cycle. The paper will consider both classical cycles as well as cycles in the growth rate of the different variables and include international variables, due to the potential importance of international developments for financial markets in an open economy.
    Keywords: business cycles, South Africa, financial variables, real economy
    JEL: E30 E32 E37 E44 E47
    Date: 2005
  7. By: Paul Bergin; Giancarlo Corsetti
    Abstract: This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.
    Keywords: productivity, monetary policy, market dynamics
    JEL: E22 E52 L16
    Date: 2005
  8. By: Enzo Weber
    Abstract: This paper addresses the question of the British state of convergence towards the Euro area, compared to the USA. Economically, the analysis is based on dependences in the money and capital markets, namely the uncovered interest parity (UIP) and the expectation hypothesis of the term structure (EHT). The econometric procedure consists of backward recursive calculations carried out in a cointegration framework. As the evidence for the single parities remains unconvincing, UIP and EHT are combined in a common model. Generally, the results are in favour of a growing British integration into the European Currency Union.
    Keywords: Nominal Convergence, Cointegration, UIP, Term Structure, Euro Area
    JEL: E43 E44 C32
    Date: 2006–01
  9. By: Bjørnland, Hilde C. (Dept. of Economics, University of Oslo)
    Abstract: This paper analyses the transmission mechanisms of monetary policy in a small open economy like Norway through structural VARs, paying particular attention to the interdependence between the monetary policy stance and exchange rate movements in the inflation-targeting period. Previous studies of the effects of monetary policy in open economies have typically found small or puzzling effects on the exchange rate; puzzles that may arise due to the recursive restrictions imposed on the contemporaneous interaction between monetary policy and the exchange rate. By instead imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, the interdependence increases considerably. In particular, following a contractionary monetary policy shock, the real exchange rate appreciates immediately and thereafter depreciates back to baseline. Furthermore, output and consumer price inflation fall gradually as expected; thereby also ruling out any price puzzle that has commonly been found in the literature. Results are compared and found to be consistent with among other the findings from an “event study” that focuses on immediate responses in asset prices following a surprise monetary policy decision.
    Keywords: VAR; monetary policy; open economy; identification; event study.
    JEL: C32 E52 F31 F41
    Date: 2005–12–15
  10. By: Giancarlo Corsetti
    Abstract: Models of stabilization in open economy traditionally emphasize the role of exchange rates as a substitute for nominal price flexibility in fostering relative price adjustment. This view has been recently criticized on the ground that, to the extent that prices are sticky in local currency, the exchange rate does not play the stabilizing role envisioned by the received wisdom. An important question is whether, for this very reason, stabilization policies should limit exchange rate movements, or even eliminate them altogether. In this paper, I re-assess this issue by extending the Corsetti and Pesenti (2001) model to allow for home bias in consumption, so that I can exploit the advantages of closed-form solutions. While this extension leaves most properties of the model unaffected, home bias implies that the real exchange rate in an efficient equilibrium is not constant, but fluctuates with the terms of trade. The weight that monetary authorities optimally place on stabilizing domestic marginal costs is increasing in Home bias. With asymmetric shocks, fixed exchange rates are incompatible with efficient monetary rules. Yet, the adverse welfare consequences of exchange rate movements constrain the optimal intensity of monetary responses to domestic shocks. Openness matters: the larger the import content of consumption, the lower the exchange rate volatility implied by optimal stabilization rules.
    Keywords: optimal monetary policy, nominal rigidities, exchange rate pass-through, exchange rate regimes, international cooperation
    JEL: E31 E52 F42
    Date: 2005
  11. By: Giancarlo Corsetti; Gernot J. Müller
    Abstract: In this paper we reconsider the twin deficit hypothesis (that fiscal shocks generating budget deficits also worsen external trade) both from a theoretical point of view and by analyzing data for Australia, Canada, the UK and the US. First, we assess the joint dynamics of budget and trade deficits along the business cycle, uncovering a strikingly recurrent S-shaped relation between the two. The correlation is actually negative, suggesting twin divergence. This observation however cannot rule out the possibility that government spending expansions and/or tax cuts may cause trade deficits, as the overall correlation is likely to be dominated by cyclical factors. Second, we reconsider the transmission of government spending in a standard two-country two-good model: we find that openness and the persistence of fiscal shocks are major determinants of the magnitude (or even sign) of the response of the trade balance to fiscal shocks. For a given persistence of the fiscal shock, the closer an economy, the larger the crowding out effect on investment, the lower the deterioration of the trade balance. Third, we take this insight to the data, investigating the transmission of fiscal shocks in a VAR framework in the four countries in our sample. Our empirical findings tend to support our view. In the US and Australia, which are relatively less open than Canada and the UK, and where government spending shocks are less persistent, we find that the external impact of fiscal policy is rather limited. Instead, private investment responds substantially. The reverse is true for Canada and the UK. These findings confirm and put into perspective earlier results, whereas fiscal expansions in the US are found to have on average a negligible effect on the country's trade balance. However, we emphasize that these results are consistent with a call for a US fiscal retrenchment to address global imbalances: the impact of budget cuts on the US external trade is muted by their positive effect on domestic investment, strengthening the US ability to generate resources against future interest and debt repayment.
    Keywords: twin deficits, budget deficit, trade deficits, home-bias, openness, crowding out, international transmission of fiscal policy, current account adjustment, business cycle dynamics.
    JEL: E62 E63 F32 F42 H30
    Date: 2005
  12. By: Hendry, David F; Hubrich, Kirstin
    Abstract: We explore whether forecasting an aggregate variable using information on its disaggregate components can improve the prediction mean squared error over first forecasting the disaggregates and then aggregating those forecasts, or, alternatively, over using only lagged aggregate information in forecasting the aggregate. We show theoretically that the first method of forecasting the aggregate should outperform the alternative methods in population. We investigate whether this theoretical prediction can explain our empirical findings and analyse why forecasting the aggregate using information on its disaggregate components improves forecast accuracy of the aggregate forecast of euro area and US inflation in some situations, but not in others.
    Keywords: disaggregate information; factor models; forecast model selection; predictability; VAR
    JEL: C51 C53 E31
    Date: 2006–01
  13. By: Ralf Brüggemann; Wolfgang Härdle; Julius Mungo; Carsten Trenkler
    Abstract: The implied volatility of a European option as a function of strike price and time to maturity forms a volatility surface. Traders price according to the dynamics of this high dimensional surface. Recent developments that employ semiparametric models approximate the implied volatility surface (IVS) in a finite dimensional function space, allowing for a low dimensional factor representation of these dynamics. This paper presents an investigation into the stochastic properties of the factor loading times series using the vector autoregressive (VAR) framework and analyzes associated movements of these factors with movements in some macroeconomic variables of the Euro - economy.
    Keywords: Implied volatility surface, dynamic semiparametric factor model, unit root tests, vector autoregression, impulse responses
    JEL: C14 C32
    Date: 2006–02
  14. By: Mark Weder
    Abstract: The aim of the present paper is to analyze the link between price rigidity and indeterminacy. This is done within a cash-in-advance economy from which we know that it exhibits indeterminacy at high degrees of relative risk aversion. I find that price stickiness reduces the scope of these sunspot equilibria: sluggish price adjustment requires degrees of relative risk aversion compatible with indeterminacy that prove too high to square with data.
    Keywords: Cash-in-advance economies; Calvo-pricing; sunspot equilibria.
    JEL: E31 E32
    Date: 2006–02
  15. By: Marc Hofstetter
    Abstract: Why is that the achievements of some disinflations from low and moderate peaks are longlived, whereas in others the gains in the inflationary front dissipate quickly? Based on an index of the sustainability of disinflations proposed in the paper, various competing explanations of what determines sustainability are tested. Three factors, potentially at the top of the list of many researchers, are shown to be insignificant: oil shocks, fiscal policy and inflation targeting. Nevertheless, other important features such as the exchange rate regime, achieving a low inflation rate during the disinflation and food price shocks are shown to be important variables driving the sustainability records.
    Date: 2005–11–30
  16. By: Gianni Amisano; Marco Tronzano
    Abstract: This paper extends Svensson (1994) ?simplest test?of in?ation target credibility inside a Bayesian econometric framework. We apply this approach to the initial years of the Eurosystem and obtain various estimates of ECB?s monetary policy credibility. Overall, our empirical evidence is robust to alternative prior assumptions, and suggests that the strategy followed by the ECB was successful in building a satisfactory degree of reputation. However, we ?nd some signi?cant credibility reversals concerning both anti-in?ationary and anti-de?ationary credibility. These reversals, in turn, are closely related to the evolution of the cyclical macroeconomic conditions in the Euro area.
  17. By: Oleg Korenok (Department of Economics, VCU School of Business)
    Abstract: Mankiw and Reis (2002) have revived imperfect information explanations for the short run real effects of monetary policy. This paper contrasts their sticky information model with the standard sticky price model. First, I utilize a theoretical relation between aggregate prices and unit labor cost that allows me to leave unspecified household preferences, wage setting and money demand. Second, I introduce a modeling approach that allows me to nest the sticky price and the sticky information models within a single empirical framework. Third, I propose a single-step estimation method that provides consistent estimates of adjustment speeds and reliable confidence bands that enable me to reject flexible prices. Finally, I use the approach to carry out an empirical specification analysis of multiple structural models. An empirical comparison favors the sticky price explanation over the Mankiw-Reis model.
    Keywords: sticky price, sticky information, model selection
    JEL: E12 E3 C32
    Date: 2004–11
  18. By: Kristina Kittelmann; Marcel Tirpak; Rainer Schweickert; Lúcio Vinhas de Souza
    Abstract: This paper uses a Markov regime-switching model to assess the vulnerability of a series of Central and Eastern European countries (i.e. Czech Republic, Hungary, Slovak Republic) and two CIS countries (i.e., Russia and Ukraine) during the period 1993–2004. For the new EU member states in Central and Eastern Europe, the results of our model show that the majority of crises in those countries can be explained by inconsistencies in the domestic policy mix and by the deterioration of macroeconomic fundamentals, as emphasized by first generation crises models, while for the CIS countries analysed, financial vulnerability type indicators were the most relevant, i.e., indicators connected with the second and third generation of crisis model better explain the vulnerability of these countries. Additionally, the set of indicators choosen by our model is rather heterogenous, supporting the superiority of a country-by-country approach.
    Keywords: EU, Central and Eastern Europe, CIS, early warning system, currency crisis, Markov switching
    JEL: F47 P20 C22
    Date: 2006–02
  19. By: Manoel F. Meyer Bittencourt
    Abstract: We examine the impact that financial development had on earnings inequality in Brazil in the 1980's and 90's. The empirical evidence, based on panel time series and time series data, shows that more broad access to financial and credit markets had a significant and robust effect in reducing inequality during the period investigated. We suggest that this is not only because the poor can invest the acquired credit in all sorts of productive activities, but also because those with access to financial markets can insulate themselves against recurrent poor macroeconomic performance, which is exemplified by high inflation rates. The main implication of the results is that a seemingly nondistortionary policy, such as more credit aimed at the poor, alleviates the extreme inequality present in Brazil and consequently improves welfare without distorting economic efficiency.
    Keywords: Financial development and markets, credit, inequality and welfare, inflation.
    JEL: D31 E44 O11 O54
    Date: 2006–01
  20. By: Michael B. Devereux (University of British Columbia); Gregor W. Smith (Queen's University)
    Abstract: We study the classic transfer problem of predicting the effects of an international transfer on the terms of trade and the current account. A two-country model with debt and capital allows for realistic features of historical transfers: they follow wartime increases in government spending and are financed partly by borrowing. The model is applied to the largest historical transfer, the Franco-Prussian War indemnity of 1871-1873. In these three years, France transferred to Germany an amount equal to 22 percent of a year's GDP. When the transfer is combined with measured shocks to fiscal policy and a proxy for productivity shocks over the period, the model provides a very close fit to the historical sample paths of French GDP, terms of trade, net exports, and aggregate consumption. This makes a strong case for the dynamic general equilibrium approach to studying the transfer problem.
    Keywords: transfer problem, current account, terms of trade
    JEL: F32 F41 N14
    Date: 2005–08
  21. By: James Foreman-Peck (Cardiff Business School)
    Abstract: This paper examines whether the states brought together in the Italian monetary union of the nineteenth century constituted an optimum monetary area, either before or after unification. Interest rate shocks indicate close relations between states in northern Italy but negative correlations between the North and the South before unification, suggesting some advantages of continued Southern monetary independence. The proportion of Southern Italian trade with the North was small, in contrast to intra- Northern trade, and therefore monetary independence imposed a light burden. Changes in the wheat market indicate that the South and North after unification (though not probably because of it) increasingly specialised according to their comparative advantages. Coupled with differences in economic behaviour of the Southern economy, this meant that monetary policies appropriate for the North were less so for the South. In the face of agricultural shocks originating in the New World and in France, the South would have gained from depreciating its exchange rate against the North or against the non-Italian world. As it was, nineteenth century Italian monetary union did not create the conditions for its own success, contrary to the findings of Frankel and Rose (1998) for the later twentieth century.
    Date: 2006–01–23
  22. By: Flandreau, Marc
    Abstract: This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians.
    Keywords: free riding; market integration; monetary union; secession
    JEL: F31 N32
    Date: 2006–01
  23. By: Warwick J. McKibbin
    Abstract: The world is in the midst of a significant demographic transition with important implications for the macroeconomic performance of the global economy. This paper summarizes the key features of the current and projected future demographic change that are likely to have macroeconomic effects. It then applies a new ten region global model (an extended version of the MSG-Cubed model) incorporating demographic dynamics, to examine the consequences of projected global demographic change on the world economy from 2005 to 2050. A distinction is made between the effects on each country of its own demographic transition and the effects on each country of the equally large demographic changes occurring in the rest of the world.
    Date: 2005–10
  24. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: This paper develops a quantitative, dynamic, open-economy model which endogenously generates high exchange rate volatility, whereas a low degree of pass-through stems from both nominal rigidities (in the form of local currency pricing) and price discrimination. We model real exchange rate volatility in response to real shocks by reconsidering and extending two approaches suggested by the quantitative literature (one by Backus Kehoe and Kydland [1995], the other by Chari, Kehoe and McGrattan [2003]), within a common framework with incomplete markets and segmented domestic economies. Our model accounts for a variable degree of ERPT over different horizons. In the short run, we find that a very small amount of nominal rigidities - consistent with the evidence in Bils and Klenow [2004] - lowers the elasticity of import prices at border and consumer level to 27% and 13%, respectively. Remarkably, exchange rate depreciation worsens the terms of trade - in accord to the evidence stressed by Obstfeld and Rogo [2000]. In the long run, exchange-rate pass-through coefficients are also below one, as a result of price discrimination. The latter is an implication of distribution services, which makes the goods demand elasticity market specific.
    Keywords: international business cycle, exchange rate volatility, pass-through, international transmission, DSGE models
    JEL: F33 F41
    Date: 2005
  25. By: Markku Lanne; Helmut Luetkepohl
    Abstract: In structural vector autoregressive (SVAR) models identifying restrictions for shocks and impulse responses are usually derived from economic theory or institutional constraints. Sometimes the restrictions are insufficient for identifying all shocks and impulse responses. In this paper it is pointed out that specific distributional assumptions can also help in identifying the structural shocks. In particular, a mixture of normal distributions is considered as a plausible model that can be used in this context. Our model setup makes it possible to test restrictions which are just-identifying in a standard SVAR framework. In particular, we can test for the number of transitory and permanent shocks in a cointegrated SVAR model. The results are illustrated using a data set from King, Plosser, Stock and Watson (1991) and a system of US and European interest rates.Classification-JEL: C32
    Keywords: Mixture normal distribution, cointegration, vector autoregressive process, vector error correction model, impulse responses
    Date: 2005
  26. By: John T. Addison (University of South Carolina, Universidade de Coimbra/GEMF and IZA Bonn); Paulino Teixeira (Universidade de Coimbra and GEMF)
    Abstract: Using international data, we investigate whether the quality of industrial relations matters for the macro economy. We measure industrial relations inversely by strikes – which proxy we cross-check with an industrial relations reputation indicator – and our macro performance outcome is the unemployment rate. Independent of the role of other institutions, good industrial relations do seem to matter: greater strike volume is associated with higher unemployment. Holding country effects constant, however, the sign of the variable is reversed. This fixed-effects result likely picks up a direct effect of strikes, namely, their tendency to rise when striking becomes more attractive to the union.
    Keywords: strike rate/volume, quality of labor relations, labor market institutions, unemployment
    JEL: E24 J52 J53 J64 J65
    Date: 2006–02
  27. By: Miles B. Cahill (Department of Economics, College of the Holy Cross)
    Abstract: This paper presents some Excel-based exercises that allow students to estimate some key macroeconomic relationships: Okun's Law and the Taylor rule. The Okun's law exercise has the additional benefit of providing estimates for long-run GDP growth. The Taylor rule exercises give students the opportunity to replicate, and then improve upon a seminal paper in macroeconomics. Overall, these exercises give students an introduction to some key aspects of conducting empirical research in macroeconomics, including manipulating models into a form that can be estimated and gathering and manipulating data. In addition, the exercises provide students with useful spreadsheet skills that can be used in other assignments and other arenas, long after graduation.
    Keywords: Excel, teaching, Taylor Rule, Okun's Law
    JEL: A2
    Date: 2006–01
  28. By: Junmin Wan (Osaka School of International Public Policy, Osaka University)
    Abstract: The hypotheses of non-addiction, myopia and rational addiction are tested using annual, quarterly and monthly data. Changes in the prices of Japanese cigarettes can be viewed as exogenous from the point of view of consumer behavior, because the Japanese government controls cigarette prices. The empirical results of this paper support the addiction hypothesis. The short-run and long-run price elasticities range from -0.338 to -0.421, and from -0.679 to -0.686, respectively; thus, increases in tax revenues in the long-run are likely to be smaller than those in the short-run. As a result, tax increases would be an effective means of curbing smoking and reducing its social cost. Furthermore, the debt compensation programs for the Japan Railway and the National Forestry will not go according to plan, unless revenues are increased in the future.
    Keywords: smoking, rational addiction, tax revenues
    JEL: D12 E21 H29
    Date: 2004–06
  29. By: Eric Canton; Bert Minne; Ate Nieuwenhuis; Marc van der Steeg
    Abstract: Long-run per capita economic growth is driven by productivity growth. Major determinants of productivity are investments in education and research, and the intensity of competition on product markets. While these ideas have been incorporated into modern growth theories and tested in empirical analyses, they have not yet found their way to applied macroeconomic models used to forecast economic developments. In this paper, we discuss various options to include human capital, R&D, and product market competition in a macroeconomic framework. We also study how policy can affect the decisions to build human capital or to perform research, and how competition policy impacts on macroeconomic outcomes. We finally sketch how these mechanisms can be implemented into the large models used at CPB.
    Keywords: Human capital; R&D; competition; applied macroeconomic mode
    JEL: O40
    Date: 2005–07
  30. By: Henk Don; Johan Verbruggen
    Abstract: The Netherlands Bureau for Economic Policy Analysis (CPB) has been involved in econometric model building since its foundation in 1945. During the 60 years of model building and use reviewed in this Discussion Paper, CPB's models have evolved significantly. Over this period, a shift of emphasis can be observed from econometrics and empiricism to economic theory. New questions from policymakers and new features in the national economy have guided research, while new developments in econometrics and economic theory were taken on board wherever they helped to improve the quality and scope of the analysis. Although considerable progress has been achieved in several spheres, the models continue to be riddled with some long-standing limitations and weaknesses which the model users should take into account.
    Keywords: econometric models, model building, economic policy preparation
    JEL: C50 E10 N10
    Date: 2006–01
  31. By: Winfried Koeniger (IZA Bonn and University of Bonn); Julien Prat (University of Vienna and IZA Bonn)
    Abstract: This paper analyzes the effect of labor and product market regulation in a dynamic stochastic equilibrium with search frictions. Modeling multiple-worker firms allows us to distinguish between the exit-and-entry (extensive) margin, and the hiring-and-firing (intensive) margin. We characterize analytically how both margins depend on regulation before we calibrate the model to the US economy. We find that firing costs matter most for the intensive margin. Fixed or set-up costs in the product market instead alter primarily the behavior of firms at the extensive margin. Moreover, we find important interactions between the policies through firm selection. Finally, the opposite effect of product and labor market regulation on job turnover rationalizes the empirically observed similarity of turnover rates across countries.
    Keywords: firing cost, product market regulation, firm selection, firm turnover, job turnover
    JEL: E24 J63 J64 J65
    Date: 2006–02
  32. By: António Afonso (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Vito Tanzi (Inter-American Development Bank, 1300 New York Avenue, NW Washington, DC 20577, USA.)
    Abstract: In this paper we analyse public sector efficiency in the new member states of the European Union compared to that in emerging markets. After a conceptual discussion of expenditure efficiency measurement issues, we compute efficiency scores and rankings by applying a range of measurement techniques. The study finds that expenditure efficiency across new EU member states is rather diverse especially as compared to the group of top performing emerging markets in Asia. Econometric analysis shows that higher income, civil service competence and education levels as well as the security of property rights seem to facilitate the prevention of inefficiencies in the public sector.
    Keywords: Interest rate pass-through; euro area countries; panel cointegration
    JEL: E43 G21
    Date: 2006–01
  33. By: George Gelauff; Arjan Lejour
    Abstract: The Lisbon strategy could reinvigorate Europe's economy and boost employment. In 2000 the European leaders agreed to stimulate economic growth and employment and make Europe's economy the most competitive in the world. If Europe would really reach the goals they set, Europe's Gross Domestic Product could increase by 12 to 23% and employment by about 11%. This paper draws this conclusion after having analysed five of the most important Lisbon goals: the internal market for services, the reduction of administrative burdens, goals on improving human capital, the 3% target on research and development expenditures, and the 70% target on the employment rate. Using CPB's general equilibrium model for the world economy we have simulated the consequences for Europe of reaching the Lisbon targets in these fields.
    Keywords: Jobs creation and economic growth; Lisbon agenda; general equilibrium model
    JEL: E20 E61 D58 O52
    Date: 2006–01
  34. By: Olivier Brunet; Ronny Nilsson
    Abstract: The OECD developed a System of Composite Leading indicators for its Member countries in the early 1980's based on the 'growth cycle' approach. Today the OECD compiles composite leading indicators (CLIs) for 23 of its 30 Member countries and it is envisaged to expand country coverage to include all Member countries and the major six OECD non-member economies (NMEs) monitored by the organization in the OECD System of Composite Leading Indicators. The importance of the six major NMEs was considered the first priority and a workshop with participants from the six major NMEs was held at the OECD in Paris in April 2005 to discuss an initial OECD selection of potential leading indicators for the six major NMEs and national suggestions for alternative and/or additional potential leading indicators for calculation of country specific composite leading indicators. The outcomes of this meeting and followup activities undertaken by the OECD in co-operation with the participating national agencies are reflected in the results presented in this final version of the document. The OECD indicator system uses univariate analysis to estimate trend and cycles individually for each component series and then a composite indicator is obtained by aggregation of the resulting de-trended components. Today, statistical techniques based on alternative univariate methods and multivariate analysis are increasingly used in cyclical analysis and some of these techniques are used in this study to supplement the current OECD approach in the selection of leading components and the construction of composite indicators. L’OCDE a développé un système d’indicateurs composites avancés pour ses pays membres au début des années 80 basé sur les "cycles de croissance". Aujourd’hui, l’OCDE calcule les indicateurs composites avancés pour 23 des 30 pays membres et envisage d’étendre la couverture du système des indicateurs composites avancés à tous les pays membres ainsi qu’aux six principales économies non membres suivies par l’Organisation. L’importance des six principales économies non membres est considérée comme prioritaire et un séminaire regroupant ces six principales économies non membres fut organisé au siège de l’OCDE à Paris en avril 2005 afin de discuter d’une première sélection par l’OCDE d’indicateurs avancés potentiels pour les six principales économies non membres et discuter des suggestions des pays pour des indicateurs avancés potentiels alternatifs et/ou supplémentaires pour le calcul des indicateurs composites avancés spécifiques aux pays. Les résultats de cette réunion et les futures activités entreprises par l’OCDE en collaboration avec les agences nationales participantes sont décrits dans la version finale de ce document. Le système des indicateurs composites avancés de l’OCDE utilise une analyse univariée afin d’estimer la tendance et les cycles individuellement pour chaque série composante et ensuite un indicateur composite est obtenu par aggrégation des composantes sans tendance. Aujourd’hui, les techniques statistiques basées sur d’autres méthodes d’analyse univariée ainsi que multivariée sont de plus en plus utilisées en analyse cyclique et certaines de ces techniques sont utilisées dans l’étude afin de compléter l’approche courante de l’OCDE dans la sélection des composantes avancées et dans la construction des indicateurs composites.
    Date: 2006–01–25
  35. By: Ramon Marimon; Vincenzo Quadrini
    Abstract: We study how barriers to business start-up affect the investment in knowledge capital when contracts are not enforceable. Barriers to business start-up lower the competition for knowledge capital and, in absence of commitment, reduce the incentive to accumulate knowledge. As a result, countries with large barriers experience lower income and growth. Our results are consistent with cross-country evidence showing that the cost of business start-up is negatively correlated with the level and growth of income.
    Keywords: Innovation, Knowledge Capital, Enforcement, Growth, Competition, Commitment, Recursive Contracts, Mobility
    JEL: O30 O31 O40 J24 E22 D23
    Date: 2005–12
  36. By: Manuela Angelucci (University of Arizona and IZA Bonn); Giacomo De Giorgi (University College London)
    Abstract: Aid programs in developing countries are likely to affect all households living in the treated areas, both eligible and non-eligible ones. Studies that focus on the treatment effect on the treated may fail to capture important spillover effects. We exploit the unique design of an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas. We find that this effect is positive, and that it occurs through changes in the insurance and credit markets: non-eligible households receive more transfers, and borrow more when hit by a negative idiosyncratic shock, because of the program liquidity injection, thus they can reduce their precautionary savings. We also test for general equilibrium effects in the local labor and goods markets, finding no significant changes in labor income and prices, while there is a reduction in earnings from sales of agricultural products, which are now consumed. We show that this class of aid programs has important positive externalities, thus their overall effect is larger than the effect on the treated. Our results confirm that a key identifying assumption - that the treatment has no effect on the non-treated - is likely to be violated in similar policy designs.
    Keywords: program evaluation, consumption, Progresa
    JEL: E21 H43 I38 O12 O17
    Date: 2006–01
  37. By: Kyoji Fukao; Debin Ma; Tangjun Yuan
    Abstract: This article provides estimates of purchasing power parity (PPP) converters for expenditure side GDP of Japan/China and Japan/U.S through a detailed matching of prices for more than 50 types of goods and services in private consumption and about 20 items or sectors for investment and government expenditure. Based on our finding and linking with the earlier studies on the relative price levels of Taiwan and Korea, we derive the mid-1930s benchmark PPP adjusted per capita income of Japan, China, Taiwan and Korea at 31%, 10%, 23%, and 12% of the U.S. level respectively for the mid-1930s. These estimates corrected the consistent downward bias in East Asian income levels based on market exchange rate conversions. While confirming Angus Maddisonfs estimates for China and Taiwan based on the 1990 benchmark back-projection method, they do point to a 23% and 85% overestimate in his comparable figures for Japan and Korea respectively for the mid-1930s period. This article develops a preliminary theoretical and empirical framework to demonstrate the possible source of the biases in the back-projection method. We briefly discuss the implications of our findings on the initial conditions and long-term growth dynamics in East Asia and beyond.
    Date: 2006–01
  38. By: Juan Carlos Echeverry; Leopoldo Fergusson; Pablo Querubín
    Abstract: The study of budgetary institutions has long been an important topic in the economic literature. Nonetheless, the degree of rigidity or inflexibility in budget preparation, a prime preoccupation for policy makers and in particular for finance ministers since a long time ago, has been relatively unexplored. In this paper we show that budget inflexibility can take several forms and argue that it is likely to be closely related to various types of political conflict present in the budget process. Moreover, we study one particular form of budget inflexibility and its connection with one specific (but perhaps the most important) political force driving the budget process. More specifically, we discuss some of the consequences of "expenditure inflexibility," defined as the existence of transfers to special interests enjoying constitutional or legal protection which impede their modification in the short run, in a simple model of legislative bargaining that captures the Tragedy of the Commons present in public budget allocation.
    Date: 2005–09–05
  39. By: Servaas van der Berg (Department of Economics, Stellenbosch University); Ronelle Burger (Department of Economics, Stellenbosch University); Rulof Burger (Department of Economics, Stellenbosch University); Megan Louw (Department of Economics, Stellenbosch University); Derek Yu (Department of Economics, Stellenbosch University)
    Abstract: Using a constructed data series and another data series based on AMPS (the All Media and Products Survey), this paper explores trends in poverty and income distribution over the post-transition period. To steer clear of an unduly optimistic conclusion, assumptions are chosen that would tend to show the least decline in poverty. Whilst there were no strong trends in poverty for the period 1995 to 2000, both data series show a considerable decline in poverty after 2000, particularly in the period 2002-2004. Poverty dominance testing shows that this decline is independent of the poverty line chosen or whether the poverty headcount, the poverty ratio or the poverty severity ratio are used as measure. We find likely explanations for this strong and robust decline in poverty in the massive expansion of the social grant system as well as possibly in improved job creation in recent years. Whilst the collective income of the poor (using our definition of poverty) was only R27 billion in 2000, the grants (in constant 2000 Rand values) have expanded by R22 billion since. Even if the grants were not well targeted at the poor (and in the past they have been), a large proportion of this spending must have reached the poor, thus leaving little doubt that poverty must have declined substantially. However, there are limits to the expansion of the grant system as a means of poverty alleviation, pointing to the importance of economic growth with job creation for sustaining the decline in poverty.
    Keywords: poverty, inequality, South Africa, employment
    JEL: D31 D33 D63 E25 C81 J3 O1
    Date: 2005
  40. By: Christian Pierdzioch; Andrea Schertler
    Abstract: We used a recursive modeling approach to study whether investors could, in real time, have used information on the comovement of stock markets to forecast stock returns in European stock markets for high-technology firms. We used weekly data on returns in the Neuer Markt, the Nouveau Marché, the Alternative Investment Market, and the NASDAQ. We found substantial changes over time in the usefulness of the inter-European and cross-Atlantic comovement of stock markets for predicting stock returns. We also studied how monitoring the comovement of stock markets would have affected the performance of simple trading rules and investor’s markettiming skills.
    Keywords: Recursive modeling approach; Comovement of returns; Hightechnology firms learning by exporting, total factor productivity, export destination, quantile regression, instrumental variables
    JEL: B22 C32 E24
    Date: 2006–01

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