nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒02‒19
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication By Helge Berger; Jakob de Haan; Jan-Egbert Sturm
  2. A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models By Andreas Beyer; Roger E. A. Farmer
  3. Should Monetary Policy use Long-term Rates? By Mariano Kulish
  4. A Time-Varying Parameter Model of A Monetary Policy Rule for Switzerland. The Case of the Lucas and Friedman Hypothesis. By Marwan Elkhoury
  5. Job Flows and the Recent Business Cycle: Not All "Recoveries" Are Created Equal By R. Jason Faberman
  6. Monetary regimes: is there a trade-off between consumption and employment variability? By Matthews, Kent; Meenagh, David; Minford, Patrick; Webb, Bruce
  7. Does Central Bank Transparency Reduce Interest Rates? By Petra M. Geraats; Sylvester C.W. Eijffinnger; Carin A.B. van der Cruijsen
  9. India's Public Finances: Excessive Budget Deficits, a Government-Abused Financial System and Fiscal Rules By Buiter, Willem H; Patel, Urjit R.
  10. ECB Governance in an Enlarged Eurozone By Agnes Benassy-Quere; Edouard Turkisch
  11. Industries and the Bank Lending Effects of Bank Credit Demand and Monetary Policy in Germany By Raabe Katharina; Arnold Ivo J.M.; Kool Clemens J.M.
  12. Independence Day for the “Old Lady”: A Natural Experiment on the Implications of Central Bank Independence By Jagjit S. Chadha; Peter Macmillan; Charles Nolan
  14. Macroeconomic Confusions By Schlicht, Ekkehart
  16. Four Ingredients for New Approaches to Macroeconomic Modeling By Masanao Aoki
  17. Modelos Para La Inflación Básica de Bienes Transables y No Transables en Colombia By José Luis Torres
  18. Macroeconometric Modelling with a Global Perspective By M. Hashem Pesaran; Ron Smith
  19. Can a Cartel Fuel the Engine of Economic Development? OPEC and the macroeconomics of oil By Jose Noguera; Rowena A. Pecchenino
  20. Capital Account Controls, Bank’s Efficiency, Growth and Macroeconomic Volatility in the FLAR’s Member Countries? By Humberto Mora; Hernán Rincón
  22. Is There a Euro Effect on Trade? An Application of End-of-Sample Instability Tests for Panel Data. By Tommaso Mancini-Griffoli; Laurent L. Pauwels
  23. FISCAL COMPETITION AND PUBLIC EDUCATION IN REGIONS By Jorge Durán; Charles Figuieres; Alexandra Rillaers
  24. A New Stochastic Framework for Macroeconomics: Some Illustrative Examples By Masanao Aoki
  25. Discount Rates in Risk v. Money and Money v. Money Tradeoffs By Anna Alberini; Aline Chiabai
  26. Learning from the Expectations of Others By Jim Granato; Eran Guse; M.C. Sunny Wong
  27. Stabilisation Targets, Technical Change and the Macroeconomic Costs of Climate Change Control By Valentina Bosetti; Carlo Carraro; Marzio Galeotti
  28. Fiscal Hedging and the Yield Curve(joint with Chris Sleet, CMU, and Sevin Yeltekin (CMU)) By Hanno Lustig
  29. Cyclical Productivity in Europe and the United States, Evaluating the Evidence on Returns to Scale and Input Utilization By Inklaar, Robert
  31. Growth in Euro Area Labour Quality By Schwerdt, Guido; Turunen, Jarkko
  32. House Prices and Affordability - A First and Second Look Across Countries By Dirk Brounen; Peter Neuteboom; Arjen van Dijkhuizen
  33. Self-Fulfilling Currency Crises: The Role of Interest Rates (March 2005, joint with Arijit Mukherji, Minnesota, and Aleh Tsyvinski, UCLA) By Christian Hellwig
  36. Politico-Economic Determinants of the Crowding-in Effects of Public Investments in Developing Countries By Erdal Atukeren
  37. Unequal Pay or Unequal Employment? A Cross-Country Analysis of Gender Gaps By Olivetti, Claudia; Petrongolo, Barbara
  38. Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification By Harald Uhlig
  39. Rotterdam vs Almost Ideal Models: Will the Best Demand Specification Please Stand Up? By William Barnett; Ousmane Seck
  40. Systemic Crises and Growth By Aaron Tornell
  41. Predicting Bubbles and Bubbles-Substitutes By Earl A. Thompson; Jonathan Treussard; Charles R. Hickson
  42. Conditional Indexation in Defined Benefit Pension Plans By Jacob A. Bikker; Peter J.G. Vlaar
  43. Crises and Growth: A Re-evaluation By Romain Ranciere; Aaron Tornell; Frank Westermann
  44. Asset Trading Volume in Infinite-Horizon Economies with Dynamically Complete Markets and Heterogeneous Agents: Comment By Peter Bossaerts; William R. Zame

  1. By: Helge Berger (Free University Berlin, Germany and CESifo, Munich, Germany); Jakob de Haan (University of Groningen, The Netherlands and CESifo, Munich, Germany); Jan-Egbert Sturm (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: We examine the role of money in the policies of the ECB, using introductory statements of the ECB President at the monthly press conferences during 1999-2004. Over time, the relative amount of words devoted to the monetary analysis has decreased. Our analysis of indicators of the monetary policy stance suggests that developments in the monetary sector, while somewhat more important in the later half of the sample, only played a minor role most of the time. Our estimates of ECB interest rate decisions suggest that the ECB’s words (monetary-sector based policy intensions) are not an important determinant of its actions.
    Keywords: ECB, communication, monetary policy
    JEL: E58 E52 E43
    Date: 2006–01
  2. By: Andreas Beyer (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Roger E. A. Farmer (UCLA, Department of Economics, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA;)
    Abstract: We develop a technique for analyzing the response dynamics of economic variables to structural shocks in linear rational expectations models. Our work differs fromstandard SVARs since we allow expectations of future variables to enter structural equations. We show how to estimate the variance-covariance matrix of fundamental and non-fundamental shocks and we construct point estimates and confidence bounds for impulse response functions. Our technique can handle both determinate and indeterminate equilibria. We provide an application to U.S. monetary policy under pre and post Volcker monetary policy rules.
    Keywords: Identification; indeterminacy; rational expectations models.
    JEL: C39 C62 D51 E52 E58
    Date: 2006–02
  3. By: Mariano Kulish (Reserve Bank of Australia)
    Abstract: This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. It is shown that in both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high.
    Keywords: interest rates, monetary policy
    Date: 2005–11–21
  4. By: Marwan Elkhoury (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper is an empirical research of a monetary policy rule for a small open economy model, taking Switzerland as a case-study. A time-varying parameter model of a monetary policy reaction function is proposed to integrate various trade-offs to be made about various macroeconomic variables -- inflation, the output gap and the real exchange rate gap. The Kalman filter estimations of the time-varying parameters shows how rational economic agents combine past and new information to make new expectations about the state variables. The uncertainty created by the time-varying parameter model, and estimated by the conditional forecast error and conditional variance, is decomposed into two components, the uncertainty related to the time-varying parameters and the uncertainty related to the purely monetary shock. Most of the monetary shock uncertainty comes from the time-varying parameters and not from the pure monetary shock. The Lucas and Friedman hypotheses about the impact of uncertainty on output are revisited, using a conditional variance to test them. Both hypothesis are confirmed, using the one-step ahead conditional variance of the monetary shock. An inverse relation between the magnitude of the response on output to the nominal shock and the variance of this shock is found, as Lucas had predicted. Moreover, there is a direct negative impact of uncertainty which reduces output in the long-term.
    Keywords: time-varying parameter model; Taylor rule; Kalman Filter.
    Date: 2005–12
  5. By: R. Jason Faberman (U.S. Bureau of Labor Statistics)
    Abstract: The last two economic downturns are notable for their slow labor market recoveries. Yet, the behavior of their underlying gross job flows is quite different. The 1990-92 period had a relatively slow decline in job destruction, while the 2001-03 period had a large, persistent decline in job creation that occurs across most industries. The dynamics of the latter period run counter to the conventional wisdom that large movements in job destruction drive business cycles. Evidence spanning the entire postwar period suggests that job creation is at a historic low, and that its recent patterns are part of decades-long decline in the magnitude and volatility of job reallocation.
    Keywords: Job Reallocation; Business Cycles; Employment Fluctuations
    JEL: E24 E32
  6. By: Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Webb, Bruce (Cardiff Business School)
    Abstract: Macro models generally assume away heterogeneous welfare in assessing policies. We investigate here within two aggregative models - one with a representative agent, the other a long-used forecasting model of the UK - whether allowing for differences in welfare functions (specifically between those in continuous employment and those with frequent unemployment spells) alters the rankings of monetary policies. We find that it does but that a set of policies (money supply targeting implemented by money supply control) can be found that are robust in the sense of avoiding very poor outcomes for either of the two groups.
    Keywords: Robustness; heterogenous welfare; money supply rules; interest rate setting; price level targeting
    JEL: E52
    Date: 2006–02
  7. By: Petra M. Geraats; Sylvester C.W. Eijffinnger; Carin A.B. van der Cruijsen
    Abstract: Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoreticalmodels is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental e¤ect on interest rates.
    Keywords: central bank transparency; monetary policy; interest rates.
    JEL: E52 E58
    Date: 2006–02
  8. By: Jana Hromcová (Universitat de Girona)
    Abstract: A stochastic growth model with money introduced via a cash-in-advance constraint is used to analyze the behaviour of the income velocity of real monetary balances. Agents can purchase consumption goods only using government issued money and capital is a credit good. The cash-in-advance constraint may become nonbinding because of the uncertainty about the realization of the state of the economy. Changes in the income velocity of money due to a precautionary money demand are studied. We find that despite the precautionary money demand does not introduce significant changes into the volatility of the income velocity, its presence can alter the relationship between the growth rate of money supply and the income velocity.
    Keywords: Cash-in-advance; Income velocity; Precautionary money demand.
    JEL: E40
    Date: 2004–05
  9. By: Buiter, Willem H; Patel, Urjit R.
    Abstract: Capital formation is a key driver of the growth of potential output. With continuing widespread capital controls and persistently small inward FDI the volume of capital formation in India is constrained by domestic saving. The national saving rate in India (the sum of the saving rates of households, enterprises and the state) is depressed by the continuing large public sector deficits (and much below the near 40% of GDP saving rates achieved by China). Even this saving rate should be able to support a higher growth rate than has been achieved thus far. The reason it does not is that the intermediation of this saving into domestic capital formation is inefficient. Since the middle of the 1990s, India's public debt has risen steadily as a share of GDP, but remains below the levels achieved at the time of the 1991 currency crisis. The composition of this debt is, however, significantly different from that in 1991: external public debt is modest and international gold and foreign exchange reserves stand at historically high levels. The domestic debt is rupee-denominated. For all these reasons, government solvency may not be a pressing issue at this stage. Globally, risk-free rates at all maturities and all imaginable credit risk spreads are extraordinarily and unsustainably low. Continuation of the pattern of recent years - a steady increase in the debt-GDP ratio - will sooner or later raise the public debt to unsustainable levels. The fiscal rules adopted by the Indian Central Government under the Fiscal Responsibility and Budget Management Act do not address the key distortions imposed by the authorities on the private sector through financial repression, misguided regulations and inefficient ownership and incentive structures. Nor do they address the underlying fiscal sustainability problem faced by the Indian state. In addition, they create a mechanism for macroeconomic volatility-enhancing, pro-cyclical fiscal policy.
    Keywords: financial intermediation; financial repression; fiscal sustainability; Indian public finance
    JEL: E5 E6 G1 G2 H6 O5
    Date: 2006–02
  10. By: Agnes Benassy-Quere; Edouard Turkisch
    Abstract: In this paper, we provide an assessment of the rotation rule decided by the European Council for the functioning of the ECB Governing council after EMU enlargement. Desired interest rates by each member of the Governing council are calculated on the basis of Fisher, truncated Taylor and Taylor rules successively, and on the basis of a convergence of both GDP per capita and price levels within the EU in 30 years. Then, various decision rules are simulated. We show that moving from the “old” rule (where each member of the Governing council has a vote at each meeting) to the “new” one (where, at a given meeting, only 15 national governors have a vote) does not have much impact on the decisions made by the Governing council in an enlarged Eurozone. However, should rotations be relatively infrequent, the system could end up close to a constituency system. In this case, core Euro12 countries could be better off in a Euro25 than in the Euro12, because they would be in the position of imposing lower interest rates. However, core Euro12 would be worse off in a Euro22 compared to a Euro12 because high inflation countries would be able to impose higher interest rates. On the whole, in a Euro25, the (fast) rotation system which was decided by the European Council appears acceptable by all Euro members because it is never the worst system. However, full centralisation (where the choice of the interest rate is left to the Executive board) would deliver the same results, with much lower transaction costs.
    Keywords: ECB; EMU; enlargement; monetary policy; voting
    JEL: E58
    Date: 2005–12
  11. By: Raabe Katharina; Arnold Ivo J.M.; Kool Clemens J.M. (METEOR)
    Abstract: This paper presents evidence on the industry effects of bank lending in Germany and asks whether bank lending to single industries depends on industry-specific bank credit demand or on monetary policy as determinant of bank credit supply. To this end, we estimate individual bank lending functions for 17 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models illustrates that industry bank lending responds more to changes in industry-specific bank credit demand than to changes in monetary policy. We report evidence in favor of a credit channel through bank lending, but find the bank lending effects of monetary policy to be very sensitive to the choice of industry. The empirical results, hence, lend strong support to the existence of industry effects of bank lending. In view of this finding, we conclude that bank lending growth and monetary policy effectiveness crucially depend on the industry composition of bank credit portfolios.
    Keywords: monetary economics ;
    Date: 2006
  12. By: Jagjit S. Chadha; Peter Macmillan; Charles Nolan
    Abstract: Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was ‘news’ and illustrate that the reduction in medium and long term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policymaker’s aversion to inflation deviations from target. We suggest therefore central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation.
    Keywords: Central bank independence; preferences; yield curve.
    JEL: E4 E5 N2
    Date: 2006–01
  13. By: Ivan Paya (Universidad de Alicante); Agustín Duarte (Universidad de Alicante); Ioannis A. Venetis (Centre of Planning and Economic Research (KEPE))
    Abstract: Although the spread has been established as a leading indicator of economic activity, recent studies on US and EU countries have documented, theoretically and empirically, that the term spread-output growth relationship may not be stable over time and it may be subjected to nonlinearities. Using aggregate data for the Euro area over the period 1970:1 - 2000:4, we applied linear regression as well as nonlinear models to examine the predictive accuracy of the term spread-output growth relationship. Our results confirm the ability of the yield curve as a leading indicator. Moreover, significant nonlinearity with respect to time and past annual growth is detected outperforming the linear model in out-of-sample forecasts of one-year-ahead annual growth. Furthermore probit models that use the EMU and US yield spreads are successful in predicting EMU recessions.
    Keywords: Term Spread and Real Growth; Threshold Models; Recession; Forecasting Accuracy
    Date: 2004–07
  14. By: Schlicht, Ekkehart
    Abstract: This note critically evaluates the New Classical Macroeconomics from a Marshallian perspective. Revisiting the famous Keynes-Tinbergen controversy, it is argued that Keynes' criticism comprises the "Lucas critique," and that it is misleading to label this a critique of Keynesian economics. The postulate of immutable economic structures carries Tinbergen's approach to the extreme and neglects the possibility of slowly changinmg structures, as conceived by Marshall. The position is defended by arguments about equilibrium and rationality that are admittedly empty.
    JEL: B22 E1
    Date: 2006–02
  15. By: Lilia Maliar (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: Euler-equation methods for solving nonlinear dynamic models involve parameterizing some policy functions. We argue that in the typical macroeconomic model with valuable leisure, labor function is particularly convenient for parameterizing. This is because under the labor-function parameterization, the intratemporal first-order condition admits a closed-form solution, while under other parameterizations, there should be a numerical solution. In the context of a simulation-based parameterized expectations algorithm, we find that using the labor-function parameterization instead of the standard consumption-function parameterization reduces computational time by more than a factor of ten.
    Keywords: Nonlinear models, Parameterized expectations, PEA, Monte Carlo simulation, Numerical solution
    JEL: C6 C63 C68
    Date: 2004–10
  16. By: Masanao Aoki
    Date: 2005–02–03
  17. By: José Luis Torres
    Abstract: En este trabajo se estiman modelos de corto plazo para pronosticar la inflación de bienes transables y no transables en Colombia. Estos modelos no existían en el Banco Central antes de 2004 y son de gran utilidad para la toma de decisiones de política monetaria. También se evalúan los beneficios, en términos de análisis y de capacidad pronóstico, de utilizar métodos que capturen la posible no linealidad de la curva de Phillips en los datos colombianos. Aunque existen diferentes razones que justifican una relación no lineal de corto plazo entre producto e inflación, cada una de ellas sugiere una forma diferente para la curva. Por esta razón, se utilizan redes neuronales artificiales (ANN) y los mínimos cuadrados flexibles (FLS), procedimientos que tienen la gran ventaja de que no imponen de antemano ninguna forma funcional que pueda sesgar los resultados. Una vez se hace la estimación de los modelos de inflación de transables y de no transables, se comparan los pronósticos de estos dos modelos no lineales con los de dos estimaciones lineales, se analizan las funciones de impulso respuesta de cada uno de los modelos y además se realiza una prueba de no linealidad. Se encuentra que la curva de Phillips en Colombia podría ser no lineal y por tanto resulta pertinente considerar modelos no lineales para su estimación. Finalmente, con estos modelos se intenta explicar el proceso de desinflación que ha vivido la economía colombiana en los últimos años tanto en la inflación de transables, como en la de no transables.
    Keywords: Inflación, Curva de Phillips no Lineal, Redes Neuronales Artificiales, Mínimos Cuadrados Flexibles.
    JEL: E31 E37 C45
  18. By: M. Hashem Pesaran; Ron Smith
    Abstract: This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann and Weiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables to their foreign counterparts and then consistently combined to form a Global VAR (GVAR). It is shown that 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. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where foreign 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.
    Keywords: Global VAR (GVAR), DSGE models, VARX*
    JEL: C32 E17 F42
    Date: 2006–02
  19. By: Jose Noguera; Rowena A. Pecchenino
    Abstract: OPEC’s stated mission is to promote the economic development and growth of its member states while minimizing volatility in the oil markets. But after a promising beginning many member states’ economies have declined rather than prospered—a clear indication of OPEC’s failure to meet their development goals. Thus, we ask if a resource cartel can achieve the joint goals of development and resource market stability. In a model in which oil producing countries choose whether to join an oil cartel or remain in the fringe, we find that, in a highly elastic oil market, a profit maximizing cartel is inconsistent with oil market stability in the face of demand shocks. Thus, it is inimical to macroeconomic stability, an essential requirement for long-lasting capital investment, and therefore economic development and growth. Consequently, it may not be optimal for an oil-exporting country that cares adequately about macroeconomic stability to join the cartel. But for a country where short-run considerations overwhelm long-run concerns, cartel membership may be the correct choice. Yet the oil rich are ultimately cursed by their excessive reliance on their resource wealth—current profligacy begets future decline.
    Keywords: OPEC, macroeconomic stability, resource curse, economic development.
    JEL: E6 F4 Q43 Q32 O11
    Date: 2005–08
  20. By: Humberto Mora; Hernán Rincón
    Abstract: This paper evaluates the effects of capital account controls adopted in the past years by the FLAR’s member countries (Bolivia, Colombia, Costa Rica, Ecuador, Perú and Venezuela) on the efficiency of the banking sector, the economic growth and the volatility of output, consumption, and investment. The findings on efficiency show that the degree of the monopoly power in the loans and deposits markets are positively correlated with capital controls. The findings also indicate that, in general, capital controls neither reduce growth nor reduce macroeconomic volatility. On the contrary, and as it is expected, the capital account openness promotes growth.
    Keywords: Capital account controls; Efficiency of the banking sector; Economic growth; Macroeconomic volatility; SUR; Cointegration; Arellano and Bond estimator; Instrumental variables
    JEL: F32 F33 F36 F41 G14 G18 G21 C51 C52
  21. By: José Ramón García (Dpto. Análisis Económico, Universitat de València); José Vicente Ríos (Dpto. Análisis Económico, Universitat de València)
    Abstract: In this paper we introduce a progressive income tax in the shirking model with union bargaining presented by in Altenburg and Straub (2002). Indeed, we differentiate taxation on employees and employers for the fiscal policy analysis. The main results show that it is possible, with a constant revenue reform, to enhance employment by shifting the tax imposition towards lower firm taxation. And, that it is crucial to consider a proportional or progressive taxation on labour income in order to be able to analyse the effect on unemployment for a constant replacement rate.
    Keywords: Labour taxation, union bargaining, efficiency wages
    JEL: E24 J32 J41 J51
    Date: 2004–11
  22. By: Tommaso Mancini-Griffoli; Laurent L. Pauwels (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The debate on whether a common currency increases trade has persisted for years. Recently, the introduction of the Euro has been hailed as a possible natural experiment to test this theory. But the ensuing empirical literature has inadequately dealt with the very few observations in the post-break period, by recurring to formal residuals-based tests constructed on asymptotic results that cannot be verified. We extend the very recent Andrews' (2003) end-of-sample instability test to panel data in order to rigorously investigate whether the introduction of the Euro has affected trade in the EU. The test features a distribution built with empirical subsampling techniques, robust to very few post break observations. We also use recently developed methods to deal with nonstationarity in our regressors. As in the literature, we find a structural break in trade between Euro-Area countries when using a traditional gravity equation. The break begins in 1999 Q1, but is short-lived as it lasts only 10 quarters (2 1/2 years). We then take the additional step to explain this break. We test a micro-founded augmented gravity equation to capture supply-side effects stemming from macroeconomic policies accompanying the Euro. Namely, we show that the break can be explained by a marked decrease in real interest rates across the Euro-Area preceding and following the introduction of the Euro. Alternatively, we find equally conclusive evidence for the role of institutional integration deployed at the time of the Euro in fostering trade. Lastly, we find no evidence of a break in trade between non Euro Area EU15 countries and between non Euro Area EU 15 and Euro Area countries.
    Keywords: Gravity equation; International Trade; Common Currency; Instability tests in Panel data; Euro Area.
    Date: 2006–02
  23. By: Jorge Durán (Universidad de Alicante); Charles Figuieres (INRA); Alexandra Rillaers (Universidad de Alicante)
    Abstract: We explore an economy with two regions and independent local administrations. Local governments collect taxes to finance public education, but once educated agents can choose to migrate to the other region. The Nash equilibrium of the long-run game between the two governments is compared to a golden rule-type social optimum. Preliminary results show that the Nash equilibrium will result in over- or under-investment depending on the extent to which public education is subject to congestion.
    Keywords: Successive generations, Public education, Federal and local government, Fiscal games.
    JEL: E13 O41 I29
    Date: 2004–11
  24. By: Masanao Aoki
    Date: 2005–03–29
  25. By: Anna Alberini (University of Maryland and Fondazione Eni Enrico Mattei); Aline Chiabai (Fondazione Eni Enrico Mattei)
    Abstract: We use data from a survey of residents of five Italian cities conducted in late Spring 2004 to estimate the discount rates implicit in (a) money v. future risk reductions and (b) money v. money tradeoffs. We find that the mean personal discount rate is 2% in (a) and 8.7% in (b). The latter is lower than the discount rates estimated in comparable situations in many recent studies, greater than market interest rates in Italy at the time, and exhibits modest variation with age and gender. The discount rate implicit in money v. risk tradeoffs is in line with estimates from studies in the US and Europe, and does not depend on observable individual characteristics.
    Keywords: Value of a statistical life, Latent risk reductions, Individual discount rates, Stated preference questions
    JEL: J17 I18 D91
    Date: 2006–01
  26. By: Jim Granato; Eran Guse; M.C. Sunny Wong
    Abstract: The assumption of perfectly rational representative agents is commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms’ forecasts can confound the leading firms’ forecasts - when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms’ mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market.
    Keywords: Adaptive Learning; Expectational Stability; Information Diffusion, Cobweb Model, Heterogeneous Expectations
    JEL: C62 D84 E37
    Date: 2006–02
  27. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Carlo Carraro (Università Ca’ Foscari di Venezia and Fondazione Eni Enrico Mattei); Marzio Galeotti (Università di Milano and Fondazione Eni Enrico Mattei)
    Abstract: The issue of greenhouse gas (GHG) stabilization stands on three critical open questions. Namely, what are the impacts deriving from different levels of climate change and their distribution. What are the levels at which GHG concentration should be stabilized in order to avoid unacceptable impacts. And, finally, what are the costs and what are the instruments available to reach such stabilization targets. In the present paper, we address the latter question, in the specific attempt of shedding some light on the debated role of technological progress in lowering the costs of GHG stabilization. In particular, we use an optimal growth climate-economy model, where technical change is endogenously driven by learning by researching and learning by doing. In the model, when an ambitious stabilization target has to be reached, some additional technological innovation and diffusion is induced. The magnitude of this induced effect substantially affects the costs of stabilizing greenhouse gasses and may even make a well-designed climate policy a win-win strategy. A sensitivity analysis on the model crucial parameters is performed to account for structural and parametric uncertainties on learning effects, on the relationship between knowledge accumulation and the energy and carbon intensity of the economic system, and on the crowding out of investments in the energy sector R&D with respect to other research fields.
    Keywords: Climate policy, Environmental modelling, Integrated assessment, Technical change
    JEL: H0 H2 H3
    Date: 2006–01
  28. By: Hanno Lustig
    Date: 2005–03–22
  29. By: Inklaar, Robert
    Abstract: This paper studies procyclical productivity growth at the industry level in the U.S. and in three European countries (France, Germany and the Netherlands). Industry-specific demand-side instruments are used to examine the prevalence of non-constant returns to scale and unmeasured input utilization. For the aggregate U.S. economy, unmeasured input utilization seems to explain procyclical productivity. However, this correction still leaves one in three U.S. industries with procyclical productivity. This failure of the model can also be seen in Europe and is mostly concentrated in services industries.
    Keywords: cyclical productivity; input utilizations; instrumental variables; returns to scale
    JEL: D24 E32 O47
    Date: 2006–02
  30. By: Christophe Muller (Universidad de Alicante)
    Abstract: Many social indicators are based on household consumption information. The valuation of non-monetary operations is crucial for the analysis of consumption surveys in developing countries because of the importance of own-consumption and transfers in kind. What are the price statistics used in the valuation of consumption indicators? How is the available price information exploited to produce consumption indicators? How can the different steps of the valuation process be analysed? We explore these questions by presenting the valuation method for the consumption used in rural Rwanda for the 1983 consumption survey, and by proposing a general model of valuation algorithm. This is useful not only for improving such algorithms, but also for assessing the impact of the valuation process on economic analyses.
    Keywords: Household surveys, Data processing, Consumption analysis, Valuation method, Prices, Demand Systems, Poverty Analysis.
    Date: 2004–03
  31. By: Schwerdt, Guido; Turunen, Jarkko
    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 1990s, 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: growth accounting; human capital; labour quality; total factor productivity
    JEL: E24 J24 O47
    Date: 2006–02
  32. By: Dirk Brounen; Peter Neuteboom; Arjen van Dijkhuizen
    Abstract: In this paper we analyze the development of house prices for eight different countries over the period 1970-2003. First we look at real house price dynamics of the United States, the United Kingdom, Germany, France, Italy, the Netherlands, Sweden, and Belgium. After discussing the observable similarities and variations in national house prices, we continue by analyzing structural differences in legislation and mortgage markets, which might help us to understand the cross-sectional variation in prices levels and price developments. Next, we construct a comprehensive first-buyer affordability model in which nominal house prices are corrected for household income changes and the net financing costs of mortgage payments. This model grants us a second look on the cross-section of international house price dynamics. We finish our study with first-buyer elasticity tests, which give a first glance on the stability of each price level on the basis of affordability.
    Keywords: house prices; affordability index; price-elasticity; stress test.
    JEL: E44 E64 G12 G18
    Date: 2006–01
  33. By: Christian Hellwig
    Date: 2004–12–09
  34. By: José Ramón García (Dpto. Análisis Económico, Universitat de València)
    Abstract: This paper analyses the relationship between tax structure and unemployment in thelabour market of OECD countries for the period 1960-1996. In this work, the sample ofcountries is divided in three groups based on institutional aspects that determine thewage bargaining in the labour market. In addition, the labour tax burden was separatedbetween payroll tax (paid by employers) and income labour tax (paid by employees).The results suggest that the payroll tax is a relevant factor to explain the unemploymentin the European Continental countries. En este artículo se considera la relación entre la estructura impositiva y el desempleo en el mercado de trabajo de la OCDE en el periodo 1960-1996. En dicho análisis se separa la muestra en tres grupos de países atendiendo al tipo de instituciones que determinan el salario en el mercado de trabajo. Adicionalmente se divide la imposición global que recae en el mercado de trabajo entre los impuestos que pagan los empresarios y los que pagan los trabajadores. Los resultados obtenidos muestran que el impuesto que pagan los empresarios es un factor relevante a la hora de explicar el desempleo en el grupo de países de la Europa Continental.
    Keywords: Desempleo, Estructura impositiva, Negociación. Unemployment, Tax structure and Wage bargaining.
    JEL: E62 J38 J64
    Date: 2004–10
  35. By: Paulo M.M. Rodrigues (University of Algarve); Antonio Rubia (Universidad de Alicante)
    Abstract: Testing for unit roots in short-term interest rates plays a key role in the empirical modelling of these series. It is widely assumed that the volatility of interest rates follows some time-varying function which is dependent of the level of the series. This may cause distortions in the performance of conventional tests for unit root nonstationarity since these are typically derived under the assumption of homoskedasticity. Given the relative unfamiliarity on the issue, we conducted an extensive Monte Carlo investigation in order to assess the performance of the DF unit root tests, and examined the effects on the limiting distributions of test procedures (t- and likelihood ratio tests) based on maximum likelihood estimation of models for short-term rates with a linear drift.
    Keywords: Unit root, interest rates, CKLS model.
    JEL: C12 C15 C52 E43
    Date: 2004–03
  36. By: Erdal Atukeren (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This study investigates the politico-economic determinants of the crowding-in effects of public investments in a cross-section of 25 developing countries for the 1975-2000 period using multivariate probit analysis. The estimation results show that public fixed capital investments may crowd in private investments, but this still depends on the developments in the economic, political, and legal environment of business in individual countries. As such, our findings capture the essence of the mixed results found in this literature well and shed further light on the conditions under which public investments are more likely (not) to crowd in private investments in developing countries.
    Keywords: Public investment, crowding-in effects, environment of private business, institutions, rule of law, property rights
    JEL: E62 H54 O11
    Date: 2006–01
  37. By: Olivetti, Claudia; Petrongolo, Barbara
    Abstract: Gender wage and employment gaps are negatively correlated across countries. We argue that non-random selection of women into work explains an important part of such correlation and thus of the observed variation in wage gaps. The idea is that, if women who are employed tend to have relatively high-wage characteristics, low female employment rates may become consistent with low gender wage gaps simply because low-wage women would not feature in the observed wage distribution. We explore this idea across the US and EU countries estimating gender gaps in potential wages. We recover information on wages for those not in work in a given year using alternative imputation techniques. Imputation is based on (i) wage observations from other waves in the sample, (ii) observable characteristics of the nonemployed and (iii) a statistical repeated-sampling model. We then estimate median wage gaps on the resulting imputed wage distributions, thus simply requiring assumptions on the position of the imputed wage observations with respect to the median, but not on their level. We obtain higher median wage gaps on imputed rather than actual wage distributions for most countries in the sample. However, this difference is small in the US, the UK and most central and northern EU countries, and becomes sizeable in Ireland, France and southern EU, all countries in which gender employment gaps are high. In particular, correction for employment selection explains more than a half of the observed correlation between wage and employment gaps.
    Keywords: median gender gaps; sample selection; wage imputation
    JEL: E24 J16 J31
    Date: 2006–02
  38. By: Harald Uhlig
    Abstract: Fifteen years after German reunification, the facts about slow regional convergence have born out the prediction of Barro (1991), except that migration out of East Germany has not slowed down. I document that in particular the 18-29 year old are leaving East Germany, and that the emigration has accelerated in recent years. To understand these patterns, I provide an extension of the standard labor search model by allowing for migration and network externalities. In that theory, two equilibria can result: one with a high networking rate, high average labor productivity, low unemployment and no emigration (“West Germany”) and one with a low networking rate, low average labor productivity, high unemployment and a constant rate of emigration (“East Germany”). The model does not imply any obviously sound policies to move from the weakly networked equilibrium to the highly networked equilibrium.
    Keywords: German reunification, labor market search, network externalities, migration, regional economics
    JEL: E20 E24 J6 J1
    Date: 2006–02
  39. By: William Barnett (Department of Economics, The University of Kansas); Ousmane Seck (Department of Economics, The University of Kansas)
    Abstract: Among the many demand specifications in the literature, the Rotterdam model and the Almost Ideal Demand System (AIDS) have particularly long histories, have been highly developed, and are often applied in consumer demand systems modeling. Using Monte Carlo techniques, we seek to determine which model performs better in terms of its ability to recover the true elasticities of demand. We derive the correct formulae for the AIDS models elasticities, when the T¡§ornqvist or two modified versions of the Stone index are used to linearize the model. The resulting linearized AIDS are compared to the full AIDS.
    Keywords: Rotterdam Model, Almost Ideal Model, consumer demand system, Monte Carlo study, flexible functional forms
    JEL: C3 E41 G12 C43 C22
  40. By: Aaron Tornell
    Date: 2005–05–20
  41. By: Earl A. Thompson (UCLA); Jonathan Treussard (Boston University); Charles R. Hickson (Queens University at Belfast)
    Date: 2004–07–01
  42. By: Jacob A. Bikker; Peter J.G. Vlaar
    Abstract: In the Netherlands, the typical pension contract nowadays comprises an average earnings defined benefit pension in which only nominal benefits are guaranteed, but with the intention to provide wage indexation. In the new supervisory regime, the guaranteed pension rights, based on market valuation, are subject to risk-based solvency requirements. Provisioning is not required for conditional pension rights, though contributions have to be consistent with the indexation ambition, as communicated with the participants. This paper analyses to what extent indexation is indeed likely, given different indexation and contribution policies. Thereby, it explains how intergenerational risk sharing in defined benefit pension plans can provide a reasonable insurance of pension benefits against wage or price inflation. Moreover, it illustrates the tenability of defined benefit pension plans under ageing, the new fair-value accounting regimes, and possible volatility on financial markets. The analysis is based on a stochastic Pension Asset and Liability Model for the Netherlands (PALMNET). According to the PALMNET simulations, voluntary provisioning for indexation is to be recommended. Without reserving, indexation cuts may be severe and the solvency requirements incidentally lead to extreme premiums. Fully guaranteed indexation is virtually unaffordable under the new supervisory regime, because the real discount rate is generally both very low and volatile.
    Keywords: Average wage defined benefit pension; Monte Carlo simulations; Regulation. J.E.L. Code: C15; C59; G23; J18
    JEL: C33 E41 G3
    Date: 2006–02
  43. By: Romain Ranciere (Universitat Pompeu Fabra and CERAS); Aaron Tornell (UCLA nad NBER); Frank Westermann (University of Munich and CESifo)
    Date: 2004–04–01
  44. By: Peter Bossaerts (California Institute of Technology); William R. Zame (UCLA/Califonia Institute of Technology)
    Date: 2005–03–01

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