nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒02‒26
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Output Persistence and Upside Down Electoral Business Cycles, What Does Really Matter? By António Caleiro
  2. Monetary Policy in the Euro-Area: An Analysis Using a Stylized New-Keynesian Model By Garretsen H.; Moons C.; van Aarle B.
  3. Estimating Macroeconomic Models: A Likelihood Approach By Jesus Fernandez-Villaverde; Juan F. Rubio-Ramirez
  4. The Time Varying Volatility of Macroeconomic Fluctuations By Alejandro Justiniano; Giorgio E. Primiceri
  5. Pervasive Stickiness (Expanded Version) By N. Gregory Mankiw; Ricardo Reis
  6. Business Cycles in Emerging market Economies: A New View of the Stylised Facts By Stan du Plessis
  7. Expectations in Inflations Targeting Regimes By Oleg Korenok; Stanislav Radchenko
  8. Exchange Rate Targeting in a Small Open Economy By Mette Ersbak Bang Nielsen
  9. Optimal Market Timing By Erica X. N. Li; Dmitry Livdan; Lu Zhang
  10. Policy-Induced Mean Reversion in the Real Interest Rate? By Zisimos Koustas; Jean-Francois Lamarche
  11. Trade Regimes, Liberalization and Macroeconomic Instability in Africa By Chantal Dupasquier; Patrick N. Osakwe
  12. Does one size fit all? A Taylor-rule based analysis of monetary policy for current and future EMU members By Moons C.; Van Poeck A.
  13. Evaluation of macroeconomic models for financial stability analysis By Gunnar Bårdsen; Kjersti-Gro Lindquist; Dimitrios P. Tsomocos
  14. Evaluation of macroeconomic models for financial stability analysis By Gunnar Bårdsen; Kjersti-Gro Lindquist; Dimitrios P. Tsomocos
  15. Growth and Employment: A survey on the Demand Side of the Labour Market By Maria Gabriela Ladu
  16. Why Did U.S. Market Hours Boom in the 1990s? By Ellen McGrattan; Edward Prescott
  17. Insights into Business Confidence from Firm-Level Panel Data By Brian Silverstone; James Mitchell
  18. Finance and the Cambridge Equation: A Commentary Note By MAN-SEOP PARK
  19. Further evidence about alcohol consumption and the business cycle By C. Vilaplana; José M. Labeaga; S. Jiménez-Martín
  20. Japanese growth and stagnation: a Keynesian perspective By Peter Skott; Takeshi Nakatani
  21. Evaluation of macroeconomic models for financial stability analysis By Gunnar Bardsen; Kjersti-Gro Lindquist; Dimitrios P.Tsomocos
  22. Fiscal Decentralization and Economic Growth: A Comparative Study of China and India By Jorge Martinez-Vazquez; Mark Rider
  23. The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States By John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
  24. The Role of Search Frictions and Bargaining for Inflation Dynamics By Antonella Trigari
  25. Using the Dynamic Bi-Factor Model with Markov Switching to Predict the Cyclical Turns in the Large European Economies By Konstantin A. Kholodilin
  26. Testing Theories of Job Creation: Does Supply Create Its Own Demand? By Carlsson, Mikael; Eriksson, Stefan; Gottfries, Nils
  27. How to Sustain Growth in a Resource Based Economy?: The Main Concepts and their Application to the Russian Case By Rudiger Ahrend
  28. Wage inequality and unemployment with overeducation By Xavier Cuadras Morató; Xavier Mateos-Planas
  29. On the Synchronisation of Elections: A Differential Games Approach By António Caleiro
  30. Una aproximación a la dinámica de las tasas de interés de corto plazo en Colombia a través de modelos GARCH multivariados By Luis Fernando Melo Velandia; Oscar Reinaldo Becerra Camargo
  31. Total Factor Productivity Growth and Employment: A Simultaneous Equations Model Estimate By Maria Gabriela Ladu
  32. An Equilibrium Model of "Global Imbalances" and Low Interest Rates By Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
  33. China's Fiscal System: A Work in Progress By Richard Bird; Christine C.P.Wong
  34. Investment and Uncertainty By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  35. Money, credit and Smithian growth in Tokugawa Japan By Osamu Saito; Tokihiko Settsu
  36. Down or Out: Assessing the Welfare Costs of Household Investment Mistakes By Laurent E. Calvet; John Y. Campbell; Paolo Sodini
  37. Listening to the Market: Estimating Credit Demand and Supply from Survey Data By Satoru Kanoh; Chakkrit Pumpaisanchai
  38. A Variety-Expansion Model of Growth with External Habit Formation By Junko Doi; Kazuo Mino
  39. Banks, Financial Markets and Growth By Luca Deidda; Bassam Fattouh
  40. On the relative stickiness of wages and prices in Western Europe and the United States: A structural VAR approach By Ferraz L.P.D.C.; Plasmans J.; Van Poeck A.
  41. Legal-Political Factors and the Historical Evolution of the Finance-Growth Link By Michael D. Bordo; Peter L. Rousseau
  42. A Macro and Microeconomic Integrated Approach to Assessing the Effects of Public Policies By José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
  43. Democracy and Development: The Devil in the Details By Torsten Persson; Guido Tabellini
  44. The Effects of Entry on Incumbent Innovation and Productivity By Philippe Aghion; Richard Blundell; Rachel Griffith; Peter Howitt; Susanne Prantl

  1. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: This note shows in what circumstances output persistence may invert the pattern of the electoral cycle when inflation expectations are of the adaptive or rational type and the government preferences are quadratic over output and inflation.
    Keywords: Electoral Cycles, Output persistence
    JEL: E23 E32 E52 E61
    Date: 2006
  2. By: Garretsen H.; Moons C.; van Aarle B.
    Abstract: This paper analyses monetary policy in the Euro-Area using a stylized new-Keynesian model. A number of issues are focused upon: (i) optimal monetary policy under commitment and discretion, (ii) a comparison of optimal monetary policies and ad-hoc monetary policies, (iii) the effects of fiscal policies and foreign variables on monetary policy in the model. Using numerical simulations, it is analyzed how these aspects affect monetary policy of the ECB in particular and macro economic fluctuations in the Euro-Area in general.
    Date: 2005–12
  3. By: Jesus Fernandez-Villaverde; Juan F. Rubio-Ramirez
    Abstract: This paper shows how particle filtering allows us to undertake likelihood-based inference in dynamic macroeconomic models. The models can be nonlinear and/or non-normal. We describe how to use the output from the particle filter to estimate the structural parameters of the model, those characterizing preferences and technology, and to compare different economies. Both tasks can be implemented from either a classical or a Bayesian perspective. We illustrate the technique by estimating a business cycle model with investment-specific technological change, preference shocks, and stochastic volatility.
    JEL: C11 C15 E10 E32
    Date: 2006–02
  4. By: Alejandro Justiniano; Giorgio E. Primiceri
    Abstract: In this paper we investigate the sources of the important shifts in the volatility of U.S. macroeconomic variables in the postwar period. To this end, we propose the estimation of DSGE models allowing for time variation in the volatility of the structural innovations. We apply our estimation strategy to a large-scale model of the business cycle and find that investment specific technology shocks account for most of the sharp decline in volatility of the last two decades.
    JEL: E30 C32
    Date: 2006–02
  5. By: N. Gregory Mankiw; Ricardo Reis
    Abstract: This paper explores a macroeconomic model of the business cycle in which stickiness of information is pervasive. We start from a familiar benchmark classical model and add to it the assumption that there is sticky information on the part of consumers, workers, and firms. We evaluate the model against three key facts that describe short-run fluctuations: the acceleration phenomenon, the smoothness of real wages, and the gradual response of real variables to shocks. We find that pervasive stickiness is required to fit the facts. We conclude that models based on stickiness of information offer the promise of fitting the facts on business cycles while adding only one new plausible ingredient to the classical benchmark.
    JEL: E30 E10
    Date: 2006–02
  6. By: Stan du Plessis (Department of Economics, Stellenbosch University)
    Abstract: This paper builds on an earlier work in business cycle theory - explicitly in the classical cycle tradition of Burns and Mitchell (1946) and the more recent work by Harding and Pagan (e.g.: 2002a; 2005b; 2005a) - to identify and analyse business cycles in emerging market economies. The goal is to revisit the work of for example Agénor, McDermott and Prasad (2000), whom have established a set of stylised facts for business cycle fluctuations in developing countries. Agénor, et. al. (2000) established these stylised facts using the presently standard method of analysing the features of serially correlated deviations from trends (idenified with statistical techniques such as the Hodrick-Prescott filter) in certain macroeconomic time series, including real GDP, the price level, and components of final demand. The alternative method, implemented in this paper, uses an algorithm of Bry and Boschan (1971), and the recent work of Harding and Pagan to identify the various stylised facts regarding the duration, steepness, amplitude and concordance of these fluctuations in emerging market economies.
    Keywords: business cycles, turning points, emerging market economies, quantitative analysis of business cycles, time series econometrics, regression with binary variables
    JEL: C25 C41 E32
    Date: 2006
  7. By: Oleg Korenok (Department of Economics, VCU School of Business); Stanislav Radchenko (Department of Economics, University of North Carolina at Charlotte)
    Abstract: In this paper we test for the nonlinear short term expectations of inflation in Canada, Sweeden and the United Kingdom. Nonlinear inflation expectations are one of the predictions of Krugman (1991) credible target zone model. We test for nonlinearity in the extended model that retains possibility of the nonlinearity while allowing for violations of the target zone and lags in monetary transmission mechanism. We find that inflation targeting does not alter short term inflation expectations.
    Keywords: inflation targeting, expectations, target zone model
    Date: 2005–09
  8. By: Mette Ersbak Bang Nielsen
    Abstract: The paper develops a New Keynesian Small Open Economy Model charac- terized by external habit formation and Calvo price setting with dynamic inflation updating. The model is used to analyze the e¤ect of nominal ex- change rate targeting on optimal policy and impulse responses. It is found that even moderate exchange rate concerns are capable of changing both sign and magnitude of the optimal instrument response to variables, and that whether the concern is with respect to the level or first di¤erence has much impact on monetary policy. Also, the cost of exchange rate stabilization in terms of output and inflation is evident in the model, and impulse responses under moderate exchange rate targeting are not simple combinations of those under a float and a regime that cares almost only for meeting the exchange rate target.
    Keywords: Flexible inflation targeting, exchange rates, fear of floating
    JEL: E52 F41
  9. By: Erica X. N. Li; Dmitry Livdan; Lu Zhang
    Abstract: We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.
    JEL: E13 E22 E32 E44
    Date: 2006–02
  10. By: Zisimos Koustas (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: This paper utilizes tests for a unit root that have power against nonlinear alternatives to provide empirical evidence on the time series properties of the ex-post real interest rate in the G7 countries. We find that the unit root hypothesis can be rejected in the presence of a nonlinear alternative motivated by theoretical literature on optimal monetary policy rules. This represents a reversal of the results obtained using standard linear unit root and cointegration tests. Tests for linearity reject this hypothesis for Canada, France, Italy and Japan for which we estimate nonlinear models capturing the dynamics of the interest rate.
    Keywords: Fisher Effect; Unit Roots; Self-Exciting Threshold Autoregression
    JEL: E40 E50 C32
    Date: 2005–07
  11. By: Chantal Dupasquier (UN Economic Commission for Africa, Addis Ababa, Ethiopia); Patrick N. Osakwe (UN Economic Commission for Africa, Addis Ababa, Ethiopia)
    Abstract: Trade policy has been a very contentious issue in the discourse on African development. Using panel data for 33 African countries spanning the period 1986-2000, we examine the relationship between trade liberalization and macroeconomic instability in Africa. We focus on instabilities in output, consumption and investment, and use both single and system estimation techniques as well as different measures of trade regimes. After controlling for key potential sources of macroeconomic instability, we find no substantial evidence that trade liberalization has a systematic impact on instability in the region. The study shows that the volatilities of inflation and the terms of trade, as well as climatic disasters, the nature of fiscal policy, and the severity of debt are more robust determinants of macroeconomic instability in the region. The paper also argues that policymakers in the region can reduce macroeconomic instability and vulnerability to shocks by diversifying their export structures, using fiscal policy in a countercyclical manner, and improving the functioning of the financial sector.
    Keywords: instability, openness, trade regime, Africa, macroeconomic, panel data
    JEL: F13 O24 O55
  12. By: Moons C.; Van Poeck A.
    Abstract: This paper uses the Taylor rule to examine the appropriateness of ECB interest rate policy for the initial EMU members and the ten new EMU member states some of whom are expected to join the Eurozone in 2006-7. Specifically it addresses three questions. (1) Are there differences between the interest rate aggregated from the Taylor interest rates of individual member states in the euro area and the interest rate set by the ECB? (2) For which countries do the desired interest rates according to the original Taylor rule and the interest rate of the euro area differ most and in which respect? (3) The last question is whether the interest rate gaps change over time. We find that the ECB’s policy does not fit individual EMU members equally well and this result is unlikely to be changed with the addition of the ten new members, which will have only a marginal effect on the ECB interest rate stance.
    Date: 2005–10
  13. By: Gunnar Bårdsen (NTNU, Department of Economics and Norges Bank (Central Bank of Norway)); Kjersti-Gro Lindquist (Norges Bank (Central Bank of Norway)); Dimitrios P. Tsomocos (Saïd Business School and St. Edmund Hall, Oxford University)
    Abstract: As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and consensus definition of ‘financial stability’, and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors, one can not expect one single model to satisfactorily capture all the risk factors. Rather, a suite of models is needed. This is in particular true for the evaluation of risk factors originating and developing inside and outside the financial system respectively.
    Keywords: Financial stability; Banks; Default; Macroeconomic models; Policy
    JEL: E1 E4 E5 G1 G2
    Date: 2006–02–15
  14. By: Gunnar Bårdsen (Department of Economics, Norwegian University of Science and Technology, Norway); Kjersti-Gro Lindquist (Bank of Norway); Dimitrios P. Tsomocos (Saïd Business School and St. Edmund Hall, Oxford University, United Kingdom)
    Abstract: As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and consensus definition of ‘financial stability’, and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors, one can not expect one single model to satisfactorily capture all the risk factors. Rather, a suite of models is needed. This is in particular true for the evaluation of risk factors originating and developing inside and outside the financial system respectively.
    Keywords: Financial stability; Banks; Default; Macroeconomic models; Policy
    JEL: E1 E4 E5 G1 G2
    Date: 2006–02–14
  15. By: Maria Gabriela Ladu
    Abstract: Until recently, the neoclassical growth theory and the neoclassical labour market theory have independently evolved over time without communicating to each other. The neoclassical growth theory (Solow, 1956), born after the second world war, assumes full employment. On the other hand, the unemployment theory (Friedman, 1968) turned the attention to the problem of inflation, ignoring that one of growth. In this paper I present recent contributions suggesting that such a sharp division may be unjustified from a theoretical viewpoint.
    Keywords: Growth, Embodied and Disembodied Technological change, Employment
    JEL: E24 J64 O40
    Date: 2005
  16. By: Ellen McGrattan; Edward Prescott
    Abstract: During the 1990s, market hours in the United States rose dramatically. The rise in hours occurred as gross domestic product (GDP) per hour was declining relative to its historical trend, an occurrence that makes this boom unique, at least for the postwar U.S. economy. We find that expensed plus sweat investment was large during this period and critical for understanding the movements in hours and productivity. Expensed investments are expenditures that increase future profits but, by national accounting rules, are treated as operating expenses rather than capital expenditures. Sweat investments are uncompensated hours in a business made with the expectation of realizing capital gains when the business goes public or is sold. Incorporating expensed and sweat equity into an otherwise standard business cycle model, we find that there was rapid technological progress during the 1990s, causing a boom in market hours and actual productivity.
    JEL: E3 O4
    Date: 2006–02
  17. By: Brian Silverstone (University of Waikato); James Mitchell (National Institute of Economic and Social Research)
    Abstract: Business confidence announcements attract widespread attention, yet relatively little is known about the series itself. What, for example, does an improvement or deterioration in business confidence mean? We consider this question using a panel of firm-level responses to a business opinion survey that includes a question on business confidence. We relate the confidence responses of the firms to microeconomic and macroeconomic variables that have a direct interpretation and, as a result, determine the variables that firms associate with business confidence. Our analysis of firm-level data reveals that what firms associate with business confidence changes over time and means different things to different firms. Consequently, it is not immediately apparent what a change in business confidence actually means.
    Keywords: business confidence; business surveys; polychoric correlation; New Zealand
    JEL: E32
    Date: 2005–12–31
    Abstract: Ciccarone (2004) attempts to show that the Pasinetti theorem allows for the profit-making financial sector. In this effort, however, he ends up with unwittingly associating the theorem with the Wicksellian monetary theory. The present note traces the origin of this uncomfortable association to his incomplete understanding of the income of financial capitalists, and tries on its part to demonstrate that the Pasinetti theorem is in the tradition of the 'monetary analysis' of the (Post) Keynesian monetary theory, in contrast to the 'real analysis' of the Wicksellian theory.
  19. By: C. Vilaplana; José M. Labeaga; S. Jiménez-Martín
    Abstract: The main goal of this paper is to test whether macroeconomic conditions a¤ect alcohol consumption using data from the Behavioral Risk Factor Surveillance System for the period 1987-2003. We try to control unobserved heterogeneity by relying on the construction of pseudo-panel data from the different cross-sections available. Our results indicate that when we do not take into account unobserved heterogeneity, the unemployment rate is signifficant and reduces the probability of becoming drinker and the number of alcoholic beverages consumed. However, once we estimate the model using cohort data, controlling for both observed and unobserved heterogeneity, the unemployment rate becomes non-signifficant. This implies that unobserved effects are important when explaining alcohol consumption. As a result, inferences obtained without controlling for them should be interpreted with caution.
  20. By: Peter Skott (University of Massachusetts Amherst); Takeshi Nakatani (Kobe University)
    Abstract: This paper uses a modified Harrodian model to understand both the long period of rapid Japanese growth and the recent period of stagnation. The model has multiple steady-growth solutions when the labour supply is highly elastic, and government intervention, we argue, took the Japanese economy onto a high-growth trajectory. Labour constraints began to ap- pear around 1970, and a combination of high saving rates and slow popu- lation growth account for the stagnation of the 1990s. This combination produces a structural liquidity trap and threatens the sustainability of at- tempts to ensure near full employment through fiscal policy or by running a persistent trade surplus. JEL Categories: E12, E63, O53
    Keywords: Japan, growth, stagnation, liquidity trap, public debt, multiple equilibria
    Date: 2006–02
  21. By: Gunnar Bardsen; Kjersti-Gro Lindquist; Dimitrios P.Tsomocos
    Abstract: As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy has increased. Alternative macroeconomic models are available for policy analyses, and this paper evaluates the usefulness of some models from the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and consensus definition of =91financial stability=92, and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors, one can not expect one single model to satisfactorily capture all the risk factors. Rather, a suite of models is needed. This is in particular true for the evaluation of risk factors originating and developing inside and outside the financial system respectively.
    Date: 2006
  22. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Mark Rider (Andrew Young School of Policy Studies)
    Abstract: Although there are obvious differences in the political systems of China and India, there are surprising similarities in their respective approaches to decentralization. Both countries face similar design issues with their intergovernmental systems, such as the lack of clear expenditure assignments, high transfer dependency, low revenue autonomy, and soft budget constraints. As a result, in both countries there is a lack of aggregate fiscal discipline among sub-national governments, and the quality of sub-national government service delivery is poor. Poor service delivery and the lack of fiscal discipline threaten the ability of both countries to sustain high rates of economic growth.
    Keywords: China, India, Fiscal Decentralization, Economic Growth, Intergovernmental fiscal
    Date: 2005–10–01
  23. By: John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
    Abstract: This paper summarizes the empirical evidence on how defaults impact retirement savings outcomes. After outlining the salient features of the various sources of retirement income in the U.S., the paper presents the empirical evidence on how defaults impact retirement savings outcomes at all stages of the savings lifecycle, including savings plan participation, savings rates, asset allocation, and post-retirement savings distributions. The paper then discusses why defaults have such a tremendous impact on savings outcomes. The paper concludes with a discussion of the role of public policy towards retirement saving when defaults matter.
    JEL: D0 E21 G23
    Date: 2006–02
  24. By: Antonella Trigari
    Abstract: This paper develops a dynamic general equilibrium model that integrates labor market search and matching into an otherwise standard New Keynesian model. I allow for changes of the labor input at both the extensive and the intensive margin and develop two alternative specifications of the bargaining process. Under efficient bargaining (EB) hours are determined jointly by the firm and the worker as a part of the same Nash bargain that determines wages. With right to manage (RTM), instead, firms retain the right to set hours of work unilaterally. I show that introducing search and matching frictions affects the cyclical behavior of real marginal costs by way of two different channels: a wage channel under RTM and an extensive margin channel under EB. In both cases, the presence of search and matching frictions may cause a lower elasticity of marginal costs with respect to output and thus help to account for the observed inertia in inflation.
  25. By: Konstantin A. Kholodilin
  26. By: Carlsson, Mikael (Research Department); Eriksson, Stefan (Department of Economics); Gottfries, Nils (Department of Economics)
    Abstract: How well do alternative labor market theories explain variations in net job creation? According to search-matching theory, job creation in a firm should depend on the availability of workers (unemployment) and on the number of job openings in other firms(congestion). According to afficiency wage and bargaining theory, wages are set above the market clearing level and employment is determined by labor demand. To compare models, we estimate an encompassing equation for net job creation on firm-level data. The results support demand-oriented theories of job creation, whereas we find no evidence in favor of the search-matching theory.
    Keywords: Job Creation; Involuntary Unemployment; Search-Matching; Labor Demand.
    JEL: E24 J23 J64
    Date: 2006–02–17
  27. By: Rudiger Ahrend
    Abstract: In recent years economists have come to see rich natural resource endowments as a ?curse? or ?precious bane? that inevitably undermines development and slows economic growth. Resource-based development undeniably involves important risks. Nonetheless, the resource curse - if it exists - is at least no fatalité, as the examples of Australia, Canada and the Scandinavian countries demonstrate. This paper argues that the serious challenges posed by resource-dependence, which include an increased vulnerability to external shocks, the risk of ?Dutch disease?, and the risk of developing specific institutional pathologies, can be overcome, or at least very substantially mitigated, if accompanied by the right economic policies. It then analyses in detail what these ?right? economic policies are, and how to set up economic and political framework conditions to facilitate their successful implementation. The paper thereafter looks specifically at Russia as a prominent example of a resource-based economy. It investigates briefly the main drivers of Russian growth in recent years, and makes specific recommendations that would help the Russian economy to sustain high growth. <P>Comment soutenir la croissance dans une économie fondée sur l'exploitation des ressources naturelles ? Ces dernières années les économistes ont commencé à envisager la dotation en ressources naturelles comme une "malédiction" qui inévitablement mine le développement économique et freine la croissance. Le développement économique fondé sur l'exploitation des ressources naturelles comporte sans aucun doute des risques importants. Cependant, la malédiction des ressources -- si elle existe -- n'est pas toujours une fatalité, comme le montre les exemples de l'Australie, du Canada et des pays scandinaves. Cet article soutient que les défis sérieux posés par une forte dépendance envers les ressources naturelles - comme une vulnérabilité accrue aux chocs externes, le risque d'un "syndrome néerlandais" et le risque de développer des pathologies institutionnelles spécifiques - peuvent être maîtrisés, ou au moins très sensiblement amoindris, s'ils s'accompagnent de politiques économiques adéquates. L'article analyse en détail ces politiques économiques "adéquates", et comment mettre en place un cadre politique et économique qui facilite l'implémentation réussie de ces politiques. Le cas de la Russie est ensuite étudié comme un important exemple d'une économie fondée sur l'exploitation des ressources naturelles. L'article examine brièvement les principaux moteurs de la croissance de ces dernières années, et formule des propositions qui pourraient aider la Russie à maintenir une croissance forte.
    Keywords: economic growth, croissance économique, transition, transition, fiscal policy, politique budgétaire, monetary policy, politique monétaire, Russia, Russie, capital flight, natural resources, dutch disease, resource curse, oil, diversification, ressources naturelles, syndrome néerlandais, malédiction des ressources, pétrole, diversification
    JEL: E6 O1 O52 P2 Q43
    Date: 2006–02–09
  28. By: Xavier Cuadras Morató; Xavier Mateos-Planas
    Abstract: A skill-biased change in technology can account at once for the changes observed in a number of important variables of the US labour market between 1970 and 1990. These include the increasing inequality in wages, both between and within education groups, and the increase in unemployment at all levels of education. In contrast, in previous literature this type of technology shock cannot account for all of these changes. The paper uses a matching model with a segmented labour market, an imperfect correlation between individual ability and education, and a fixed cost of setting up a job. The endogenous increase in overeducation is key to understand the response of unemployment to the technology shock.
    Keywords: Unemployment, wage premium, overeducation, SBTC
    JEL: E24 J31 J64
    Date: 2006–01
  29. By: António Caleiro (Department of Economics, University of Évora)
    Abstract: The paper offers an analysis of the issues related to the election dates synchronisation between two countries. The first purpose of the paper is to analyse the circumstances in which a government of a single country, considered to be a small economy, has incentives, or not, to synchronise the domestic election dates with the election dates (not necessarily determined in an endogenous way) of a country performing the role of an ‘anchor’, considered to be a big economy. To achieve this purpose, the paper uses an asymmetric version of MILLER and SALMON’s (1990) model in order to derive the optimal domestic electoral period length, which, in this sense, can be said to be endogenously determined. The second main purpose of the paper is to re-analyse the situation being studied by considering that the foreign government also determines its election dates in an optimal way, this leading to a differential game played by the two incumbents from which incentives to totally synchronise the election dates may result. The paper shows that the interests of both economies in what concerns the existing electoral period length in the other economy are not always compatible.
    Keywords: Differential Games, Electoral business cycles, Election dates, Mandates durations, Synchronisation of elections
    JEL: C73 E32 E61 F42
    Date: 2006
  30. By: Luis Fernando Melo Velandia; Oscar Reinaldo Becerra Camargo
    Abstract: Este documento estudia una parte relevante del mecanismo de transmisión de la política monetaria asociado con el crédito bancario. Con tal objeto se estima un modelo VARXGARCH multivariado para establecer la relación, en frecuencia diaria, entre dos tasas de interés de corto plazo, la CDT y la TIB y una de las tasas de intervención del Banco de la República, la tasa de subasta de expansión, SEXP, en el periodo enero de 2001 - septiembre de 2005. Este tipo de modelos tiene la ventaja de que no solo incorpora las interacciones entre los niveles (o variaciones) de estas series, si no que también modela las relaciones entre las volatilidades de las variables endógenas del modelo. Posteriormente, se realizan análisis de impulso respuesta en niveles (IRF y MA) y en volatilidades (VIRF). En niveles, se encuentra que la variable que más responde a choques sobre variables endógenas y exógenas del modelo, es la TIB. La respuesta de la tasa CDT ante un choque de 100 puntos básicos (p.b.) en SEXP oscila alrededor de 7 p.b., mientras que la respuesta de la TIB ante ese mismo choque es inicialmente de 68 p.b. y finalmente se estabiliza en 38 p.b.. Sin embargo, cuando se consideran muestras más recientes el efecto de SEXP sobre la TIB aumenta, lo cual indica una relación más estrecha entre los instrumentos de política y la meta operativa del BR. Para la muestra 2003-2005 la respuesta de la TIB a un choque en SEXP es inicialmente de 82 p.b. y converge a 56 p.b. Analizando los efectos cruzados, se observa que la respuesta de la TIB ante choques en la CDT es casi nula, mientras la CDT responde de manera significativa a choques en la TIB. Es así, como un aumento de 100 p.b. en la TIB incrementa aproximadamente 8.5 p.b. la tasa CDT. Todos estos efectos son permanentes. El análisis VIRF es realizado para diferentes tipos de choques. Sin embargo, los resultados muestran que no existen patrones claramente diferenciables para los distintos tipos de choques analizados. Esto indica que con respecto a otros tipos de choques, los que realiza el Banco Central a través de cambios en la tasa de subasta de expansión no afectan de manera diferente las volatilidades de las series. También se encuentra que en términos de volatilidad la variable que presenta una mayor respuesta ante diferentes choques al igual que en choques en niveles es la TIB, con un efecto aproximado de tres meses. Adicionalmente, al comparar los efectos sobre la volatilidad de la TIB con los de la CDT, se observa que aunque la magnitud de respuesta de la volatilidad de la tasa CDT es menor, su persistencia es más alta.
    Keywords: Modelos VARX, modelos GARCH multivariados, función de impulso respuesta en varianza (VIRF).
    JEL: C32 C52 E43
  31. By: Maria Gabriela Ladu
    Abstract: This paper provides a structural estimation of the recent model proposed by Pissarides and Vallanti, a simplified equilibrium model which draws heavily on models with frictions and quasi-rents. The structural model is a system of three equations. The estimation method is a three-stage least squares. My empirical results find that although faster TFP growth temporarily decreases employment, most likely be- cause job destruction reacts faster to schocks than job creation does, after the first year I do not find any statistically significant effect of growth on employment.
    Keywords: Total Factor Productivity, Job Creation, Job De-struction, Employment
    JEL: E24 J64 O40 O52
    Date: 2005
  32. By: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
    Abstract: Three of the most important recent facts in global macroeconomics -- the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio -- appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
    JEL: E0 F3 F4 G1
    Date: 2006–02
  33. By: Richard Bird (Andrew Young School of Policy Studies); Christine C.P.Wong (University of Washington)
    Abstract: We argue in this paper that unless China begins to tackle more systematically the serious problems that have emerged in the finances of its various levels of sub-national government the problems to which the present unsatisfactory system give rise will over time increasingly distort resource allocation, increase distributional tensions, and slow down the impressive recent growth of the Chinese economy. Despite the lack of solid and reliable information on the size and nature of China’s real fiscal system, we show that the evidence available is generally consistent with this pessimistic reading. China’s fiscal and – in time – economic future thus rests to some extent on reforms to key aspects of its fiscal system, especially its intergovernmental finances. Moreover, a more consistent and purposive framework to this complex of problems seems needed. Given the scale and scope of China’s underlying public finance problems, the ‘reactive gradualism’ evidenced in recent ad hoc reforms to this or that piece of the fiscal system has, we suggest, run its course.
    Keywords: Chima. Sun-national government, Fiscal system, China's fiscal system
    Date: 2005–11–01
  34. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow); Oleksandr Talavera (DIW Berlin)
    Abstract: In this paper we investigate the linkages between firms' capital investment behavior and uncertainty. In our empirical investigation, we use measures of uncertainty derived from firms' daily stock returns and S\&P 500 index returns along with a CAPM-based risk measure. Using a panel of U.S. manufacturing firm data obtained from COMPUSTAT over the 1984-2003 period, we specifically find that increases in both intrinsic and CAPM-based measures of uncertainty have a significant negative impact on firms' investment spending. Our investigation also provides evidence that the relationship is nonlinear and more complex than previously considered.
    Keywords: capital investment, uncertainty, CAPM, dynamic panel data
    JEL: E22 D81 C23
    Date: 2006–02–15
  35. By: Osamu Saito; Tokihiko Settsu
    Abstract: In the latter half of the Tokugawa period economic growth, however sluggish its pace was, took place in the form of rural industrialisation and the expansion of inter-regional trade. This paper addresses the following questions: how capital was mobilised for such rural-centred growth in production and commerce, and how the quasi-capital markets worked in both the Osaka economy and in the countryside, with special reference to trends in interest rates over time, in a pre-modern setting of market segmentation. The paper will argue that although Tokugawa Japan's formal institutions were far from ideal, the credit systems did function as quasi-capital markets reasonably well within each commercial network formed through relational contracting, and that for the Smithian process of early modern growth to work, inter-regional competition mattered more than institutional maturity of the nation's market environment.
    Date: 2006–02
  36. By: Laurent E. Calvet; John Y. Campbell; Paolo Sodini
    Abstract: This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets ("down") and nonparticipation in risky asset markets ("out"). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficiently if they participated in risky asset markets.
    JEL: D5 D9 E3 O1
    Date: 2006–02
  37. By: Satoru Kanoh; Chakkrit Pumpaisanchai
    Abstract: The literature referring to the credit slowdown has been plagued by the identification problem of whether a decline in a bank's credit is derived from the demand or the supply side. This paper proposes an original approach in directly estimating the credit demand and the credit supply from survey data. Using the TANKAN and the recently published Senior Loan Officer survey data, the paper demonstrates that the observed lending amount did not change much during the period of study; however, the observed lending amount deviated, as one might expect, from the estimated credit demand and credit supply for every firm size. This credit mismatch presents evidence of credit market imperfections and is of interest for further investigation as a possible explanation of firms' liquidity constraints and banks' lending mechanisms.
    Keywords: Credit demand, Credit supply, Survey data, Japanese Economy
    JEL: C42 C51 E10 O53
    Date: 2006–02
  38. By: Junko Doi (Kyoto Sangyo University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper introduces external habit formation into one of the basic models of endogenous growth in which continuing expansion of product variety sustains long-term growth. We assume that households consume a range of final goods and they set a benchmark level of consumption for each good. The benchmark consumption is determined by external habit formation so that there are commodity-specific external effects. Each good is produced by a monopolistically competitive firm and the firmfs optimal pricing decision exploits the fact that consumersf demand is subject to the external habit formation. Given those settings, we show that the introduction of consumption externalities may affect the balanced-growth characterization, transitional dynamics as well as policy impacts in fundamental manners.
    Keywords: consumption externalities, habit formation, monopolistic competition, R&Dbased growth model
    JEL: E2 O3 O4
    Date: 2006–02
  39. By: Luca Deidda; Bassam Fattouh
    Abstract: We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening.We show that,if a market is established characterized by a disclosure law such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing,this might undermine bankers'incentive to screen,even when screening is effcient.Correspondingly,other things being equal,the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth.Consistent with this result,our empirical findings suggest that,althoug both bank and stock market development have a positive effect on growth, the growth impact of bank development is reduced by the development of the stock market.
    Keywords: Bank-finance, Market-finance, Economic Growth, Monitoring, Screening
    JEL: G10 G20 E44 O40
    Date: 2005
  40. By: Ferraz L.P.D.C.; Plasmans J.; Van Poeck A.
    Date: 2005–08
  41. By: Michael D. Bordo; Peter L. Rousseau
    Abstract: Recent cross-country investigations of the role of institutional fundamentals such as the protection of property rights in promoting financial development have extended a literature that has for decades maintained that financial factors can affect real outcomes. In this paper we pursue this new direction by considering relationships between finance, growth, legal origin, and political environment in a historical cross-section of 17 countries covering the period from 1880 to 1997. We find that relationships between a county's legal origin (i.e., English, French, German, or Scandinavian) and financial development are roughly consistent with earlier findings but are not persistent. At the same time, political variables such as proportional representation election systems, frequent elections, universal female suffrage, and infrequent revolutions or coups seem linked to larger financial sectors and higher conditional rates of economic growth. Despite the explanatory power of some of our measures of the deeper "fundamentals," however, a significant part of the growth-enhancing role of financial development remains unexplained by them.
    JEL: E44 F3 N1 N2
    Date: 2006–02
  42. By: José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
    Abstract: Most public policies have not only efficiency but also distributional effects. However, there is a kind of trade-off between modeling approaches suitable for calculating each one of these impacts on the economy. For the former, most of the studies have been conducted with general equilibrium models, whereas partial equilibrium models represent the main approach for distributional analysis. This paper proposes a methodology which enables us to carry out an analysis of the distributional and efficiency consequences of public policies. In order to do so, we have integrated a microeconomic household demand model and a computable general equilibrium model for the Spanish economy. We illustrate the advantages of this approach by simulating a revenue-neutral reform in Spanish indirect taxation, with a reduction of VAT and a simultaneous increase of energy taxes. The results show that the reform brings about significant efficiency and distributional effects, in some cases counterintuitive, and demonstrate the academic and social utility of this approximation.
  43. By: Torsten Persson; Guido Tabellini
    Abstract: Does democracy promote economic development? We review recent attempts to address this question, which exploit the within-country variation associated with historical transitions in and out of democracy. The answer is positive, but depends – in a subtle way – on the details of democratic reforms. First, democratizations and economic liberalizations in isolation each induce growth accelerations, but countries liberalizing their economy before extending political rights do better than those carrying out the opposite sequence. Second, different forms of democratic government and different electoral systems lead to different fiscal trade policies: this might explain why new presidential democracies grow faster than new parliamentary democracies. Third, it is important to distinguish between expected and actual political reforms: expectations of regime change have an independent effect on growth, and taking expectations into account helps identify a stronger growth effect of democracy.
    JEL: P0 O1 E0
    Date: 2006–02
  44. By: Philippe Aghion; Richard Blundell; Rachel Griffith; Peter Howitt; Susanne Prantl
    Abstract: How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries--incumbents in technologically advanced industries react positively to foreign firm entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technological frontier--successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation--increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.
    JEL: E2
    Date: 2006–02

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