nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒04‒01
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Characteristics of Business Cycles in Selected European Emerging Market Economies By Fabrizio Carmignani
  2. Keynesian Macrodynamics and the Phillips Curve. An Estimated Baseline Macromodel for the U.S. Economy By Pu Chen; Carl Chiarella; Peter Flaschel; Willi Semmler
  3. On Optimal Monetary and Fiscal Policy Interactions in Open Economies By Chiara Forlati
  4. Keynesian Disequilibrium Dynamics: Convergence, Roads to Instability and the Emergence of Complex Business Fluctuations By Pu Chen; Carl Chiarella; Peter Flaschel; Hing Hung
  5. Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden By Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
  6. Interest Rate Rules and Macroeconomic Stabilization By Mark Weder
  7. Inflation Forecast-Based-Rules and Indeterminacy: A Puzzle and a Resolution By Paul Levine; Peter McAdam; Joseph Pearlman
  8. Monetary and fiscal theories of the price level: the irreconcilable differences By Bennett T. McCallum; Edward Nelson
  9. Openness, exchange rate regimes and the Phillips curve By Christopher Bowdler
  10. Demand shocks and economic fluctuations By Yi Wen
  11. Reaction Functions of Bank of England MPC Members: Insiders versus Outsiders By Christopher Spencer
  12. Endogenous Labor Market Participation and the Business Cycle By Christian Haefke; Michael Reiter
  13. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through" By Takatoshi Ito; Kiyotaka Sato
  14. Imperfect competition and indeterminacy of aggregate output By Pengfei Wang; Yi Wen
  15. Central Bank Independence and the `Free Lunch Puzzle': A New Perspective By Ali al-Nowaihi; Paul Levine; Alex Mandilaras
  16. Openness and inflation volatility: Cross-country evidence By Christopher Bowdler; Adeel Malik
  17. Inflation: do expectations trump the gap? By Jeremy M. Piger; Robert H. Rasche
  18. Ireland and Switzerland: the jagged edges of the Great Inflation By Edward Nelson
  19. Does central bank transparancy reduce interes rates? By Geraats,Petra M.; Eijffinger,Sylvester C.W.; Cruijsen,Carin A.B. van der
  20. The road to price stability By Athanasios Orphanides
  21. On the efficiency-legitimacy trade-off in EMU By Francisco Torres
  22. Time-varying risk, interest rates, and exchange rates in general equilibrium By Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
  23. "Irrational exuberance" in the Pigou cycle under collateral constraints By Keiichiro Kobayashi; Masaru Inaba
  24. Productivity-Enhancing Reforms, Private Capital Inflows, and Real Interest Rates in Africa By Manoj Atolia
  25. Imperfect competition and sunspots By Pengfei Wang; Yi Wen
  26. International Transmission of Fiscal Shocks: An Empirical Investigation By Faik Koray; K. Peren Arin
  27. Real business cycles By Ellen R. McGrattan
  28. The return to capital and the business cycle By Paul Gomme; B. Ravikumar; Peter Rupert
  29. A Convergência Monetária: Portugal e a União Europeia By Francisco Torres
  30. The Dissent Voting Behaviour of Bank of England MPC Members By Christopher Spencer
  31. Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises By Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
  32. Public Debt Maturity and Currency Crises By Paul Levine; Alexandros Mandilaras; Jun Wang
  33. Exchane-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts By Edward F. Buffie; Manoj Atolia
  34. Australia's Deflation in the 1890s By Colin McKenzie
  35. C-CAPM Refinements and the Cross-Section of Returns By Paul Söderlind
  36. Impulse Response Functions from Structural Dynamic Factor Models:A Monte Carlo Evaluation By George Kapetanios and Massimiliano Marcellino
  37. Large dimension forecasting models and random singular value spectra By Jean-Philippe Bouchaud; Laurent Laloux; M. Augusta Miceli; Marc Potters
  38. Dynamic Scoring: Alternative Financing Schemes By Eric M. Leeper; Shu-Chun Susan Yang
  39. The Role of Search Frictions and Bargaining for Inflation Dynamics By George Kapetanios and Massimiliano Marcellino
  40. On Policy Relevance of Ramsey Tax Rules By Selim, Sheikh Tareq
  41. Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom By Chang-Tai Hsieh; Jonathan A. Parker
  42. The Government and the Financial System: an Overview By Kazuhito Ikeo; Yasuo Goto
  43. The Lost Decade in the Japanese Labor Market: Labor’s share and Okun’s Law By Shigeru Wakita
  44. The Irrelevance of Market Incompleteness for the Price of Aggregate Risk (joint with Dirk Krueger, University of Frankfurt) By Hanno Lustig
  45. Rectifying Québec's fiscal situation By François Dupuis; Benoit Durocher; Claude Montmarquette; Maryse Robert
  47. Net exports, consumption volatility and international real business cycle models By Andrea Raffo
  48. The macroeconomic conditions of EU-inspired employment policies By János Gács
  49. Fiscal Decentralisation and Economic Growth in the OECD By Phil Bodman; Kathryn Ford
  50. Methods for Robust Control By Richard Dennis, Kai Leitemo, and Ulf Soderstrom
  51. The 24/7 Society and Multiple Habits By Ali Choudhary; Paul Levine
  52. A Healthy Economy Can Break Your Heart By Christopher J. Ruhm
  53. Terminal conditions in forward-looking economic models By Richard Pierse
  54. Illiquidity in the interbank payment system following wide-scale disruptions By Morten L. Bech; Rod Garratt
  55. Environmental Policy and the Location of Foreign Direct Investment in China By Christer Ljungwall; Martin Linde-Rahr
  56. Choosing Monetary Sequences: Theory and Experimental Evidence By Paola Manzini; Marco Mariotti; Luigi Mittone

  1. By: Fabrizio Carmignani (United Nations Economic Commission for Europe)
    Abstract: This paper analyses the business cycles of selected European emerging market economies (EME) in terms of their statistical properties and degree of synchronization with the euro area, and discusses the associated policy implications. The evidence suggests that in these economies cyclical fluctuations are wider and more frequent than in the euro area, that there is moderate consumption smoothing, and that technological shocks and labour hoarding are driving labour-market dynamics. The macroeconomic policy stance is not significantly countercyclical. Furthermore, the degree of synchronization of domestic business cycles with the business cycle of the euro area is weak in all the EME except Hungary and Poland.
    Keywords: business cycles, European macroeconomics, emerging market economies
    JEL: E32 E60 P24
    Date: 2005–12
  2. By: Pu Chen (Faculty of Economics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Peter Flaschel (Faculty of Economics, University of Bielefeld); Willi Semmler (Bernhard Schwartz Center for Economic Policy Analysis, New School University and Center for Empirical Macroeconomics, University of Bielefeld, Bielefeld,)
    Abstract: In this paper we formulate a baseline disequilibrium AS-AD model and empirically estimate it with time series data for the US-economy. The version of the model used here exhibits a Phillips-curve, a dynamic IS curve and a Taylor interest rate rule. It is based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. A version of Okun's law is used to link capacity utilization to employment. Our proposed nonlinear 5D model of real market dynamics overcomes anomalies of the old Neoclassical synthesis and also the rational expectations methodology of the new Neoclassical Synthesis. It resembles New Keynesian macroeconomics but permits nonclearing of markets. It exhibits typical Keynesian feedback structures with asymptotic stability of its steady state for low adjustment speeds and with loss of stability { generally by way of Hopf bifurcations { when certain adjustment speeds are made sufficiently large. We provide system estimates of our model, for quarterly time series data of the U.S. economy 1965.1-2001.1, and study the stability features of the U.S. economy with respect to its various feedback channels from an empirical perspective. Based on these estimates, which in particular imply that goods market dynamics are profit led, we find that the dynamics are strongly convergent around the steady state, if monetary policy is sufficiently active, but will lose this feature if the inflationary climate variable or the price inflation rate itself adjusts sufficiently fast. We also study to what extent more active interest rate feedback rules or downward wage rigidity can stabilize the dynamics in the large when the steady state is locally repelling. We study the economy's behavior due to faster adjustments. We find that monetary policy should allow for sufficient steady state inflation in order to avoid stability problems in areas of the phase space where wages are not flexible in a downward direction.
    Keywords: AS-AD disequilibrium; wage and price Phillips curves; Okun's law; (in-)stability; persistent fluctuations; monetary policy
    JEL: E24 E31 E32
    Date: 2006–03–01
  3. By: Chiara Forlati
    Abstract: This paper studies monetary and fiscal policy interactions in a two country model, where taxes on firms’ sales are optimally chosen and the monetary policy is set cooperatively. It turns out that in a two country setting non-cooperative fiscal policy makers have an incentive to change taxes on sales depending on shocks realizations in order to reduce output production. Therefore whether the fiscal policy is set cooperatively or not matters for optimal monetary policy decisions. Indeed, as already shown in the literature, the cooperative monetary policy maker implements the flexible price allocation only when special conditions on the value of the distortions underlying the economy are met. However, if non-cooperative fiscal policy makers set the taxes on firms’ sales depending on shocks realizations, these conditions cannot be satisfied; conversely, when fiscal policy is cooperative, these conditions are fulfilled. We conclude that whether implementing the flexible price allocation is optimal or not depends on the fiscal policy regime.
    Keywords: Monetary and Fiscal Policy, Policy Coordination
    JEL: E52 E58 E62 F42
    Date: 2004–07
  4. By: Pu Chen (Faculty of Economics, University of Bielefeld); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Peter Flaschel (Faculty of Economics, University of Bielefeld); Hing Hung (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We reformulate the traditional AS-AD growth model of the Neoclassical Synthesis (stage I) with a Taylor policy rule replacing the conventional LM-curve, with gradually adjusting wages as well as prices, and with perfect foresight on current inflation rates and an adaptively revised notion of an inflationary climate in which the economy is operating. We compare this approach with the New Keynesian approach, the Neoclassical Synthesis, stage II, with staggered price and wage setting and find various common components, yet with radically different dynamic implications due to our treatment of the forward-looking part of our wage-price spiral. We show for a system estimate of our model that it implies qualitatively local asymptotic stability and when its estimated form is simulated in response to isolated shocks strongly damped business fluctuations, due to a stable interaction of goods market dynamics with the interest rate policy of the central bank and due to a normal working of a real-wage feedback chain. These results are however endangered ? leading in fact to economic breakdown ? when there is a global floor to money wage inflation rates. In this case, the return of some money wage flexibility in deep depressions is of help in restoring viability of the model, thereby even avoiding explosive dynamics and the collapse of the economy. This situation leads to viable, but complex business fluctuations.
    Keywords: DAS-DAD dynamics; wage and price Phillips curves; real interest effects; real wage effects; (in)stability; persistent business cycles; complex dynamics
    JEL: E24 E31 E32
    Date: 2006–03–01
  5. By: Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
    Abstract: We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that forward inflation compensation has been insensitive to economic news over the whole period for which we have data. Our findings support the view that a well-known and credible inflation target helps to anchor the private sector's perceptions of the distribution of long-run inflation outcomes.
    Keywords: Inflation (Finance) ; Prices ; Monetary policy
    Date: 2006
  6. By: Mark Weder (School of Economics, University of Adelaide)
    Abstract: High degrees of relative risk aversion induce indeterminacy in cash- in-advance economies. This paper finds that Taylor-style policies can pre-empt such sunspot equilibria. Specific policy recommendations depend on the fundamentals of the economy, i.e. the empirically true value of coecient of relative risk aversion.
    Keywords: Cash-in-Advance Economies, Taylor Rules, Sunspot Equilibria.
    JEL: E32 E52
    Date: 2006–01
  7. By: Paul Levine (University of Surrey); Peter McAdam (European Central Bank); Joseph Pearlman (London Metropolitan University)
    Abstract: We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely to be forward-looking and pre-emptive) and the poor stabilization properties routinely reported for forecast-based rules. Our resolution is that central banks should be viewed as following ‘Calvo-type’ inflation-forecast-based (IFB) interest rate rules which depend on a discounted sum of current and future rates of inflation. Such rules might be regarded as both within the legal frameworks, and potentially mimicking central bankers’ practice. We find that Calvo-type IFB interest rate rules are first: less prone to indeterminacy than standard rules with a finite forward horizon. Second, for such rules in difference form the indeterminacy problem disappears altogether. Third, optimized forms have good stabilization properties as they become more forward-looking, a property that sharply contrasts that of standard IFB rules. Fourth, they appear potentially data coherent when incorporated into a well-known estimated DSGE model of the Euro-area.
    Keywords: Inflation-forecast-based interest rate rules, Calvo-type interest rate rules, indeterminacy
    JEL: E52 E37 E58
    Date: 2006–02
  8. By: Bennett T. McCallum; Edward Nelson
    Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
    Keywords: Monetary policy ; Fiscal policy
    Date: 2006
  9. By: Christopher Bowdler (Nuffield College, Oxford University)
    Abstract: A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this finding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and inflation dynamics in open economies, but previous studies have not made a distinction between fixed and floating exchange rate regimes. Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely affected by price and wage controls, inflationary oil price hikes and the role played by fiscal policy in driving output and inflation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining flexible and semi-flexible exchange rate regimes, but is unrelated to openness amongst countries maintaining fixed exchange rate regimes.
    Keywords: Openness, inflation, Phillips curve, sacrifice ratio, exchange rate regime.
    JEL: E31 E32 F41
    Date: 2005–10–01
  10. By: Yi Wen
    Abstract: This paper studies conditions under which demand-side shocks can generate realistic business cycles in RBC models. Although highly persistent demand shocks are necessary for generating procyclical investment, variable capacity utilization and habit formation can reduce the required degree of persistence.
    Keywords: Business cycles
    Date: 2006
  11. By: Christopher Spencer (University of Surrey)
    Abstract: In 1997, the Bank of England was granted operational responsibility for setting interest rates to meet a Government inflation target of RPIX 2.5 percent. As part of the shift towards independence, operational decisions on monetary policy were delegated to a Monetary Policy Committee. Using voting data obtained from Minutes of Monetary Policy Committee Meetings, I show that as a group, internally appointed MPC members (insiders) on average prefer higher interest rates than external appointees (outsiders). Further, ordered logit analysis demonstrates that insiders and outsiders are motivated by different concerns when setting interest rates, with the interest rate setting behaviour of outsiders being less easy to predict than those of insiders.
    Keywords: Monetary Policy Committee, insiders, outsiders, voting
    Date: 2006–03
  12. By: Christian Haefke; Michael Reiter
    Abstract: Existing models of equilibrium unemployment with endogenous labor market participation are complex, generate procyclical unemployment rates and cannot match unemployment variability relative to GDP. We embed endogenous participation in a simple, tractable job market matching model, show analytically how variations in the participation rate are driven by the cross-sectional density of home productivity near the participation threshold, and how this density translates into an extensive-margin labor supply elasticity. A calibration of the model to macro data not only matches employment and participation variabilities but also generates strongly countercyclical unemployment rates. With some wage rigidity the model also matches unemployment variations well. Furthermore, the labor supply elasticity implied by our calibration is consistent with microeconometric evidence for the US.
    Keywords: Matching Models, Labor Market Participation, Labor Supply Elasticity, Time Aggregation
    JEL: E24 E32 J21 J64
    Date: 2006–03
  13. By: Takatoshi Ito (Faculty of Economics, University of Tokyo); Kiyotaka Sato (Faculty of Economics, Yokohama National University)
    Abstract: The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.
    Date: 2006–03
  14. By: Pengfei Wang; Yi Wen
    Abstract: This paper shows that imperfect competition can lead to indeterminacy in aggregate output in a standard DSGE model that features no distortions except imperfect competition. Indeterminacy arises in the model from the composition of aggregate output. In sharp contrast to the indeterminacy literature pioneered by Benhabib and Farmer (1994) and Gali (1994), indeterminacy in our model is global (i.e., independent of the eigenvalues near the steady state); hence it is robust to parameter values of the utility function and production technologies. In addition, sunspots shocks to expectations in our model can be autocorrelated. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. Our model can explain procyclical marginal cost and procyclical labor productivity simultaneously, and it outperforms a standard RBC model driven by technology shocks in explaining fluctuations in the labor market.
    Keywords: Prices ; Business cycles
    Date: 2006
  15. By: Ali al-Nowaihi (University of Leicester); Paul Levine (University of Surrey); Alex Mandilaras (University of Surrey)
    Abstract: A new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.
    Keywords: central bank independence, open economy, political uncertainty
    JEL: C72 E61
    Date: 2006–03
  16. By: Christopher Bowdler (Nuffield College, Oxford University); Adeel Malik (Centre for the Study of African Economies, University of Oxford)
    Abstract: Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks.
    Keywords: Openness, inflation, globalization, volatility, panel data.
    JEL: E31 F41 O57
    Date: 2005–03–15
  17. By: Jeremy M. Piger; Robert H. Rasche
    Abstract: We measure the relative contribution of the deviation of real activity from its equilibrium (the gap), *supply shock* variables, and long-horizon inflation expectations for explaining the U.S. inflation rate in the post-war period. For alternative specifications for the inflation driving process and measures of inflation and the gap we reach a similar conclusion: the contribution of changes in long-horizon inflation expectations dominates that for the gap and supply shock variables. Put another way, variation in long-horizon inflation expectations explains the bulk of the movement in realized inflation. We also use our preferred specification for the inflation driving process to compute a history of model-based forecasts of the inflation rate. For both short and long horizons these forecasts are close to those observed from surveys.
    Keywords: Government securities ; Inflation (Finance)
    Date: 2006
  18. By: Edward Nelson
    Abstract: Ireland and Switzerland both had rising inflation during the early 1970s, but their experiences diverged thereafter, so that they form a rare example of two countries whose inflation rates are poorly correlated with one another over the Great Inflation period. In addition, each of the two countries' records is anomalous in important respects relative to other economies' 1970s inflations. This paper proposes that the monetary policy neglect hypothesis can account for the anomalies, providing a consistent explanation for the Great Inflation across countries. Extensive archival evidence is considered from each country regarding the doctrines that guided 1970s policymaking. This evidence establishes that Switzerland*s better record is accounted for by the competition between monetary and nonmonetary views of inflation being resolved earlier and more decisively in favor of the monetary view. In Ireland, by contrast, nonmonetary views of inflation dominated policymaking throughout the 1970s.
    Keywords: Inflation (Finance) ; Ireland ; Switzerland
    Date: 2006
  19. By: Geraats,Petra M.; Eijffinger,Sylvester C.W.; Cruijsen,Carin A.B. van der (Tilburg University, Center for Economic Research)
    Abstract: Central banks have become increasingly transparent during the last decade. One of the main bene ts of transparency predicted by theoreticalmodels is that it enhances the credibility, reputation, and exibility 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 a¤ected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with signi cant e¤ects 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
  20. By: Athanasios Orphanides
    Abstract: Nearly a quarter-century after Paul Volcker's declaration of war on inflation on October 6, 1979, Alan Greenspan declared that the goal had been achieved. Drawing on the extensive historical record, I examine the views of Chairmen Volcker and Greenspan on some aspects of the evolving monetary policy debate and explore some of the distinguishing characteristics of the disinflation.
    Keywords: Anti-inflationary policies ; Monetary policy ; Greenspan, Alan ; Volcker, Paul A.
    Date: 2006
  21. By: Francisco Torres (Universidade de Aveiro)
    Abstract: This paper addresses the question whether the process of European monetary integration implies efficiency-legitimacy trade-off. The paper considers that the process of monetary policy delegation to the European Central Bank (ECB), ratified by all European Union (EU) parliaments, was a non-zero-sum game, increasing both the efficiency and the legitimacy of monetary policy in the eurozone. There was however a change in the nature of delegation: the initial principal (EU national governments and/or parliaments) delegated to the agent (the ECB) control over its behaviour in regard to monetary policy. The paper distinguishes two types of constraints for monetary policy: credibility constraints and political constraints. The change in the nature of delegation of monetary policy (tying the hands of the principal) was a means of dealing with credibility constraints. The paper goes on investigating whether, and if so to what extent, the European Parliament (EP) is fit to function as a principal of the ECB as a means of dealing with political constraints. Thus, the paper analyses the European Parliament’s increased involvement in overseeing the Central Bank’s activities, aiming at understanding whether and how that new and special role (an informal institution of dialogue) could affect the trade-off between efficiency and legitimacy in the conduct of monetary policy in the eurozone.
    Keywords: Economic and Monetary Union; monetary policy delegation: efficiency and legitimacy; accountability; responsiveness; principal-agent relations; governance
    JEL: E58 E61 E65
    Date: 2006–03
  22. By: Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
    Abstract: Under mild assumptions, the data indicate that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. A general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. In this model, the endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, so does the benefit of asset market participation, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. This model produces variation in the risk premium even though the fundamental shocks have constant conditional variances.
    Date: 2006
  23. By: Keiichiro Kobayashi; Masaru Inaba
    Abstract: The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations, which is called the Pigou cycle by Beaudry and Portier (An exploration into Pigou's theory of cycles, Journal of Monetary Economics, 2004). The key feature of the notion of the Pigou cycle is the comovements in the consumption, the labor, and the investment, in response to changes in expectations. We show that with the assumption that firms are subject to the collateral constraint in financing labor input (and investment), a fairly standard neoclassical model can generate the Pigou cycle. We also show that the collateral-constraint model with the private information can generate the "irrational exuberance," i.e., a boom in which each firm correctly anticipates that its own productivity will not rise, while it also believes wrongly that the productivity of the other firms will rise dramatically.
    Date: 2006–03
  24. By: Manoj Atolia (Department of Economics, Florida State University)
    Abstract: The paper uses a currency substitution model to explain the stylized macroeconomic facts associated with productivity-enhancing reforms in countries of Africa. The model, when calibrated to Ghana and Uganda results in current account deficit and private capital inflows as well as changes in real interest rate, real exchange rate, and inflation comparable to those in data. Thus, currency substitution is important to understand macroeconomic dynamics in countries of Africa as many of them are currently undertaking such reforms. The paper also implements a new technique to solve for global nonlinear saddlepath for perfect foresight models with two state variables. The technique combines reverse shooting with the bisection method in two dimensions to systematically shoot for the trajectory in the state space that corresponds to the desired saddlepath.
    Keywords: Africa, Currency Substitution, Real Interest Rates, Capital Inflows, Nonlinear dynamics
    JEL: C63 F32 F41 O55
    Date: 2003–10
  25. By: Pengfei Wang; Yi Wen
    Abstract: This paper shows that imperfect competition can be a rich source of sunspots equilibria and coordination failures. This is demonstrated in a dynamic general equilibrium model that has no major distortions except imperfect competition. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium. But there is also a continuum of stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. Markup is always counter-cyclical in sunspots equilibria, which is consistent with empirical evidence. The paper provides a justification for exogenous variations over time in desired markups, which play an important role as a source of cost-push shocks in the monetary policy literature. We show that fluctuations driven by self-fulfilling expectations (or sunspots) look very similar to fluctuations driven by technology shocks, and we prove that such fluctuations are welfare reducing.
    Keywords: Equilibrium (Economics) ; Business cycles
    Date: 2006
  26. By: Faik Koray; K. Peren Arin
    Abstract: This paper investigates how innovations in income taxes and government purchases originating in the U.S. affect the U.S. economy, and how these effects are transmitted to the Canadian economy. Using a semi-structural VAR model and data for both countries for the 1961:1-2004:3 period, we find that fiscal policy innovations originating in the U.S. are transmitted to the Canadian economy by international trade and capital flows through interest rate and exchange rate channels. Unanticipated shocks to U.S. government purchases have beggar thy neighbor effects on Canada. U.S. output increases and Canadian output decreases in response to a positive shock to U.S. government purchases. In response to an unanticipated increase in U.S. income taxes, U.S. output declines while U.S. and Canadian real interest rates rise. The response of Canadian output, however, is not significantly different from zero.
  27. By: Ellen R. McGrattan
    Abstract: Real business cycles are recurrent fluctuations in an economy’s incomes, products, and factor inputs—especially labor—that are due to nonmonetary sources. These sources include changes in technology, tax rates and government spending, tastes, government regulation, terms of trade, and energy prices. Most real business cycle (RBC) models are variants or extensions of a neoclassical growth model. One such prototype is introduced. It is then shown how RBC theorists, applying the methodology of Kydland and Prescott (Econometrica 1982), use theory to make predictions about actual time series. Extensions of the prototype model, current issues, and open questions are also discussed.
    Date: 2006
  28. By: Paul Gomme; B. Ravikumar; Peter Rupert
    Abstract: Real business cycle models have difficulty replicating the volatility of S&P 500 returns. This fact should not be surprising since real business cycle theory suggests that the return to capital should be measured by the return to aggregate market capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. Our benchmark model captures almost 40 percent of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with higher risk aversion, which captures over 60 percent of the relative volatility in the return to capital.
    Keywords: Business cycles ; Capital
    Date: 2006
  29. By: Francisco Torres (Universidade de Aveiro)
    Abstract: In Portugal, as in most other European Union (EU) countries, the challenge of Economic and Monetary Union (EMU) has worked as a mechanism for economic stabilisation. However, the political consensus on the participation in EMU did not develop with respect to the need for implementing structural reforms and abolishing many of the policy distortions affecting the economy and to other goals of European integration, such as environmental quality, consumer protection or internal social cohesion, all of them pre-conditions for long-term development. Moreover, the objectives of EMU price stability and sound public finances were also not internalised in that consensus, although they were behind some crucial policy decisions, such as to join the EMS in 1992. During the entire macroeconomic convergence phase European monetary reform was regarded as an unavoidable external constraint that went together with an exogenous political objective. It was only due to the political consensus on not being left out of the EU core that the necessary consensus could be maintained to pursue a policy compatible with the objective of EMU participation throughout the heights of the European recession in Portugal (1993/94), the electoral year of 1995 and the two first years of a new legislature (1996/97) with a minority Government of a different political colour. This lack of internal objectives and economic and political strategy of integration surfaced and the political and social consensus broke once Portugal had joined EMU upon its inception, leading to the current economic crisis.
    Keywords: Portugal; European Union; macroeconomic stabilisation; monetary and fiscal policy; economic reform
    JEL: E63 E65 O52 F02
    Date: 2006–03
  30. By: Christopher Spencer (University of Surrey)
    Abstract: I examine the propensity of Bank of England Monetary Policy Committee (BoEMPC) members to cast dissenting votes. In particular, I compare the type and frequency of dissenting votes cast by socalled insiders (members of the committee chosen from within the ranks of bank staff) and outsiders (committee members chosen from outside the ranks of bank staff). Significant differences in the dissent voting behaviour associated with these groups is evidenced. Outsiders are significantly more likely to dissent than insiders; however, whereas outsiders tend to dissent on the side of monetary ease, insiders do so on the side of monetary tightness. I also seek to rationalise why such differences might arise, and in particular, why BoEMPC members might be incentivised to dissent. Amongst other factors, the impact of career backgrounds on dissent voting is examined. Estimates from logit analysis suggest that the effect of career backgrounds is negligible.
    Keywords: Monetary Policy Committee, insiders, outsiders, dissent voting, career backgrounds, appointment procedures
    Date: 2006–03
  31. By: Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
    Abstract: Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call Phoenix Miracle, where output “rises from its ashes”, suggesting that firms go through a process of financial engineering to restore liquidity outside the formal credit markets. Moreover, we show that the US Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the US Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubts on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors are prominent for understanding these collapses.
    JEL: F31 F32 F34 F41
    Date: 2006–03
  32. By: Paul Levine (University of Surrey); Alexandros Mandilaras (University of Surrey); Jun Wang (University of Surrey)
    Abstract: This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.
    Keywords: Currency crisis, debt management
    JEL: F31
    Date: 2006–03
  33. By: Edward F. Buffie (Department of Economics, Indiana University); Manoj Atolia (Department of Economics, Florida State University)
    Abstract: In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.
    Keywords: Reverse Shooting, Global Nonlinear Saddlepath Solution
    JEL: C63 C61
    Date: 2005–12
  34. By: Colin McKenzie
    Abstract: The purpose of this paper is to examine two factors, gold production and export prices, that have been suggested as having aided Australia's escape from the deflation it faced in the early 1890s. In order to examine the factors influencing Australian domestic prices in the second half of the nineteenth century, annual data over the period 1861-1900 are used to estimate a structural vector autoregression. Causality tests in a reduced form vector autoregression suggest that two factors Granger cause the movements in Australian domestic prices, namely export prices and net exports. In contrast, movements in gold production in Australia do not significantly directly cause Australian domestic prices, but have some indirect effect through the interest rate and net exports. Impulse response functions computed from the structural vector autoregression suggest that shocks in export prices lead to a rise in domestic prices, but shocks in gold production do not. Perhaps surprisingly, an export price shock leads to a fall in net exports in the medium term. Changes in capital flows would appear to be an important adjustment channel.
    Date: 2006–03
  35. By: Paul Söderlind
    Abstract: This paper studies if the consumption-based asset pricing model can explain the cross-section of expected returns. The CRRA model and several refinements (habit persistence and idiosyncratic shocks) all imply that the conditional expected return is linearly increasing in the asset's conditional covariance with consumption growth. Results from quarterly data on the 25 Fama-French portfolios suggest that the model has serious problems: there are large and systematic pricing errors. In addition, the estimated time-varying effective risk aversion coefficients appear implausible and are unrelated with most candidates for habit persistence and idiosyncratic risk.
    JEL: G12 E13 E32
    Date: 2006–03
  36. By: George Kapetanios and Massimiliano Marcellino
    Abstract: The estimation of structural dynamic factor models (DFMs) for large sets of variables is attracting considerable attention. In this paper we briefly review the underlying theory and then compare the impulse response functions resulting from two alternative estimation methods for the DFM. Finally, as an example, we reconsider the issue of the identification of the driving forces of the US economy, using data for about 150 macroeconomic variables.
  37. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Laurent Laloux (Science & Finance, Capital Fund Management); M. Augusta Miceli; Marc Potters (Science & Finance, Capital Fund Management)
    Abstract: We present a general method to detect and extract from a finite time sample statistically meaningful correlations between input and output variables of large dimensionality. Our central result is derived from the theory of free random matrices, and gives an explicit expression for the interval where singular values are expected in the absence of any true correlations between the variables under study. Our result can be seen as the natural generalization of the Mar?cenko-Pastur distribution for the case of rectangular correlation matrices. We illustrate the interest of our method on a set of macroeconomic time series.
    Date: 2005–12
  38. By: Eric M. Leeper; Shu-Chun Susan Yang
    Abstract: Neoclassical growth models predict positive growth effects over the entire transition path following a reduction in capital or labor tax rates when lump-sum taxes (or transfers) are used to balance the government budget. This paper considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. The paper shows that the stronger the response of distorting fiscal policies to debt, the more favorable the growth effects of a tax cut.
    JEL: E1 H3 H6
    Date: 2006–03
  39. By: George Kapetanios and Massimiliano Marcellino
    Abstract: The estimation of dynamic factor models for large sets of variables has attracted considerable attention recently, due to the increased availability of large datasets. In this paper we propose a new parametric methodology for estimating factors from large datasets based on state space models and discuss its theoretical properties. In particular, we show that it is possible to estimate consistently the factor space. We alsodevelop a consistent information criterion for the determination of the number of factors to be included in the model. Finally, we conduct a set of simulation experiments that show that our approach compares well with existing alternatives.
  40. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: Over the last three decades, the literature has experienced a marked enthusiasm amongst the critics of optimal taxation theory who attempted to establish the limits of optimal tax formulas and prescriptions in designing tax policy. This paper, in pursuit of investigating the importance and policy relevance of Ramsey tax rules, establishes that most of the common grounds of such criticisms, be it realistic, such as administrative and compliance costs, or be it rather abstract, such as fairness, are either unimportant or irrelevant for Ramsey taxation. The more important inadequacy of the traditional Ramsey tax models is their limited applicability for designing tax policy in developing countries.
    Keywords: Optimal taxation; Ramsey tax rules; Policy relevance
    JEL: E61 E62 H21 H30
    Date: 2006–03
  41. By: Chang-Tai Hsieh; Jonathan A. Parker
    Abstract: This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.
    JEL: H32 E22 D92 O54 O16
    Date: 2006–03
  42. By: Kazuhito Ikeo (Keio University); Yasuo Goto (Mitsubishi Research Institute)
    Abstract: This paper surveys the relationship between the government and the financial system in Japan, mainly from the viewpoint of financial stocks, to gain an overall perspective and identify where any problems lie. During this decade, it seems that the relationship between the government and the financial system in Japan has changed significantly. The government has generally become more deeply involved in the financial system. As a result it is no exaggeration to say that current Japanese financial system has become “a financial system of the government, by the government, for the government.” This was for the most part, promoted by the fact that there occurred a huge redistribution of wealth during the realignment process after the bursting of the bubble economy. Considering such circumstances, the aspects of “of the government,” “by the government,” and “for the government” will be surveyed in turn. Furthermore, postal system privatization will be discussed in terms of public debt management. Lastly, reference will be made to the possible problems accompanying the change in trend of investment-savings balances.
    Keywords: financial system, Japan, financial stocks, financial system, government, postal system, privatization, investment-savings balances
    JEL: E61 E62 F16
    Date: 2006–12
  43. By: Shigeru Wakita (Tokyo Metropolitan University)
    Abstract: The purpose of this study is to reexamine two empirical regularities in the Japanese labor market: the constant labor share and Okun's law. The former law relates to the price of labor in the labor market while the latter is a quantity law; they represent suitable benchmarks for judging the condition of the labor market. Although there are more elaborate statistical techniques, these laws are frequently used because they can clarify the macroeconomic situation at a glance. First, a constant labor share is implied in theory by the Cobb–Douglas production function. Thus, labor’s share should be based on the production function. Labor’s share based on income has only been rising because of massive depreciation. Secondly, there have been several structural breaks in Okun's law since the bubble collapsed, and the potential growth rate has fallen.
    Keywords: Okun's Law, Japan, labour market, labor market, Cobb-Douglas,
    JEL: J24 J30 J88
    Date: 2006–12
  44. By: Hanno Lustig
  45. By: François Dupuis; Benoit Durocher; Claude Montmarquette; Maryse Robert
    Date: 2006–03–01
  46. By: Martin Fukac; Adrian Pagan
    Date: 2006–03
  47. By: Andrea Raffo
    Abstract: Conventional two-country RBC models interpret countercyclical net exports as reflecting, in large part, the dynamics of capital. I show that, quantitatively, theoretical economies rely on counterfactual terms of trade effects: trade fluctuations, on the contrary, are driven primarily by consumption smoothing, thus generating procyclical net trade in goods. I then consider a class of preferences that embeds home production in a reduced form: consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between income and imports, as in the data. The major discrepancy between theory and data concerns the variability of international prices.
    Date: 2006
  48. By: János Gács (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: With its impulses and coordination initiatives the EU makes efforts to influence the employment and labour policies in its Member States. Here the principal instruments are the European Employment Strategy and its main constituent, the Employment Guidelines. The latter, while based on modern professional ideas about the institutional determinants of the labour market, have been incomplete up to 2005: due to departmentalism reflected in the tensions between the EU institutions responsible for employment and macro-policies crucial fields were kept out of the employment guidelines such as wage-setting policies, the wage bargaining system as well as the budgetary implications of active labour market policies. The macroeconomic support of the EU-inspired employment policies is theoretically not sound. An example of this is the objective of the Lisbon Process of simultaneous ambitions improvement of both macro-level productivity and employment. This target ignores the trade-off between these two factors prevailing even in the long term. The division and inconsistency between the philosophy and operation of various EU institutions is reflected in the moderate, but disturbing inconsistencies between the mid-term macroeconomic and employment strategies of the Hungarian government (the Convergence Programme and the National Action Plan for Employment). There are, however, possibilities for the member countries, including Hungary, to prepare and carry out employment policies in the EU framework that are supported by sound macro-policies: they have to be less slavish abiding by specific EU recommendations, have to take into account the domestic conditions realistically, and get rid of detrimental institutional divisions, at least in their indigenous administration.
    Keywords: European integration, employment strategy, coordination of policies
    JEL: F15 E61 J20 O11
    Date: 2006–01–12
  49. By: Phil Bodman (MRG - School of Economics, The University of Queensland); Kathryn Ford
    Abstract: What impact, if any, does fiscal decentralisation have on economic growth? Further investigations of the inter-relationships between fiscal decentralisation and economic growth are timely given that government decentralisation remains at the forefront of many OECD policy agendas. The study incorporates new measures of fiscal decentralisation to better account for the impact of different levels of subnational fiscal autonomy on economic growth. The analysis also considers the impact of previously omitted public sector decentralisation variables that provide further indication of the extent to which subnational governments are ‘closer to the people’ and potentially better able to account for local preferences in fiscal decision-making. Whilst little evidence of a direct relationship between fiscal decentralisation and output growth is found, some evidence is found to support the hypothesis that a medium degree of fiscal decentralisation is positively related to growth in the capital stock and the level of human capital.
  50. By: Richard Dennis, Kai Leitemo, and Ulf Soderstrom
    Abstract: Robust control allows policymakers to formulate policies that guard against model misspecification. The principal tools used to solve robust control problems are state-space methods (see Hansen and Sargent, 2006, and Giordani and Soderlind, 2004). In this paper we show that the structural-form methods developed by Dennis (2006) to solve control problems with rational expectations can also be applied to robust control problems, with the advantage that they bypass the task, often onerous, of having to express the reference model in statespace form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibriafor robust control problems. We apply both state-space and structural solution methods to an empirical New Keynesian business cycle model and find that the differences between the methods are both qualitatively and quantitatively important. In particular, with the structural-form solution methods the specification errors generally involve changes to the conditional variances in addition to theconditional means of the shock processes.
  51. By: Ali Choudhary (University of Surrey); Paul Levine (University of Surrey)
    Abstract: We examine a model where households develop external habits by following norms and therefore have multiple habits in both consumption and labour supply. In doing so, they contribute to habit formation and hence pose an externality effect on others. Our findings are: first, that consumption and work habit (‘work ethic’) drive us towards a 24/7 society; both forms of habit increase the labour supply of households. Second, the two externalities involved in external habit work in opposite directions. For consumption, external habit is a negative externality as it reduces the utility of others in the economy. By contrast work ethic reduces the disutility and is therefore a positive externality. Third, as a result of our second finding, multiple habits can involve both a consumption tax and subsidy to correct for these externalities. Fourth, with plausible parameter values, the welfare consequences of multiple habits are far greater where there are long-run inefficiencies compared with only transitional inefficiency.
    Keywords: Catching-up with the Joneses, Work Ethic, Savings, Output Inefficiency and Taxation
    JEL: D12 E52
    Date: 2006–03
  52. By: Christopher J. Ruhm
    Abstract: Panel data econometric methods are used to investigate how the risk of death from acute myocardial infarction (AMI) varies with macroeconomic conditions after controlling for demographic factors, fixed state characteristics, general time effects and state-specific time trends. The sample includes residents of the 20 largest states over the 1979 to 1998 period. A one percentage point reduction in unemployment is predicted to raise AMI mortality by 1.3 percent, with a larger increase in relative risk for 20-44 year olds than older adults, particularly if the economic upturn is sustained. Nevertheless, the much higher absolute AMI fatality rate of senior citizens implies that they account for most of the additional deaths. This suggests the importance of factors like air pollution and traffic congestion that increase with economic activity, are linked to coronary heart disease and may have particularly strong effects on vulnerable segments of the population, such as the frail elderly. AMI mortality risk quickly rises when the economy strengthens and increases further if the favorable economic conditions persist. This is consistent with strong effects of other short-term factors on heart attack risk and with health being a durable capital stock that is affected by flows of lifestyle behaviors and environmental conditions whose effects accumulate over time.
    JEL: E32 I12
    Date: 2006–03
  53. By: Richard Pierse (University of Surrey)
    Abstract: In this paper we show how the popular L-B-J algorithm for solving forward-looking economic models using Newton methods can be gen- eralised to allow for a block of terminal equations for variables that appear with a lead. The e¤ect of choosing di¤erent types of termi- nal condition is explored in a simple stochastic growth model using WinSolve, a general nonlinear model solution package.
    Date: 2006–03
  54. By: Morten L. Bech; Rod Garratt
    Abstract: We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions-operational problems and changes in participants' behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a "too-big-to-fail" participant, then the coordination of payment processing can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of coordination. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks.
    Keywords: Payment systems ; Banks and banking ; Game theory ; Banks and banking, Central
    Date: 2006
  55. By: Christer Ljungwall (China Center of Economic Research, Peking University); Martin Linde-Rahr (Department of economics and statistics, Goteborg University)
    Abstract: This paper introduce an environmental policy variable, i.e., the provincial pollution levy paid by an average firm, and measure its impact on the foreign investors' location decisions over the 1987 to 1998 period. We argue that less developed regions in China are more inclined to sacrifice environmental policies as an instrument to attract foreign direct investment (FDI). National level results show that stringent environmental policies have insignificant effect on foreign investors' location decision, and that transportation, economic growth, and regional location matters more. At the provincial level stringent environmental policies reduce FDI in the less developed regions.
    Keywords: Foreign Direct Investment, Environmental policy
    JEL: C23 E24 F21 H25 O53 Q28
    Date: 2005–12
  56. By: Paola Manzini; Marco Mariotti; Luigi Mittone
    Abstract: In this paper we formulate and investigate experimentally a model of how individuals choose between sequences of monetary outcomes spread out in time. The theoretical model assumes that a decision-maker uses, in a sequential way, two criteria to screen options. Each criterion only permits a decision between some pairs of options, while the other options are incomparable according to that criterion When the first criterion is not decisive, the decision maker resorts to the second criterion to select an alternative. This type of decision procedures has encountered the favour of several psychologists, though it is quite under-explored in the economics domain. We find that: 1) traditional economic models based on discounting alone cannot explain a significant (almost 30%) proportion of the data no matter how much variability in discount functions is allowed; 2) our model, despite considering only a specific (exponential) form of discounting, can explain the data much better solely thanks to the use of the secondary criterion; 3) our model explains certain specific patterns in the choices of the 'irrational' people: we can reject the hypothesis that anomalous behaviour is due simply to random 'mistakes' around the basic predictions of discounting theories: the deviations are not random and there are clear systematic patterns of association between 'irrational' choices.
    Keywords: Time preference, Time sequences, Negative discounting
    Date: 2006

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