nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒04‒08
seventy papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Fiscal Policy and Macroeconomic Stability Within a Currency Union By Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
  2. Optimal Fiscal Policy Rules in a Monetary Union By Kirsanova, Tatiana; Satchi, Mathan; Vines, David; Wren-Lewis, Simon
  3. Debt, Deficits and Destabilizing Monetary Policy in Open Economies By Schabert, Andreas; van Wijnbergen, Sweder
  4. The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective? By Andrea Colciago; Anton Muscatelli; Tiziano Ropele; Patrizio Tirelli
  5. Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation By Burkhard Heer; Alfred Maussner
  6. Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data By Ivo J. M. Arnold; Jan J.G. Lemmen
  7. Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication By Helge Berger; Jakob de Haan; Jan-Egbert Sturm
  8. Inflation Rate Dispersion and Convergence in Monetary and Economic Unions: Lessons for the ECB By Günter W. Beck; Axel A. Weber
  9. Price Stability, Inflation Convergence and Diversity in EMU: Does One Size Fit All? By Axel A. Weber; Günter W. Beck
  10. Meta-Analysis of the Business Cycle Correlation between the Euro Area and the CEECs By Jarko Fidrmuc; Iikka Korhonen
  11. Inflation Bias with Dynamic Phillips Curves By Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
  12. Estimating Macroeconomic Models: A Likelihood Approach By Fernández-Villaverde, Jesús; Rubio-Ramirez, Juan F
  13. Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes By Giannitsarou, Chryssi
  14. Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative Approach to Shock Identification By John C. Bluedorn; Christopher Bowdler
  15. Monetary Regimes: Is There a Trade-Off Between Consumption and Employment Variability? By Matthews, Kent; Meenagh, David; Minford, Patrick; Webb, Bruce
  16. Growth and Inflation Disparities in Corridor V By Dino Martellato
  17. Monetary Policy Transparency in the UK:The Impact of Independence and Inflation Targeting By Iris Biefang-Frisancho Mariscal; Peter Howells
  18. Pervasive Stickiness (Expanded Version) By Mankiw, N Gregory; Reis, Ricardo
  19. Optimal Monetary Policy in a Small Open Economy with Home Bias By Faia, Ester; Monacelli, Tommaso
  20. Does Central Bank Transparency Reduce Interest Rates? By Eijffinger, Sylvester C W; Geraats, Petra M; van der Cruijsen, Carin A B
  21. UK Inflation Persistence: Policy or Nature? By Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
  22. The New Keynesian Phillips Curve and the Role of Expectations: Evidence from the Ifo World Economic Survey By Steffen Henzel; Timo Wollmershäuser
  23. Fiscal Policy, Monopolistic Competition, and Finite Lives By Ben J. Heijdra; Jenny Ligthart
  24. Optimal Central Bank Design: Benchmarks for the ECB By Helge Berger
  25. Price-Level Determination Under Dispersed Information and Monetary Policy By Aoki, Kosuke
  26. Pricing Behaviour and the Response of Hours to Productivity Shocks By Marchetti, Domenico J.; Nucci, Francesco
  27. The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies By K C Neanidis; C S Savva
  28. The Greenspan Era: Discretion, Rather Than Rules By Benjamin M. Friedman
  29. Structural Breaks and Consumer Credit: Is Consumption Smoothing Finally a Reality? By Ryan R. Brady
  30. Sticky Prices and Indeterminacy By Weder, Mark
  31. Algunos criterios para evaluar una meta de inflación de largo plazo By Martha López
  32. Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises By Andreas Röthig; Willi Semmler; Peter Flaschel
  33. Evaluación de Reglas de Tasa de Interés en un Modelo de Economía Pequeña y Abierta By Julian Pérez Amaya
  34. Financing Government Expenditures Optimally By Pinar Ayse Yesin
  35. Inflation, Prices, and Information in Competitive Search By Miquel Faig; Belén Jerez
  36. Aggregate Implications of Wealth Redistribution: The Case of Inflation By Doepke, Matthias; Schneider, Martin
  37. Household Credit in the New Europe: Lending Boom or Sustainable Growth? By Coricelli, Fabrizio; Mucci, Fabio; Revoltella, Debora
  38. Menu Costs and Markov Inflation: A Theoretical Revision with New Evidence By Christian Ahlin; Mototsugu Shintani
  39. Boosting Your Instruments: Estimation with Overidentifying Inequality Moment Conditions By Moon, Hyungsik Roger; Schorfheide, Frank
  40. Measuring Expectations By Kjellberg, David
  41. Credit Card Debt Puzzles By Michael Halisassos; Michael Reiter
  42. Real and Nominal Wage Adjustment in Open Economies By Anders Forslund; Nils Gottfries; Andreas Westermark
  43. Macroeconometric Modelling with a Global Perspective By M. Hashem Pesaran; Ron P. Smith
  44. Indeterminacy with Small Externalities: The Role of Non-Separable Preferences By Lloyd-Braga, Teresa; Nourry, Carine; Venditti, Alain
  45. The Time-Varying Long-Run Unemployment Rate: The Colombian Case By Luis Eduardo Arango; Carlos Esteban Posada
  46. Sustainability of Swiss Fiscal Policy By Gebhard Kirchgässner; Silika Prohl
  47. The Declining Equity Premium: What Role Does Macroeconomic Risk Play? By Lettau, Martin; Ludvigson, Sydney; Wachter, Jessica
  48. Endogenous Redistributive Cycles An Overlapping Generations Approach to Social Conflict and Cyclical Growth By Christiane Clemens; Maik Heinemann
  49. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Daniel Cardona; Fernando Sánchez-Losada
  50. Phillips curve forecasting in a small open economy By Anthony Garratt; Gary Koop; Shaun P. Vahey
  51. Modelos para la Inflación Básica de Bienes Transables y No Transables en Colombia By José Luis Torres
  52. What are their Words Worth? Political Plans and Economic Pains of Fiscal Consolidations in New EU Member States By Jan Zápal; Ondrej Schneider
  53. Forecasting Substantial Data Revisions in the Presence of Model Uncertainty By Troy Matheson
  54. La Tasa de Desempleo de Largo Plazo en Colombia By Luis Eduardo Arango; Carlos Esteban Posada
  55. Do Consumers Choose the Right Credit Contracts? By Sumit Agarwal; Souphala Chomsisengphet; Chunlin Liu; Nicholas S. Souleles
  56. Measuring the Volatility in U.S. Treasury Benchmarks and Debt Instruments By Suhejla Hoiti; Esfandiar Maasoumi; Michael McAleer; Daniel Slottje
  57. Pricing Risk in Economies with Heterogenous Agents and Incomplete Markets By Pijoan-Mas, Josep
  59. An Equilibrium Model of 'Global Imbalances' and Low Interest Rates By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  60. Incentives in Competitive Search Equilibrium and Wage Rigidity By Moen, Espen R; Rosen, Asa
  61. 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
  62. El Riesgo de Mercado de la Deuda Pública: ¿Una Restricción a la Política Monetaria? El Caso Colombiano By Hernando Vargas Herrera; Dpto de Estabilidad Financiera
  63. Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections By Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
  65. Mean Variance Optimization of Non-Linear Systems and Worst-case Analysis By Panos Parpas; Berc Rustem; Volker Wieland; Stan Zakovic
  66. Awareness and Stock Market Participation By Luigi Guiso; Tullio Jappelli
  67. A Signaling Theory of Grade Inflation By William Chan; Hao Li; Wing Suen
  68. Equity Culture and the Distribution of Wealth By Yannis Bilias; Dimitris Georgarakos; Michael Haliassos
  69. The Geography of Output Volatility By Malik, Adeel; Temple, Jonathan
  70. The Economic Consequences of Dollar Appreciation for U.S. Manufacturing Investment: A Time-Series Analysis By Robert A. Blecker

  1. By: Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
    Abstract: We analyse the stability of countries within a monetary union in the face of asymmetric shocks, using a simple but widely applicable model. We show that members of the union may be subject to severe, and possibly unstable, cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour, and if real interest rates influence the level of aggregate demand. This cyclical instability can be mitigated if fiscal policy in each member country reacts to inflation differences, but it can be aggravated if fiscal feedback on debt is too strong.
    Keywords: macroeconomic stability; monetary and fiscal policies; monetary union
    JEL: E52 E61 E63 F41
    Date: 2006–03
  2. By: Kirsanova, Tatiana; Satchi, Mathan; Vines, David; Wren-Lewis, Simon
    Abstract: This paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation and output, but that not much is lost if national fiscal policy is restricted to react only to national differences in inflation and output.
    Keywords: monetary union; optimal monetary policy and fiscal policies; simple rules
    JEL: E52 E61 E63 F41
    Date: 2006–03
  3. By: Schabert, Andreas; van Wijnbergen, Sweder
    Abstract: Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint on stabilizing interest rate policy is tighter the higher the primary deficit and the more open the economy is. If the government cannot borrow from abroad in its own currency, stability requires interest rate policy to be accommodating (passive). Inflation stabilization is nevertheless feasible if the CB uses an instrument not associated with default risk, e.g. money supply.
    Keywords: fiscal-monetary policy interactions; foreign debt; inflation targeting; policy implementation; sovereign default risk
    JEL: E52 E63 F41
    Date: 2006–03
  4. By: Andrea Colciago; Anton Muscatelli; Tiziano Ropele; Patrizio Tirelli
    Abstract: We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DGE model which incorporates non-Ricardian consumers (as in Galì et al. 2004) and a home bias in the composition of national consumption bundles. We find that fiscal policies stabilize the aggregate economy but, in some cases, generate conflicting views among national policymakers. Finally, model determinacy requires that national fiscal feedbacks on debt accumulation be designed with reference to the debt dynamics of the entire monetary union. This is in sharp contrast with the "Brussels consensus" based on the view that the ECB alone should stabilize the union-wide economy and national fiscal policies should react to idiosyncratic shocks and to national debt levels.
    JEL: E58 E62 E63
    Date: 2006
  5. By: Burkhard Heer; Alfred Maussner
    Abstract: In our dynamic optimizing sticky price model, agents are heterogeneous with regard to their age and their productivity. We find that the business cycle dynamics in the OLG model in response to both a technology shock and a monetary shock are similar, but not completely identical to those found in the corresponding representative-agent model. In particular, working hours in the OLG model decrease in response to a positive technological shock, since for young workers the income effect dominates the substitution effect. This is in line with the adverse effect of productivity shocks on employment found in structural vector autoregressions.
    Keywords: fluctuations, unanticipated inflation, wealth distribution, income distribution, progressive income taxation, Calvo price staggering
    JEL: D31 D58 E31 E32 E52
    Date: 2006
  6. By: Ivo J. M. Arnold; Jan J.G. Lemmen
    Abstract: This paper uses the European Commission’s Consumer Survey to assess whether inflation expectations have converged and whether inflation uncertainty has diminished following the introduction of the Euro in Europe. Consumers’ responses to the survey suggest that inflation expectations depend more on past national inflation rates than on the ECB’s anchor for price stability. The convergence in inflation expectations does not appear to be faster than the convergence in actual inflation rates. Regarding inflation uncertainty, the data indicate a relationship with country size, suggesting that within EMU, inflation uncertainty may increase in countries that have a smaller influence on ECB policy.
    Keywords: monetary union, inflation differentials, consumer survey
    JEL: D84 E31 E58
    Date: 2006
  7. By: Helge Berger; Jakob de Haan; Jan-Egbert Sturm
    Abstract: We examine the role of money in the policies of the ECB, using introductory statements of the ECB President at the monthly press conferences during 1999-2004. Over time, the relative amount of words devoted to the monetary analysis has decreased. Our analysis of indicators of the monetary policy stance suggests that developments in the monetary sector, while somewhat more important in the later half of the sample, only played a minor role most of the time. Our estimates of ECB interest rate decisions suggest that the ECB’s words (monetary-sector based policy intensions) are not an important determinant of its actions.
    Keywords: ECB, communication, monetary policy
    JEL: E43 E52 E58
    Date: 2006
  8. By: Günter W. Beck (University of Frankfurt and CFS); Axel A. Weber (Deutsche Bundesbank)
    Abstract: Using a set of regional inflation rates we examine the dynamics of inflation dispersion within the U.S.A., Japan and across U.S. and Canadian regions. We find that inflation rate dispersion is significant throughout the sample period in all three samples. Based on methods applied in the empirical growth literature, we provide evidence in favor of significant mean reversion (ß- convergence) in inflation rates in all considered samples. The evidence on s-convergence is mixed, however. Observed declines in dispersion are usually associated with decreasing overall inflation levels which indicates a positive relationship between mean inflation and overall inflation rate dispersion. Our findings for the within-distribution dynamics of regional inflation rates show that dynamics are largest for Japanese prefectures, followed by U.S. metropolitan areas. For the combined U.S.-Canadian sample, we find a pattern of withindistribution dynamics that is comparable to that found for regions within the European Monetary Union (EMU). In line with findings in the so-called ‘border literature’ these results suggest that frictions across European markets are at least as large as they are, e.g., across North American markets.
    Keywords: Inflation Convergence, Deflation, ECB Monetary Policy, EMU, Regional Diversity
    JEL: E31 E52 E58
    Date: 2005–11–01
  9. By: Axel A. Weber (Deutsche Bundesbank); Günter W. Beck (University of Frankfurt and CFS)
    Abstract: Using a unique data set of regional inflation rates we are examining the extent and dynamics of inflation dispersion in major EMU countries before and after the introduction of the euro. For both periods, we find strong evidence in favor of mean reversion (ß-convergence) in inflation rates. However, half-lives to convergence are considerable and seem to have increased after 1999. The results indicate that the convergence process is nonlinear in the sense that its speed becomes smaller the further convergence has proceeded. An examination of the dynamics of overall inflation dispersion (s-convergence) shows that there has been a decline in dispersion in the first half of the 1990s. For the second half of the 1990s, no further decline can be observed. At the end of the sample period, dispersion has even increased. The existence of large persistence in European inflation rates is confirmed when distribution dynamics methodology is applied. At the end of the paper we present evidence for the sustainability of the ECB’s inflation target of an EMU-wide average inflation rate of less than but close to 2%.
    Keywords: Convergence, Deflation, ECB Monetary Policy, EMU, Regional Diversity
    JEL: E31 E52 E58
    Date: 2005–11–01
  10. By: Jarko Fidrmuc; Iikka Korhonen
    Abstract: We review the literature on business cycle correlation between the euro area and the Central and Eastern European countries (CEECs), a topic that has gained attention as the newest EU members approach monetary union. Our meta-analysis of 35 identified publications suggests some CEECs already have comparably high correlation with the euro area business cycle. We find that estimation methodologies can have a significant effect on correlation coefficients. While CEEC central bankers tend to be more conservative in their estimates than academics or eurosystem researchers, we find no evidence of a geographical bias in the studies.
    Keywords: monetary union, optimum currency area, business cycles, meta analysis
    JEL: C42 E32 F15 F31
    Date: 2006
  11. By: Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
    Abstract: We generalise the analysis of inflation bias with dynamic Phillips curves in three respects. First, we examine the discretionary (time consistent) solution in cases where the Phillips curve has both a backward looking and forward-looking component. Second, we show that the commitment (time inconsistent) solution does not normally involve zero inflation and output at its natural rate. Instead, with a purely forward-looking Phillips curve and positive discounting, it will involve a dynamic path for inflation in which steady state inflation is below its target. In this sense, we obtain negative inflation bias. Third, we show that the timeless perspective policy has the same steady state as the commitment case, but without any short-term output gains.
    Keywords: commitment; discretion; inflation bias; timeless perspective policy
    JEL: E52 E61 E63 F41
    Date: 2006–03
  12. By: Fernández-Villaverde, Jesús; Rubio-Ramirez, Juan F
    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.
    Keywords: business cycle; dynamic macroeconomic models; nonlinear and/or non-normal models; particle filtering; stochastic volatility
    JEL: C11 C5 E10 E32
    Date: 2006–03
  13. By: Giannitsarou, Chryssi
    Abstract: It is known that, in the context of a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule, steady state indeterminacy may arise as a result of endogenous labor income tax rates. In this paper, it is shown that when the government finances its expenditures via an endogenous consumption tax instead, there exists a unique steady state which is always saddle-path stable. As a result, combining income taxes with consumption taxes makes the ranges of indeterminacy shrink, thus reducing the possibility of aggregate instability. From a policy perspective, the results provide an additional argument in favor of (less distortionary) consumption taxes in place of capital taxes.
    Keywords: balanced budget rules; consumption tax; fiscal policy; indeterminacy
    JEL: C62 E62
    Date: 2006–03
  14. By: John C. Bluedorn (Nuffield College, Oxford University); Christopher Bowdler (Nuffield College, Oxford University)
    Abstract: We argue that endogenous and anticipated movements in interest rates lead to underestimates of the speed and magnitude of the exchange rate response to monetary policy. Employing the Romer and Romer (2004) exogenous monetary policy shock measure, we find that the effect of a one percentage point increase in the U.S. interest rate is up to twice as large and 3 times as fast as that obtained using the actual federal funds rate to identify monetary shocks. Moreover, new evidence from open economy VARs emphasises the adjustment role of the exchange rate. U.S. prices and output respond almost twice as quickly as they do in a closed economy VAR using the Romer and Romber shock measure. There is also evidence of stronger international transmission of U.S. monetary shocks. Overall, the estimated response speeds and magnitudes are more easily reconciled with existing models than previous empirical work.
    Keywords: monetary policy shocks, exchange rate dynamics, open economy VARs
    JEL: E52 F31 F41
    Date: 2005–08–01
  15. By: Matthews, Kent; Meenagh, David; Minford, Patrick; Webb, Bruce
    Abstract: Macro models generally assume away heterogeneous welfare in assessing policies. We investigate here within two aggregative models - one with a representative agent, the other a long-used forecasting model of the UK - whether allowing for differences in welfare functions (specifically between those in continuous employment and those with frequent unemployment spells) alters the rankings of monetary policies. We find that it does but that a set of policies (money supply targeting implemented by money supply control) can be found that are robust in the sense of avoiding very poor outcomes for either of the two groups.
    Keywords: heterogenous welfare; interest rate setting; money supply rules; price level targeting; robustness
    JEL: E52
    Date: 2006–04
  16. By: Dino Martellato (Department of Economics, University Of Venice Cà Foscari)
    Abstract: The paper offers a brief discussion about the role of transport infrastructure in the current growth strategy followed by the EU. As a corridor is the locus where transport infrastructure and growth should interact more effectively, the central part of Corridor V is considered as an interesting case study. A growth scenario for eight countries is provided to show that wide growth disparities are to be expected during the next decade. The final part of the paper speculates about inflation differentials that are likely to emerge when growth differentials tend to persist inside a monetary union. As the Euro zone will be enlarged to host fast-growers in Corridor V such as Slovenia (maybe as soon as 2007), Hungary and the Slovak Republic, growth differentials and the single monetary policy could make it difficult to deliver a common monetary environment.
    Keywords: Growth, money demand; inflation; infrastructure, European Union
    JEL: O47 E31 E47 H54
    Date: 2006
  17. By: Iris Biefang-Frisancho Mariscal; Peter Howells (School of Economics, University of the West of England)
    Abstract: There is a widespread belief that the transparency of UK monetary policy has increased substantially as a result of the introduction of inflation targeting in 1992 and a number of procedural and institutional reforms which accompanied and followed it. In this paper, we use money market responses (and other data) to test the possibility that improved anticipation of policy moves may be the result of developments other than the institutional reforms popularly cited. We find overwhelming evidence that the switch to inflation targeting itself significantly reduced monetary policy surprises, while subsequent reforms have contributed little. Where we advance substantially on earlier work is to look at the cross-sectional dispersion of agents’ anticipation. If the benefit of transparency is the elimination of policy surprise, there is little benefit if the averagely correct anticipations of agents conceal a wide dispersion of view. The most striking feature is the general decline in cross-sectional one year-ahead forecast uncertainty of the interbank rate. So, even though we do not find that agents on average have improved monetary policy anticipation since 1997, we do find that they have become more unanimous about forecasting future money market rates. However, further testing reveals that it is a simultaneous fall in the dispersion of inflation rate forecasts that explains the increased consensus on interest rates, rather than institutional reforms in 1997 and later.
    Keywords: Monetary Policy; transparency; independence; inflation targeting
    JEL: E58
    Date: 2006–01
  18. By: Mankiw, N Gregory; Reis, Ricardo
    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.
    Keywords: business cycles; sticky information
    JEL: E10 E30
    Date: 2006–03
  19. By: Faia, Ester; Monacelli, Tommaso
    Abstract: We analyze optimal monetary policy in a small open economy characterized by home bias in consumption. Peculiar to our framework is the application of a Ramsey-type analysis to a model of the recent open economy New Keynesian literature. We show that home bias in consumption is a sufficient condition for inducing monetary policy-makers of an open economy to deviate from a strategy of strict markup stabilization and contemplate some (optimal) degree of exchange rate stabilization. We focus on the optimal setting of policy both in the case in which firms set prices one period in advance as well as in the case in which firms set prices in a dynamic forward-looking fashion. While the first setup allows us to analytically highlight home bias as an independent source of equilibrium markup variability, the second setup allows us to study the effects of future expectations on the optimal policy problem and the effect of home bias on optimal inflation volatility. The latter, in particular, is shown to be related to the degree of trade openness in a U-shaped fashion, whereas exchange rate volatility is monotonically decreasing in openness.
    Keywords: home bias; optimal monetary policy; Ramsey planner; sticky prices
    JEL: E52 F41
    Date: 2006–03
  20. By: Eijffinger, Sylvester C W; Geraats, Petra M; van der Cruijsen, Carin A B
    Abstract: Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoretical models is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental effect on interest rates.
    Keywords: central bank transparency; interest rates; monetary policy
    JEL: E52 E58
    Date: 2006–03
  21. By: Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
    Abstract: A large econometric literature has found that post-war US inflation exhibits very high persistence, approaching that of a random walk process. Given similar evidence for other OECD countries, many macroeconomists have concluded that high inflation persistence is a 'stylized fact'. The objective of this paper is to show that degree of inflation persistence is not an inherent structural characteristic of an economy, but in fact a function of the stability and transparency of monetary policy regime in place. We begin by estimating univariate processes for inflation across different periods, allowing for structural breaks based on a priori knowledge of the UK economy. Then we examine whether, a rather straightforward model, easily micro-founded in a standard classical set-up can generate the facts such as we find them. We calibrate our structural model for each of the regimes and solve it analytically for the implied persistence in the inflation process. We compare this theoretical prediction with the estimated persistence for each regime. Finally we bootstrap our model to generate pseudo inflation series and check whether the actual persistence coefficients lie within the 95 percent confidence limits implied by the bootstraps. As a robustness exercise we do the same for the Liverpool model.
    Keywords: bootstraps; inflation
    JEL: E0
    Date: 2006–04
  22. By: Steffen Henzel; Timo Wollmershäuser
    Abstract: We provide evidence on the fit of the hybrid New Keynesian Phillips curve for selected euro zone countries, the US and the UK. Instead of imposing rational expectations and estimating the Phillips curve by the Generalized Method of Moments, we follow Roberts (1997) and Adam and Padula (2003) and use direct measures of inflation expectations. The data source is the Ifo World Economic Survey, which quarterly polls economic experts about their expected future development of inflation. Our main findings are as follows: (i) In comparison with the rational expectations approach, backward-looking behaviour turns out to more relevant for most countries in our sample. (ii) The use of survey data for inflation expectations yields a positive slope of the Phillips curve when the output gap is used as a measure for marginal cost.
    Keywords: inflation expectations, survey data, euro zone, Phillips curve
    JEL: C52 E31
    Date: 2006
  23. By: Ben J. Heijdra; Jenny Ligthart
    Abstract: The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier, (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect, (iii) short-run out- put multipliers under lump-sum tax financing are smaller than long-run output multipliers if labor supply is elastic, and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output, and (ii) negative long-run output multipliers.
    Keywords: fiscal policy, output multipliers, Yaari-Blanchard model, overlapping generations, monopolistic competition, love of variety, temporary fiscal shocks
    JEL: E12 E63 L16
    Date: 2006
  24. By: Helge Berger
    Abstract: The paper discusses key elements of optimal central bank design and applies its findings to the Eurosystem. A particular focus is on the size of monetary policy committees, the degree of centralization, and the representation of relative economic size in the voting rights of regional (or sectoral) interests. Broad benchmarks for the optimal design of monetary policy committees are derived, combining relevant theoretical arguments with available empirical evidence. A new indicator compares the mismatch of relative regional economic size and voting rights in the monetary policy committees of the US Fed, the pre-1999 German Bundesbank, and the ECB over time. Based on these benchmarks, there seems to be room to improve the organization of the ECB Governing Board and current plans for reform.
    Keywords: central bank design, federal central banks, ECB, Eurosystem, ECB reform
    JEL: D72 E58
    Date: 2006
  25. By: Aoki, Kosuke
    Abstract: This paper considers the determination of aggregate price level under dispersed information. Central Bank sets policy in response to its noisy measure of the price level, and each agent makes its decisions by observing a subset of data. Information revealed to the agents and Bank is determined endogenously. It is shown that the aggregate state of the economy is not revealed perfectly to anybody but this economy behaves as if it is a representative-agent economy in which the representative agent has perfect information while the Bank has partial information. The Bank has information set affects fluctuations in the price level through its effect on policy.
    Keywords: monetary policy; uncertainty
    JEL: E52 E58
    Date: 2006–03
  26. By: Marchetti, Domenico J.; Nucci, Francesco
    Abstract: Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favour of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper we estimate a variety of alternative TFP measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours. Using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with more flexible prices. Price stickiness remains a crucial factor in the response of hours even if product storability or market power are allowed for. Our results hold under alternative assumptions for the stationarity of hours per capita.
    Keywords: labour input; price rigidity; productivity shocks
    JEL: E31 E32
    Date: 2006–03
  27. By: K C Neanidis; C S Savva
    Abstract: MThis paper examines the effects of inflation and currency substitution volatility on the average rates of inflation and currency substitution for twelve emerging market economies. Using a bivariate GARCH-in-Mean model, which accommodates for asymmetric and spillover effects of inflation and currency substitution innovations on their volatilities, we find that for the majority of the countries in the sample the variability of inflation exerts a positive influence on both the average rates of inflation and currency substitution. Similarly, higher uncertainty in currency substitution displays enhancing effects on inflation and currency substitution. These results indicate an alternative avenue that stresses the importance of currency substitution for the conduct of monetary policy in terms of price stability, and provide an additional explanation to the phenomenon of dollarization hysteresis.
    Date: 2006
  28. By: Benjamin M. Friedman
    Abstract: What stands out in retrospect about U.S. monetary policy during the Greenspan Era is the ongoing movement away from mechanistic restrictions on the conduct of policy, together with a willingness on occasion to depart even from what more flexible guidelines dictated by contemporary conventional wisdom would imply, in the interest of carrying out the Federal Reserve System’s dual mandate to pursue both stable prices and maximum employment. Part of this change was procedural – for example, the elimination of money growth targets. The most substantive demonstration of policy flexibility came in the latter half of the 1990s, as unemployment fell below 6% (in 1994), then below 5% (in 1997), and then remained below 5% for more than four years, yet the Federal Reserve did not tighten monetary policy. This policy stance was consistent with a view of the economy, including faster productivity growth and increased exposure to international competition, that Chairman Greenspan had articulated nearly a decade before.
    JEL: E52
    Date: 2006–03
  29. By: Ryan R. Brady (United States Naval Academy)
    Abstract: Has structural change in consumer credit made consumption smoother? Given recent empirical analysis the consumer's inability to smooth consumption appears as prevalent as ever. In this paper, however, I show that structural change in consumer credit appears to have made consumption smoothing a reality. First, using the statistical methods of Bai and Perron (1998, 2003), I find structural breaks in the series for consumer credit and consumption at various points from 1959 through 2005. Most notably, structural breaks occur in total consumer credit and revolving consumer credit in the 1990s. Based on the break date estimates, I estimate a structural equation of consumption growth in line with previous empirical tests of the permanent income hypothesis. Consumption smoothing is evident in the data after the mid-1980s and into the 2000s. The findings of this paper have important implications for a variety of economic research. The evidence for consumption smoothing bears directly on the efficacy of monetary policy and fiscal policy, as well as on the recent discussion of the decline in macroeconomic volatility since the 1980s.
    Date: 2006–04
  30. By: Weder, Mark
    Abstract: The aim of the present paper is to analyze the link between price rigidity and indeterminacy. This is done within a cash-in-advance economy from which we know that it exhibits indeterminacy at high degrees of relative risk aversion. I find that price stickiness reduces the scope of these sunspot equilibria: sluggish price adjustment requires degrees of relative risk aversion compatible with indeterminacy that prove too high to square with data.
    Keywords: Calvo-pricing; cash-in-advance economies; sunspot equilibria
    JEL: E31 E32
    Date: 2006–03
  31. By: Martha López
    Abstract: Uno de los hechos estilizados más recientes alrededor del mundo es que, después de varias décadas, se está convergiendo a una inflación baja y estable. Algunos países ya llegaron a su estado estacionario en este sentido y otros aún están en proceso de desinflación. Dado que la inflación inflinge costos en el bienestar de los agentes y frena el crecimiento económico de largo plazo, este es uno de los logros más importantes de las autoridades monetarias. No obstante, en el corto plazo el proceso desinflacionario puede tener impacto negativo sobre el producto y el empleo. Este trabajo presenta algunos criterios que son relevantes en la determinación del nivel de inflación de largo plazo y cómo el régimen de política monetaria de Inflación-objetivo permite disminuir los costos asociados al proceso desinflacionario en la medida que la política monetaria gana credibilidad.
    Keywords: Inflación, bienestar, demanda por dinero, Inflación Objetivo.
    JEL: E31 E41 E52 O42 E58
  32. By: Andreas Röthig (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Willi Semmler (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld)); Peter Flaschel (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld))
    Abstract: This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure - caused by balance sheet effects as in Krugman (2000) - and therefore their investments' sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.
    Keywords: Mundell-Fleming-Tobin model, foreign-debt financed investment, currency crises, real crises, currency futures, hedging, speculation.
    JEL: E32 E44 F31 F41
    Date: 2006–02
  33. By: Julian Pérez Amaya
    Abstract: Empleando un modelo de equilibrio general dinámico y estocástico para una economía pequeña y abierta con imperfecciones y rigideces en el sector no transable calibrado para Colombia, se estudia la conveniencia de que la autoridad monetaria fije como medida de inflación objetivo en su función de reacción la inflación total, la inflación doméstica o la inflación externa, en un contexto en el cual la fuente de las fluctuaciones proviene del sector externo y de choques en la productividad en cada uno de los sectores. Dada la existencia de una curva de Phillips aumentada por expectativas en el sector no transable, la política monetaria implica un trade-off entre la incertidumbre sobre la inflación y la variabilidad del producto. Se encuentra que este trade-off varía de acuerdo a la medida de inflación incluida en la función de reacción de la autoridad monetaria. Además, se encuentran los siguientes resultados: Una regla de tasa de interés que responde a la inflación no transable, es la más efectiva en reducir la variabilidad del producto, al costo de tener una inflación total más volátil que en los otros dos regímenes estudiados. En el caso de tener un régimen que responde a la inflación transable se genera más volatilidad en el producto con un nivel de volatilidad medio en la inflación. La política más efectiva para reducir la variabilidad de la inflación total, es aquella en que el banco central responde a la inflación total. Dado que este régimen genera una volatilidad media en el producto, puede ser considerado como el mejor régimen en términos de minimización de la variabilidad del producto y de la inflación total.
    Keywords: Inflación Objetivo; Economía Pequeña y Abierta; Modelos de Equilibrio General Estocástico y Dinámico; Colombia.
    JEL: E31 E32 E52 F41
  34. By: Pinar Ayse Yesin (Study Center Gerzensee)
    Abstract: In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.
    Date: 2006–01
  35. By: Miquel Faig; Belén Jerez
    Abstract: We study the effects of inflation in a competitive search model where each buyer's utility is private information, and where money is essential in facilitating trade. The equilibrium is efficient at the Friedman rule, but inflation creates an inefficiency in the terms of trade. Buyers experience a preference shock after they are matched with a seller, and thus they have a precautionary motive for holding money. Sellers, who compete to attract buyers, post non-linear price schedules to screen out different types of buyers. As inflation rises, sellers post relatively flat price schedules which reduce the need for buyers to hold precautionary balances. These price schedules induce buyers with a low desire to consume to purchase inefficiently high quantities because of the low marginal cost of purchasing goods. In contrast, buyers with a high desire to consume purchase inefficiently low quantities as they face binding liquidity constraints. The reduction of precautionary balances as inflation rises allows the model to fit historical US data on velocity and interest rates.
    Keywords: inflation; precautionary money demand; competitive search; private information.
    JEL: E40 E52 D58
  36. By: Doepke, Matthias; Schneider, Martin
    Abstract: This paper shows that a zero-sum redistribution of wealth within a country can have persistent aggregate effects. Motivated by the case of an unanticipated inflation episode, we consider redistribution shocks that shift resources from old to young households. Aggregate effects arise because there are asymmetries in the reaction of winners and losers to changes in wealth. We focus on two sources of asymmetries: differences in the average age of winners and losers, and differences in their labour force status.
    Keywords: aggregate effects; inflation; redistribution
    JEL: D31 D58 E31 E50
    Date: 2006–03
  37. By: Coricelli, Fabrizio; Mucci, Fabio; Revoltella, Debora
    Abstract: Retail lending grew very fast in the New Europe region in the last years, prompting a debate on whether such a rapid growth can be considered sustainable. This paper investigates the main determinants of retail lending growth throughout the region. It tries to identify episodes of credit boom and analyzes the possible correlation between such booms, consumption booms and a country external account position. Estimating an aggregate consumption function, under the assumption of liquidity-constrained households, the paper finds that current trends in household credit markets largely reflect an equilibrium phenomenon, in which household credit increases rapidly from extremely low initial levels, in the context of a relaxation of liquidity constraints. The rate of growth of credit responds to changing market conditions on the supply side and to good prospects for income growth. In such an environment, loosening credit market conditions can have sizable effects on consumption, which, in some cases may create macroeconomic imbalances, both in terms of current account deficits and inflationary pressures.
    Keywords: credit booms; household credit; new members of the European Union
    JEL: D14 E21 E44
    Date: 2006–03
  38. By: Christian Ahlin (Department of Economics Vanderbilt University); Mototsugu Shintani (Department of Economics, Vanderbilt University)
    Abstract: We revisit a foundational theoretical paper in the menu cost literature, Sheshinski and Weiss (1983), one of the few to treat stochastic inflation with persistent deviations from trend. In contrast to the original finding, we find that optimal pricing in this environment entails using different (s,S) bands in high-inflation and low-inflation states of the world. The low-inflation band is strictly contained within the high-inflation band. This revised solution has very different implications from the original one. Firms are generally risk-loving, not risk-averse, with respect to inflation. An increase in the variance of inflation increases price dispersion when inflation is high and decreases price dispersion when inflation is low. On an aggregate level, this optimal pricing would lead to bunching of prices and non-neutrality of money in the setting of Caplin and Spulber (1987). To test the main finding, we construct an establishment-level dataset from the months surrounding Mexico's Tequila crisis, in 1995. In the high-inflation state, price increases are larger and establishments allow their prices to vary more widely around their respective long-run mean relative prices. Cross-establishment price dispersion is lower, but this result seems due to decreased establishment heterogeneity rather than narrower (s,S) bands. Overall, the evidence suggests that establishments employ wider (s,S) bands in the high-inflation state.
    Keywords: (s,S) policy, neutrality of money, optimal pricing, regime switching
    JEL: D40 E31
    Date: 2006–03
  39. By: Moon, Hyungsik Roger; Schorfheide, Frank
    Abstract: This paper derives limit distributions of empirical likelihood estimators for models in which inequality moment conditions provide overidentifying information. We show that the use of this information leads to a reduction of the asymptotic mean-squared estimation error and propose asymptotically valid confidence sets for the parameters of interest. While inequality moment conditions arise in many important economic models, we use a dynamic macroeconomic model as data generating process and illustrate our methods with instrumental variable estimators of monetary policy rules. The assumption that output does not fall in response to an expansionary monetary policy shock leads to an inequality moment condition that can substantially increase the precision with which the policy rule is estimated. The results obtained in this paper extend to conventional GMM estimators.
    Keywords: empirical likelihood estimation; generalized method of movements; inequality moment conditions; instrumental variable estimation; monetary policy rules
    JEL: C32
    Date: 2006–03
  40. By: Kjellberg, David (Department of Economics)
    Abstract: To evaluate measures of expectations I examine and compare some of the most common methods for capturing expectations: the futures method which utilizes financial market prices, the VAR forecast method, and the survey method. I study average expectations on the Federal funds rate target, and the main findings can be summarized as follows: i) the survey measure and the futures measure are highly correlated; the correlation coefficient is 0.81 which indicates that the measures capture the same phenomenon, ii) the survey measure consistently overestimates the realized changes in the interest rate, iii) the VAR forecast method shows little resemblance with the other methods.
    Keywords: Interest rates; expectations; futures; VAR forecasts; survey data
    JEL: E43 E44 E47
    Date: 2006–02
  41. By: Michael Halisassos (School of Economics and Business, Goethe University Frankfurt); Michael Reiter (Dept. of Economics and Business, Universitat Pompeu Fabra)
    Abstract: Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an ‘accountant-shopper’ framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.
    Keywords: Credit Cards, Debt, Self Control, Household Portfolios
    JEL: E21 G11
    Date: 2005–10–09
  42. By: Anders Forslund; Nils Gottfries; Andreas Westermark
    Abstract: How are wages set in an open economy? What role is played by demand pressure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for aggregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.
    Keywords: wage formation, efficiency wage, turnover, bargaining, rent sharing, nominal wage rigidity, exchange rate policy, competitiveness
    JEL: E52 F33 F41 J31 J51 J63 J64
    Date: 2006
  43. By: M. Hashem Pesaran; Ron P. Smith
    Abstract: This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann and Weiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, x*it, and then consistently combined to form a Global VAR (GVAR). It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where x*it variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. This approach has been used in a wide variety of contexts and for a wide variety of purposes. The paper also provides some new results.
    Keywords: Global VAR (GVAR), DSGE models, VARX*
    JEL: C32 E17 F42
    Date: 2006
  44. By: Lloyd-Braga, Teresa; Nourry, Carine; Venditti, Alain
    Abstract: In this paper we consider a Ramsey one-sector model with non-separable homothetic preferences, endogenous labour and productive external effects arising from average capital and labour. We show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labour external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital-labour substitution (including the Cobb-Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of the labour supply are large enough.
    Keywords: capital and labour externalities; endogenous cycles; endogenous labour supply; indeterminacy; infinite-horizon model
    JEL: C62 E32 O41
    Date: 2006–03
  45. By: Luis Eduardo Arango; Carlos Esteban Posada
    Abstract: The long-run component of the Colombian unemployment rate is estimated for the last twenty years. According to the results, the main determinants of the permanent component of the unemployment rate are the real hourly wage, the non-wage labor costs and the rate of capital accumulation. Given the statistical properties of the variables, a cointegration approach was adopted.
    Keywords: Unemployment rate, labor costs, capital accumulation, cointegration
    JEL: J32 J23 J60 E24 C32
  46. By: Gebhard Kirchgässner; Silika Prohl
    Abstract: We examine whether Swiss federal fiscal policy was sustainable over the period from 1900 to 2002. We perform unit root and cointegration tests for federal revenues and expenditures, taking into account a structural shift in the budgetary process related to World War II. We find sustainability over the entire period. However, splitting the sample into two sub-samples before and after World War II, the results do much less support sustainability. Finally, applying the tax smoothing model of BARRO (1979), we show that cyclical fluctuations of the output and changes in expected inflation rate are major determinants of the federal budget deficit over the time period considered.
    Keywords: sustainability, budget deficit, cointegration, structural breaks
    JEL: H62 H63
    Date: 2006
  47. By: Lettau, Martin; Ludvigson, Sydney; Wachter, Jessica
    Abstract: Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the volatility of the aggregate economy. Empirically, we find a strong correlation between low frequency movements in macroeconomic volatility and low frequency movements in the stock market. To model this phenomenon, we estimate a two-state regime switching model for the volatility and mean of consumption growth, and find evidence of a shift to substantially lower consumption volatility at the beginning of the 1990s. We then use these estimates from post-war data to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth. Plausible parameterizations of the model are found to account for a significant portion of the run-up in asset valuation ratios observed in the late 1990s.
    Keywords: equity premium; macroeconomic volatility; regime shifts; stock market boom
    JEL: G12
    Date: 2006–03
  48. By: Christiane Clemens (Economics Department, University of Hannover); Maik Heinemann (Institute of Economics, University of Lüneburg)
    Abstract: This paper discusses the emergence of endogenous redistributive cycles in a stochastic growth model with incomplete asset markets and heterogeneous agents, where agents vote on the degree of progressivity in the tax-transfer-scheme. The model draws from Bénabou (1996) and ties the bias in the distribution of political power to the degree of inequality in the society, thereby triggering redistributive cycles which then give rise to a nonlinear, cyclical pattern of savings rates, growth and inequality over time.
    Keywords: Inequality, growth, political cycles, redistribution, Hopf bifurcation
    JEL: D31 E62 O41 P16
    Date: 2005–03–17
  49. By: Daniel Cardona; Fernando Sánchez-Losada
    Abstract: We analyze the effects of the unemployment benefit system on the economy. In particular, we focus on both the tax structure and the unemployment benefits composition. We show that if the unemployment benefit system is only paid by firms, then employment and production are maximized. Moreover, the way the government contemplates the unemployment benefit system, either as a redistributive or as an insurance institution, is crucial for the dynamics and the equilibria of the economy.
    Keywords: unemployment benefit system, payroll tax, wage tax.
    JEL: E24 E62 H53 J50 J65
    Date: 2004–12
  50. By: Anthony Garratt; Gary Koop; Shaun P. Vahey (Reserve Bank of New Zealand)
    Abstract: A recent revision to the preliminary measurement of GDP(E) growth for 2003Q2 caused considerable press attention, provoked a public enquiry and prompted a number of reforms to UK statistical reporting procedures. In this paper, we compute the probability of "substantial revisions" that are greater (in absolute value) than the controversial 2003 revision. The pre-dictive densities are derived from Bayesian model averaging over a wide set of forecasting models including linear, structural break and regime-switching models with and without heteroskedasticity. Ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures the improvement in the quality of preliminary UK macroeconomic measurements relative to the early 1990s.
    JEL: C11 C32 C53
    Date: 2006–02
  51. By: José Luis Torres
    Abstract: En este trabajo se estiman modelos de corto plazo para pronosticar la inflación de bienes transables y no transables en Colombia. Estos modelos no existían en el Banco Central antes de 2004 y son de gran utilidad para la toma de decisiones de política monetaria. También se evalúan los beneficios, en términos de análisis y de capacidad pronóstico, de utilizar métodos que capturen la posible no linealidad de la curva de Phillips en los datos colombianos. Aunque existen diferentes razones que justifican una relación no lineal de corto plazo entre producto e inflación, cada una de ellas sugiere una forma diferente para la curva. Por esta razón, se utilizan redes neuronales artificiales (ANN) y los mínimos cuadrados flexibles (FLS), procedimientos que tienen la gran ventaja de que no imponen de antemano ninguna forma funcional que pueda sesgar los resultados. Una vez se hace la estimación de los modelos de inflación de transables y de no transables , se comparan los pronósticos de estos dos modelos no lineales con los de dos estimaciones lineales, se analizan las funciones de impulso respuesta de cada uno de los modelos y además se realiza una prueba de no linealidad. Se encuentra que la curva de Phillips en Colombia podría ser no lineal y por tanto resulta pertinente considerar modelos no lineales para su estimación. Finalmente, con estos modelos se intenta explicar el proceso de desinflación que ha vivido la economía colombiana en los últimos años tanto en la inflación de transables, como en la de no transables.
    Date: 2006–01–01
  52. By: Jan Zápal; Ondrej Schneider
    Abstract: In this paper, we track fiscal authority behaviour in the ten new EU member states (NSM) in the period which immediately preceded their EU accession. We first present basic stylized facts about public budgets of those countries. The paper then analyses reasons which led to periods of fiscal consolidation in the NMS. Secondly, we also present evidence from Pre-Accession Economic and Convergence programmes of NMSs concerning planned steps of the fiscal authorities and try to contrast them with reality. Throughout the paper, we identify two different groups of countries which significantly differ in their fiscal behaviour. On the one side is the group of Baltic countries, displaying strong reform effort and responsible fiscal policy usually supported by strong economic growth. On the second extreme, we identify fiscally irresponsible central European countries and two Mediterranean islands displaying lax fiscal policies and little political will to implement costly reforms. Somewhere between stand Slovenia and Slovakia, first without a strong reform performance yet with budget deficits in compliance with the Stability and Growth Pact and later with recent reform efforts. Our key finding concerning the behaviour of the fiscally irresponsible group of countries is that their current problems with high budget deficits originate in their lax approach and inability to implement politically costly expenditure cuts which is apparent from their revision of budget plans and endeavour to shift envisioned deficit reductions into the future. Yet, this strategy has led those countries to an uncomfortable position vis-à-vis European fiscal rules.
    Keywords: fiscal policy, new member states, consolidations, Stability and Growth Pact, excessive deficit procedure, convergence programmes
    JEL: E60 E62 H60 H87
    Date: 2006
  53. By: Troy Matheson (Reserve Bank of New Zealand)
    Abstract: Stock and Watson (1999) show that the Phillips curve is a good forecasting tool in the United States. We assess whether this good performance extends to two small open economies, with relatively large tradable sectors. Using data for Australia and New Zealand, we find that the open economy Phillips curve performs poorly relative to a univariate autoregressive benchmark. However, its performance improves markedly when sectoral Phillips curves are used which model the tradable and non-tradable sectors separately. Combining forecasts from these sectoral models is much better than obtaining forecasts from a Phillips curve estimated on aggregate data. We also find that a diffusion index that combines a large number of indicators of real economic activity provides better forecasts of non-tradable inflation than more conventional measures of real demand, thus supporting Stock and Watson's (1999) findings for the United States.
    JEL: C53 E31
    Date: 2006–02
  54. By: Luis Eduardo Arango; Carlos Esteban Posada
    Abstract: Se estima el componente de largo plazo de la tasa de desempleo en Colombia para los últimos veinte años. De acuerdo con los resultados, los principales determinantes del componente permanente de la tasa de desempleo son el salario real por hora, los costos laborales no salariales y la tasa de acumulación de capital. Dadas las propiedades estadísticas de las variables se adoptó un enfoque de cointegración.
    Keywords: Tasa de desempleo, costos laborales distintos del salario, acumulación de capital, cointegración
    JEL: J32 J23 J60 E24 C32
  55. By: Sumit Agarwal (Bank of America); Souphala Chomsisengphet (Office of the Comptroller of the Currency); Chunlin Liu (University of Nevada - Reno, Finance Department); Nicholas S. Souleles (University of Pennsylvania)
    Abstract: A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions. We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice. The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa. We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching.
    Keywords: Consumption-Saving, Borrowing, Consumer Finance, Consumer Credit, Credit Cards, Banking
    JEL: G11 G21 E21 E51
    Date: 2005–11–07
  56. By: Suhejla Hoiti; Esfandiar Maasoumi; Michael McAleer; Daniel Slottje
    Abstract: As U.S. Treasury securities carry the full faith and credit of the U.S. government, they are free of default risk. Thus, their yields are risk-free rates of return, which allows the most recently issued U.S. Treasury securities to be used as a benchmark to price other fixedincome instruments. This paper analyzes the time series properties of interest rates on U.S. Treasury benchmarks and related debt instruments by modelling the conditional mean and conditional volatility for weekly yields on 12 Treasury Bills and other debt instruments for the period 8 January 1982 to 20 August 2004. The conditional correlations between all pairs of debt instruments are also calculated. These estimates are of interest as they enable an assessment of the implications of modelling conditional volatility on forecasting performance. The estimated conditional correlation coefficients indicate whether there is specialization, diversification or independence in the debt instrument shocks. Constant conditional correlation estimates of the standardized shocks indicate that the shocks to the first differences in the debt instrument yields are generally high and always positively correlated. In general, the primary purpose in holding a portfolio of Treasury Bills and other debt instruments should be to specialize on instruments that provide the largest returns. Tests for Stochastic Dominance are consistent with these findings, but find somewhat surprising rankings between debt instruments with implications for portfolio composition. 30 year treasuries, Aaa bonds and mortgages tend to dominate other instruments, at least to the second order.
    Keywords: Treasury bills, debt instruments, risk, conditional volatility, conditional correlation, asymmetry, specialization, diversification, independence, forecasting.
    Date: 2005–10
  57. By: Pijoan-Mas, Josep
    Abstract: Habit formation has been proposed as a possible solution to the equity premium puzzle. This paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits and consumption. I find that habit formation does indeed increase the equity premium. However, contrary to earlier results, the habit hypothesis does not imply a price for risk as big as the one measured in the data. There are three reasons for this. First, households in a habits economy modify their consumption/savings decision. Second, they modify their portfolio choice. These two changes in behavior diminish the consumption fluctuations faced by households. And third, the composition of the set of agents pricing risk in the economy changes so that relatively better self-insured households end up pricing risk.
    Keywords: equity premium; habit formation; incomplete markets
    JEL: C68 D52 E21 G12
    Date: 2006–03
  58. By: Miquel Faig
    Abstract: This paper provides a tractable search model with divisible money that encompasses the two frameworks currently used in the literature. Individuals belong to many villages. Inside a village, individuals know each other so financial contracts are feasible. Money is essential to facilitate trade across villages. When financial markets inside a village are complete, the model generalizes the framework advanced by Lagos and Wright (2005) without having to assume quasi-linear preferences. Likewise, complete financial markets in each village substitutes for the representative household in the framework advanced by Shi (1997). The paper describes sets of financial arrangements that complete the markets inside the villages. In general, these financial arrangements include a combination of credit and insurance. However, if individuals choose period by period the trading role they play outside their village, then under some parametric restrictions either a lottery or a risk-free bond market are sufficient.
    Keywords: monetary search, divisible money
    JEL: E40
  59. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    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) hetero- geneity 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.
    Keywords: capital flows; current account deficits; exchange rates; FDI; global portfolios and equilibrium; growth and financial development asymmetries; interest rates; intermediation rents
    JEL: E0 F3 F4 G1
    Date: 2006–03
  60. By: Moen, Espen R; Rosen, Asa
    Abstract: This paper examines competitive search equilibrium when workers' effort choice and 'type' are private information. We derive a modified Hosios Rule determining the allocation of resources, and analyze how private information influences the responsiveness of the unemployment rate to changes in macroeconomic variables. Most importantly, private information increases the responsiveness of the unemployment rate to changes in the general (type- and effort independent) productivity level. If the changes also affect the information structure, the responsiveness of the unemployment rate may be large, even if the changes in expected productivity are small.
    Keywords: private information; search; unemployment; wage rigidity
    JEL: E30 J30 J60
    Date: 2006–03
  61. 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.
    Date: 2006–02–28
  62. By: Hernando Vargas Herrera; Dpto de Estabilidad Financiera
    Abstract: El presente trabajo ilustra cómo los altos niveles de deuda pública, a través de los riesgos de mercado, pueden convertirse en una restricción para la ejecución de la política monetaria. Dependiendo de donde se financie el sector público, un nivel grande de deuda pública se refleja en una importante exposición de éste al riesgo cambiario y/o en una exposición sustancial del sistema financiero a los riesgos de mercado. Ante esta situación, un choque a la cuenta de capitales que genere una fuerte depreciación de la moneda y una caída en los precios de los títulos de deuda pública podría restringir las acciones de la autoridad monetaria. Una política restrictiva encaminada a cumplir las metas inflacionarias podría generar pérdidas importantes por valoración en el portafolio de las instituciones financieras, afectando de esta manera la estabilidad del sistema. El documento discute por qué los riesgos de mercado de la deuda pública son un problema latente en Colombia a la vez que se discute cómo podría responder el banco central ante una salida de capitales.
    Keywords: Política monetaria, riesgos de mercado.
    JEL: E44 E52
  63. By: Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
    Abstract: Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
    Keywords: elections; event study; partisan effects; political economy
    JEL: D72 E3 E6 G13 G14 H6
    Date: 2006–04
  64. By: Miquel Faig; Xiuhua Huangfu
    Abstract: This is a comment on the work of Rocheteau and Wright (2005) who have recently introduced competitive search into monetary economics. We extend their work by eliminating the restriction that the fees market makers charge to enter a submarket must be either non-negative or identical for buyers and sellers. Without this restriction, buyers pay a positive fee to enter the submarket they visit and nothing else when they meet a seller. Sellers are remunerated by the market makers from the entry fees collected from the buyers. This trading arrangement allows buyers to perfectly predict their expenses, so the opportunity cost of holding idle money balances is eliminated.
    JEL: E40
  65. By: Panos Parpas (Imperial College, London); Berc Rustem (Imperial College, London); Volker Wieland (University of Frankfurt); Stan Zakovic (Imperial College London)
    Abstract: In this paper, we consider expected value, variance and worst-case optimization of nonlinear models. We present algorithms for computing optimal expected values, and variance, based on iterative Taylor expansions. We establish convergence and consider the relative merits of policies beaded on expected value optimization and worst-case robustness. The latter is a minimax strategy and ensures optimal cover in view of the worst-case scenario(s) while the former is optimal expected performance in a stochastic setting. Both approaches are used with a macroeconomic policy model to illustrate relative performances, robustness and trade-offs between the strategies.
    JEL: C61 E43
    Date: 2006–01–13
  66. By: Luigi Guiso (University of Sassari, University of Chicago & CEPR); Tullio Jappelli (University of Salerno, CSEF, and CEPR)
    Abstract: The paper documents lack of awareness of financial assets in the 1995 and 1998 Bank of Italy Surveys of Household Income and Wealth. It then explores the determinants of awareness, and finds that the probability that survey respondents are aware of stocks, mutual funds and investment accounts is positively correlated with education, household resources, long-term bank relations and proxies for social interaction. Lack of financial awareness has important implications for understanding the stockholding puzzle and for estimating stock market participation costs.
    Keywords: Financial Information, Portfolio Choice
    JEL: E2 D8 G1
    Date: 2005–09–06
  67. By: William Chan; Hao Li; Wing Suen
    Abstract: When employers cannot tell whether a school truly has many good students or just gives easy grades, schools have an incentive to inflate grades to help mediocre students, despite concerns about preserving the value of good grades for good students. We construct a signaling model where grades are inflated in equilibrium. The inability to commit to an honest grading policy reduces the informativeness of grades and hurts schools. Grade inflation by one school makes it easier for another school to fool the market with inflated grades. Easy grades are strategic complements, providing a channel to make grade exaggeration contagious.
  68. By: Yannis Bilias (University of Cyprus); Dimitris Georgarakos (Goethe University Frankfurt); Michael Haliassos (Goethe University Frankfurt)
    Abstract: Wider participation in stockholding is often presumed to reduce wealth inequality. We measure and decompose changes in US wealth inequality between 1989 and 2001, a period of considerable spread of equity culture. Inequality in equity wealth is found to be important for net wealth inequality, despite equity's limited share. Our findings show that reduced wealth inequality is not a necessary outcome of the spread of equity culture. We estimate contributions of stockholder characteristics to levels and inequality in equity holdings, and we distinguish changes in configuration of the stockholder pool from changes in the influence of given characteristics. Our estimates imply that both the 1989 and the 2001 stockholder pools would have produced higher equity holdings in 1998 than were actually observed for 1998 stockholders. This arises from differences both in optimal holdings and in financial attitudes and practices, suggesting a dilution effect of the boom followed by a cleansing effect of the downturn. Cumulative gains and losses in stockholding are shown to be significantly influenced by length of household investment horizon and portfolio breadth but, controlling for those, use of professional advice is either insignificant or counterproductive.
    Keywords: Wealth distribution, inequality, stockholding, equity culture
    JEL: E21 G11
    Date: 2005–01–20
  69. By: Malik, Adeel; Temple, Jonathan
    Abstract: This paper examines the structural determinants of output volatility in developing countries, and especially the roles of geography and institutions. We investigate the volatility effects of market access, climate variability, the geographic predisposition to trade, and various measures of institutional quality. We find an especially important role for market access: remote countries are more likely to have undiversified exports and to experience greater volatility in output growth. Our results are based on Bayesian methods that allow us to address formally the problem of model uncertainty and to examine robustness across a wide range of specifications.
    Keywords: Bayesian model averaging; geography; institutions; volatility
    JEL: E30 O11
    Date: 2006–02
  70. By: Robert A. Blecker (Department of Economics, American University)
    Abstract: This paper analyzes the effects of the real value of the dollar on aggregate investment in the US domestic manufacturing sector, using annual time-series data for 1973-2003. Estimates of investment and profit functions imply a total elasticity of between about -0.8 and -1.1 for the long-run effect of a rise in the real value of the dollar on US manufacturing investment, including both the direct effect on investment and the indirect effects via profits. These are much larger negative estimates than have been obtained in previous studies. This study also shows that models of investment that omit either exchange rates or profit variables are subject to omitted variable bias, and suggests that previous studies using panel data may have overemphasized cross-sectional differences in industry responses to exchange rate changes and therefore have underestimated the overall negative impact of dollar appreciation on US manufacturing investment.
    Keywords: investment, manufacturing, exchange rate, US dollar, profits, US economy
    JEL: E22 F31 L60 E25
    Date: 2005–08

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