nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒04‒29
77 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary and fiscal policy coordination and macroeconomic stabilization. A theoretical analysis. By L. Lambertini; R. Rovelli
  2. Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps By Ragna Alstadheim; Dale Henderson
  3. Fiscal multipliers and policy coordination By Gauti B. Eggertsson
  4. Firm-specific capital and welfare By Tommy Sveen; Lutz Weinke
  5. Inflation targeting under imperfect knowledge By Athanasios Orphanides; John C. Williams
  6. Which inflation to target? A small open economy with sticky wages indexed to past inflation By Alessia Campolmi
  7. Term Structure Rules for Monetary Policy By Mariano Kulish
  8. Interpreting Euro Area Inflation at High and Low Frequencies By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  9. An Equilibrium Approach to the Term Structure of Interest rates with the Interaction between Monetary and Fiscal Policy. By M. Marzo
  10. Monetary and Fiscal Policy Interactions: the Impact on the Term Structure of Interest Rates. By M. Marzo
  11. Evaluating Monetary Policy Regimes: the Role of Nominal Rigidities. By M. Marzo
  12. Optimal Fiscal Stabilization Policy With Credible Central Bank Independence. By L. Lambertini; R. Rovelli
  13. The euro's trade effect By Robert J. Tetlow; Peter von zur Muehlen
  14. Trends and cycles in the euro area: how much heterogeneity and should we worry about it? By Domenico Giannone; Lucrezia Reichlin
  15. The Dynamics of European Inflation Expectations By Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
  16. The road to price stability By Athanasios Orphanides
  17. On the Dynamic Consistency of Optimal Monetary Policy By R. Cellini; L. Lambertini
  18. Real rigidities and nominal price changes By Peter J. Klenow; Jonathan L. Willis
  19. Asymmetric Information and Monetary Policy in Common Currency Areas. By L. Bottazzi; P. Manasse
  20. AN ASIAN MONETARY UNION? By Hsiao Chink Tang
  21. The Asymmetric Effects of Oil Shocks on Output Growth: A Markov-Switching Analysis for the G-7 Countries By Matteo Manera; Alessandro Cologni
  22. An Idealized View of Financial Intermediation By Carolyn Sissoko
  23. Interest Rate Rules and Inflation Targeting in Three Transition Countries. By R. Golinelli; R. Rovelli
  24. The Friedman Rule: A Reinterpretation By Carolyn Sissoko
  25. On the Stability of the German Beveridge Curve: A Spatial Econometric Perspective By Reinhold Kosfeld; Christian Dreger; Hans-Friedrich Eckey
  26. Trend Breaks, Long-Run Restrictions and the Contractionary Effects of Technology Improvements By Fernald, John
  27. Human Capital and Political Business Cycles By Akhmedov Akhmed
  28. Methods for Robust Control By Dennis, Richard; Leitemo, Kai; Söderström, Ulf
  29. Money and modern banking without bank runs By David R. Skeie
  30. Forecasting professional forecasters By Eric Ghysels; Jonathan H. Wright
  31. The Reform of the Fiscal Institutions in Latin America By Eduardo A. Lora; Mauricio Cardenas
  32. Volatility accounting: a production perspective on increased economic stability By Kevin J. Stiroh
  34. The daily liquidity effect By Daniel L. Thornton
  35. Short-Term Credit: A Monetary Channel Linking Finance to Growth By Carolyn Sissoko
  36. Real-time model uncertainty in the United States: the Fed from 1996-2003 By Robert J. Tetlow; Brian Ironside
  38. The yield curve and predicting recessions By Jonathan H. Wright
  39. Transparency, expectations, and forecasts By Andrew Bauer; Robert A. Eisenbeis; Daniel F. Waggoner; Tao Zha
  40. Hysteresis and Persistence in the Course of Unemployment : The EU and US Experience By Christian Dreger; Hans-Eggert Reimers
  41. Another look at long-horizon uncovered interest parity By Antonio Montañés; Marcos Sanso-Navarro
  42. Capital Flows and Monetary Policy By Javier Guillermo Gómez
  43. The 2006 Economic Report of the President: Comment on Chapter One (The Year in Review) and Chapter Six (The Capital Account Surplus) By Martin Feldstein
  44. Product Market Reforms, Labour Market Institutions and Unemployment By Griffith, Rachel Susan; Harrison, Rupert; Macartney, Gareth
  45. A two-sector model of the business cycle: a preliminary analysis. By G. Gozzi; F. Nardini
  46. The Rationality of EIA Forecasts under Symmetric and Asymmetric Loss By Maximilian Auffhammer
  47. La estimación de un indicador de brecha del producto a partir de encuestas y datos reales By Norberto Rodríguez N; José Luis Torres; Andrés Velasco M.
  49. Cyclical differences emerge in border city economies By Jesus Canas; Roberto Coronado; Jose Joaquin Lopez
  50. The topology of interbank payment flows By Kimmo Soramaki; Morten L. Bech; Jeffrey Arnold; Robert J. Glass; Walter Beyeler
  51. International financial integration through the law of one price By Van Horen, Neeltje; Schmukler, Sergio L.; Levy Yeyati, Eduardo
  52. Measuring U.S. credit card borrowing: an analysis of the G.19's estimate of consumer revolving credit By Mark Furletti; Christopher Ody
  53. Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates By Zsolt Darvas; Gábor Rappai; Zoltán Schepp
  54. Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan By Oscar Bernal
  55. On the Time Stability of the Output-Capital Ratio. By A. Scorcu
  56. Endogenous Aggregate Elasticity of Substitution By Chris Papageorgiou; Kaz Miyagiwa
  57. Estudio de la tasa de cambio dólar euro By Ariño, Miguel A.; Canela, Miguel A.
  58. Friction and the Multiplicity of Equilibria By Larry Karp; Thierry Paul
  59. How Much Information should Interest Rate-Setting Central Banks Reveal? By Pierre Gosselin; Aileen Lotz; Charles Wyplosz
  60. Exchange Rate Volatility and Productivity Growth: The Role of Financial Development By Aghion, Philippe; Bacchetta, Philippe; Rancière, Romain; Rogoff, Kenneth
  61. On Monopoly Power and Ramsey Taxation By Selim, Sheikh Tareq
  62. Forecasting Long-Term Government Bond Yields: An Application of Statistical and AI Models By Marco Castellani; Emanuel Santos
  63. Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly? By Sita Nataraj Slavov
  64. The Fractional Ornstein-Uhlenbeck Process: Term Structure Theory and Application By Høg, Espen P.; Frederiksen, Per H.
  65. Wage Inequality in Russia (1994–2003) By Lukyanova Anna
  66. Collateralized borrowing and life-cycle portfolio choice By Paul Willen; Felix Kubler
  67. The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China By Xiaoqiang Cheng; Hans Degryse
  68. Chapter 17 of Keynes' General Theory: The Mystery Unveiled By Franco Donzelli
  69. Volatility Regimes in Central and Eastern European Countries' Exchange Rates By Frömmel, Michael
  70. Reform Redux: Measurement, Determinants and Reversals By Nauro F. Campos; Roman Horváth
  71. Effects of Trade Liberalization on Domestic Prices: Some Evidence from Tunisian Manufacturing By Saggay, Ali; Heshmati, Almas; Adel Dhif, Mohamed
  72. Excess burden and the cost of inefficiency in public services provision By António Afonso; Vítor Gaspar
  73. The industrial organisation of economic policy preparation in the Netherlands By Butter, Frank A.G. den
  74. The Long-Run Impact of ICT By Francesco VENTURINI
  75. financial contagion and asset price dynamics. By R. Andergassen
  76. Contribution of ICT to the Chinese Economic Growth By Heshmati, Almas; Yang, Wanshan
  77. Enhanced Cooperation in an Enlarged EU By Joachim Ahrens; Renate Ohr; Götz Zeddies

  1. By: L. Lambertini; R. Rovelli
  2. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Dale Henderson (Federal Reserve Board)
    Abstract: We consider standard monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There are also below-target equilibria (BTE) with inflation always below target and constant asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary or sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE, some which are monotonic in inflation but all of which are non-differentiable at a point. For standard monetary-policy rules, there are plausible fiscal policies that insure uniqueness by precluding BTE; those policies exclude perpetual surpluses and, possibly, perpetual balanced budgets.
    Keywords: Zero bound, liquidity trap, inflation targeting, determinancy
    JEL: E31 E41 E52 E62
    Date: 2006–04–18
  3. By: Gauti B. Eggertsson
    Abstract: This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is "goal independent," the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression.
    Keywords: Fiscal policy ; Government spending policy ; Deficit financing ; Monetary policy
    Date: 2006
  4. By: Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University)
    Abstract: What are the consequences for monetary policy design implied by the fact that price setting and investment takes typically place simultaneously at the firm level? To address this question we analyze simple (constrained) optimal interest rate rules in the context of a dynamic New Keynesian model featuring firm-speci.c capital accumulation as well as sticky prices and wages à la Calvo. We make the case for Taylor type rules. They are remarkably robust in the sense that their welfare implications do not appear to hinge neither on the speci.c assumptions regarding capital accumulation that are used in their derivation nor on the particular definition of natural output that is used to construct the output gap. On the other hand we find that rules prescribing that the central bank does not react to any measure of real economic activity are not robust in that sense.
    Keywords: Monetary policy, Sticky prices, Aggregate investment
    JEL: E22 E31 E52
    Date: 2006–04–18
  5. By: Athanasios Orphanides; John C. Williams
    Abstract: A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank's goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.
    Date: 2006
  6. By: Alessia Campolmi
    Abstract: In a closed economy context there is common agreement on price inflation stabilization being one of the objects of monetary policy. Moving to an open economy context gives rise to the coexistence of two measures of inflation: domestic inflation (DI) and consumer price inflation (CPI). Which one of the two measures should be the target variable? This is the question addressed in this paper. In particular, I use a small open economy model to show that once sticky wages indexed to past CPI inflation are introduced, a complete inward looking monetary policy is no more optimal. I first, derive a loss function from a second order approximation of the utility function and then, I compute the fully optimal monetary policy under commitment. Then, I use the optimal monetary policy as a benchmark to compare the performance of different monetary policy rules. The main result is that once a positive degree of indexation is introduced in the model the rule performing better (among the Taylor type rules considered) is the one targeting wage inflation and CPI inflation. Moreover this rule delivers results very close to the one obtained under the fully optimal monetary policy with commitment.
    Keywords: Inflation, open economy, sticky wages, indexation
    JEL: E12 E52
    Date: 2006–03
  7. By: Mariano Kulish (Reserve Bank of Australia)
    Abstract: This paper studies two types of interest rate rules that involve long-term nominal interest rates in the context of a New Keynesian model. The first type considers the possibility of adding longer-term rates to the list of variables the central bank reacts to in setting its short-term rate. The second type considers Taylor-type rules that are expressed in terms of interest rates of different maturities, which are operationally equivalent to more complex rules expressed in terms of the short-term rate. It is shown that both types of rules can give rise to a unique rational expectations equilibrium in large regions of the policy-parameter space. The normative evaluation shows that under certain preferences of the monetary authority, policy rules of the second type produce better results than the standard Taylor-type rule.
    Keywords: term structure of interest rates; monetary policy rules
    JEL: E43 E52 E58
    Date: 2006–04
  8. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: Several authors have recently interpreted the ECB's two-pillar framework as separate approaches to forecast and analyse inflation at different time horizons or frequency bands. The ECB has publicly supported this understanding of the framework. This paper presents further evidence on the behaviour of euro area inflation using band spectrum regressions, which allow for a natural definition of the short and long run in terms of specific frequency bands, and causality tests in the frequency domain. The main finding is that variations in inflation are well explained by low-frequency movements of money and real income growth and high-frequency fluctuations of the output gap.
    Keywords: frequency domain; inflation; money growth; quantity theory; spectral regression
    JEL: C22 E3 E5
    Date: 2006–04
  9. By: M. Marzo
  10. By: M. Marzo
  11. By: M. Marzo
  12. By: L. Lambertini; R. Rovelli
  13. By: Robert J. Tetlow (Federal Reserve Board, 20th and C Streets, NW, Washington, D.C. 20551, USA.); Peter von zur Muehlen (von zur Muehlen & Associates, Vienna, VA 22181, USA.)
    Abstract: In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE.
    Keywords: monetary policy; learning; E-stability; learnability; robust control.
    JEL: C6 E5
    Date: 2006–03
  14. By: Domenico Giannone (European Centre for Advanced Research in Economics and Statistics (ECARES) Université Libre de Bruxelles, CP 114, Av. F.D. Roosevelt, 50. B-1050 Brussels, Belgium); Lucrezia Reichlin (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.)
    Abstract: Not so much and we should not, at least not yet.
    Keywords: International Business Cycles, Euro Area, Risk Sharing, European Integration, Income Insurance.
    JEL: E32 C33 C53 F2 F43
    Date: 2006–03
  15. By: Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
    Abstract: We investigate the relevance of the Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
    Keywords: Inflation expectations, sticky information, inflation persistence
    JEL: D84 E31
    Date: 2006
  16. 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
  17. By: R. Cellini; L. Lambertini
  18. By: Peter J. Klenow; Jonathan L. Willis
    Abstract: A large literature seeks to provide microfoundations of price setting for macro models. A challenge has been to develop a model in which monetary policy shocks have the highly persistent effects on real variables estimated by many studies. Nominal price stickiness has proved helpful but not sufficient without some form of "real rigidity" or "strategic complementarity." We embed a model with a real rigidity a la Kimball (1995), wherein consumers flee from relatively expensive products but do not flock to inexpensive ones. We estimate key model parameters using micro data from the U.S. CPI, which exhibit sizable movements in relative prices of substitute products. When we impose a significant degree of real rigidity, fitting the micro price facts requires very large idiosyncratic shocks and implies large movements in micro quantities.
    Date: 2006
  19. By: L. Bottazzi; P. Manasse
  20. By: Hsiao Chink Tang
    Abstract: This study empirically examines whether a group of 12 Asian countries is suitable to form an Asian Monetary Union (AMU). The criteria of suitability are based on the Optimum Currency Area (OCA) literature whereby countries experiencing symmetrical shocks, have smaller size of shock and faster speed of adjustment are considered as potentially good partners in a monetary union. The Blanchard and Quah (BQ) structural vector autoregression (SVAR) methodology is used to identify the demand and supply shocks. The overall finding provides no support for the formation of a full-fledged AMU. Instead, what appears more feasible initially is the formation of smaller sub-groupings within the region.
    Date: 2006–04
  21. By: Matteo Manera (University of Milan-Bicocca and Fondazione Eni Enrico Mattei); Alessandro Cologni (IMT Institute for Advanced Studies)
    Abstract: In this paper we specify and estimate different Markov-switching (MS) regime autoregressive models. The empirical performance of the univariate MS models used to describe the switches between different economic regimes for the G-7 countries is in general not satisfactory. We extend these models to verify if the inclusion of asymmetric oil shocks as an exogenous variable improves the ability of each specification to identify the different phases of the business cycle for each country under scrutiny. Following the wide literature on this topic, we have considered six different definitions of oil shocks: oil price changes, asymmetric transformations of oil price changes, oil price volatility, and oil supply conditions. We measure the persistence of each economic regime, as well as the ability of each MS model to detect the business cycle dates as described by widely acknowledged statistical institutions. Our empirical findings can be summarized as follows. First, the null hypothesis of linearity against the alternative of a MS specification is always rejected by the data. This suggests that regime-dependent models should be used if a researcher is interested in obtaining statistically adequate representations of the output growth process. Second, three-regime MS models typically outperform the corresponding two-regime specifications in describing the business cycle features for each country. Third, the introduction of different oil shock specifications is never rejected. Fourth, positive oil price changes, net oil price increases and oil price volatility are the oil shock definitions which contribute to a better description of the impact of oil on output growth. Finally, models with exogenous oil variables generally outperform the corresponding univariate specifications which exclude oil from the analysis.
    Keywords: Oil shocks, Output growth, Markov-switching models
    JEL: E31 E32 E52 Q41
    Date: 2006–02
  22. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This paper develops a monetary model based on a standard infinite horizon general equilibrium endowment economy by relaxing the general equilibrium assumption that every agent buys and sells simultaneously. The paper finds that fiat money can implement a Pareto optimum only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue credit cards to consumers can resolve the monetary problem without type-specific policy. We argue that our idealized financial environment is a starting point for studying the monetary use of credit.
    JEL: E5
    Date: 2006–03
  23. By: R. Golinelli; R. Rovelli
  24. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint the Friedman Rule holds, but can be implemented only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. The Friedman Rule is reinterpreted as a statement that fiat money is inferior to credit as a form of money.
    JEL: E4 E5
    Date: 2006–03
  25. By: Reinhold Kosfeld (University of Kassel); Christian Dreger (DIW Berlin and IZA Bonn); Hans-Friedrich Eckey (University of Kassel)
    Abstract: In this paper, the framework of the aggregated Beveridge curve is used to investigate the effectiveness of the job matching process using German regional labour market data. For a fixed matching technology, the Beveridge curve postulates a negative relationship between the unemployment rate and the rate of vacancies, which is efficiently estimated using spatial econometric techniques. The eigenfunction decomposition approach suggested by Griffith (2000, 2003) is the workhorse to identify spatial and nonspatial components. As the significance of the spatial pattern might vary over time, inference is conducted on the base of a spatial SUR model. Shifts of the Beveridge curve will affect its position, and time series estimates on this parameter are obtained. In contrast to findings for the US and the UK, the results provide serious indication that the degree of job mismatch has increased over the last decade. Although the outward shift of the Beveridge curve can be explained by structural factors such as the evolution of long term unemployment, it is also affected by business cycle fluctuations. The role of cyclical factors challenges the stability property of the curve. The relationship might be inappropriate to investigate policy measures directed to improve the mismatch, such as labour market reforms.
    Keywords: Beveridge curve, job mismatch, business cycle, long-term unemployment, spatial SUR model
    JEL: C21 C23 E24 E32
    Date: 2006–04
  26. By: Fernald, John
    Abstract: Structural vector-autoregressions with long-run restrictions are extraordinarily sensitive to low-frequency correlations. This paper explores this sensitivity analytically and via simulations, focusing on the contentious issue of whether hours worked rise or fall when technology improves. Recent literature finds that when hours per person enter the VAR in levels, hours rise; when they enter in differences, hours fall. However, once we allow for (statistically and economically plausible) trend breaks in productivity, the treatment of hours is relatively unimportant: Hours fall sharply on impact following a technology improvement. The issue is the common high-low-high pattern of hours per capita and productivity growth since World-War II. Such low-frequency correlation almost inevitably implies a positive estimated impulse response. The trend breaks control for this correlation. In addition, the specification with breaks can easily 'explain' (or encompass) the positive estimated response when the breaks are omitted; in contrast, the no-breaks specification has more difficulty explaining the negative response when breaks are included. More generally, this example suggests a need for care in applying the long-run-restrictions approach.
    Keywords: business cycles; structural change; technology
    JEL: E24 E32 O47
    Date: 2006–04
  27. By: Akhmedov Akhmed
    Abstract: Classical theory considers political business cycle as a result of either opportunistic behavior of government (opportunistic cycle) or aiming policy on certain constituency (partisan cycle). In this paper, we propose an alternative explanation of the phenomenon of political business cycle — experience of government. We propose an illustration that shows that elections infer cycles without any opportunism or ideology of incumbents. We also build a model with endogenous ego-rent. The model explains a channel to increase incentives, when none has commitment — governors need to develop skills to increase their value for public and increase probability to get re-elected. Using fiscal monthly data of Russian regions from 1996 to 2004, we got evidence both of positive effect of experience on performance and opportunistic component of the cycle. We also got evidence of diminishing return on experience.
    Keywords: Russia, elections, opportunistic business cycle, experience, sunk cost, Russian regions
    JEL: D72 E32 H72 P16
    Date: 2006–04–26
  28. By: Dennis, Richard; Leitemo, Kai; Söderström, Ulf
    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 Söderlind, 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 state-space form. Interestingly, because state-space forms and structural forms are not unique the two approaches do not necessarily return the same equilibria for 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 the conditional means of the shock processes.
    Keywords: misspecification; optimal policy; robust control
    JEL: C61 E52 E58
    Date: 2006–04
  29. By: David R. Skeie
    Abstract: In the literature, bank runs take the form of withdrawals of real demand deposits that deplete a fixed reserve of goods in the banking system. However, in a modern banking system, large withdrawals take the form of electronic payments that shift balances among banks within a clearinghouse system, with no analog of a depletion of a scarce reserve. In a model of nominal demand deposits repayable in money within a clearinghouse, I show that interbank lending and monetary prices imply that traditional bank runs do not occur. This finding suggests that deposit insurance may not be needed to prevent bank runs in a modern economy.
    Keywords: Financial crises ; Clearinghouses (Banking) ; Bank deposits ; Bank reserves
    Date: 2006
  30. By: Eric Ghysels; Jonathan H. Wright
    Abstract: Surveys of forecasters, containing respondents' predictions of future values of growth, inflation and other key macroeconomic variables, receive a lot of attention in the financial press, from investors, and from policy makers. They are apparently widely perceived to provide useful information about agents' expectations. Nonetheless, these survey forecasts suffer from the crucial disadvantage that they are often quite stale, as they are released only infrequently, such as on a quarterly basis. In this paper, we propose methods for using asset price data to construct daily forecasts of upcoming survey releases, which we can then evaluate. Our methods allow us to estimate what professional forecasters would predict if they were asked to make a forecast each day, making it possible to measure the effects of events and news announcements on expectations. We apply these methods to forecasts for several macroeconomic variables from both the Survey of Professional Forecasters and Consensus Forecasts.
    Date: 2006
  31. By: Eduardo A. Lora (Research Department, Inter-American Development Bank); Mauricio Cardenas (Fedesarrollo)
    Abstract: Fiscal deficits on average only 1.4% of GDP; debt coefficients on the decline; early debt repayments to the International Monetary Fund and massive repurchases of Brady bonds that 15 years ago were the last salvation for overly endebted governments. This doesn't look like Latin America, the region with the strongest tradition of macroeconomic instability in the world and the longest history of noncompliance with its public debt commitments. However, these are some of the fiscal events that have been occurring since the beginning of 2006, a particularly favorable time for the region (Available only in Spanish).
    Keywords: Fiscal institutions; budget institutions; decentralization; tax policy; Latin America.
    Date: 2006–04
  32. By: Kevin J. Stiroh
    Abstract: This paper examines the declining volatility of U.S. output growth from a production perspective. At the aggregate level, increased output stability reflects decreased volatility in both labor productivity growth and hours growth as well as a significant decline in the correlation. The decline in output volatility can also be traced to less volatile labor input and total factor productivity (TFP) growth and the smaller covariance between them. This relationship suggests that labor market changes such as increased labor market flexibility are an important source of increased output stability. At the industry level, the decline in volatility appears widespread, with about 80 percent of component industries showing smaller contributions to aggregate output volatility after 1984, although most of the aggregate decline reflects smaller covariances between industries. Across industries, there is strong evidence of a decline in the correlation between hours growth and labor productivity growth, suggesting again that the labor market dynamics are part of the decline in U.S. output volatility.
    Keywords: Production (Economic theory) ; Productivity ; Labor productivity ; Labor market ; Industries
    Date: 2006
  33. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks’ decisions and their consequences.
    Date: 2006–04
  34. By: Daniel L. Thornton
    Abstract: Motivated, on the one hand, by the belief that the Fed controls the short-term rate through open market operations, and on the other, by "the lack of convincing proof that this is what happens," Hamilton (1997) suggested that more convincing evidence of the liquidity effect could be obtained with the use of high-frequency (daily) data. Thornton*s (2001a) detailed analysis of Hamilton*s results and evidence using both Hamilton*s and an alternative methodology indicates a quantitatively unimportant daily liquidity effect. Recently, Carpenter and Demiralp (2006) report "clear evidence" of a daily liquidity effect using a more comprehensive reserve-supply-shock measure than that used by Hamilton. This paper investigates the daily liquidity effect using Carpenter and Demiralp*s new measure.
    Keywords: Interest rates ; Open market operations ; Monetary policy
    Date: 2006
  35. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The mechanism is based on an analysis of the late 18th century British environment. At this time the money supply was composed mainly of circulating private debt, which was liquid because of the intermediation of bankers. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright’s search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth. Because the growth rate of the economy is increasing in the quantity of credit in the economy, the model provides a theoretic explanation for the empirical findings of Levine, Loayza and Beck and Rousseau and Wachtel.
    JEL: E5 O3 O4
    Date: 2002–08
  36. By: Robert J. Tetlow; Brian Ironside
    Abstract: We study 30 vintages of FRB/US, the principal macro model used by the Federal Reserve Board staff for forecasting and policy analysis. To do this, we exploit archives of the model code, coefficients, baseline databases and stochastic shock sets stored after each FOMC meeting from the model's inception in July 1996 until November 2003. The period of study was one of important changes in the U.S. economy with a productivity boom, a stock market boom and bust, a recession, the Asia crisis, the Russian debt default, and an abrupt change in fiscal policy. We document the surprisingly large and consequential changes in model properties that occurred during this period and compute optimal Taylor-type rules for each vintage. We compare these optimal rules against plausible alternatives. Model uncertainty is shown to be a substantial problem; the efficacy of purportedly optimal policy rules should not be taken on faith. We also find that previous findings that simple rules are robust to model uncertainty may be an overly sanguine conclusion.
    Date: 2006
  37. By: Javier Guillermo Gómez
    Abstract: El artículo hace una narración de la política monetaria en Colombia. Por ser una narración de la política monetaria en una economía abierta, el artículo hace énfasis en los conceptos de trilema de la política monetaria, ancla nominal y regimenes monetarios. Además, la narración incluye el período actual de régimen de inflación objetivo, presenta los antecedentes académicos y la definición del régimen de inflación objetivo, y presenta las características actuales de este régimen en Colombia. La principal implicación de política es que el requisito más importante para mantener la estabilidad de precios es que el Banco de la República procure mantener la meta de inflación firme, y dirija las tasas de interés en consecuencia, ante aumentos de la inflación producidos por presiones de demanda, devaluaciones y aumentos en la inflación de alimentos
    Date: 2006–03–01
  38. By: Jonathan H. Wright
    Abstract: The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance.
    Keywords: Economic indicators ; Economic forecasting ; Interest rates
    Date: 2006
  39. By: Andrew Bauer; Robert A. Eisenbeis; Daniel F. Waggoner; Tao Zha
    Abstract: In 1994, the Federal Open Market Committee (FOMC) began to release statements after each meeting. This paper investigates whether the public’s views about the current path of the economy and of future policy have been affected by changes in the Federal Reserve’s communications policy as reflected in private sector’s forecasts of future economic conditions and policy moves. In particular, has the ability of private agents to predict where the economy is going improved since 1994? If so, on which dimensions has the ability to forecast improved? We find evidence that the individuals’ forecasts have been more synchronized since 1994, implying the possible effects of the FOMC’s transparency. On the other hand, we find little evidence that the common forecast errors, which are the driving force of overall forecast errors, have become smaller since 1994.
    Date: 2006
  40. By: Christian Dreger; Hans-Eggert Reimers
    Abstract: We investigate hysteresis and persistence behaviour in the course of unemployment in EU countries and US states by means of first and second generation panel unit root tests. While the former tests assume independent cross sections, the latter control for dependencies. The first generation tests indicate, that unemployment is persistent, but nevertheless stationary. Second generation tests reveal mixed results, but the evidence for stationarity is much stronger for the US. Hysteresis in EU unemployment is attributed to the idiosyncratic, but not to the common component. In contrast, idiosyncratic components are stationary in the US. If hysteresis behaviour is also relevant here, it is more likely to arise in the common component. These findings might reflect a lower degree of migration of the unemployed in the EU from starving into prosperous regions, possibly because of language barriers or national labour market regulations
    Keywords: Unemployment persistence, hysteresis, panel unit roots
    JEL: C22 C23 E24
    Date: 2006
  41. By: Antonio Montañés; Marcos Sanso-Navarro
    Abstract: Long-horizon uncovered interest parity during the post-Bretton Woods era in the G7 countries is analyzed in this paper. The main di¤erence with previous studies relies in the use of cointegration methods due to the non-stationary behavior of the variables involved. Moreover, the consideration of structural breaks becomes a key element for this relationship to hold. These shifts are identi.ed as sharp changes in the time-varying risk premium as a consequence of turning points in monetary policy and exchange rates regimes. Finally, the robustness of the obtained results to recent developments in the Eurozone is checked.
  42. By: Javier Guillermo Gómez
    Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under different policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.
    Date: 2006–03–01
  43. By: Martin Feldstein
    Abstract: This paper is an analytic comment on two chapters of the Economic Report of the President for 2006. Chapter One deals with the economy in 2005 and the outlook for the future. The chapter provides a detailed analysis of the expansion in 2005 but not an explanation of why the expansion occurred despite the sharp rise in oil prices. I discuss the role of easy money in stimulating mortgage borrowing which generated negative savings in 2005. Looking ahead, I comment on the risk to inflation implied by the rising unit labor costs over the past four years. Chapter six deals with the international position of the United States. It provides a useful analysis of capital flows to the United States and the reasons why other countries have current account surpluses. It does not deal with the role of the dollar or the nature of the adjustment that might occur to reduce the US current account deficit. I present some comments on those issues.
    JEL: E0 F3 F4
    Date: 2006–04
  44. By: Griffith, Rachel Susan; Harrison, Rupert; Macartney, Gareth
    Abstract: We analyze the impact of product market competition on unemployment and wages, and how this depends on labour market institutions. We use differential changes in regulations across OECD countries over the 1980s and 1990s to identify the effects of competition. We find that increased product market competition reduces unemployment, and that it does so more in countries with labour market institutions that increase worker bargaining power. The theoretical intuition is that both firms with market power and unions with bargaining power are constrained in their behaviour by the elasticity of demand in the product market. We also find that the effect of increased competition on real wages is beneficial to workers, but less so when they have high bargaining power. Intuitively, real wages increase through a drop in the general price level, but workers with bargaining power lose out somewhat from a reduction in the rents that they had previously captured.
    Keywords: competition; product market regulation; unemployment; wage bargaining
    JEL: E24 J50 L50
    Date: 2006–04
  45. By: G. Gozzi; F. Nardini
  46. By: Maximilian Auffhammer (University of California, Berkeley)
    Abstract: The United States Energy Information Administration publishes annual forecasts of nationally aggregated energy consumption, production, prices, intensity and GDP. These government issued forecasts often serve as reference cases in the calibration of simulation and econometric models, which climate and energy policy are based on. This study tests for rationality of published EIA forecasts under symmetric and asymmetric loss. We find strong empirical evidence of asymmetric loss for oil, coal and gas prices as well as natural gas consumption, GDP and energy intensity.
    Keywords: Forecasting, Asymmetric Loss, Energy Intensity, Energy Information Administration,
    Date: 2005–12–16
  47. By: Norberto Rodríguez N; José Luis Torres; Andrés Velasco M.
    Abstract: Una estimación adecuada de la brecha del producto es un requisito indispensable para la conducción de la política monetaria bajo el régimen de inflación objetivo. Por esta razón, en la literatura y al interior del Banco de la República, se trabaja con una gran variedad de mediciones a partir de técnicas alternativas. Desafortunadamente, como la brecha del producto es una variable no observable, siempre hay gran incertidumbre sobre cualquier estimación. Para sobreponerse a este problema, en el Departamento de Inflación se siguen regularmente una amplia gama de indicadores, en especial encuestas de opinión empresarial y datos de actividad, para mejorar la comprensión de la situación de la economía en el ciclo y para identificar posibles presiones de demanda. Aunque en principio parece razonable y adecuado contar con gran cantidad de medidas y monitorear diversas fuentes de información complementarias, en la práctica resulta problemático poder resumir de manera eficiente la información disponible en una sola medida que pueda ser utilizada para producir pronósticos de inflación y recomendaciones de política. Hasta hace poco, la reducción de la información se hacía a partir del juicio de los expertos sobre los pesos relativos que se asignaban para cada medición y para la información proveniente de encuestas. Lo cual potencialmente podía conducir a un problema de variables omitidas y a sesgar cualquier estimación. Para resolver este problema en este trabajo se estima un indicador de brecha del producto como el factor no observado entre los datos disponibles. Dicho factor se estima utilizando componentes principales estáticos, el cual debe resumir la información contenida en los datos mientras que excluye cualquier error presente en las medidas originales. La calidad del indicador se evalúa posteriormente a partir de su capacidad predictiva de la inflación básica de bienes no transables en Colombia, mediante una Curva de Phillips híbrida. Los resultados sugieren, como se esperaba, que el indicador de brecha del producto es superior a cualquiera de las medidas individuales para señalar presiones de demanda, puesto que combina de manera eficiente la información de varias fuentes. Adicionalmente se encuentra, que los pronósticos fuera de muestra se pueden mejorar si se excluyen para la estimación del indicador aquellas medidas que provienen de filtros estadísticos. Lo cual reafirma la importancia de seguir fuentes alternativas de información, en especial de encuestas de opinión industrial, a pesar de que la industria tan sólo pesa un 15% del PIB en Colombia.
    Date: 2006–02–01
  48. By: Helena Veiga
    Abstract: This paper compares empirically the forecasting performance of a continuous time stochastic volatility model with two volatility factors (SV2F) to a set of alternative models (GARCH, FIGARCH, HYGARCH, FIEGARCH and Component GARCH). We use two loss functions and two out-of-sample periods in the forecasting evaluation. The two out-of-sample periods are characterized by different patterns of volatility. The volatility is rather low and constant over the first period but shows a significant increase over the second out-of-sample period. The empirical results evidence that the performance of the alternative models depends on the characteristics of the out-ofsample periods and on the forecasting horizons. Contrarily, the SV2F forecasting performance seems to be unaffected by these two facts, since the model provides the most accurate volatility forecasts according to the loss functions we consider.
    Date: 2006–04
  49. By: Jesus Canas; Roberto Coronado; Jose Joaquin Lopez
    Keywords: Maquiladora ; North American Free Trade Agreement ; Business cycles
    Date: 2005
  50. By: Kimmo Soramaki; Morten L. Bech; Jeffrey Arnold; Robert J. Glass; Walter Beyeler
    Abstract: We explore the network topology of the interbank payments transferred between commercial banks over the Fedwirer Funds Service. We find that the network is compact despite low connectivity. The network includes a tightly connected core of money-center banks to which all other banks connect. The degree distribution is scale-free over a substantial range. We find that the properties of the network changed considerably in the immediate aftermath of the attacks of September 11, 2001.
    Keywords: Fedwire ; Payment systems ; Electronic funds transfers ; Banking structure
    Date: 2006
  51. By: Van Horen, Neeltje; Schmukler, Sergio L.; Levy Yeyati, Eduardo
    Abstract: The authors argue that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity literature, they show that nonlinear Threshold Autoregressive (TAR) models properly capture the behavior of the cross market premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, the authors find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Cr isis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price.
    Keywords: Markets and Market Access,Economic Theory & Research,Access to Markets,Macroeconomic Management,Fiscal & Monetary Policy
    Date: 2006–04–19
  52. By: Mark Furletti; Christopher Ody
    Abstract: This paper describes the Federal Reserve System’s monthly estimate of revolving consumer credit as published in the G.19 statistical release. It analyzes the source data, sampling methods, and calculations on which this estimate currently relies. In addition, it proposes a framework for analyzing the revolving credit statistic and suggests modifications to how the estimate is calculated and presented. The paper concludes that the revolving credit estimate is highly accurate and proposes that the System consider five modifications that would improve its usefulness to researchers.
    Keywords: Consumer credit ; Credit cards ; Debt
    Date: 2006
  53. By: Zsolt Darvas; Gábor Rappai; Zoltán Schepp
    Abstract: Results and models of this paper are based on a strikingly new empirical observation: long maturity forward rates between bilateral currency pairs of the US, Germany, UK, and Switzerland are stationary. Based on this result, we suggest a new explanation for the UIP-puzzle maintaining rational expectations and risk neutrality. The model builds on the interaction of foreign exchange and fixed income markets. Ex ante short run and long run UIP and the EHTS is assumed. We show that ex post shocks to the term structure could explain the behavior of the nominal exchange rate including its volatility and the failure of ex post short UIP regressions. We present evidence on ex post validity of long run UIP and strikingly new evidence on the stationarity of the long forward exchange rates of major currencies. We set up, calibrate and simulate a stylized model that well captures the observed properties of spot exchange rates and UIP regressions of major currencies. We define the notion of yield parity and test its empirical performance for monthly series of major currencies with favorable results.
    Keywords: EHTS; forward discount bias; stationarity of long maturity forward rates; UIP; yield parity
    JEL: E43 F31
    Date: 2006–04
  54. By: Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s.
    Keywords: Central banks; Foreign exchange interventions; Interactions; Friction models.
    JEL: E58 E61 F31 G15
    Date: 2006–04
  55. By: A. Scorcu
  56. By: Chris Papageorgiou; Kaz Miyagiwa
    Abstract: In the literature studying aggregate economies the aggregate elasticity of substitution (AES) between capital and labor is often treated as a constant or “deep” parameter. This view contrasts with the conjecture put forward by Arrow et al. (1961) that AES evolves over time and changes with the process of economic development. This paper evaluates this conjecture in a simple dynamic multi-sector growth model, in which AES is endogenously determined. Our findings support the conjecture, and in particular demonstrate that AES tends to be positively related to the state of economic development, a result consistent with recent empirical findings.
  57. By: Ariño, Miguel A. (IESE Business School); Canela, Miguel A. (Universitat de Barcelona)
    Abstract: En este informe se describen los rasgos principales de la evolución de la tasa de cambio dólar-euro, usando datos diarios, desde la adopción efectiva del euro a principios de 1999 hasta finales de 2005. Se muestra cómo la trayectoria de esta tasa de cambio se puede caracterizar de distinta forma según la escala temporal adoptada. En primer lugar, al examinar las variaciones en períodos superiores a seis meses, la trayectoria de la tasa dólar-euro se puede caracterizar mediante una sucesión de tendencias lineales. Sobre esta tendencia poligonal se superponen unos ciclos de entre uno y tres meses de duración. Por último, a escala diaria, muestra un comportamiento prácticamente impredictible, muy cercano a lo que en econometría se denomina ruido blanco. Estas pautas no son exclusivas de la tasa dólar-euro, sino compartidas, en general, por las tasas de cambio contra el dólar de las monedas de flotación libre. Tomando el valor de cambio del dólar contra una cesta de monedas utilizada por la Reserva Federal, se muestra que las pautas observadas pueden ser atribuidas a las variaciones en el valor "intrínseco" del dólar.
    Keywords: Tasa cambio; volatilidad; indice cesta monedas;
    Date: 2006–03–25
  58. By: Larry Karp (University of California, Berkeley and Giannini Foundation); Thierry Paul (IDEP/GREQAM)
    Abstract: In familiar models, a decrease in the friction facing mobile factors (e.g., lowering their adjustment costs) increases a coordination problem, leading to more circumstances where there are multiple equilibria. We show that a decrease in friction can decrease coordination problems if, for example, a production externality arises from a changing stock of knowledge or a changing environmental stock. In general, the relation between the amount of friction that mobile factors face and the likelihood of multiple equilibria is non-monotonic.
    Keywords: Indeterminacy, Multiple equilibria, Coordination games, Factor reallocation, Environmental externality, Learning-by-doing, Costs of adjustment,
    Date: 2005–02–08
  59. By: Pierre Gosselin; Aileen Lotz; Charles Wyplosz (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.
    Keywords: Central Bank Transparency
    Date: 2006–04–10
  60. By: Aghion, Philippe; Bacchetta, Philippe; Rancière, Romain; Rogoff, Kenneth
    Abstract: This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country's level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83 country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.
    Keywords: exchange rate regime; financial development; growth
    JEL: E44 F33 F43 O42
    Date: 2006–04
  61. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: This paper examines the equivalence of the two key results that dominate the discussion on Ramsey tax policy with imperfect competition. With imperfectly competitive intermediate goods market, the long run Ramsey policy is consistent with capital tax or subsidy, and this result is generally dominant if the government is permitted or not permitted to use any other subsidy, or if the government has access to consumption tax. This is an important extension of the two effect result due primarily to Guo & Lansing (1999). Access to consumption tax but no access to labor subsidy enables the government to reduce labor tax in monopoly sector to zero, but the two effect result for capital taxation remains unaltered. Qualifying Judd’s (1997) principle of optimal capital subsidy requires full confiscation of profits, or subsidizing capital income at a rate that may be larger than the first best subsidy rate. The strong motivation to tax capital assists in explaining the repeal of the Investment Tax Credit scheme in the US.
    Keywords: Optimal taxation; Monopoly power; Ramsey policy
    JEL: D42 E62 H21 H30
    Date: 2006–04
  62. By: Marco Castellani; Emanuel Santos
    Abstract: This paper evaluates several artificial intelligence and classical algorithms on their ability of forecasting the monthly yield of the US 10-year Treasury bonds from a set of four economic indicators. Due to the complexity of the prediction problem, the task represents a challenging test for the algorithms under evaluation. At the same time, the study is of particular significance for the important and paradigmatic role played by the US market in the world economy. Four data-driven artificial intelligence approaches are considered, namely, a manually built fuzzy logic model, a machine learned fuzzy logic model, a self-organising map model and a multi-layer perceptron model. Their performance is compared with the performance of two classical approaches, namely, a statistical ARIMA model and an econometric error correction model. The algorithms are evaluated on a complete series of end-month US 10-year Treasury bonds yields and economic indicators from 1986:1 to 2004:12. In terms of prediction accuracy and reliability of the modelling procedure, the best results are obtained by the three parametric regression algorithms, namely the econometric, the statistical and the multi-layer perceptron model. Due to the sparseness of the learning data samples, the manual and the automatic fuzzy logic approaches fail to follow with adequate precision the range of variations of the US 10-year Treasury bonds. For similar reasons, the self-organising map model gives an unsatisfactory performance. Analysis of the results indicates that the econometric model has a slight edge over the statistical and the multi-layer perceptron models. This suggests that pure data-driven induction may not fully capture the complicated mechanisms ruling the changes in interest rates. Overall, the prediction accuracy of the best models is only marginally better than the prediction accuracy of a basic one-step lag predictor. This result highlights the difficulty of the modelling task and, in general, the difficulty of building reliable predictors for financial markets.
    Keywords: interest rates; forecasting; neural networks; fuzzy logic.
  63. By: Sita Nataraj Slavov (Department of Economics, Occidental College)
    Abstract: Across countries, government expenditures tend to favor the elderly. This paper provides a political economy explanation for this phenomenon. I consider the classic problem of dividing a fixed payoff in an overlapping generations setting. Any share of the payoff can be given to any generation. Using a new solution concept for majority rule in dynamic settings (Bernheim and Nataraj, 2004), I demonstrate that policies favoring the old are easier to sustain politically than any other policies. This result appears across a broad class of majoritarian institutions and thus reflects general forces at work in the political process. Age bias arises because it is easy to induce the young to support policies favoring the elderly by promising them large rewards later in their lives. On the other hand, there is little flexibility to reward older generations in a similar manner. This asymmetry helps to generate broad political support for large public transfers to older individuals.
    Keywords: majority rule, overlapping generations, age bias, Condorcet winner, intergenerational transfers, Social Security
    JEL: D72 H55
    Date: 2001–11
  64. By: Høg, Espen P. (Department of Accounting, Aarhus School of Business); Frederiksen, Per H. (Jyske Bank)
    Abstract: The paper revisits dynamic term structure models (DTSMs) and proposes a new way in dealing with the limitation of the classical affine models. In particular, this paper expands the flexibility of the DTSMs by applying a fractional Brownian motion as the governing force of the state variable <p> instead of the standard Brownian motion. This is a new direction in pricing non defaultable bonds with offspring in the arbitrage free pricing of weather derivatives based on fractional Brownian motions. By applying fractional Itˆo calculus and a fractional version of the Girsanov transform, <p> a no arbitrage price of the bond is recovered by solving a fractional version of the fundamental bond pricing equation. Besides this theoretical contribution, the paper proposes an estimation methodology based on the Kalman filter approach, which is applied to the US term structure of <p> interest rates.
    Keywords: Fractional bond pricing equation; fractional Brownian motion; fractional Ornstein-Uhlenbeck process; long memory; Kalman filter
    Date: 2006–04–24
  65. By: Lukyanova Anna
    Abstract: The paper documents the changes in the size of the wage distribution in Russia over the period 1994–2003. Developments in wage inequality varied a lot by sub-periods: overall wage inequality stayed stable in 1994–1996, then it jumped following the 1998 crisis and remained at higher levels for three years. In 2002 the trend reversed again and in the course of a single year wage inequality fell back to the level of the mid-1990s. We find that evolution wage inequality was largely driven by changes in the upper end of the wage distribution. Decomposition of wage inequality by population sub-groups shows that inequality has been higher for men, younger and low-educated workers, and rural inhabitants. The structure of inequality did not change much over the period from 1994 to 2003. Demographic variables (mainly gender and region) explain the largest proportion of wage dispersion (over 40% of the explained variation and 15% of total variation). Nearly equivalent is the contribution of firm characteristics with industry affiliation of employer playing the leading role. Our results show that returns to education continued to rise at all percentiles of the wage distribution converging at the level of about 8–9% of wage increase for an additional year of schooling.
    Keywords: Russia, wage inequality, decomposition, quantile regression
    JEL: E24 J31
    Date: 2006–04–26
  66. By: Paul Willen; Felix Kubler
    Abstract: We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: The gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock.
    Keywords: Margin accounts ; Investments ; Securities
    Date: 2006
  67. By: Xiaoqiang Cheng; Hans Degryse
    Abstract: This paper shows that banking development spurs growth, even in a country with a high growth rate such as China. Employing data of 27 Chinese provinces over the period 1995-2003, we study whether the financial development of two different types of institutions – banks and non-bank financial institutions – have a (significantly different) impact on local economic growth. Our findings show that banks outperform non-bank financial institutions. Only banking development exerts a statistically and economically significant positive impact on local economic growth. This effect becomes more pronounced when the financial sector is less concentrated.
    Keywords: growth, financial development, Chinese provinces, banks
    JEL: E44 G21
    Date: 2006
  68. By: Franco Donzelli (Universita' degli Studi di Milano)
    Abstract: In Chapter 17 of the General Theory (henceforth GT) Keynes tries to generalize the standard GT model, which can be found expounded in the preceding sixteen Chapters of his well-known book, by developing an "extended" model of portfolio choice and capital-asset pricing based on a newly devised notion of "own rate of interest". Yet Keynes' attempt can hardly be regarded as successful: in fact, soon after the publication of the GT, Keynes himself apparently gives up defending the peculiar traits of his "extended" model, while most early Keynesians show perplexity or even positive hostility towards the theoretical contents of Chapter 17 of the GT. In this paper we shall unveil the many mysteries still surrounding the conception, interpretation, meaning, and possible uses of the conceptual apparatus and theoretical system put forward by Keynes in Chapter 17 of his book. After clarifying Keynes' motivations and purposes in writing that Chapter, we shall compare its central analytical concept, the "own rate of interest", with a few concepts of "commodity" rates of interest that are explicitly cited, or implicitly hinted at, by Keynes as possible sources of inspiration for his theory: namely, we shall examine two alternative notions of real rate of interest, respectively called the "loan-in-kind" and the "payment-in-advance" rate of interest; then, after analyzing Sraffa's notion of "futures" rate of interest, we shall conclude our review of the relevant literature by discussing Fisher's notion of "expected" rate of interest. Finally, after formally restating Keynes' "extended" model, as informally expounded in Chapter 17 of the GT, we shall trace back the failure of Keynes' attempts at generalizing his theory in that Chapter to his poor value theory, which, being rooted in Marshall's partial equilibrium analysis, proves desperately inadequate to tackle the truly general equilibrium problem posed in Chapter 17.
    Keywords: Keynes, money, interest rates, asset pricing, general equilibrium and disequilibrium,
    Date: 2006–02–24
  69. By: Frömmel, Michael
    Abstract: We investigate the exchange rate volatility of six Central and Eastern European countries (CEEC) between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching Model (Hamilton 1989). We discover switches between high and low volatility regimes which are consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. Slovenia, finally, shows some kind of anticipation of the wide fluctuation margins in ERM2.
    Keywords: CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies
    JEL: E42 F31 F36
    Date: 2006–04
  70. By: Nauro F. Campos (Brunel University, CEPR, WDI and IZA Bonn); Roman Horváth (Czech National Bank and IES, Charles University, Prague)
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and OECD growth increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: reform, liberalization, privatization, political economy, transition
    JEL: E23 D72 H26 O17
    Date: 2006–04
  71. By: Saggay, Ali; Heshmati, Almas (Ratio); Adel Dhif, Mohamed
    Abstract: This paper presents estimates of the competitive effects of trade liberalization on domestic pricing behaviour of Tunisian manufacturing industries. The theoretical framework is based on a dynamic flexible adjustment model of price determination in a small open economy. It investigates the process of adjustment in price level toward a desired level. The adjustment process is both industrial and time-specific. The empirical results show that, in the long run, domestic price responds greatly to import penetration, followed by demand pressure. There was a negative effect from import competition on domestic price. Trade policy is a viable policy option to promote competitiveness.
    Keywords: dynamic model; domestic price; trade liberalization; panel data; speed of adjustment; Tunisia
    JEL: C33 E31 F14 L60
    Date: 2006–04–25
  72. By: António Afonso; Vítor Gaspar
    Abstract: In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency.
    Keywords: Government efficiency; excess burden; taxes; spending.
    JEL: D11 E62 H21 H50
  73. By: Butter, Frank A.G. den (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
    Abstract: In the institutional set-up of (economic) policy preparation in the Netherlands there is ample interaction between scientific insights and policy proposals. This Dutch polder model lays much emphasis on the social dialogue to come to an agreement on, and have public support for policy proposals. It was very much the idea of Jan Tinbergen winner of the first Nobel price in economics to have a clear separation in policy preparation between (i) trying to reach consensus on the working of the economy, as formalised in econometric models; (ii) come to a compromise on policy goals between the various minority parties of the government; and (iii) rely on independent and undisputed data collection by an autonomous Central Bureau of Statistics (CBS). The aim of this separation of responsibilities is to guarantee, as much as possible, the scientific quality of policy preparation and at the same time to gain public support for policy measures so that implementation costs are kept low. This paper discusses the working of this institutional set-up, its historical background and the mechanisms of quality control and reputation which are essential for the interaction between scientific knowledge and policy preparation to remain fruitful.
    Keywords: Economic policy; Polder model; Social dialogue; Interaction between science and policy
    JEL: E61 E66 H11
    Date: 2006
  74. By: Francesco VENTURINI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: Using some new techniques of panel cointegration analysis, this paper describes the long-run impact of digital capital on the aggregate performance of the US and EU-15 member countries. ICT is found to significantly impact on output levels without substantial cross-country variation when one adopts the dynamic extension of panel OLS (PDOLS). In this case, however, the long-run elasticity of factor inputs does not differ from the one estimated in the short-run. The time-series version of seemingly unrelated regression (DSUR) provides more plausible findings, showing a significant cross-countries heterogeneity. The effect of ICT on growth appears relevant - and higher than emerging from short-differences - for most economies but not for the EU largest countries.
    Keywords: ICT, economic growth, panel cointegration analysis
    JEL: C33 E20 O47
    Date: 2006–03
  75. By: R. Andergassen
  76. By: Heshmati, Almas (Ratio); Yang, Wanshan
    Abstract: The view about systematic irrationality of investors and managers in investment with reference to information and communication technology (ICT) with no effects on productivity growth is called productivity paradox. Research suggests that ICT return in developed nations is significant and positive, but not in developing countries. This paper challenges the above conclusion by examining the contribution of ICT to the Chinese economic growth. We investigate the relationship between TFP growth and ICT capital and provide estimation of the returns to ICT investment. The contribution of ICT to economic growth has not been studied earlier for the developing countries like China. The empirical results suggest that China has reaped the benefits of ICT investment. The policy implications for the Chinese ICT investment and development are also discussed. The results add to our understanding of how ICT affects growth in the context of economic development.
    Keywords: Productivity paradox; ICT; economic development; TFP growth; China
    JEL: D24 E22 O47
    Date: 2006–04–25
  77. By: Joachim Ahrens; Renate Ohr; Götz Zeddies
    Abstract: The paper adresses the need for more flexibility in the integration process of the European Union after its recent eastward enlargement. Due to the increasing number of decision-makers and the increasing heterogeneity of economic structures, financial constraints, societal preferences, and political interests, European integration based on the uniformity principle is hardly feasible. In order to avoid a rank growth of integration and yet to strengthen the momentum of flexibility, so-called enhanced cooperation appears to be an appropriate instrument to be applied to the overall integration process. In this context the paper analyzes different possible developments of selected common policies in the EU if enhanced cooperation is practised by a sub-group of EU-members. Based on cluster analysis similarities and distinctions among the EU members with respect to some specific policy realms are elaborated to identify clusters, or clubs, of countries which may apply the instrument of enhanced cooperation in the specific policy fields.
    Keywords: European integration, enhanced cooperation, cluster analysis
    JEL: E61 F15 F42
    Date: 2006–04–25

This nep-mac issue is ©2006 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.