nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒05‒20
forty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The elusive welfare economics of price stability as a monetary policy objective - why New Keynesian central bankers should validate core inflation By Willem H. Buiter
  2. Myths and Maths: Macroeconomic Effects of Fiscal Adjustments in Hungary By Ágnes Horváth; Zoltán M. Jakab; Gábor P. Kiss; Balázs Párkányi
  3. Intertemporal Disturbances By Giorgio E. Primiceri; Ernst Schaumburg; Andrea Tambalotti
  4. Welfare-based monetary policy rules in an estimated DSGE model of the US economy By Michel Juillard; Philippe Karam; Douglas Laxton; Paolo Pesenti
  5. Financial integration, GDP correlation and the endogeneity of optimum currency areas By Stefano Schiavo
  6. Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB? By Luca Onorante
  7. Learning, Inflation Cycles, and Depression By Ryo Horii; Yoshiyasu Ono
  8. Discussion of "The Source of Historical Economic Fluctuations: An Analysis using Long-Run Restrictions" by Neville Francis and Valerie A. Ramey By Harald Uhlig
  9. Wage and employment in a finance-led economy. By Célia Firmin
  10. Do financial markets react to Bank of England communication? By Rachel Reeves; Michael Sawicki
  11. Inflation Taxation and Welfare with Externalities and Leisure By Ho, W-M, Zeng, J.; Jie Zhang
  12. The Causes of Japan%u2019s %u2018Lost Decade%u2019: The Role of Household Consumption By Charles Yuji Horioka
  13. Asymmetry of Shocks and Convergence in Selected Asean Countries: A Dynamic Analysis By Carlos Cortinhas
  14. Portfolio Choice in a Monetary Open-Economy DSGE Model By Charles Engel; Akito Matsumoto
  15. Political Instability and Inflation Volatility By Ari Aisen; Francisco José Veiga
  16. An Experimental Test of Taylor-Type Rules with Inexperienced Central Bankers By Jim Engle-Warnick; Nurlan Turdaliev
  17. Endogenous Housing Market Cycles By Trond Borgersen, Dag Einar Sommervoll and Tom Wennemo
  18. The Economic Dynamics in Amoroso's Contribution By Cristina Nardi Spiller; Mario Pomini
  19. Macroeconomic effects of banking secrecy when tax evasion is endogenous By Frode Brevik; Manfred Gärtner
  20. El efecto traspaso de la tasa de interés y la política monetaria en el Perú: 1995-2004. By Lahura Erick
  21. Vintage Capital By Raouf Boucekkine; David de la Croix; Omar Licandro
  22. The French Monetary Management in the Inter-war Period: the Dismissal of Open Market Procedure? By Nicolas Barbaroux
  23. Corporate Sector Debt Composition and Exchange Rate Balance Sheet Effect in Turkey By Mehtap Kesriyeli; Erdal Ozmen; Serkan Yigit
  24. The patterns and determinants of price setting in the Belgian industry By David Cornille; Maarten Dossche
  25. Monetary Unions, External Shocks and Economic Performance: A Latin American Perspective By Sebastian Edwards
  26. ¿Cambia la Inflación Cuando los Países Adoptan Metas Explícitas de Inflación? By Marco Vega; Diego Winkelried
  27. The Econometric Analysis of Constructed Binary Time Series By Don Harding; Adrian Pagan
  28. Macroeconomic and Structural Constraints on Export-Led Growth in Mexico By Robert A. Blecker
  29. Expenditure Switching vs. Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy By Michael B. Devereux; Charles Engel
  30. Technology Shocks and Hours Worked: A Fractional Integration Perspective By Luis Alberiko Gil-Alana; Antonio Moreno
  31. Hysteresis and Insider-Outside Theory - A Literature Review By Michael Dobbie
  32. Baumol%u2019s Diseases: A Macroeconomic Perspective By William D. Nordhaus
  33. "Long-run Behavior of Macroeconomic Models with Heterogeneous Agents: Asymptotic Behavior of One- and Two-Parameter Poisson-Dirichlet Distributions" By Masanao Aoki
  34. Microfoundations By Maarten C.W. Janssen
  35. Natural Disasters in a Two-Sector Model of Endogenous Growth By Masako Ikefuji; Ryo Horii
  36. Interdipendenza fra sistema reale e finanziario: una rilettura alla luce dell’insegnamento del prof. Menegazzi By Paola Dongili
  38. Choosing Monetary Sequences: Theory and Experimental Evidence By Paola Manzini; Marco Mariotti; Luigi Mittone
  39. Markets Versus Governments: Political Economy of Mechanisms By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
  40. Public jobs creation and unemployment dynamics. By Céline Choulet
  41. Macroeconomic Dimensions of Social Economics: Saving, the Stock Market, and Pension Systems By Martha A. Starr
  42. The Economic Consequences of Dollar Appreciation for U.S. Manufacturing Investment: A Time-Series Analysis By Robert A. Blecker
  43. Choix d’un régime monétaire et pauvreté des ménages : l’exemple du currency board argentin By Emilie Laffiteau; Jean-Marc Montaud
  44. Expectations and Exchange Rate Policy By Michael B. Devereux; Charles Engel

  1. By: Willem H. Buiter (European Institute, London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom.)
    Abstract: The paper studies the inflation rate associated with optimal monetary and fiscal policy in a number of standard dynamic stochastic general equilibrium models with nominal price rigidities. While the focus is on Calvo-style nominal price contracts with a range of indexation rules for constrained price setters, the conclusions have much wider validity - (1) Regardless of whether nominal price and/or wage rigidities are due to New-Keynesian, Old-Keynesian or sticky-information Phillips curves, optimal inflation policy requires the validation, that is, the full accommodation of core producer inflation by actual producer price inflation;(2) Optimal monetary policy implements Bailey-Friedman optimal quantity of money rule. No welfare-economics based argument for price stability as an objective (let alone the overriding objective) of monetary policy can be established for the class of DSGE models with nominal rigidities for which they have been proposed by Woodford and others.
    Keywords: Inflation targeting, Nominal price rigidities, New Keynesian macroeconomics, DSGE.
    JEL: E3 E4 E5 E6
    Date: 2006–04
  2. By: Ágnes Horváth (Magyar Nemzeti Bank); Zoltán M. Jakab (Magyar Nemzeti Bank); Gábor P. Kiss (Magyar Nemzeti Bank); Balázs Párkányi (Magyar Nemzeti Bank)
    Abstract: In this paper we investigate the possible effects of fiscal tightening in Hungary from two perspectives. First, simulations in an estimated neo-Keynesian model are used to characterise the effects of different scenarios for fiscal consolidations. We show that the composition of fiscal shocks is important for both the economic outcome and monetary policy. These simulations suggest a modest output cost of fiscal consolidation. Then we take a closer look at the non-Keynesian effects and their relevance for Hungary in a qualitative way. In our review of non-Keynesian channels of fiscal adjustments we conclude that expansionary effects are likely to become evident only in the medium or long run, rather than immediately after measures are taken.
    Keywords: Keynesian, non-Keynesian effects, expansionary fiscal adjustment, Monetary policy reactions, Model simulations.
    JEL: E17 E52 E61 E62 E63 E65 H30
    Date: 2006
  3. By: Giorgio E. Primiceri; Ernst Schaumburg; Andrea Tambalotti
    Abstract: Disturbances affecting agents intertemporal substitution are the key driving force of macroeconomic fluctuations. We reach this conclusion exploiting the bond pricing implications of an estimated general equilibrium model of the U.S. business cycle with a rich set of real and nominal frictions.
    JEL: E30 E32 E44
    Date: 2006–05
  4. By: Michel Juillard (CEPREMAP and University Paris 8, 2 rue de la Liberté, 93526 Saint-Denis Cedex 02, France.); Philippe Karam (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.); Douglas Laxton (International Monetary Fund (IMF), 700 19th Street NW, Washington, DC 20431, United States.); Paolo Pesenti (NBER, CEPR and Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, United States.)
    Abstract: We develop and estimate a stylized micro-founded model of the US economy. Next we compute the parameters of a simple interest rate policy rule that maximizes the unconditional mean of utility. We show that such a welfare-based rule lies close to the Taylor efficiency frontier. A counterfactual analysis assesses to what extent using such a rule as a guideline for monetary policy would have helped to avoid the inflationary swings of the 1970s and reduce the severity of boom and bust cycles. The paper also provides estimates of the welfare implications of business cycle variability and discusses their relevance.
    Keywords: Competition, Markups, Monetary Policy, Taylor Rule.
    JEL: C51 E31 E52
    Date: 2006–04
  5. By: Stefano Schiavo (University of Trento)
    Abstract: The paper analyzes the relationship between trade, financial integration and business cycle synchronization in the euro area. The introduction of the euro has had a noticeable impact on European financial markets: we find evidence that capital markets integration exerts a positive effect on output correlation. This in turn has two major implications. First, it corroborates the hypothesis of the endogeneity of optimum currency areas, whereby after joining a monetary union countries fit better standard OCA criteria; second, it provides European policymakers with yet another reason to purse financial integration in the euro area (and in prospective members as well).
    Keywords: business cycle; EMU; endogeneity; integration; optimum currency areas;
    JEL: E32 E44 F36
    Date: 2005–09
  6. By: Luca Onorante
    Abstract: Since the Helsinki European Council of December 1999, a process of increased coordination of fiscal policies in the area of the Euro seems to be on its way. In this paper I examine this process from the point of view of the independence of the European Central Bank (ECB). The interaction of the governments and the ECB is addressed in a game theoretical framework. First, the conditions under which the national governments are able to put pressure on the ECB are made explicit. Then the main question is addressed: would a greater fiscal coordination reduce or increase the capacity of the monetary authority of targeting long run inflation? Formal and informal, discretional (positive) and rule-based (negative) coordination and their interactions are examined as possible solutions of the game. I conclude that the main point is not how much fiscal coordination is there, but the form it takes. It turns out that a mix of informal political coordination and binding rules is the one that best preserves the independence of the ECB. For negative coordination, it is shown that a simple change in the definition of "excessive deficit" can at the same time allow more stabilization of output after a shock and a better control of inflation by the ECB.
    Keywords: European Montary Union, European Central Bank, game theory, fiscal policy, monetary policy, policy coordination
    JEL: C7 E0 E3 E6 H5
    Date: 2006
  7. By: Ryo Horii (Graduate School of Economics, Osaka University); Yoshiyasu Ono (Institute of Social and Economic Research, Osaka University)
    Abstract: This paper constructs a model that describes inflation cycles and prolonged depression as generated by the learning behavior of households who face a random liquidity shock in which money is needed. Households update the subjective probability of the shock based on the observation and change their liquidity preference accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of depression in which unemployment exists and deflation occurs gradually. Depression is deep and prolonged when the economy has experienced a long period of boom before encountering a liquidity shock.
    Keywords: Bayesian Learning in Continuous Time, Hamilton-Jacobi-Bellman Equations, Markov Modulated Poisson Processes, Partial Delay Differential Equations, Liquidity Preference.
    JEL: D83 E41 E32
    Date: 2006–05
  8. By: Harald Uhlig
    Abstract: This paper discusses the paper "The Source of Historical Economic Fluctuations: An Analysis using Long-Run Restrictions" by Neville Francis and Valerie A. Ramey. It argues that these authors have made great progress both in the precise measurement of labor input as well as determining the effect of productivity shocks on labor, but a number of questions remain. As for measurement, the issue of schooling needs further work. As for calculating the long-run impact of labor productivity shocks, unreasonable results emerge for the response of the capital stock, if included in the VAR. Using medium-term identification delivers more reasonable results.
    Keywords: technological progress, business cycles, hours worked, labor productivity, vector autoregressions, identification, long-run restrictions, medium-run restrictions
    JEL: E22 E23 E24 E32 C32
    Date: 2004
  9. By: Célia Firmin (Centre d'Economie de la Sorbonne)
    Abstract: The object of this paper is to analyse the links between income distribution and growth in a finance-led economy, with a post Keynesian "stock-flow" macroeconomic model. In fact, the increased share of financial activities creates a new macroeconomic and income distribution dynamic. We will use the steady-state case and simulations experiments to analyse model reaction to a change in financial key parameter when the wage share is endogeneous.
    Keywords: Financialization, labor's share, capital accumulation, simulations experiments.
    JEL: E12 E24 E44 E51
    Date: 2006–03
  10. By: Rachel Reeves; Michael Sawicki
    Abstract: The effectiveness of a central bank's monetary policymaking is determined by the merit of its policy actions and their perceived credibility. Since the 1990s central banks have placed more emphasis on clear communications and transparency as additional levers to help achieve their goals. In this paper we examine how UK financial markets react to Bank of England communication. We might expect interest rate expectations, and potentially other asset prices, to react to official communication if such communication helps inform market participants. We find evidence that the publication of the Minutes of the Monetary Policy Committee meetings and the Inflation Report significantly affect near-term interest rate expectations, an effect particularly visible in intraday data. Speeches and parliamentary committee hearings appear to have less of an impact. Our results for the UK are arguably less strong than Kohn and Sack's (2003) findings for US Federal Reserve communication. Although differences in institutional frameworks between the UK and US mean communications are not directly comparable, our results might also reflect the different mandates of the FOMC and the MPC, with the Federal Reserve having greater freedom to interpret its objectives.
    Date: 2005
  11. By: Ho, W-M, Zeng, J.; Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: This paper examines how inflation taxation a ects resource allocation and welfare in a neoclassical growth model with leisure, a production externality and money in the utility function. Switching from consumption taxation to inflation taxation to finance government spending reduces real money balances relative to income, but increases consumption, labor, capital and output. The net welfare effect of this switch depends crucially on the strength of the externality and on the elasticity of intertemporal substitution: While it is always negative without the externality, it is likely to be positive with a strong externality and elastic intertemporal substitution.
  12. By: Charles Yuji Horioka
    Abstract: In this paper, I analyze the causes of the prolonged slowdown of the Japanese economy in the 1990s and find that the stagnation of investment, especially private fixed investment, was the primary culprit. I then investigate the causes of the stagnation of household consumption during the 1990s and find that the stagnation of household disposable income, the decline in household wealth, and increased uncertainty about the future are among the contributing factors. Finally, I consider whether demand side factors or supply side factors were more important as causes of the prolonged slowdown of the Japanese economy in the 1990s and conclude that the former (especially misguided government policies) were probably more important.
    JEL: D12 E21 E32 O47
    Date: 2006–04
  13. By: Carlos Cortinhas (Universidade do Minho - NIPE)
    Abstract: This paper aims to investigate whether structural shocks among ASEAN countries are becoming more symmetrical over time, thus indicating whether this region is becoming better prepared to introduce a common monetary policy. For that purpose a dynamic space-state model that complements the conventional Structural VAR models used in the existing literature was estimated by using the Kalman filter so that the evolution of the degree of shock symmetry and, therefore, the evolution in the degree of convergence could be identified over time, distinguishing between a country’s convergence with a regional partner and a more general trend of convergence with the rest of the world. The results showed that in the majority of cases there has been an increase in the degree of convergence of demand shocks in recent years. More importantly, it also showed an increase in divergence in supply shocks for most cases since the beginning of the 90’s even when taking into account the Asian Financial Crisis. This is especially true for the periphery countries suggesting that the Philippines and Thailand are not only not converging but actually diverging from the core group. These results have important implications for the prospects of the creation of a common monetary policy in the region.
    Keywords: Optimum currency areas; Monetary integration; Asymmetric shocks; Convergence; Asean.
    JEL: F15 F33 E42
    Date: 2006
  14. By: Charles Engel; Akito Matsumoto
    Abstract: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. We show that temporarily sticky nominal goods prices can have large effects on equity portfolios. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated. Even a small amount of nominal price stickiness can generate these portfolio differences, depending on the diversification role played by the terms of trade. Returns on human capital and equities may be positively correlated under sticky prices when the source of shocks is monetary, but this risk is hedged through nominal assets rather than through equities.
    JEL: F31 F41 G11
    Date: 2006–05
  15. By: Ari Aisen (International Monetary Fund); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: The purpose of this paper is to empirically determine the causes of the worldwide diversity of inflation volatility. We show that higher degrees of political instability, ideological polarization and political fragmentation are associated with higher inflation volatility.
    Keywords: Inflation, volatility, political instability, institutions.
    JEL: E31 E63
    Date: 2006
  16. By: Jim Engle-Warnick; Nurlan Turdaliev
    Abstract: We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics. <P>Nous avons mené une étude expérimentale dans le but de savoir si les règles de décision en matière de politique monétaire sont utilisées par les banquiers inexpérimentés au sein des banques centrales. Au cours de nos expériences, des sujets établissaient un taux d’intérêt à court terme dans un contexte d’économie informatisée dans le but de maîtriser l’inflation. Une grande majorité des sujets ont appris à maîtriser efficacement l’inflation. Nous sommes d’avis que les règles du type Taylor correspondent bien aux données liées aux choix et contribuent grandement à établir l’hétérogénéité du processus de décision. Notre étude est la première à recourir à l’organisation expérimentale des données sans, pour autant, perdre de vue les règles liées à la politique monétaire qui fait le plus l’objet de surveillance et d’analyse dans le domaine de l’économie.
    Keywords: experimental economics, monetary policy, repeated games, Taylor rule, économie expérimentale, jeux répétés, politique monétaire, règle Taylor
    JEL: C91 E42
    Date: 2006–05–01
  17. By: Trond Borgersen, Dag Einar Sommervoll and Tom Wennemo (Statistics Norway)
    Abstract: Housing markets tend to display both positive serial correlation as well as a considerable volatility over time. We present a stochastic model illustrating the connection between adaptive expectations and market fluctuations. All macro economic and demographic variables stay fixed over time and price movements are driven by expectations only. In the case where agents face unconstrained mortgage financing, the housing market oscillations are regular and depend on mortgage to income ratios. When credit institutions are introduced, which view houses as mortgage collaterals, the dynamics get complex. Periods of mild oscillations are mixed with violent collapses in an unpredictable manner.
    Keywords: Heterogeneous agents; adaptive expectation; credit score models; house price cycles
    Date: 2006–05
  18. By: Cristina Nardi Spiller (Dipartimento di Scienze economiche (Università di Verona)); Mario Pomini (Università di Padova)
    Abstract: This paper aims to highlight the main features of Amoroso's reflections on macroeconomic dynamics to which he dedicated a large part of his scientific activity. He developed an original theory of business cycle and he formulated a dynamic generalisation of the Paretian theory of general economic equilibrium which can be considered the main achievement of dynamic macroeconomics due to its ability to extend the analysis of optimising behaviour to an intertemporal context of resource allocation. The influence of Amoroso was modest despite its undoubted analytical capacity, probably because it was too faithful to a Paretian vision of economic relations and at epistemological level too closely connected to the models of nineteenth century physics which he tried to economic reasoning
    Keywords: business cycles, growth, dynamic theory
    JEL: N1
    Date: 2006–01
  19. By: Frode Brevik; Manfred Gärtner
    Abstract: We analyze a multi-country model in which a small group of countries adopts banking secrecy (BS) laws and a withholding tax. The other group doesn't. BS countries benefit in all relevant macroeconomic variables, including taxes and the provision of public goods. In non- BS countries most of the same variables deteriorate - when tax evasion is exogenous or its tax elasticity is moderate. When this elasticity is high, BS may drive these countries' tax rates down also, and income, consumption and wealth may rise. However, public-goods provision always deteriorates and welfare falls. We also argue that this case does not appear to be relevant empirically.
    Keywords: Banking secrecy, tax evasion, withholding tax, welfare effects
    JEL: E2 E62 F42 H2
    Date: 2006–05
  20. By: Lahura Erick (Central bank of Peru)
    Abstract: El propósito del presente trabajo es investigar el efecto traspaso (pass-through) de la tasa de interés interbancaria sobre las tasas de interés en moneda doméstica y su relación con la política monetaria en el Perú, considerando el periodo 1995-2004. Específicamente, se evalúan las siguientes hipótesis: (a) el traspaso de largo plazo es aún incompleto; sin embargo, se ha incrementado luego del anuncio del corredor de tasas de interés de referencia (febrero de 2001) y se ha reforzado con la adopción del esquema de Metas Explícitas de Inflación o MEI (enero de 2002); (b) el anuncio del corredor de tasas de interés por parte del banco central ha incrementado la velocidad de ajuste de las tasas de mercado ante cambios en la tasa de referencia; y (c) en el corto plazo, las tasas de interés de mercado responden asimétricamente cuando la tasa de interés de referencia sube o baja. Las hipótesis fueron evaluadas a través de un modelo de corrección de errores no lineal-asimétrico. Los resultados de las estimaciones muestran evidencia a favor de las hipótesis planteadas. De esta manera, se puede inferir que la política monetaria ha mostrado una evolución favorable en términos de su impacto sobre las tasas de interés de mercado, desde el anuncio del corredor de referencia y la adopción del esquema MEI.
    Keywords: Tasa de interés, efecto traspaso, política monetaria, cointegración, modelo de corrección de errores, no linealidad, asimetrías.
    JEL: E43 E50
    Date: 2005–12
  21. By: Raouf Boucekkine; David de la Croix; Omar Licandro
    Abstract: We highlight the salient characteristics and implications of the seminal contributions in the field of vintage capital growth theory (proposed entry for the New Palgrave Dictionary of Economics, 2nd edition).
    Keywords: vintage capital, the embodied question, replacement echoes, technology diffusion, inequality, demographics
    JEL: E22 E32 O40
    Date: 2006
  22. By: Nicolas Barbaroux (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne])
    Abstract: The notion of rule surrounded the gold standard system. For instance, it is not seldom to present the gold standard system under the 1925 Keynesian expression as the rules of the game. However, it is nowadays quite crystal clear that gold standard system was not such a self regulating system in which automatic rules prevailed (Eichengreen 1996; Mouré 2001). At the same time, the behaviour of the French bank of issue in the inter-war period gave rise to polemic (Nurkse 1944). The paper proposes to examine the conduct of the French monetary management in the inter-war period by focusing on the context and behaviour adopted by Bank of France. Three points emerge from the study. (1) Before explaining the way franc was managed, we need to make a short recall on the state of the French economy after WWI and on the way the French banker system functioned. (2) The monetary management implemented by the Bank of France is both characterized by a discount rate policy and by the total rejection of open-market operations. This way of managing the franc can be explained by the French historical background and by the conflict between the two leading economists of the moment: C.Rist and P.Quesnay. (3) In order to illustrate the French monetary policymaking the paper will expose the peculiar policy implemented by Bank of France between 1928 and 1932. This way of behaving -based on the gold gathering at the expense of the other countries- was roughly criticized in Europe since France was accused of being responsible of the 1930's international depression.
    Keywords: Histoire économique; Politique monétaire; Banque de France
    Date: 2006–04–20
  23. By: Mehtap Kesriyeli (Research Department, Central Bank of the Republic of Turkey, Ankara, Turkey); Erdal Ozmen (Department of Economics, METU); Serkan Yigit (Research Department, Central Bank of the Republic of Turkey, Ankara, Turkey)
    Abstract: This paper investigates the causes and balance sheet effect consequences of the liability dollarisation of non-financial sectors in Turkey using the Company Accounts database compiled by the Central Bank of Turkey. The results from the panel EGLS and GMM procedures suggest that both sector-specific (tangibility, leverage ratio, export share) and macroeconomic condition variables (inflation, real exchange rate change, budget deficits and confidence) are significant in explaining the corporate sector liability dollarisation. Firms are found to match only partially the currency composition of their debt with their income streams making them potentially vulnerable to negative balance sheet affects of real exchange rate depreciation shocks. Consistent with this argument, real exchange rate depreciations are found to be contractionary, in terms of investments and profits, for sectors with higher liability dollarisation. Macroeconomic instability, as proxied by budget deficits and inflation, appears to have a significant negative affect on the performance of the firms in the non-financial sectors, in terms of their investments, sales and profits. Our results also stress the importance of strong macroeconomic policy stance and price stability for an endogenous dedollarisation process along with regulatory measures to limit vulnerabilities caused by dollarisation.
    Keywords: Balance sheet effects, Capital structure, Corporate sector, Debt composition, Liability dollarisation, Turkey
    JEL: E22 F31 G32
    Date: 2005–11
  24. By: David Cornille (National Bank of Belgium, Research Department); Maarten Dossche (National Bank of Belgium, Research Department; Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))
    Abstract: This paper documents the patterns and determinants of price setting in the Belgian industry. We analyse the micro data underlying the Producer Price Index (PPI) over the period from February 2001 to January 2005. On average only one out of four prices changes in a typical month, whereas the absolute size of a price change amounts to 6 p.c. The frequencies of price adjustment are particularly heterogeneous across sectors, which is determined by heterogeneity in the market and cost structure. We find no signs of downward nominal rigidity. A joint analysis of sizes and frequencies of price adjustment across time shows that price setting is characterised by both time and state-dependent pricing. About 38 p.c. of the exported goods are affected by pricing-to-market.
    Keywords: producer price setting, nominal price rigidity, pricing-to-market, time-dependent pricing, state-dependent pricing, staggering
    JEL: D40 E31
    Date: 2006–05
  25. By: Sebastian Edwards
    Abstract: During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include, among other: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union has not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks have been amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.
    JEL: F02 F43 O11
    Date: 2006–05
  26. By: Marco Vega (Central bank of Peru and London School of Economics); Diego Winkelried (Central bank of Peru and Cambridge University)
    Abstract: Este trabajo revisa la evidencia existente sobre el impacto de la adopción del esquema de metas explícitas de inflación (MEI) sobre la dinámica de la inflación. En particular, se reporta la evaluación econométrica de Vega y Winkelried (2005) y se compara sus resultados con aquellos obtenidos de estudios recientes sobre la materia. Un resultado general de esta revisión es que los efectos sobre la inflación son leves o estadísticamente no significativos cuando un país desarrollado es quien adopta el esquema MEI mientras que los efectos son bastante beneficioso cuando un país en desarrollo es quien adopta el esquema.
    Keywords: Metas explícitas de inflación.
    JEL: C50 E42 E52
    Date: 2006–03
  27. By: Don Harding; Adrian Pagan
    Abstract: Macroeconometric and Financial researchers often use secondary or constructed binary random variables that differ in terms of their statistical properties from the primary random variables used in microeconometric studies. One important di¤erence between primary and secondary binary variables is that while the former are, in many instances, independently distributed (i.d.) the later are rarely i.d. We show how popular rules for constructing binary states determine the degree and nature of the dependence in those states. When using constructed binary variables as regressands a common mistake is to ignore the dependence by using a probit model. We present an alternative non-parametric method that allows for dependence and apply that method to the issue of using the yield spread to predict recessions.
    Keywords: Business cycle;binary variable;Markov chain;probit model;yield curve
    JEL: C22 C53 E32 E37
    Date: 2006
  28. By: Robert A. Blecker (Department of Economics, American University)
    Date: 2006–03
  29. By: Michael B. Devereux; Charles Engel
    Abstract: This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, the elasticity of substitution between home and foreign goods, and the amount of home bias in production. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic.
    JEL: F3 F4 E5
    Date: 2006–05
  30. By: Luis Alberiko Gil-Alana; Antonio Moreno
    Abstract: Previous research has found that the response of hours worked to a technology shock crucially depends on whether the variable hours is assumed to be an I(0) or an I(1) variable ex-ante. In this paper we employ a multivariate fractionally integrated model which allows us to determine simultaneously the order of integration of hours worked and the response of hours to a technology shock. We find that hours fall on impact in response to a positive technology shock.
    JEL: C12 C22 C32 C51 E32
  31. By: Michael Dobbie (Department of Economics, Macquarie University)
    Abstract: In recent years a large theoretical and empirical literature has emerged on hysteresis in unemployment. This paper reviews the theoretical part of this literature, including the various insider-outsider models that have been advanced to explain hysteresis. The review finds that while the assumptions required to generate full hysteresis are somewhat extreme, a less severe form of hysteresis, called persistence, emerges quite readily from models with reasonable assumptions. The paper however questions the extent to which the recent experience of unemployment can be explained by this approach.
    Keywords: Hysteresis, persistence, insider-outsider theory
    JEL: E24 J6
    Date: 2004–09
  32. By: William D. Nordhaus
    Abstract: William Baumol and his co-authors have analyzed the impact of differential productivity growth on the health of different sectors and on the overall economy. They argued that technologically stagnant sectors experience above average cost and price increases, take a rising share of national output, and slow aggregate productivity growth. Using industry data for the period 1948-2001, the present study investigates Baumol’s diseases for the overall economy. It finds that technologically stagnant sectors clearly have rising relative prices and declining relative real outputs. Additionally, technologically progressive sectors tend to have slower hours and employment growth outside of manufacturing. Finally, sectoral shifts have tended to lower overall productivity growth as the share of stagnant sectors has risen over the second half of the twentieth century.
    JEL: D4 O3 O4
    Date: 2006–05
  33. By: Masanao Aoki (Department of Economics, University of California, Los Angeles)
    Abstract: This paper discusses a symptotic behavior of one-and two-parameter Poisson-Dirichlet models, that is, Ewens models and its two parameter extensions by Pitman, and show that their a symptotic behavior arevery di?erent. The paper shows asymptotic properties of a class of one-and two-parameter Poisson-Dirichlet distribution models are drastically di?erent. Convergence behavioris expressedin termsof generalized Mittag-Le?er distributions in the statistics literature. The coe?cients of variations of suitably normalized number of clusters andof clusters of speci?c sizesdo not vanish in the two-parameter version, but they do in one-parameter Ewens models.
    Date: 2006–05
  34. By: Maarten C.W. Janssen (Erasmus Universiteit Rotterdam)
    Abstract: This paper gives an overview and evaluates the literature on Microfoundations.<P>
    Keywords: Representative Agents; New Keynesian Economics; and New Classical Economics
    JEL: B22 D40 E00
    Date: 2006–04–26
  35. By: Masako Ikefuji (Graduate School of Economics, Osaka University); Ryo Horii (Graduate School of Economics, Osaka University)
    Abstract: This paper studies sustainability of economic growth considering the risk of natural disasters caused by pollution in an endogenous growth model with physical and human capital accumulation. We consider an environmental tax policy, and show that economic growth is sustainable only if the tax rate on the polluting input is increased over time and that the long-term rate of economic growth follows an inverted V-shaped curve relative to the growth rate of the environmental tax. The social welfare is maximized under a positive steadystate growth in which faster accumulation of human capital compensates the productivity loss due to declining use of the polluting input.
    Keywords: natural disasters, human capital, endogenous depreciation, economic growth.
    JEL: O41 O13 E22
    Date: 2006–05
  36. By: Paola Dongili (Dipartimento di Scienze economiche (Università di Verona))
    Abstract: Prof. G. Menegazzi was a Known Italian economist working in the mid of the twentieth century. His works are focused on the complex functioning of the economic systems and underline the importance of the aim of the actions of the economic agents and the consistency between aim and tools. The paper goes over some of his papers which testify that prof. Menegazzi was fully aware of the links between finance and growth and, moreover, he was acquainted with the importance of the efficiency of financial system in shaping this relation.
    JEL: G E44
    Date: 2005–12
  37. By: Jesús Antonio Bejarano Rojas
    Abstract: En este artículo se estiman, para Colombia, los parámetros profundos de la curva de Phillips neokeynesiana propuesta por Gali y Gertler (1999). La estimación de los parámetros implica que más del setenta por ciento de las firmas en Colombia mantiene sus precios fijos durante aproximadamente tres trimestres. Adicionalmente, se estiman los parámetros estructurales que soportan la relación positiva que hay entre la brecha del costo marginal real y la brecha del producto a partir de un modelo de equilibrio general propuesto por Gali y Monacelli (2002). Los resultados obtenidos muestran una relación positiva de corto plazo entre el costo marginal real y el producto en Colombia.
    Date: 2005–06–30
  38. By: Paola Manzini (Queen Mary, University of London and IZA Bonn); Marco Mariotti (Queen Mary, University of London); Luigi Mittone (University of Trento)
    Abstract: In this paper we formulate and investigate experimentally a model of how individuals choose between time sequences of monetary outcomes. The theoretical model assumes that a decision-maker uses, sequentially, two criteria to screen options. Each criterion only permits a decision between some pairs of options, while the other options are incomparable according to that criterion. When the first criterion is not decisive, the decision maker resorts to the second criterion to select an alternative. This type of decision procedures has encountered the favour of several psychologists, though it is quite under-explored in the economics domain. In the experiment we find that: 1) traditional economic models based on discounting alone cannot explain a significant (almost 30%) proportion of the data no matter how much variability in the discount functions is allowed; 2) our model, despite considering only a specific (exponential) form of discounting, can explain the data much better solely thanks to the use of the secondary criterion; 3) our model explains certain specific patterns in the choices of the ‘irrational’ people. We can safely reject the hypothesis that anomalous behaviour is due simply to random ‘mistakes’ around the basic predictions of discounting theories: the deviations are not random and there are clear systematic patterns of association between ‘irrational’ choices.
    Keywords: time preference, time sequences, negative discounting
    JEL: C91 D9
    Date: 2006–05
  39. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Abstract: We study the optimal Mirrlees taxation problem in a dynamic economy with idiosyncratic (productivity or preference) shocks. In contrast to the standard approach, which implicitly assumes that the mechanism is operated by a benevolent planner with full commitment power, we assume that any centralized mechanism can only be operated by a self-interested ruler/government without commitment power, who can therefore misuse the resources and the information it collects. An important result of our analysis is that there will be truthful revelation along the equilibrium path (for all positive discount factors), which shows that truth-telling mechanisms can be used despite the commitment problems and the different interests of the government. Using this tool, we show that if the government is as patient as the agents, the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when the government is less patient than the citizens, there are positive aggregate distortions and positive aggregate capital taxes even asymptotically. Under some additional assumptions on preferences, these results generalize to the case when the government is benevolent but unable to commit to future tax policies. We conclude by providing a brief comparison of centralized mechanisms operated by self-interested rulers to anonymous markets.
    JEL: H11 H21 E61 P16
    Date: 2006–05
  40. By: Céline Choulet (Centre d'Economie de la Sorbonne)
    Abstract: This paper raises the question of the dynamic effects of public spending in jobs on labor market performance. We use a dynamic matching model and study how public jobs creation affects endogenous workers' decisions to move on the labor market and private-sector firms' job creation and destruction decisions. We obtain that it exerts an attracting effect and a fiscal effect on the labor market that make the unemployment rate and job flows overshoot. As an empirical illustration, we estimate a SVAR model that focuses on the consequences of public job creations on unemployment, wages and job flows dynamics. We confirm our intuition : public employment has a significant ambiguous effect on private wages.
    Keywords: Public sector labor market, unemployment dynamics.
    JEL: J45 J21
    Date: 2006–03
  41. By: Martha A. Starr (Department of Economics, American University)
    Abstract: Saving, investment, and pensions are avenues by which households build up claims to future income and consumption. Such claims are important in a number of respects: they broaden people’s options, reduce their insecurities about material living standards, and enhance their ability to live with dignity in old age. As such, understanding the multiplicity of factors that shape how people save, invest and acquire pension rights is important for understanding their access to well-being and the ways in which social arrangements improve or undercut that access. This paper reviews social-economics perspectives on these macroeconomic issues, highlighting contributions of existing research and identifying fruitful directions for future work.
    Date: 2006–05
  42. By: Robert A. Blecker (Department of Economics, American University)
    Abstract: This paper analyzes the effects of the real value of the dollar on investment in US domestic manufacturing, using aggregate time-series data for 1973-2004. The econometric estimates reveal robust evidence for a negative effect of the dollar that is much larger than has been found in any previous study (and which is not sensitive to various alternative specifications). The results also suggest that the exchange rate affects investment mainly, although not exclusively, through the channel of financial or liquidity constraints, rather than by affecting the desired stock of capital. Counterfactual simulations show that US manufacturing investment would have been 61% higher and the capital stock would have been 17% higher in 2004 if the dollar had not appreciated after 1995.
    Keywords: investment, manufacturing, exchange rate, US dollar, profits, US economy
    JEL: E22 F31 L60 E25
    Date: 2006–05
  43. By: Emilie Laffiteau (CATT - UPPA); Jean-Marc Montaud (CATT – UPPA et CED / IFReDE-GRES, Université Montesquieu Bordeaux IV)
    Abstract: Cette analyse montre l’impact du choix du régime de Currency Board sur la pauvreté des ménages en Argentine. Un tel régime monétaire introduisant des contraintes majeures sur l’économie, notamment sur le marché du travail, nous partons d’une désagrégation des ménages argentins identifiant leurs différentes modalités d’insertion sur ce marché et dégageant leur vulnérabilité respective en termes de pauvreté. Dans un second temps, nous construisons un modèle EGC financier incorporant les mécanismes du Currency Board, les principales caractéristiques de l’économie argentine, ainsi que les indicateurs de pauvreté et d’inégalités des différents groupes de ménages. Trois types de simulations sont effectuées pour retracer les différentes conditions économiques qu’a pu connaître l’Argentine à la fin des années quatre-vingt dix : renforcement des politiques d’austérité, instabilité financière et ouverture commerciale. Elles montrent comment réagit cette économie contrainte par le Currency Board et quelles sont les répercussions en termes de pauvreté et d’inégalités. This study shows the impact of the choice of a Currency Board regime on household’s poverty in Argentina. Such monetary system introducing strong constraints on the economy, in particular on its labour market, we make an argentines households stratification witch identify their different occupational integration conditions on its market and show their respective vulnerability on poverty. Secondly, we build a financial general equilibrium model which includes Currency Board mechanisms, the main features of the argentine economy and inequality and poverty indicators. Three types of simulations illustrate the economic conditions that go through Argentina in the end of the nineties: austerity politics strengthening, financial instability and commercial liberalisation. Each simulation explains how the argentine economy, constraint by the Currency Board, react and show the consequences on poverty and inequality. (Full text in french)
    JEL: D58 E42 I32
    Date: 2006–05
  44. By: Michael B. Devereux; Charles Engel
    Abstract: Both empirical evidence and theoretical discussion have long emphasized the impact of “news” on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in determining the relative price of non-durable goods when nominal goods prices are sticky. In this paper we argue that these two roles may conflict with one another. If news about future asset returns causes movements in current exchange rates, then when nominal prices are slow to adjust, this may cause changes in current relative goods prices that have no efficiency rationale. In this sense, anticipations of future shocks to fundamentals can cause current exchange rate misalignments. Friedman’s (1953) case for unfettered flexible exchange rates is overturned when exchange rates are asset prices. We outline a series of models in which an optimal policy eliminates the effects of news on exchange rates.
    JEL: F3 F4 E5
    Date: 2006–05

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