nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒05‒27
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Increasing Returns to Scale and the Long-Run Phillips Curve By Andrea Vaona; Dennis Snower
  2. Monetary Policy with Endogenous Firm Entry and Sticky Entry Costs By Tommaso Mancini Griffoli
  3. Uncertainty and Monetary Policy Rules in the United States By Christopher Martin; Costas Milas
  4. Monetary Policy and Inflation Divergences in a Heterogeneous Monetary Union By Patrick Villieu; Nelly Gregoriadis; Florina Semenescu
  5. Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank By Bernd Hayo; Boris Hofmann
  6. Uncertainty and UK Monetary Policy By Christopher Martin; Costas Milas
  7. Regime changes and monetary stagflation By Edward S. Knotek II
  8. U.K. inflation targeting and the exchange rate By Christopher Allsopp; Amit Kara; Edward Nelson
  9. Time-varying U.S. inflation dynamics and the New-Keynesian Phillips curve By Kevin J. Lansing
  10. Optimal regional biases in ECB interest rate setting By Ivo J.M. Arnold
  11. The Svensson versus McCallum and Nelson Controversy Revisited in the BMW Framework By Peter Bofinger; Eric Mayer
  12. Derivation and Estimation of a New Keynesian Phillips Curve in a Small Open Economy By Holmberg, Karolina
  13. The bond yield "conundrum" from a macro-finance perspective By Glenn D. Rudebusch; Eric T. Swanson; Tao Wu
  14. The price-dividend relationship in inflationary and deflationary regimes By Jakob B Madsen; Costas Milas
  15. Real-time model uncertainty in the United States: the Fed from 1996-2003 By Robert J. Tetlow; Brian Ironside
  16. The Wage Curve: An Entry Written for the New Palgrave, 2nd Edition By David G. Blanchflower; Andrew J. Oswald
  17. Dynamic employment adjustments over business cycles By Tung Liu; Lee C. Spector
  18. Why Did the Sign of the Price-Output Correlation Change? Evidence from a Structural VAR with GARCH Errors By James Peery Cover; C. James Hueng
  19. On the Stability of the German Beveridge Curve : A Spatial Econometric Perspective By Reinhold Kosfeld; Christian Dreger; Hans-Friedrich Eckey
  20. Non-linear adjustments in fiscal policy By Gabriella Legrenzi; Costas Milas
  21. Stock market fluctuations and money demand in Italy, 1913-2003 By Massimo Caruso
  22. On the predictability of common risk factors in the US and UK interest rate swap markets:Evidence from non-linear and linear models. By Ilias Lekkos; Costas Milas; Theodore Panagiotidis
  23. Duration Dependent Markov-Switching Vector Autoregression: Properties, Bayesian Inference, Software and Application By Matteo Pelagatti
  24. Gross loan flows By Ben Craig; Joseph G. Haubrich
  25. A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro By Lindblad, Hans; Sellin, Peter
  26. Testing Theories of Job Creation: Does Supply Create Its Own Demand? By Carlsson, Mikael; Eriksson, Stefan; Gottfries, Nils
  27. Timing transitions between determinate and indeterminate equilibria in an empirical DSGE model: benefits and implications By Anatoliy Belaygorod; Michael J. Dueker
  28. Stock market volatility and macroeconomic uncertainty. Evidence from survey data By Ivo J.M. Arnold; Evert B. Vrugt
  30. Forecasting US bond yields at weekly frequency By Riccardo LUCCHETTI; Giulio PALOMBA
  31. Do macro variables, asset markets, or surveys forecast inflation better? By Andrew Ang; Geert Bekaert; Min Wei
  32. Time-Varying Equilibrium Rates of Unemployment: An Analysis with Australian Data By Robert Dixon; John Freebairn; G. C. Lim
  33. Asset Pricing with Incomplete Information In a Discrete Time Pure Exchange Economy By Prasad Bidarkota; Brice Dupoyet
  34. Market Work, Home Production, Consumer Demand and Unemployment among the Unskilled By Melanie Lührmann; Matthias Weiss
  35. Volatility, growth, and large welfare gains from stabilization policies By Pengfei Wang; Yi Wen
  36. Technology Shocks and the Labor-Input Response: Evidence from Firm-Level Data By Carlsson, Mikael; Smedsaas, Jon
  37. Central bank intervention with limited arbitrage By Christopher J. Neely; Paul A. Weller
  38. The Euro and Financial Integration By Philip Lane; Sébastien Wälti
  39. Inside and outside money By Ricardo Lagos
  40. A Further Examination of the Expectations Hypothesis for the Term Structure By E Bataa; D R Osborn; D H Kim
  41. Method to Find the VARs Easily By Angela Birk
  42. Modeling direct investment valuation adjustments and estimating quarterly positions By Jane Ihrig; Jaime Marquez
  43. Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model By Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
  44. Linking cross-impact probabilistic scenarios to input-output models By FONTELA, EMILIO; RUEDA CANTUCHE,JOSÉ MANUEL
  45. Random walks and cointegration relationships in international parity conditions between Germany and USA for the post Bretton-Woods period By Bevilacqua, Franco
  46. Down or Out: Assessing The Welfare Costs of Household Investment Mistakes By Calvet, Laurent E.; Campbell, John Y.; Sodini, Paolo
  47. Learning and Visceral Temptation in Dynamic Savings Experiments By Alexander L. Brown; Colin F. Camerer; Zhikang Eric Chua
  48. Improving Tatonnement Methods of Solving Heterogeneous Agent Models By Alexander Ludwig
  49. Skill Biased Technological Change and Endogenous Benefits: The Dynamics of Unemployment and Wage Inequality By Matthias Weiss; Alfred Garloff
  50. Is foreign exchange intervention effective? Some micro-analytical evidence from the Czech Republic By Antonio Scalia
  51. Crowding out or crowding in? By Anette Reil Held

  1. By: Andrea Vaona; Dennis Snower
    Abstract: A growing body of empirical evidence shows that there exists a long-run positive tradeoff between inflation and real macroeconomic activity. Within a New Keynesian framewok, we examine how increasing returns generate a positive long-run relation between inflation and output.
    Keywords: Phillips curve, Inflation, Increasing returns, nominal inertia, monetary policy
    JEL: E3 E20 E40 E50
    Date: 2006–05
  2. By: Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper builds a monetary model where firm entry is endogenous, thereby exposing a new channel for the transmission of monetary policy. Individuals have a choice between consuming or investing in new firms by financing a sunk entry cost. Monetary policy shocks affect the cost-benefit analysis of creating new firms, and generate persistent as well as hump-shaped responses of consumption, investment, output and new firm entry, as observed in the data. These results lie on an endogenous source of inertia and are obtained despite minimal nominal rigidities, as only entry costs are assumed to be sticky.
    Keywords: Monetary policy, firm entry, sunk entry costs, investment, sticky prices, New Keynesian models.
    JEL: E37 E40 E52 L16
    Date: 2006–04
  3. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics)
    Abstract: This paper analyses the impact of uncertainty on monetary policy rules in the US since the early 1980s. Extending the Taylor rule to allow the response of interest rates to inflation and the output gap to depend on uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behaviour of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy.
    Keywords: Monetary policy, Uncertainty.
    JEL: C51 C52 E52 E58
    Date: 2005–07
  4. By: Patrick Villieu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Nelly Gregoriadis (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Florina Semenescu (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: It is widely recognized that the Euro area is an asymmetric monetary union which assembles countries with heterogeneous structures on financial, goods and labour markets stricken by asymmetric shocks. However, the main objective of the European Central Bank (ECB) is to preserve price stability for the euro area as a whole, and the ECB pays most of its attention to union-wide output and (principally) inflation, neglecting, at least on the level of principles, inflation and output divergences in union. In this paper, we wonder, at a theoretical level, about the social loss associated with such an objective based on aggregate magnitudes, and we search for solutions, namely an “optimal” contract for a common central bank. We show in particular that it is not necessarily a good thing that a common central bank worries about inflation divergences without being concerned about output divergences in union.
    Keywords: Monetary Policy ; Monetary Union ; Heterogeneity, Optimal Contract ; Inflation Divergences
    Date: 2006–05–23
  5. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet MarburgAuthor-Name: Boris Hofmann); Boris Hofmann (Zentrum für Europäische Integrationsforschung, University of Bonn, Walter-Flex-Str. 3, D-53113 Bonn, Germany)
    Abstract: This paper compares the ECB’s conduct of monetary policy with that of the Bundesbank. Estimated monetary policy reaction functions for the Bundesbank (1979:4-1998:12) and the European Central Bank (1999:1-2004:5) show that, while the ECB and the Bundesbank react similarly to expected inflation, the ECB reacts significantly stronger to the output gap. Theoretical considerations suggest that this stronger response to the output gap may rather be due to a higher interest rate sensitivity of the German output gap than to a higher weight given to output stabilisation by the ECB. Counterfactual simulations based on the estimated interest rate reaction functions suggest that German interest rates would not have been lower under a hypothetical Bundesbank regime after 1999. However, this conclusion crucially depends on the assumption of an unchanged long-run real interest rate for the EMU period. Adjusting the Bundesbank reaction function for the lower long-run real interest rate estimated for the ECB regime reverses this conclusion.
    Keywords: Taylor rule, monetary policy, ECB, Bundesbank
    JEL: E5
    Date: 2005
  6. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Department of Economics)
    Abstract: This paper provides empirical evidence on the response of monetary policymakers to uncertainty. Using data for the UK since the introduction of inflation targets in October 1992, we find that the impact of inflation on interest rates is lower when inflation is more uncertain and is larger when the output gap is more uncertain. These findings are consistent with the predictions of the theoretical literature. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates and argue that monetary policy would have been less passive in the absence of uncertainty.
    Keywords: Monetary policy, uncertainty
    JEL: C51 C52 E52 E58
    Date: 2005–02
  7. By: Edward S. Knotek II
    Abstract: This paper examines whether monetary shocks can consistently generate stagflation in a dynamic, stochastic setting. I assume that the monetary authority can induce transitory shocks and longer-lasting monetary regime changes in its operating instrument. Firms cannot distinguish between these shocks and must learn about them using a signal extraction problem. The possibility of changes in the monetary regime greatly improves the ability of money to generate stagflation. This is true whether the regime actually changes or not. If the monetary regime changes on average once every ten years, stagflation occurs in 76% of model simulations. The intuition for this result is simple: increased output volatility due to learning coupled with inflation inertia produce conditions conducive to the emergence of stagflation. The incidence of stagflation can be reduced by a stable, transparent central bank.
    Keywords: Inflation (Finance) ; Recessions ; Monetary policy
    Date: 2006
  8. By: Christopher Allsopp; Amit Kara; Edward Nelson
    Abstract: The United Kingdom*s monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index; and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. We argue that it is appropriate to model imports as intermediate goods rather than as goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy, while also offering a sustainable explanation fore the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target.
    Keywords: Inflation (Finance) - Great Britain ; Foreign exchange rates - Great Britain
    Date: 2006
  9. By: Kevin J. Lansing
    Abstract: This paper introduces a form of boundedly-rational expectations into an otherwise standard New-Keynesian Phillips curve. The representative agent's forecast rule is optimal (in the sense of minimizing mean squared forecast errors), conditional on a perceived law of motion for inflation and observed moments of the inflation time series. The perceived law of motion allows for both temporary and permanent shocks to inflation, the latter intended to capture the possibility of evolving shifts in the central bank's inflation target. In this case, the agent's optimal forecast rule defined by the Kalman filter coincides with adaptive expectations, as shown originally by Muth (1960). I show that the perceived optimal value of the gain parameter assigned to the last observed inflation rate is given by the fixed point of a nonlinear map that relates the gain parameter to the autocorrelation of inflation changes. The model allows for either a constant gain or variable gain, depending on the length of the sample period used by the agent to compute the autocorrelation of inflation changes. In the variable-gain setup, the equilibrium law of motion for inflation is nonlinear and can generate time-varying inflation dynamics similar to those observed in long-run U.S. data. The model's inflation dynamics are driven solely by white-noise fundamental shocks propagated via the expectations feedback mechanism; all monetary policy-dependent parameters are held constant.
    Keywords: Inflation (Finance) ; Phillips curve ; Econometric models
    Date: 2006
  10. By: Ivo J.M. Arnold (Nyenrode Business Universiteit)
    Abstract: This paper uses a simple model of optimal monetary policy to consider whether the influence of national output and inflation rates on ECB interest rate setting should equal a country’s weight in the eurozone economy. The findings depend on assumptions regarding interest rate elasticities, exchange rate elasticities, and openness vis-à-vis non-eurozone countries. The major conclusion is that the ECB should respond less to inflation shocks in EMU countries that have strong trading ties with non-eurozone countries. Intuitively, these countries can take care of some of the monetary tightening themselves, through a real appreciation vis-à-vis their non-eurozone trading partners.
    Keywords: EMU, Taylor rule; Optimal monetary poli
    Date: 2005
  11. By: Peter Bofinger; Eric Mayer
    Abstract: This note shows that the Svensson versus McCallum and Nelson controversy battled in the Federal Reserve Bank of St. Loius Review (September/ October 2005) can be mapped into a static version of a New Keynesian macro model that consists of an IS-equation, a Phillips curve and an inflation targeting central bank (e.g., Bofinger, Mayer, Wollmershäuser, (2006); Walsh (2002)). As a contribution to literature we supplement the controversy by a forceful graphical analysis. The general debate centers on the question by which notion monetary policy should be implemented. The two sides have fundamentally opposite views on this issue. Svensson argues for targeting rules as a notion of optimal monetary policy, whereas McCallum and Nelson promote simple instrument rules. In this note we systematically analyze these two categories of monetary policy rules. In particular we show that the rule discussed by McCallum and Nelson (2005) imposes different degrees of variability on the economy compared to a targeting rule when monetary policy falls prey to measurement error. To our opinion the hybrid Taylor rule developed by McCallum and Nelson contradicts the original idea of simple rules as a heuristic for monetary policy making and should be rebutted for practical reasons
    Date: 2006
  12. By: Holmberg, Karolina (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In recent years, it has become increasingly common to estimate New Keynesian Phillips curves with a measure of firms' real marginal cost as the real driving variable. It has been argued that this measure is both theoretically and empirically superior to the traditional output gap. In this paper, a marginal-cost based New Keynesian Phillips curve is estimated on Swedish data by means of GMM and Full Information Maximum Likelihood. The results show that with real marginal cost in the structural equation the point estimates generally have the exptected positive sign, which is less frequently the case using the output gap in the Phillips curve equation. This suggests that real marginal cost might be a more adequate real explanatory variable for Swedish inflation than the output gap. However, standard errors in the estimations are large and it is in fact difficult to pin down a statistically significant relationship between either real marginal cost or the output gap and inflation.
    Keywords: Inflation; New Keynesian Phillips curve; Real marginal cost; Small Open Economy; GMM; Full Information Maximum Likelihood
    JEL: C22 E31 E32
    Date: 2006–05–01
  13. By: Glenn D. Rudebusch; Eric T. Swanson; Tao Wu
    Abstract: In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a "conundrum." We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual--that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and find that some of these variables, particularly declines in long-term bond volatility, may explain a portion of the conundrum. Foreign official purchases of U.S Treasuries appear to have played little or no role.
    Keywords: Monetary policy - United States ; Federal funds rate ; Treasury bonds
    Date: 2006
  14. By: Jakob B Madsen (University of Copenhagen); Costas Milas (Keele University, Department of Economics)
    Abstract: This paper argues that the linear price- dividend relationship as predicted in the Gordon (1962) model breaks down in regimes of high inflation and deflation. Using data for the US and the UK over the period from 1871 to 2002, nonlinear estimates support the prediction of the model.
    Keywords: Regime-switching, nonlinearity, price-dividend relationship, inflation and deflation.
    JEL: C32 C51 C52 G12 E44
    Date: 2005–07
  15. 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.
    Keywords: Monetary policy ; Uncertainty ; Economic forecasting
    Date: 2006
  16. By: David G. Blanchflower (Dartmouth College, NBER and IZA Bonn); Andrew J. Oswald (University of Warwick and IZA Bonn)
    Abstract: This paper summarizes evidence for the existence of a wage curve - a downward-sloping relationship between the level of pay and the local unemployment rate - in modern micro data. At the time of writing, the curve has been found in 40 nations. Its elasticity is approximately -0.1.
    Keywords: wage determination, unemployment, wage curve, Phillips curve
    JEL: J3 J4 J6 E24 E31
    Date: 2006–05
  17. By: Tung Liu (Department of Economics, Ball State University); Lee C. Spector (Department of Economics, Ball State University)
    Abstract: This paper uses U.S. monthly industrial production employment data between 1964 and 2000 to examine the dynamic labor adjustments of production workers and nonproduction workers in both the short and longrun. The results from the short-run analysis show that the dynamic adjustment of production workers is consistent with business cycles. However, the adjustment of nonproduction workers is relatively fixed, lags behind the shocks over business cycle changes, and exhibits the quasi-fixed factor property. In the long-run, we found that nonproduction workers and production workers are cointegrated indicating that the two series are in long-run equilibrium.
    Keywords: Employment adjustment, business cycles, quasi-fixed labor
    JEL: C32 J21 J50
    Date: 2003–12
  18. By: James Peery Cover (Department of Economics, Finance & Legal Studies, University of Alabama); C. James Hueng (Department of Economics, Western Michigan University)
    Abstract: It is generally agreed that the price-output correlation in the United States was positive prior to the Second World War, but became negative during the postwar period (at least by 1972). This paper offers evidence that the price-output correlation changed signs because of a decrease in the variability of aggregate demand. A structural VAR with bivariate GARCH (1,1) errors is used to estimate a times series of price-output correlations as well as of the conditional variances of the structural shocks to AD and AS. It is found that during the postwar period the price-output correlation is negative and significantly different from zero only when the standard deviation of the AD shock is less than that of the AS shock.
    Keywords: Price-Output Correlation, Structural VAR, Supply and Demand Shocks, Blanchard-Quah Decomposition
    JEL: E3 C32
    Date: 2006–03
  19. By: Reinhold Kosfeld; Christian Dreger; Hans-Friedrich Eckey
    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 non-spatial 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 threatens 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
  20. By: Gabriella Legrenzi (Keele University, Department of Economics); Costas Milas (Keele University, Department of Economics)
    Abstract: We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.
    Keywords: General government expenditure, general government revenues, budgetary disequilibria, persistence profile, asymmetries.
    JEL: C32 C51 C52 H20 H50
    Date: 2005–02
  21. By: Massimo Caruso (Bank of Italy)
    Abstract: This paper examines the impact of stock market fluctuations on money demand in Italy taking a long-run perspective. The empirical findings suggest that stock market fluctuations contribute to explain temporary movements in the liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long-run relationship is unstable. In a dynamic, short-term specification of money demand the estimated coefficient on deflated stock prices is positive, thus compatible with a wealth effect, in the years 1913-1980, while in the last two decades a substitution effect prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalisation. Moreover, in the recent period stock market turnover and money growth are positively correlated.
    Keywords: long-run money demand function, asset prices volatility
    JEL: E41 E44 N14 N24
    Date: 2006–02
  22. By: Ilias Lekkos (Eurobank Ergasias); Costas Milas (Keele University, Department of Economics); Theodore Panagiotidis (Loughborough University)
    Abstract: This paper explores the ability of common risk factors to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. The first regime is characterised by a "flat" term structure of US interest rates, while the alternative is characterised by an "upward" sloping US term structure. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neibours model as well as that of linear AR and VAR models. We find some evidence that the nearest-neighbours and STVAR models predict better than the linear AR and VAR models. However, the evidence is not overwhelming as it is sensitive to swap spread maturity. We also find that within the non-linear class of models, the nearest-neighbours model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions.
    Keywords: Interest rate swap spreads, term structure of interest rates, regime switching, smooth transition models, nearest-neighbours, forecasting
    JEL: C51 C52 C53 E43
    Date: 2005–02
  23. By: Matteo Pelagatti
    Abstract: Duration dependent Markov-switching VAR (DDMS-VAR) models are time series models with data generating process consisting in a mixture of two VAR processes. The switching between the two VAR processes is governed by a two state Markov chain with transition probabilities that depend on how long the chain has been in a state. In the present paper we analyze the second order properties of such models and propose a Markov chain Monte Carlo algorithm to carry out Bayesian inference on the model’s unknowns. Furthermore, a freeware software written by the author for the analysis of time series by means of DDMS-VAR models is illustrated. The methodology and the software are applied to the analysis of the U.S. business cycle.
    Keywords: Markov-switching, business cycle, Gibbs sampler, duration dependence, vector autoregression
    JEL: C11 C15 C32 C41 E32
    Date: 2003–08
  24. By: Ben Craig; Joseph G. Haubrich
    Abstract: Changes in net lending hide the much larger and more variable gross lending flows. We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and the business cycle. We look at both the intensive (increases and decreases) and extensive (entry and exits) margins. We compare these results with the output from a simple stochastic search model.
    Keywords: Bank loans ; Business cycles
    Date: 2006
  25. By: Lindblad, Hans (Sveriges Riksdag); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.
    Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model
    JEL: C32 E31 F31 F41
    Date: 2006–05–01
  26. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Eriksson, Stefan (Department of Economics, Uppsala University); Gottfries, Nils (Department of Economics, Uppsala University)
    Abstract: How well do alternative labor market theories explain variations in net job creation? According to search-matching theory, job creation in a firm should depend on the availability of workers (unemployment) and on the number of job openings in other firms (congestion). According to efficiency wage and bargaining theory, wages are set above the market clearing level and employment is determined by labor demand. To compare these models we estimate an encompassing equation for net job creation on firm-level data. The results support demand-oriented theories of job creation, whereas we find no evidence in favor of the search-matching theory.
    Keywords: Job Creation; Involuntary Unemployment; Search-Matching; Labor Demand
    JEL: E24 J23 J64
    Date: 2006–05–01
  27. By: Anatoliy Belaygorod; Michael J. Dueker
    Abstract: We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). This feature is useful because DSGE models generally are estimated with data sets that include the Great Inflation of the 1970s and the surrounding low inflation periods. Timing the transitions between determinate and indeterminate equilibria is one of the key contributions of this paper. Moreover, by letting the data provide estimates of the state transition dates and allowing the estimated structural parameters to be the same across determinacy states, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the states. In particular, we find that positive interest rate shocks were inflationary under indeterminacy. While the change-point treatment of indeterminacy is applicable to all estimated linear DSGE models, we demonstrate our methodology by estimating the canonical Woodford model with a time-varying inflation target. Implementation of the change-point methodology coupled with Tailored Metropolis-Hastings provides a highly efficient Bayesian MCMC algorithm. Our prior-posterior updates indicate substantially lower sensitivity to hyperparameters of the prior relative to other estimated DSGE models.
    Keywords: Equilibrium (Economics) - Mathematical models ; Econometric models - Evaluation
    Date: 2006
  28. By: Ivo J.M. Arnold; Evert B. Vrugt (Nyenrode Business Universiteit)
    Abstract: This paper provides empirical evidence on the link between stock market volatility and macroeconomic uncertainty. We show that US stock market volatility is significantly related to the dispersion in economic forecasts from SPF survey participants over the period from 1969 to 1996. This link is much stronger than that between stock market volatility and the more traditional time-series measures of macroeconomic volatility, but disappears after 1996.
    Keywords: Stock market volatility, macro-economic factors, survey data
    Date: 2006
  29. By: Juan Ignacio Pena; Rosa Rodriguez
    Abstract: This paper presents a model linking two financial markets (stocks and bonds) with the real business cycle, in the framework of the Consumption Capital Asset Pricing Model with Generalized Isoelastic Preferences. Besides interest rate term spread, the model includes a new variable to forecast economic activity: stock market term spread, which constitutes the slope of expected stock market returns. The empirical evidence documented in this paper suggests systematic relationships between the state of the business cycle and the shapes of two yield curves (interest rates and expected stock returns). Results are robust to changes in measures of economic growth, stock prices, interest rates and expectation-generating mechanisms.
    Date: 2006–05
  30. By: Riccardo LUCCHETTI (Universita' Politecnica delle Marche, Dipartimento di Economia); Giulio PALOMBA ([n.d.])
    Abstract: Forecasting models for bond yields often use macro data to improve their properties. Unfortunately, macro data are not available at frequencies higher than monthly.;In order to mitigate this problem, we propose a nonlinear VEC model with conditional heteroskedasticity (NECH) and find that such model has superior in-sample performance than models which fail to encompass nonlinearities and/or GARCH-type effects.;Out-of-sample forecasts by our model are marginally superior to competing models; however, the data points we used for evaluating forecasts refer to a period of relative tranquillity on the financial markets, whereas we argue that our model should display superior performance under "unusual" circumstances.
    Keywords: conditional heteroskedasticity, forecasting, interest rates, nonlinear cointegration
    JEL: C32 C53 E43
    Date: 2006–05
  31. By: Andrew Ang; Geert Bekaert; Min Wei
    Abstract: Surveys do! We examine the forecasting power of four alternative methods of forecasting U.S. inflation out-of-sample: time series ARIMA models; regressions using real activity measures motivated from the Phillips curve; term structure models that include linear, non-linear, and arbitrage-free specifications; and survey-based measures. We also investigate several methods of combining forecasts. Our results show that surveys outperform the other forecasting methods and that the term structure specifications perform relatively poorly. We find little evidence that combining forecasts produces superior forecasts to survey information alone. When combining forecasts, the data consistently places the highest weights on survey information.
    Date: 2006
  32. By: Robert Dixon (Department of Economics, The University of Melbourne); John Freebairn (Department of Economics and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); G. C. Lim (Department of Economics and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: In this paper we explore a new approach to understanding the evolution of the unemployment rate in Australia. Specifically, we use gross worker flows data to explore the consequences of assuming that there is no unique equilibrium rate of unemployment but rather a continuum of stochastic equilibrium rates which reflect the movement of the entry and exit rates over time. It is shown that the stochastic equilibrium unemployment rate and the observed unemployment rate are very closely related and we explore the reasons why this is so. We examine the short-run dynamics of the entry and exit rates (specifically, the impulse response functions) and the impact on the unemployment rate of shocks to the entry and exit rates and find that shocks to the entry rate have been more important than shocks to the exit rate in bringing about variations in the unemployment rate over our sample period. We then present a new way to disentangle the effects on the (equilibrium) unemployment rate of the business cycle and structural shifts. It would appear that there was a once and for all downward shift in the equilibrium rate(s) of unemployment in Australia in the early 1990s, which likely reflects the introduction of a more generous system of disability pension benefits.
    Date: 2006–05
  33. By: Prasad Bidarkota (Department of Economics, Florida International University); Brice Dupoyet (Department of Finance, Florida International University)
    Abstract: We study the consumption based asset pricing model in a discrete time pure exchange setting with incomplete information. Incomplete information leads to a filtering problem which agents solve using the Kalman filter. We characterize the solution to the asset pricing problem in such a setting. Empirical estimation with US consumption data indicates strong statistical support for the incomplete information model versus the benchmark complete information model. We investigate the ability of the model to replicate some key stylized facts about US equity and riskfree returns.
    Keywords: asset pricing, incomplete information, Kalman filter, equity returns, riskfree returns
    JEL: G12 G13 E43
    Date: 2006–05
  34. By: Melanie Lührmann; Matthias Weiss (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: We propose and test a general equilibrium model in which longer working time and higher labor force participation lead to a fall in unemployment. Longer working hours and higher labor force participation have two direct e®ects: People have higher in- comes and less (leisure) time. This has implications for the composition of consumer demand, since people spend less time on home production. Instead, they outsource more domestic tasks to the market. Consumer demand shifts toward unskill-intensive goods. The relative demand for unskilled labor rises and unemployment falls. We test our model in two ways: First, we study the link between labor market partici- pation, home production and the demand for household and similar services using the German time use survey conducted in 1991/92. Second, we use cross-country time- series data on OECD countries between 1980 and 2003 to directly examine the link between labor force participation and the unemployment rate. The empirical results corroborate the predictions from the theoretical model.
    JEL: J22 J23 E21 E24
    Date: 2006–01–12
  35. By: Pengfei Wang; Yi Wen
    Abstract: This paper proposes a simple endogenous-fluctuations growth model to show: 1) long-run growth and short-run fluctuations can be intimately linked; in particular, the rate of long run growth can be negatively affected by volatilities; 2) imperfect competition can cause endogenous fluctuations, and it reduces not only the level of output but also its mean growth rate by amplifying the volatility of the economy; and 3) the welfare gain of stabilization policy can be enormous (e.g., as high as 25% of annual consumption when calibrated to the U.S. data) because policies designed to reduce sunspots-driven fluctuations can generate permanently higher rates of growth.
    Date: 2006
  36. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Smedsaas, Jon (Department of Economics)
    Abstract: We study the relationship between technology shocks and labor input on Swedish firm-level data using a production function approach to identify technology shocks. Taking standard steps yields a contractionary contemporaneous labor-input response in line with previous studies. This finding may, however, be driven by measurement errors in the labor-input variable. Relying on a unique feature of our data set, which contains two independently measured firm-specific labor input measures, we can evaluate the potential bias. We do not find any evidence supporting that this bias would conceal any true positive contemporaneous effect. The results thus point away from standard flexible-price models and towards models emphasizing firm-level rigidities.
    Keywords: Technology Shocks; Labor Input; Business Fluctuations; Micro Data
    JEL: C33 D24 E32
    Date: 2006–05–01
  37. By: Christopher J. Neely; Paul A. Weller
    Abstract: Shleifer and Vishny (1997) pointed out some of the practical and theoretical problems associated with assuming that rational speculation would quickly drive asset prices back to long-run equilibrium. In particular, they showed that the possibility that asset price disequilibrium would worsen, before being corrected, tends to limit rational speculators. Uniquely, Shleifer and Vishny (1997) showed that “performance-based asset management” would tend to reduce speculation when it is needed most, when asset prices are furthest from equilibrium. We analyze a generalized Shleifer and Vishny (1997) model for central bank intervention. We show that increasing availability of arbitrage capital has a pronounced effect on the dynamic intervention strategy of the central bank. Intervention is reduced during periods of moderate misalignment and amplified at times of extreme misalignment. This pattern is consistent with empirical observation.
    Date: 2006
  38. By: Philip Lane; Sébastien Wälti
    Abstract: We provide a quantitative analysis of the impact of the euro on European financial integration. We consider both volume- and price-based indicators. In general, we find evidence that common membership of the euro area strengthens bilateral financial linkages. However, we emphasize that EMU has only been one innovation driving European financial integration in recent years, with global factors also increasingly important.
    Date: 2006–05–25
  39. By: Ricardo Lagos
    Abstract: A distinction is drawn between outside money—money that is either of a fiat nature or backed by some asset that is not in zero net supply within the private sector—and inside money, which is an asset backed by any form of private credit that circulates as a medium of exchange.
    Date: 2006
  40. By: E Bataa; D R Osborn; D H Kim
    Abstract: We extend the vector autoregression (VAR) based expectations hypothesis tests of term structure using recent developments in bootstrap literature. Firstly, we use wild bootstrap to allow for conditional heteroskedasticity in the VAR residuals without imposing any parameterization on this heteroskedasticity. Secondly, we endogenize the model selection procedure in the bootstrap replications to reflect true uncertainty. Finally, a stationarity correction is introduced which is designed to prevent finitesample bias adjusted VAR parameters from becoming explosive. When the new methodology is applied to extensive US zero coupon term structure data ranging from 1 month to 10 years, we find less rejections for the theory in a subsample of Jan 1982-Dec 2003 than in Jan 1952-Dec 1978, and when it is rejected it occurs at only the very short and long ends of the maturity spectrum, in contrast to the U shape pattern observed in some of the previous literature.
    Date: 2006
  41. By: Angela Birk
    Abstract: The paper shows an easy method to get the impulse responses of VARs of a stochastic recursive dynamic macro model by defining the transition matrix and the stationary distribution function of a model using the model, i.e. economic theory, itself.
  42. By: Jane Ihrig; Jaime Marquez
    Abstract: This paper takes an in-depth look at U.S. direct investment valuation adjustments. We develop a methodology to generate valuation adjustments at the quarterly frequency, which can be combined with the Bureau of Economic Analysis's quarterly direct investment flows to obtain quarterly estimates of direct investment assets and liabilities. Our methodology involves two steps. First, we estimate valuation adjustment models with annual data. Our models rely on variables that reflect terms used by the Bureau of Economic Analysis in their data construction: exchange-rate changes, changes in the price of products, and changes in stock-market prices. Second, we apply quarterly data to the estimated models to generate quarter valuations and implement a procedure that ensures that the estimated valuations for the four quarters in a given year sum to the reported annual valuation adjustments. With this framework we consider how asset price shocks affect the net direct investment position and, hence, net international investment position.
    Keywords: Investments, Foreign ; Investments
    Date: 2006
  43. By: Axel Börsch-Supan; Alexander Ludwig; Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    JEL: E27 F21 G15 H55 J11
    Date: 2004–11–11
  44. By: FONTELA, EMILIO (Instituto "L.R.Klein"- Centro Stone); RUEDA CANTUCHE,JOSÉ MANUEL (Universidad Pablo de Olavide)
    Keywords: Forecast, World Economy;Input-Output Models
    JEL: F01 C67 E17
    Date: 2004–06
  45. By: Bevilacqua, Franco (United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology)
    Abstract: This paper is based on a recent paper by Juselius and MacDonald (2000, 2003) and two `Journal of Econometrics' article s by Juselius (1995) and Johansen and Juselius (1992). The basic feature in all these articles is that the joint modelling of international parity conditions, namely ppp and uip, produces stationary relations showing an important interaction between the goods and the capital markets. We replaced the consumer price index (CPI) considered by Juselius and MacDonald with the producer price index (PPI) to check whether the international parity relationships still cointegrate. To our surprise we outstandingly produced similar results to those by Juselius and MacDonald, suggesting that the cointegration relationships in the international parity conditions hold also if we use different measures of prices. What is striking in our results is that even if there is no direct cointegration relation between CPI and PPI both in Germany and USA, the cointegration relation found between ppp and uip still holds notwithstanding of how ppp is measured.
    Keywords: ppp, uip, Fisher parity
    JEL: E31 E43 F31 F32
    Date: 2006
  46. By: Calvet, Laurent E. (Department of Finance, HEC School of Management and CREST); Campbell, John Y. (Department of Economics, Littauer Center); Sodini, Paolo (Department of Finance, Stockholm School of Economics)
    Abstract: This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets (“down”) and nonparticipation in risky asset markets (“out”). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficiently if they participated in risky asset markets.
    Keywords: Asset allocation; Diversification; Familiarity; Participation
    JEL: D50 D90 E30 O10
    Date: 2006–05–01
  47. By: Alexander L. Brown; Colin F. Camerer; Zhikang Eric Chua
    Date: 2006–05–14
  48. By: Alexander Ludwig (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This paper modifies standard block Gauss-Seidel iterations used by tatonnement methods for solving large scale deterministic heterogeneous agent models. The composite method between first- and second-order tatonnement methods is shown to considerably improve convergence both in terms of speed as well as robustness relative to conventional first-order tatonnement methods. In addition, the relative advantage of the modified algorithm increases in the size and complexity of the economic model. Therefore, the algorithm allows significant reductions in computational time when solving large models. The algorithm is particularly attractive since it is easy to implement - it only augments conventional and intuitive tatonnement iterations with standard numerical methods.
    JEL: C63 C68 E13
    Date: 2004–09–10
  49. By: Matthias Weiss; Alfred Garloff (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: In this paper, we study the effect of skill-biased technological change on unemployment when benefits are linked to the evolution of average income and when this is not the case. In the former case, an increase in the productivity of skilled workers and hence their wage leads to an increase in average income and hence in benefits. The increased fallback income, in turn, makes unskilled workers ask for higher wages. As higher wages are not justified by respective productivity increases, unemployment rises. More generally, we show that skill-biased technological change leads to increasing unemployment of the unskilled when benefits are endogenous. The model provides a theoretical explanation for diverging developments in wage inequality and unemployment under different social benefits regimes: Analyzing the social legislation in 14 countries, we find that benefits are linked to the evolution of average income in Continental Europe but not in the U.S. and the UK. Given this institutional difference, our model predicts that skill-biased technological change leads to rising unemployment in Continental Europe and rising wage inequality in the U.S. and the UK.
    JEL: E24 J31 O30
    Date: 2005–09–14
  50. By: Antonio Scalia (Banca d’Italia)
    Abstract: I estimate a two-equation system on the euro-Czech koruna exchange rate and order flow at hourly frequency within the framework of Evans-Lyons (JME 2002). I use transac-tions data from the Reuters Spot Matching market in the second half of 2002, during which the Czech National Bank conducted discreet interventions to stem the appreciation of the domestic currency. I find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per €10 million, of which 80 percent persists through the day. The news of intervention increases the price impact of order flow by 3.9 basis points per €10 million, consistently with the notion of intervention efficacy. The order flow equation yields in-conclusive results.
    Keywords: Foreign exchange, central bank intervention, Czech koruna, ERM II, empirical microstructure
    JEL: E65 F31 G15
    Date: 2006–02
  51. By: Anette Reil Held (Mannheim Research Institute for the Economics of Aging (MEA))
    Date: 2005–05–17

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