nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒06‒03
58 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Implications of monetary union for catching-up member states By Marcelo Sánchez
  2. Assessing predetermined expectations in the standard sticky-price model - a Bayesian approach By Peter Welz
  3. What Explains the Varying Monetary Response to Technology SHocks in G7-Countries By Athena T. Theodorou; Neville R. Francis; Michael T. Owyang
  4. Other stabilisation objectives within an inflation targeting regime: Some stochastic simulation experiments By James Twaddle; David Hargreaves; Tim Hampton
  5. Which news moves the euro area bond market? By Magnus Andersson; Lars Jul Hansen; Szabolcs Sebestyén
  6. Should monetary policy attempt to reduce exchange rate volatility in New Zealand? By Dominick Stephens
  7. Long-run money demand in the new EU Member States with exchange rate effects By Christian Dreger; Hans-Eggert Reimers; Barbara Roffia
  8. The Price Puzzle: Fact or Artifact? By Efrem Castelnuovo; Paolo Surico
  9. Macroeconomic Models and the Yield Curve: An assessment of the Fit By Jagjit S. Chadha; Sean Holly
  10. Cyclical inflation divergence and different labor market institutions in the EMU By Alessia Campolmi; Ester Faia
  11. A Small New Keynesian Model of the New Zealand economy By Philip Liu
  12. Firm-specific capital, nominal rigidities, and the Taylor principle By Tommy Sveen; Lutz Weinke
  13. Modelling inflation in the Euro Area By Eilev S. Jansen
  14. Monetary Policy and Asset Prices : What Role for Central Banks in New EU Member States? By Frait, Jan; Komarek, Lubos
  15. Output growth differentials across the euro area countries - some stylised facts By Nicholai Benalal; Juan Luis Diaz del Hoyo; Beatrice Pierluigi; Nikiforos Vidalis
  16. The Euro-changeoverand Euro-inflation: Evidence from Eurostat's HICP By Marco G. Ercolani and Jayasri Dutta
  18. The Walsh Contracts for Central Bankers Are Optimal After All! By Georgios E. Chortareas; Stephen M. Miller
  19. Global Financial Transmission of Monetary Policy Shocks By Michael Ehrmann; Marcel Fratzscher
  20. The patterns and determinants of price setting in the Belgian industry By David Cornille; Maarten Dossche
  21. Before and After the Black Death: Money, Prices, and Wages in Fourteenth-Century England By John H. A. Munro
  22. Modelling currency in circulation in Malawi By kisu simwaka
  23. Dollarization Traps By John Duffy; Maxim Nikitin
  24. Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants: Evidence from an Event Study By Julia Darby; Muscatelli Anton; Graeme Roy
  25. Inflation and Nominal Rigidities in Spanish Regions: The Ball and Mankiw Approach By Carlos Usabiaga; María Ángeles Caraballo
  26. Proprietary Income, Entrepreneurial Risk, and the Predictability of U.S. Stock Returns By Mathias Hoffmann
  28. Major Provisions of Labour Contracts and their Theoretical Coherence By Louis Christofides; Amy Chen Peng
  29. Short-term forecasts of euro area real GDP growth - an assessment of real-time performance based on vintage data By Marie Diron
  30. The risk-adjusted performance of US buyouts By Groh, Alexander; Gottschalg, Oliver
  31. Social Security and Risk Sharing By Piero Gottardi; Felix Kubler
  32. Stock and Bond Returns with Moody Investors By Geert Bekaert; Eric Engstrom; Steven R. Grenadier
  33. Bank Supervision Russian style: Rules versus Enforcement and Tacit Objectives By Sophie Claeys,; Gleb Lanine; Koen Schoors
  34. Does fiscal policy matter for the trade account? A panel cointegration study By Katja Funke; Christiane Nickel
  35. Regensburger Diskussionsbeiträge zur Wirtschaftswissenschaft; Nr. 392: The Kernel-Location Approach - A New Non-parametric Approach to the Analysis of Downward Nominal Wage Rigidity in Micro Data By Knoppik, Christoph
  36. Will China Eat Our Lunch or Take us to Dinner? - Simulating the Transition Paths of the U.S., Eu, Japan and China By Hans Fehr; Sabine Jokisch; Laurence J. Kotlikoff
  37. Formulas for Consumer Price Index at the elementary aggregate - A new proposal from the economic point of view By Santiago Rodriguez Feijoó; Alejandro Rodriguez Caro; Carlos Gonzalez Correa
  38. Application of Four-Rate Formula and Exchange Rate Formula to demonstration of single currency with different value and interest rate By Xiaozhong Zhai
  39. Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels By Laura Serlenga
  40. Risk, Uncertainty and Asset Prices By Geert Bekaert; Eric Engstrom; Yuhang Xing
  41. Human capital, the structure of production, and growth By Antonio Ciccone; Elias Papaioannou
  42. Managing the effects of tax expenditures on the national budget By Swift, Zhicheng Li
  43. Micro and Macro Data Integration: The Case of Capital By Randy Becker; John Haltiwanger; Ron Jarmin; Shawn Klimek; Dan Wilson
  44. Structure par terme et règle de politique monétaire By Charlotte Lespagnol
  45. South German Silver, European Textiles, and Venetian Trade with the Levant and Ottoman Empire, c. 1370 to c. 1720: A non-mercantilist approach By John H Munro
  46. Social discounting, migration and optimal taxation of savings By Valeria DeBonis; Luca Spataro
  47. The Employment Effects of Labor and Product Markets Deregulation and their Implications for Structural Reform By Helge Berger; Stephan Danninger
  48. Volatility of GDP, macro applications and policy implications of real options for structure of capital Markets By José Pablo Dapena
  49. Economic Voting and Electoral Behaviour: How do Individual, Local and National Factors Affect the Partisan Choice? By Andrew Leigh
  50. Why and How Should We Account For the Environment? By Peter J. Stauvermann
  51. The Impact of Structural Adjustment Policies (SAPs) on Manufacturing Growth in Malawi By Thomas Munthali
  52. Down or out: assessing the welfare costs of household investment mistakes By Calvet, Laurent; Campbell, John Y.; Sodini, Paolo
  53. The Pathological Export Boom and the Bazaar Effect - How to Solve the German Puzzle By Hans-Werner Sinn
  54. The French Tax System: Main Characteristics, Recent Developments and Some Considerations for Reform By Willi Leibfritz; Paul O'Brien
  55. Soft and Hard Within- and Between-Industry Changes of U.S. Skill Intensity: Shedding Light on Worker’s Inequality By Grigoris Zarotiadis; T. Lynn Riggs
  56. Le système alimentaire mondial est-il soluble dans le développement durable ? By Rastoin, J.L.
  57. The Experiment in Macroeconometrics By Staszewska, Anna; Aldrich, John
  58. Slovakia's Introduction of a Flat Tax as Part of Wider Economic Reforms By Anne-Marie Brook; Willi Leibfritz

  1. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We examine the implications of monetary union for macroeconomic stabilisation in catching up participating countries. We allow member states’supply conditions to differ inside the union, especially with regard to sectoral characteristics. Sectoral productivity shocks on balance hamper the stabilisation properties of a currency union. In the face of aggregate supply disturbances, the stabilisation costs of renouncing monetary autonomy diminish with a flatter output-inflation tradeoff and - barring idiosyncratic shocks - with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability.
    Keywords: Monetary union, Balassa-Samuelson effect, Exchange rates, Price stability.
    JEL: E52 E58 F33 F40
    Date: 2006–05
  2. By: Peter Welz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the empirical performance of a New Keynesian sticky-price model with delayed effects of monetary impulses on inflation and output for the German pre-EMU economy. The model is augmented with rule-of-thumb behaviour in consumption and price setting. Using recently developed Bayesian estimation techniques, endogenous persistence is found to play a dominant role in consumption whereas forward-looking behaviour is greater for inflation. The model’s dynamics following a monetary shock and a preference shock are comparable to those of an identified VAR model.
    Keywords: DSGE-Model, identified VAR, predetermined expectations, Bayesian estimation.
    JEL: E43 E52 C51
    Date: 2006–05
  3. By: Athena T. Theodorou; Neville R. Francis; Michael T. Owyang
    Abstract: Structural vector autoregressions (SVARs) have become a standard tool used to determine the roles of monetary policy shocks in generating cyclical fluctuations in the United States. Using both long- and short-run identifying restrictions, various authors have explored the empirical response of the economy to exogenous monetary innovations. While the majority of the studies of monetary policy have focused on the effect of exogenous money growth or interest rate shocks, recent research has begun to investigate the effect of endogenous monetary policy -- that is, the central bank's reaction to non-monetary shocks. One exogenous shock that many economists believe contributes to the business cycle fluctuations that feed into the Taylor rule is the technology shock. In an effort to identify the empirical effects of technology shocks, Gali (1999) estimated two models: a bivariate model of productivity and hours and a five-variable model adding money, inflation, and interest rates. His identification estimates a decomposition of productivity and hours into innovations to technology and non-technology components by assuming that only the former can have long-run effects on labor productivity. Empirical identification of the technology shock was a key first step in developing a unified reduced-form framework with which to examine the role that monetary policy has played in smoothing economic fluctuations. Along these lines, Gali, Lopez-Salido, and Valles (2003 -- henceforth GLV) examined the endogenous response of monetary policy to identified technology shocks in the United States. GLV examine a four-variable structural VAR for the United States with labor productivity, labor hours, the real interest rate, and inflation. Using the Gali (1999) identification, they find that during the Volcker-Greenspan (VG) era the Fed's response to the technology shock is to raise the nominal interest rate, while during the Martin-Burns-Miller (MBM) era the Fed lowers the nominal rate. Moreover, they find that the inflation and hours responses in the two periods differ in sign. Our goal is to expand the scope of GLV to an international context to determine whether the effect of technology shocks is consistent across the major industrialized countries. In particular, we are interested in how the different central banks respond to technology shocks. We investigate the possibility that technology shocks in different countries produce fundamentally different inflation and employment responses and to what extent those effects alter the monetary response. Using a theoretical model adapted from King and Wolman (1996), we find that the empirical responses can be matched with theoretical responses. Differences in these theoretical responses can be attributed to alternative policy rules and changes in the cost of capital adjustment. Further tests verify that these country characteristics could, indeed, have some explanatory power. Our results are by no means conclusive; however, they do suggest a number of theoretically consistent similarities across countries in each subgroup. While we believe more investigation into these cross-country comparisons is warranted, the initial indication is that the manner in which monetary policy is conducted and the degree of rigidity in capital markets may be determining factors in a country's response to technology shocks. Gali, Jordi (1999). "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?" American Economic Review, March 1999, 89(1), pp. 249-271. Gali, Jordi; Lopez-Salido, J. David; and Valles, Javier (2003). "Technology Shocks and Monetary Policy: Assessing the Fed's Performance." Journal of Monetary Economics, May 2003, 50(4), pp. 723-743. King, Robert G., and Wolman, Alexander L. (1996). "Inflation Targetting in a St. Louis Model of the 21st Century." Federal Reserve Bank of St. Louis Review, May/June 1996, 78(3), pp. 83-107.
    Keywords: Technology, Productivity, Monetary Policy, Taylor Rule, Capital Adjustment Costs
    JEL: C32 E2 E52
    Date: 2004–08–11
  4. By: James Twaddle; David Hargreaves; Tim Hampton (Reserve Bank of New Zealand)
    Abstract: We use the Reserve Bank of New Zealand's macroeconomic model (FPS) to look at the feasibility of using monetary policy to reduce variability in output, the exchange rate and interest rates while maintaining an inflation target. Our experiment suggests that policy could be altered to increase the stability of interest rates, the exchange rate, inflation, or output, relative to the base case reaction function in FPS, but such a policy would incur some cost in terms of the variability of the other variables. In particular, we find that greater exchange rate stability would have relatively large costs in terms of the stability of all three other variables, primarily because monetary policy that leans too dramatically against exchange rate disturbances can create significant real economy variability. Relative to West (2003), we find larger costs of operating monetary policy to achieve exchange rate stabilisation. We attribute this finding to the relatively inertial inflation expectation process in FPS.
    JEL: E52 E58 F47
    Date: 2006–05
  5. By: Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lars Jul Hansen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen, Denmark); Szabolcs Sebestyén (Department of Fundamentos del Análisis Económico, University of Alicante, 03080 San Vicente del Raspeig, Spain.)
    Abstract: This paper explores a long dataset (1999-2005) of intraday prices on German long-term bond futures and examines market responses to major macroeconomic announcements and ECB monetary policy releases. In general, adjustments in prices are quick and new information is usually incorporated into prices within five minutes of announcements. The volatility adjustment is more long-lasting than that in the conditional mean, and excess volatility can be observed up to 30 minutes after the releases. Overall, German bond markets tend to react more strongly to the surprise component in US macro releases compared to euro area and domestic releases, and the strength of those reactions to US releases has increased over the period considered. The paper also provides evidence that the outcome of German unemployment figures has been known to investors ahead of the prescheduled release.
    Keywords: Monetary policy, intraday data, macroeconomic announcements.
    JEL: E43 E44 E58
    Date: 2006–05
  6. By: Dominick Stephens (Reserve Bank of New Zealand)
    Abstract: Previous research has suggested that including exchange rate stabilisation within the goals of monetary policy significantly increases the volatility of inflation, output and interest rates, and that the benefits of exchange rate stabilisation therefore do not justify the costs. The current paper tests whether this finding is robust when various alternative models of exchange rate determination are considered. The analysis is carried out in the context of optimal full-information monetary policy rules in a New Keynesian model that is calibrated to represent the New Zealand economy. For the models that feature rational expectations, we support the conclusion that seeking to avoid exchange rate volatility would have more costs than benefits. Indeed, a major cost of including the exchange rate within the goals of monetary policy is that inflation expectations become less anchored to the inflation target, meaning that larger movements in nominal interest rates are required to control inflation.
    JEL: E52 E58
    Date: 2006–05
  7. By: Christian Dreger (German Institute for Economic Research (DIW) Berlin, 14191 Berlin, Germany.); Hans-Eggert Reimers (Hochschule Wismar, University of Technology, Business and Design, PF 1210, 23952 Wismar, Germany.); Barbara Roffia (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Generally speaking, money demand models represent a natural benchmark against which monetary developments can be assessed. In particular, the existence of a well-specified and stable relationship between money and prices can be perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. In this study a money demand analysis in the new Member States of the European Union (EU) is conducted using panel cointegration methods. A well-behaved long-run money demand relationship can be identified only if the exchange rate as part of the opportunity cost is included. In the long-run cointegrating vector the income elasticity exceeds unity. Moreover, over the whole sample period the exchange rates vis-à-vis the US dollar turn out to be significant and a more appropriate variable in the money demand than the euro exchange rate. The present analysis is of importance for the new EU Member States as they are expected to join in the future years the euro area, where money is deemed to be highly relevant - within the two-pillar monetary strategy of the European Central Bank (ECB) - in order to detect risks to price stability over the medium term.
    Keywords: Money demand, new EU Member States, exchange rate, panel cointegration.
    JEL: C23 E41 E52
    Date: 2006–05
  8. By: Efrem Castelnuovo (University of Padua); Paolo Surico (University of Bari and Bank of England)
    Abstract: This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a weak central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre-inflation targeting regime for the UK. Using a micro-founded New Keynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle on artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed on actual data.
    JEL: E30 E52
    Date: 2006–05
  9. By: Jagjit S. Chadha; Sean Holly
    Abstract: Many have questioned the empirical relevance of the Calvo-Yun model. This paper appends three widely-studied macroeconomic models (Calvo-Yun, Hybrid and Svensson) with forward rate curves. We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model with the observed behaviour in forward rates. We find limited support for Calvo-Yun model in terms of fit with the observed yield curve but we find some support for each of the Hybrid and Svensson models. We conclude that macroeconomic persistence seems to be priced into the yield curve.
    Keywords: Macromodels, Yield Curve, Persistence
    JEL: E43 E44 E47
    Date: 2006–05
  10. By: Alessia Campolmi (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain.); Ester Faia (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005, Barcelona, Spain.)
    Abstract: This paper relates the size of the cyclical inflation differentials, currently observed for euro area countries, to the differences in labor market institutions across the same set of countries. It does that by using a DSGE model for a currency area with sticky prices and labor market frictions. We show that differences in labor market institutions account well for cyclical inflation differentials. The proposed mechanism is a supply side one in which differences in labor market institutions generate different dynamics in real wages and consequently in marginal costs and inflations. We test this mechanism in the data and find that the model replicates well the empirical facts.
    Keywords: Cyclical inflation divergence, labor market institutions, EMU.
    JEL: E52 E24
    Date: 2006–05
  11. By: Philip Liu (Reserve Bank of New Zealand)
    Abstract: This paper investigate whether a small open economy DSGE-based New Keynesian model can provide a reasonable description of key features of the New Zealand economy, in particular the transmission mechanism of monetary policy. The main objective is to design a simple, compact, and transparent tool for basic policy simulations. The structure of the model is largely motivated by recent developments in the area of DSGE modelling. Combining prior information and the historical data using Bayesian simulation techniques, we arrive at a set of parameters that largely reflect New Zealand's experience over the stable inflation-targeting period. The resultant model can be used to simulate monetary policy paths and help analyze the robustness of policy conclusions to model uncertainty.
    JEL: C15 C51 E12 E17
    Date: 2006–05
  12. By: Tommy Sveen (Norges Bank (Central Bank of Norway)); Lutz Weinke (Duke University)
    Abstract: In the presence of firm-specific capital the Taylor principle can generate multiple equilibria. Sveen and Weinke (2005b) obtain that result in the context of a Calvo-tyle sticky price model. One potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates. In the present paper we show that if nominal wages are not fully flexible (which is an uncontroversial empirical fact) then the Taylor principle fails already for some minor degree of price stickiness. We use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules.
    Keywords: Nominal Rigidities, Aggregate Investment, Monetary Policy.
    JEL: E22 E31
    Date: 2006–05–31
  13. By: Eilev S. Jansen (Norges Bank and Norwegian University of Science and Technology)
    Abstract: The paper presents an incomplete competition model (ICM), where inflation is determined jointly with unit labour cost growth. The ICM is estimated on data for the Euro area and evaluated against existing models, i.e. the implicit inflation equation of the Area Wide model (AWM) - cf. Fagan, Henry and Mestre (2001) - and estimated versions of the (single equation) P* model and a hybrid New Keynesian Phillips curve. The evidence from these comparisons does not invite decisive conclusions. There is, however, some support in favour of the (reduced form) AWM inflation equation. It is the only model that encompasses a general unrestricted model and it forecast encompasses the competitors when tested on 20 quarters of one step ahead forecasts.
    Keywords: inflation, incomplete competition model, Area Wide model, P*-model, New Keynesian Phillips curve, model evaluation, forecast encompassing.
    JEL: C22 C32 C52 C53 E31
    Date: 2004–06–20
  14. By: Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague and Prague School of Economics)
    Abstract: The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the new Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is dealt with and the main pros and cons associated with this reaction are summarised. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.
    Keywords: Monetary Policy ; Asset Markets ; Central Banking ; New EU Member States
    JEL: E52 E58 G12
    Date: 2006
  15. By: Nicholai Benalal (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Juan Luis Diaz del Hoyo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Nikiforos Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: The aim of this study is to investigate the extent to which the dispersion of real GDP growth rates has changed over the past few years and whether the synchronisation of business cycles has increased among the euro area countries. The study is divided into two main parts. The f irst focuses on the dispersion of real GDP growth rates across the euro area countries, while the second studies the synchronisation of business cycles within the euro area. The study shows first that dispersion of real GDP growth rates across the euro area countries in both unweighted and weighted terms has no apparent upward or downward trend during the period 1970-2004 as a whole. Second, since the beginning of the 1990s, the dispersion of real GDP growth rates across the euro area countries has largely reflected lasting trend growth differences, and less so cyclical differences, with some countries persistently exhibiting output growth either above or below the euro area average. Among other things, this might be due to different trends in demographics, as well as to differences in structural reforms undertaken in the past. Thirdly, the degree of synchronisation of business cycles across the euro area countries seems to have increased since the beginning of the 1990s. This f inding holds for various measures of synchronisation applied to overall activity and to the cyclical component, for annual and quarterly data, as well as for various country groupings. In particular, the degree of correlation currently appears to be at a historical high. In addition to these main findings, certain other stylised facts on dispersion and synchronisation are presented. JEL Classification: C10; E32; O40.
    Keywords: Dispersion of GDP growth across the euro area countries; trend and cycle; synchronisation of business cycles within the euro area.
    Date: 2006–05
  16. By: Marco G. Ercolani and Jayasri Dutta
    Abstract: Though anecdotal evidence suggests that retail price inflation increased tem- porarily in January 2002 when Euro notes and coins were introduced, the evi- dence from official statistics largely refutes this. We test for the presence of a sudden temporary increase in inflation for Euro-changeover countries. We use the countries that did not join the Euro: Denmark, Sweden and the UK; as a control group. Though the results are sensitive to the estimation method, we do uncover weak evidence of a minor increase in aggregate inflation in January 2002 for the countries that did join the Euro. Similar tests for the Restaurant sector find a strong Euro-changeover effect on temporary inflation. Summary tests for 129 other price sub-categories are also discussed.
    JEL: D12 D40 D84 E31 E52 E63 L89
    Date: 2006–02
  17. By: Daniel Daianu; Ella Kallai;
    Abstract: Disinflation has been pursued successfully in Romania in recent years. Inflation came down from over 40 per cent in 2001 to 14 per cent in 2003 and is expected to be cca 9.5 per cent in 2004. By 2007 it should come down to around 3%. The benefits of a lowinflation environment are unquestionable, as price stability is the ultimate objective of monetary policy. In addition, low inflation is a pre-condition for EU accession. There only remains the other critical question, namely, what is the proper strategy to achieve the ultimate objective. Different central banks have adopted strategies which place different emphasize on the various pieces of information, or elements of their decision-making process or different aspects of their communication policies. Inflation targeting (IT) is one of those strategies.
    Keywords: inflation-targeting, transition economy, EU accession
    JEL: E52 F41 P44
    Date: 2005–11–01
  18. By: Georgios E. Chortareas (University of Essex); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: Candel-Sánchez and Campoy-Miñarro (2004) argue that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract. This result relies on the authors. assumption that the participation constraint does not represent an effective constraint on the central banker's decision. Instead, the government can "impose" or "force" the contract on the central banker, even though the contract violates the participation constraint. We argue that such a contract does not make sense. The government can impose it, but it does not affect the central banker's incentives. The policy outcomes do not match those of commitment. Then we show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract.
    Keywords: central banks, contracts, Walsh
    JEL: E42 E52 E58
    Date: 2006–04
  19. By: Michael Ehrmann; Marcel Fratzscher
    Abstract: The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries – and not a country’s bilateral integration with the United States – is a key determinant for the transmission process.
    Keywords: global financial markets, monetary policy, transmission, financial integration, United States, advanced economies, emerging market economies
    JEL: F30 F36 G15
    Date: 2006
  20. By: David Cornille (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.); Maarten Dossche (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.)
    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%. 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% 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
  21. By: John H. A. Munro
    Abstract: One of the most common myths in European economic history, and indeed in Economics itself, is that the Black Death of 1347-48, followed by other waves of bubonic plague, led to an abrupt rise in real wages, for both agricultural labourers and urban artisans – one that led to the so-called ‘Golden Age of the English Labourer’, lasting until the early 16th century. While there is no doubt that real-wages in mid- to late- 15th century England did reach a peak far higher than that ever achieved in past centuries, real wages in England did not, in fact, rise in the immediate aftermath of the Black Death. In southern England, real wages of building craftsmen (rural and urban), having plummeted with the natural disaster of the Great Famine (1315-21), thereafter rose to a new peak in 1336-40. But then their real wages fell during the 1340s, and continued their decline after the onslaught of the Black Death, indeed into the 1360s. Not until the later 1370s – almost thirty years after the Black Death – did real wages finally recover and then rapidly surpass the peak achieved in the late 1330s. Thereafter, the rise in real wages was more or less continuous, though at generally slower rates, during the 15th century, reaching a peak in 1476-80 – at a level not thereafter surpassed until 1886-90, by the usual methods of calculating real wages with index numbers: i.e., by NWI/CPI = RWI [nominal wage index divided by the consumer price index equals the real wage index]. Most of the textbooks that still perpetuate the myth about the role of the Black Death in raising real wages, as an almost immediate consequence, employ a demographic model based on Ricardian economics, which predicts (ceteris paribus) that depopulation will result in falling grain prices and thus in falling rents on grain-producing lands (on land in general) and in rising real wages. The fall in population – perhaps as much as 50 percent by the late 15th century (from the 1310 peak) – presumably altered the land:labour ratio sufficiently to increase the marginal productivity of labour and thus its real wage (though in economic theory the real wage is determined by the marginal revenue product of labour). The rise in real wages would also have been a product of the fall in the cost of living, chiefly determined by bread-grain prices, whose decline would have been the inevitable result of both the abandonment of high-cost marginal lands and the rise in the marginal productivity of agricultural labour. But the evidence produced in this study demonstrates that the Black Death was followed, in England, by almost thirty years of high grain prices – high in both nominal and real terms; and that was a principal reason for the post-Plague behaviour of real wages. This study differs from all traditional models by examining the role of monetary forces in producing deflation in the second and final quarters of the fourteenth century, but severe inflation in between those quarters (i.e., from the early 1340s to the mid 1370s). The analysis of the evidence on money, prices, and wages in this study concludes that monetary forces and the consequent behaviour of the price level – in terms of those deflations and intervening inflation – were the most powerful determinant of the level of real wages (i.e., in terms of the formula: NWI/CPI = RWI). Thus the undisputed rise in nominal or money wages following the Black Death was literally ‘swamped’ by the post-Plague inflation, so that real wages fell. Conversely, the rise of real wages in the second quarter of the fourteenth century was principally due to a deflation in which consumer prices fell much more than did nominal wages. In the final quarter of the century, the even stronger rise in real wages was principally due to another deflation in which consumer prices fell sharply, but one in which, for the first time in recorded English history, nominal wages did not fall: an era that inaugurated the predominance of wage-stickiness in English labour markets for the next six centuries. But that perplexing phenomenon of downward wage-stickiness must be left to other studies. The 14th century is the most violent one before the 20th; and violent disruptions from plague, war, and civil unrest undoubtedly produced severe supply shocks and high (relative) prices. Europe also experienced more severe oscillations in monetary changes and consequently in price levels – i.e., the aforesaid deflations and intervening inflation – during the 14th century than in any other before the 20th.
    Keywords: inflation, deflation, coinage debasements, monetary flows, prices, nominal wages, real wages, labour, marginal productivity of labour, Black Death, bubonic plagues, depopulation, agricultural labourers, building craftsmen, labour markets
    JEL: E3 E4 E5 I1 I3 J1 J2 J3 J4 N1 N3 N4
    Date: 2005–03–11
  22. By: kisu simwaka (Reserve Bank of Malawi)
    Abstract: The purpose of this study is therefore twofold. First, to establish the claim that currency in circulation has been rising. Second, to empirically quantify and give a full account of the reasons determining the dynamics and volatility of currency in circulation. Using annual data for the 1965-2004 period, this paper confirms that currency in circulation as a proportion of money stock has increased. From the initial estimation results, the paper establishes strong positive effects of inflation rate, underground economy activities, financial deepening on the CU/M2 ratio, and significant negative effect of interest rates on this ratio. The other highlight result from this study is the positive and significant association between small-scale agriculture produce and CU/M2 ratio. Using annual data, among other things, this study confirms findings from other studies that cash preference is a function of real interest rates. However, one striking finding here is the importance small-scale agriculture as a determinant of currency in circulation. This reflects the agriculture-dependent nature of the economy. Better performance of this sector injects cash in the economy and because of the lack of banking facilities in rural areas, most of the injected cash remains in circulation. The message from empirical results using monthly data is similar, with interest rates, financial deepening, tobacco selling season dummy and inflation rate playing significant roles in determining movements in currency in circulation. As expected, technological innovations in the banking system or payment systems, particularly cash dispensers (ATMs) have a significant impact on the overall level of currency in circulation, whereas no major impact seems to come from the MALSWITCH smart card, however, initial indications reveal its negative effect on the CU/M2 ratio. Policy implications from these results are many. First, of late the Bank has reduced the bank rate and as is normally the case, all other interest rates were similarly adjusted. While the policy move has or is on course to achieve its intended goals, it has other side repercussions such as deposit taking capabilities by commercial banks. Currently, the minimum saving rate for the four major commercial banks averages around 7.5%. This against the current monthly inflation rate of 12.2 (for October 2004) leaves real savings rate of around –4.7% which rationally discourages savings mobilisation and consequent reduction in the availability of loanable funds for productive investment and economic growth. The public is most likely to hold their assets in cash rather than bank deposit form since the opportunity cost of doing so is essentially zero. However, due to high inflation in the past, savers in Malawi were used to high interest rates so that current demand deposits are considered as unattractive and non-worthwhile form of holding money. It is time the public get used to lower interest rates as in other countries and on the belief that causality direction is from interest rates to inflation, the reduction in the bank rate could eventually lead to a drop in inflation and, therefore, an increase in the real interest rate. Second, if the Bank intends to focus on reducing the CU/M2 ratio, intensification of smart card use and publicity could play an important role. The smart card is a direct alternative of cash as a means of payment so that its widespread use can directly reduce currency in circulation. This, as is the case in other countries could also reduce the positive impact of ATM transactions on the overall level of currency in circulation. Third, the overall civic education on the use of banking facilities, in rural areas as well as to small-scale business men (vendors) is important for increased deposit taking and, therefore, the reduction in the amount of currency in circulation.
    Keywords: Currency in circulation, Seasonality, Money demand model
    JEL: E
    Date: 2005–04–13
  23. By: John Duffy; Maxim Nikitin
    Abstract: We study unofficial dollarization, i.e., the use of foreign money alongside the domestic currency, in an environment where spatial separation and limited communication create a role for currency and banks arise endogenously to provide insurance against liquidity preference shocks. Unofficial dollarization has been a common phenomenon in emerging market economies during high inflations. However, successful disinflations have not necessarily been followed by dedollarization. In particular, Argentina, Bolivia, Peru, Russia, and Ukraine remained highly dollarized long after the inflation rate was reduced to single digits. We refer to this phenomenon as a "dollarization hysteresis paradox." It has also been observed in these economies that higher inflation has a negative impact on output and financial intermediation, that dollarization and capital flight adversely affect capital accumulation, and that post-stabilization output growth is impeded by dollarization. This paper presents an overlapping-generations model with random relocation of agents between two locations that explains the dollarization hysteresis paradox and several other stylized facts. The key link between inflation, dollarization, and capital accumulation in the model is that high inflation undermines financial intermediation, which leads to the adoption of a less efficient production technology. As a result, it is possible for economies to become stuck in low output "development traps," where the marginal product of capital is the same as the return from holding dollars. In such an environment, we show how dollarization can preclude further capital accumulation, even in the presence of successful inflation stabilization policies. We complement previous work on dollarization by allowing the "hard" currency to compete with domestic capital as a store of value instead of focusing on either currency substitution (where the use of a "hard" currency replaces the domestic currency as a medium of exchange) or official dollarization (where the domestic currency is abandoned altogether and replaced with the US dollar). We assume that in the first period of life, agents inelastically supply labor and receive the competitive market wage. A given fraction of agents will be relocated to another location, and they can take only domestic currency with them. Competitive banks arise endogenously in this environment to insure against liquidity (relocation) shock. They issue demand deposits and hold portfolios of domestic currency and the capital market assets, which may include productive capital and dollars. There are two different productive technologies that banks can invest in. The first one is a primitive autarkic technology that they can use directly. The second one is an advanced technology that requires the use of a financial center. The financial center is a profit-maximizing natural monopoly. Its profit depends positively on the scale of intermediation and production. Our model predicts that an increase in inflation will reduce the capital stock, output and the scale of intermediation. If inflation is low enough, the financial center makes a positive profit, and the advanced technology is used. However, when inflation exceeds a certain threshold, the profit of the center falls below zero, and it shuts down. Hence competitive banks switch to the inefficient autarkic technology. Even though the capital stock falls, the marginal product of capital falls as well due to the switch in technology. This creates the possibility of a "dollarization trap," in which dollars are held as a store of value alongside the autarkic productive capital. The arbitrage condition between the return on dollars and the marginal product of capital determines the capital stock and output. A subsequent disinflation does not affect this arbitrage condition, and thus has no effect on capital accumulation. Therefore, as long as the economy gets stuck in the dollarization trap during a high inflation episode, a successful stabilization of inflation is followed neither by dedollarization nor by output recovery.
    Keywords: Dollarization, Inflation, Financial Intermediation, Asset Substitution, Hysteresis
    JEL: E40 E50 F41
    Date: 2004–08–11
  24. By: Julia Darby; Muscatelli Anton; Graeme Roy
    Abstract: This paper contributes to a developing literature that examines financial interactions between different levels of government. More specifically, we investigate the use of grants, shared tax revenues, and their impact on fiscal outcomes, including decentralized service provision. Most existing empirical evidence has focused on individual country studies, and has predominantly been US based. However, it is difficult to generalize the conclusions obtained for the US to countries where the position and remit of lower tiers of government has recently been evolving or is less clear constitutionally. We use a panel dataset covering 15 OECD countries to investigate how central and sub-central expenditures, taxation, and intergovernmental grants change in response to central governments' attempts to correct their fiscal positions. We adopt an event study methodology to examine the timing of expenditure, taxation and intergovernmental grant shifts around the periods of fiscal consolidation. In addition to highlighting issues regarding the interaction between central and sub-central tiers of government, our analysis also sheds light into the extent to which sub-central tiers of government participate in fiscal consolidations, and hence to macroeconomic adjustment. Our key results can be summarized as follows. First, successful fiscal consolidations are generally driven by similar, and sustained, falls in expenditure at both central and sub-central tiers. Moreover, our evidence counters that identified by Gramlich (1987) for the USA, in that when central governments cut intergovernmental grants sub-central tiers do not take redress through offsetting increases in other forms of revenues. Second, unsuccessful consolidations tend to be characterized by increased central government taxation, with no fall back in grants and no tendency for sub-central taxation to change. It does appear that there is strong correlation between success in consolidating central fiscal deficits and similar actions from lower tiers of government. Third, we find that where consolidations are successful sub-central tiers of government are typically forced to cut back on capital expenditure. This suggests that in this regard the burden of adjustment falls onto lower tiers of government and central governments worry less about the long-term (i.e. public investment) consequences of consolidation if these decisions are taken at local level. We also find that when faced with cuts in intergovernmental grants, sub-central governments tend to maintain expenditures on wages at the expense of capital expenditure, reflecting a definite compositional switch towards public consumption. This might be interpreted as a variant of the effect identified by Gramlich (1987): sub-central governments seeking to defend current services rather than spending on infrastructure or raising taxation. This may reflect the greater constraints on sub-central tiers’ tax raising powers in many of the OECD countries in our sample, relative to those in the USA. Finally, our results shed some light, at least indirectly, on the ‘Fly-paper Effect’, by showing that it operates in reverse. Successful consolidations are characterized by cut-backs in grants that are more than offset by cut-backs in sub-central expenditures. In contrast, periods of unsuccessful consolidation are characterized by increases in central taxation, no change in grants, and small, temporary reductions in sub-central expenditure.
    Date: 2004–08
  25. By: Carlos Usabiaga; María Ángeles Caraballo
    Abstract: In this work we centre on the menu cost models of new keynesian economics and, more concretely, on the empirical testing line proposed by Ball and Mankiw (1994, 1995), authors that confront in a monopolistic competition model the explanation of why a shock that affects relative prices also affects mean inflation. Their conclusion is that if mean inflation is near to zero the inflation-skewness relation is stronger than the inflation-variability relation, whereas in the case of a high mean inflation the inflation-variability relation is stronger. Following their approach in our analysis mean inflation is the explained variable, whereas skewness and variability of the distribution of price changes are the main explanatory variables. Our type of analysis has different applications. Firstly, in the case that we confront a relative price shock, if variability and skewness, or some of their transformations, affect inflation it means that our economy is vulnerable, so it makes especially difficult to control inflation. A second application refers to a feasible way to measure core inflation, eliminating from inflation the transitory effects introduced by skewness. Finally, this approach can contribute to test if downward price rigidity is an exogenous phenomenon or the response of optimizing agents that confront menu costs in an inflationary context. Despite these utilities, the Ball and Mankiw (1995) approximation has been rarely applied to Spanish economy.In essence, our work tries to answer whether menu costs à la Ball and Mankiw are plausible for Spanish economy, and whether exists homogeneity of the Spanish regions at this respect. The structure of the work is the following: a) exposition of the basic data and variables, the methodology followed, and the results of our first approximation to Ball and Mankiw (1995); b) consideration of alternative measures of variability and skewness; c) analysis of the role of kurtosis and introduction of two real variables (unemployment and production) as control variables; d) analysis of the causality problem; and e) after the analysis at regional level, we study whether the regions jointly present an homogeneous behavior in this area. Our period of analysis is 1994.01-2001.12. We have chosen this low inflation period because around an annual 4-5% is placed the upper limit for which the model predicts a strong inflation-skewness relation. The essential data that we use come from the series of monthly variation rate of consumer price index, disaggregated by regions and goods and services (33 subgroups), elaborated by the Instituto Nacional de Estadística (INE). In general, we observe an homogeneous behavior of the "structure" of inflation for the Spanish regions. Our analysis corroborates the results of Ball and Mankiw (1995) about the importance of the skewness of the distribution of price changes. Their results in the line that the variability coefficient is higher than the skewness coefficient, and that the estimations containing skewness present a higher coefficient of determination are also confirmed. The significance of skewness and variability at regional level shows the vulnerability of Spanish inflation in terms of relative price shocks.
    Date: 2004–08
  26. By: Mathias Hoffmann
    Abstract: Small businesses tend to be owned by wealthy households. Such entrepreneur households also own a large share of U.S. stock market wealth. Fluctuations in entrepreneurs’ hunger for risk could therefore help explain time variation in the equity premium. The paper suggests an entrepreneurial distress factor that is based on a cointegrating relationship between consumption and income from proprietary and non-proprietary wealth. I call this factor the cpy residual. It reflects cyclical fluctuations in proprietary income, is highly correlated with cross-sectional measures of idiosyncratic entrepreneurial risk and has considerable forecasting power for U.S. stock returns. In line with the theoretical mechanism, the correlation between cpy and the stock market has been declining since the beginning of the 1980s as stock market participation has widened and as entrepreneurial risk has become more easily diversifiable in the wake of U.S. state-level bank deregulation.
    Keywords: non-insurable background risk, entrepreneurial income, equity risk premium, long-horizon predictability
    JEL: E21 E31 G12
    Date: 2006
  27. By: Juan de Dios Tena; A. R. Tremayne
    Abstract: This paper studies the transmission of monetary policy to industrial output in the UK. In order to capture asymmetries, a system of threshold equations is considered. However, unlike previous research, endogenous threshold parameters are allowed to be different for each equation. This approach is consistent with economic intuition and is shown to be of tangible importance after suitable econometric evaluation. Results show evidence of cross-sectional differences across industries and asymmetries in some sectors. These findings contribute to the debate about the importance of alternative economic theories to explain these asymmetries and support the use of a sectorally disaggregated approach to the analysis of monetary transmission.
    Date: 2006–05
  28. By: Louis Christofides; Amy Chen Peng
    Abstract: Theoretical work on indexation and contract duration suggests no role for the expected rate of inflation in equations explaining these variables. Yet, stand-alone or two-equation studies of indexation and contract duration often report that this variable is statistically significant. We study a wider econometric system which includes, in addition, non-contingent wage adjustment. This third, jointly dependent, variable and its nominal anchor (the expected rate of inflation) play a role in the duration and indexation decisions and offer a context within which earlier findings can be understood. In this three-equation system, the wage equation accommodates complex mechanisms through which price inflation feeds into wage adjustment both within and across contracts. The elasticity of indexation is modelled as a latent variable, supporting consideration of both the incidence and the intensity of indexation and linking consistently with the wage equation. In our results, the expected rate of inflation has no role in the duration equation and only a minor one in the elasticity of indexation equation. These findings are more consistent with received theory but they also suggest that more complex models involving all three variables and the sequence of contracts signed by a bargaining pair are needed.
    Keywords: contracts, duration, indexation, wage adjustment, simultaneity
    JEL: E31 J41 J50
    Date: 2006
  29. By: Marie Diron (Brevan Howard Asset Management LLP, London, SW1Y 6XA, United Kingdom.)
    Abstract: Economic policy makers, international organisations and private-sector forecasters commonly use short-term forecasts of real GDP growth based on monthly indicators, such as industrial production, retail sales and confidence surveys. An assessment of the reliability of such tools and of the source of potential forecast errors is essential. While many studies have evaluated the size of forecast errors related to model specifications and unavailability of data in real time, few have provided a complete assessment of forecast errors, which should notably take into account the impact of data revision. This paper proposes to bridge this gap. Using four years of data vintages for euro area conjunctural indicators, the paper decomposes forecast errors into four elements (model specification, erroneous extrapolations of the monthly indicators, revisions to the monthly indicators and revisions to the GDP data series) and assesses their relative sizes. The results show that gains in accuracy of forecasts achieved by using monthly data on actual activity rather than surveys or financial indicators are offset by the fact that the former set of monthly data is harder to forecast and less timely than the latter set. While the results presented in the paper remain tentative due to limited data availability, they provide a benchmark which future research may build on.
    Keywords: Forecasting, conjunctural analysis, bridge equations, real-time forecasting, vintage data.
    JEL: C22 C53 E17 E37 E66
    Date: 2006–05
  30. By: Groh, Alexander; Gottschalg, Oliver
    Abstract: This paper assesses the risk-adjusted performance of US buyouts.
    Keywords: risk-adjusted performance; US buyouts; risk; investment
    JEL: E22 G11 G32
    Date: 2006–01–01
  31. By: Piero Gottardi; Felix Kubler
    Abstract: In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the model used in the literature. In our model financial markets are complete and competitive equilibria are interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents’ welfare is evaluated ex ante, and arises from the possibility of inducing, through social security, an improved level of intergenerational risk sharing. We will also examine the optimal size of a given social security system as well as its optimal reform. The analysis will be carried out in a relatively simple set-up, where the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified.
    Keywords: intergenerational risk sharing, social security, ex ante welfare improvements, interim optimality, price effects
    JEL: D58 D91 E62 H55
    Date: 2006
  32. By: Geert Bekaert; Eric Engstrom; Steven R. Grenadier
    Abstract: We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than in the data.
    JEL: G12 G15 E44
    Date: 2006–05
  33. By: Sophie Claeys,; Gleb Lanine; Koen Schoors
    Abstract: We focus on the conflict between two central bank objectives, namely individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) in 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately and banks that are active on the interbank market enjoy protection from license withdrawal, showing a tacit concern for systemic stability. The CBR is also reluctant to withdraw licenses from banks that violate the individuals’ deposits to capital ratio, because this conflicts with the tacit CBR objective to secure depositor trust and systemic stability.
    Keywords: Bank supervision, bank crisis, Russia.
    JEL: G2 N2 E5
    Date: 2005–06–01
  34. By: Katja Funke (International Monetary Fund, 700 19th Street, N.W., Washington, D. C. 20431, USA.); Christiane Nickel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the empirical relationship between fiscal policy and the trade account. Research prior to this paper did not consider that the components of private and public demand in the import demand equation exhibit different elasticities. Using pooled mean group estimation for annual panel data of the G7 countries for the years 1970 through 2002, we provide empirical evidence that the composition of overall demand – i.e. the distribution among public demand, private demand and export demand – has an impact on the magnitude of the trade account deficit.
    Keywords: Fiscal policy, trade account, trade elasticities, panel cointegration.
    JEL: F32 E62 F41
    Date: 2006–05
  35. By: Knoppik, Christoph
    Abstract: A new econometric approach to the analysis of downward nominal wage rigidity in micro data is proposed, the kernel-location approach. It combines kernel-density estimation and the principle of joint variation of location and shape of the distribution of per cent annual nominal wage changes. The approach provides partial estimates of the counterfactual and factual distributions, of the rigidity function and of the degree of downward nominal wage rigidity. It avoids problematic assumptions of other semi- or non-parametric approaches to downward nominal wage rigidity in micro data and allows a discussion of the type of downward nominal wage rigidity encountered in data.
    Keywords: Downward Nominal Wage Rigidity, Kernel-Location Approach, Micro Data
    JEL: E24 J30
    Date: 2006–05–24
  36. By: Hans Fehr (University of Wuerzburg); Sabine Jokisch (Univeristy of Wuerzburg); Laurence J. Kotlikoff (Institute for Economic Development, Boston University)
    Abstract: This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S.,and the EU. Each of these countries/regions is entering a period of rapid and significant aging that will require major fiscal adjustments. But the aging of these societies may be a cloud with a silver lining coming, in this case, in the form of capital deepening that will raise real wages. In a previous model that excluded China we predicted that tax hikes needed to pay benefits along the developed world’s demographic transition would lead to a major capital shortage, reducing real wages per unit of human capital over time by one fifth. A recalibration of our original model that treats government purchases of capital goods as investment rather than current consumption suggests this concern was overstated. With government investment included, we find much less crowding out over the course of the century and only a 4 percent long-run decline in real wages. Adding China to the model further alters, indeed, dramatically alters, the model’s predictions. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are currently very different from those of developed countries. If successive cohorts of Chinese continue to save like current cohorts, if the Chinese government can restrain growth in expenditures, and if Chinese technology and education levels ultimately catch up with those of the West and Japan, the model’s long run looks much brighter. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth percent by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress, which we model as increasing the human capital endowments of successive cohorts. Even if the Chinese saving behavior (captured by its time preference rate) gradually approaches that of Americans, developed world real wages per unit of human capital are roughly 17 percent higher in 2030 and 4 percent higher at the end of the century. Without China they’d be only 2 percent higher in 2030 and, as mentioned, 4 percent lower at Century’s end. What’s more, the major short-run outflow of the developed world’s capital to China predicted by our model does not come at the cost of lower wages in the developed world. The reason is that the knowledge that their future wages will be higher (thanks to China’s future capital accumulation) leads our model’s workers to cut back on their current labor supply. So the shortrun outflow of capital to China is met with a commensurate short-run reduction in developed world labor supply, leaving the short-run ratio of physical capital to human capital, on which wages positively depend, actually somewhat higher than would otherwise be the case. Our model does not capture the endogenous determination of skill premiums studied by Heckman and Taber (1996). Doing so could well show that trade with China, at least in the short run, explains much of the relative decline in the wages of low-skilled workers in the developed world. Hence, we don’t mean to suggest here that all US, EU, and Japanese workers are being helped by trade with China, but rather that trade with China is, on average, raising the wages of developed world workers and will continue to do so. The notion that China, India, and other developing countries will alleviate the developed world’s demographic problems has been stressed by Siegel (2005). Our paper, although it includes only one developing country – China – supports Siegel’s optimistic long-term macroeconomic view. On the other hand, our findings about the developed world’s fiscal condition are quite troubling. Even under the most favorable macroeconomic scenario, tax rates will rise dramatically over time in the developed world to pay baby boomers their government-promised pension and health benefits. As Argentina has so recently shown, countries can grow quite well for years even with unsustainable fiscal policies. But if they wait too long to address those policies, the financial markets will do it for them, with often quite ruinous consequences.
    Date: 2005–09
  37. By: Santiago Rodriguez Feijoó; Alejandro Rodriguez Caro; Carlos Gonzalez Correa
    Abstract: The price level in the aggregate economy and, more concretely, controlling its changes, has become one of the high-priority objectives within the framework of the regional macroeconomic analysis. Its different evolution could modify the interregional capital and commercial flows, being able to cause strong shocks, and of asymmetric nature, in each economy. The first step to reach this objective is obtaining a trustworthy and comparable measurement of the inflation in the different regions to be compared. The Index Number Theory is then used to calculate Consumer Price Indexes (CPI) the regional level. The calculation of CPI is made, at least, in two phases. In the first one, Elementary Price Index is considered (EPI). In the second and later phases, these EPI are combined, along with weighting information based on household’s expenditure, to obtain CPI for different aggregation levels to the country level. As previous step to the calculation of the IPE and CPI, the set of goods and services has to be defined based on households’ consumption behaviour. These sets are grouped in layers, named elementary aggregates, based on their homogeneity of satisfying consumer’s necessities. The COICOP (Classification Of Individual Consumption by Purpose) has important implications at the time of analyzing the behaviour of the consumer within each elementary aggregate, because of a high possibility of substitution between products. Nevertheless, this possibility diminishes and can get to be null when the goods and services satisfy necessities with very different nature. Whether what is wanted it is to calculate an EPI that correctly reflects the consumer behaviour, the described homogenous character cannot be forgotten, especially if, in addition, we take into account that National Statistics Agencies have no expenditure information available for weighting purposes, only data of prices to calculate EPI. This paper is focussed on analysis of the formula used to obtain the IPE, with the limitations of available information just commented. The election of the formula for the IPE has not been widely studied in the economic literature, being the proposal by Carli in 1764 and Dutot in 1738 [ extracted Reference of OIT (2003), chapter 20, pages 12-13 ] the most often used for practical purposes. Nevertheless, Fisher (1922) had already recommended not using the Carli’s formula because of the bias to the rise that it introduces [Fisher (1922), pages 29-30]. Throughout the 20th century different authors has continued looking for the ideal formula extending possible approaches to the subject: the approach of Divisia, the stochastic approach, the economic approach and the axiomatic approach. The final summary of these studies can be synthesized in "Toward to Dwells Accurate Measure of The Cost of Living” by the Advisory Commission To The Study The Consumer Price Index presented in 1996. This report, also known as Boskin’s Report, suggests the use of geometric mean price indices at the elementary aggregate for the EPI, this formula is attributed to Jevons in 1983 [OIT (2003), chapter 20, pages 12-13 ]. In the present paper, we demonstrate that all usually formulas for the calculation of the IPE are incoherent with the theory of consumer behaviour, in an aggregate characterized by the high level of substitution caused by homogeneity in the consumption purpose. In addition, the formula proposed by Rodriguez, González and Rodriguez (2004), is not only superior from the axiomatic point of view, but also from the economic approach, is the only one that is able to reflect the expected consumer behaviour.
    Date: 2005–08
  38. By: Xiaozhong Zhai
    Abstract: Putting the theory of price system on the relationship among price, wage, labor time, interest rate and GNP (or GDP), four main variables in economics, Four-Rate Formula and Exchange Rate Formula are created (Xiaozhong Zhai 2003). Two formulas applying to analyses of economy and calculation can show some valuable data to macroeconomics, economist and policymaker. They can produce a proof to demonstrate that single currency, for example, single European currency with different value and interest rate in different conditions and regions, can not certainly benefit price stability, sound public finances, low interest rates, incentives for growth, investment and employment. Two formulas are very simple, practical and easy to deal with the complex phenomenon in economy. Exchange Rate Formula has an immediate signification in the international trade economy.
    Keywords: wage, price, GNP, interest rate, Four-Rate Formula and Exchange Rate Formula
    JEL: E
    Date: 2004–10–23
  39. By: Laura Serlenga (Dipartimento di Scienze Economiche - Università di Bari)
    Abstract: In this paper we consider three alternative approaches to test the Permanent Income Hypothesis (PIH) in the context of dynamic panels: the aggregate consumption approach, the Euler equation approach and Þnally Friedman (1957)’s original characteristic tests. Our empirical evidence, using the British Household Panel Survey (BHPS) data, strongly supports the PIH. This analysis can, thus, be considered as supporting the view that empirical tests of PIH, based on aggregate time-series data, might suffer from misspeciÞcation or overlook some fundamental characteristics of micro data.
    Keywords: Permanent Income Hypothesis, British Household Panel Survey
    JEL: E21 C13 C23
  40. By: Geert Bekaert; Eric Engstrom; Yuhang Xing
    Abstract: We identify the relative importance of changes in the conditional variance of fundamentals (which we call “uncertainty”) and changes in risk aversion (“risk” for short) in the determination of the term structure, equity prices and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by risk, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.
    JEL: G12 G15 E44
    Date: 2006–05
  41. By: Antonio Ciccone (ICREA and Universitat Pompeu Fabra, Department of Economics and Business, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain.); Elias Papaioannou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Do high levels of human capital foster economic growth by facilitating technology adoption? If so, countries with more human capital should have adopted more rapidly the skilled-labor augmenting technologies becoming available since the 1970’s. High human capital levels should therefore have translated into fast growth in more compared to less human-capital-intensive industries in the 1980’s. Theories of international specialization point to human capital accumulation as another important determinant of growth in human-capital-intensive industries. Using data for a large sample of countries, we find significant positive effects of human capital levels and human capital accumulation on output and employment growth in human-capitalintensive industries.
    Keywords: Human Capital, growth, structure of production.
    JEL: E13 F11 O11
    Date: 2006–05
  42. By: Swift, Zhicheng Li
    Abstract: Tax expenditures, in the form of tax provisions, are government expenditures. They are conceptually and functionally distinct from those tax provisions whose purpose is to raise revenue. Tax expenditure programs are comparable to entitlement programs. Therefore, tax expenditures must be analyzed in spending terms and integrated into the budgetary process to ensure fiscal accountability. In addition, tax expenditures must be audited for performance and the information must be published (with comprehensive analysis) to ensure fiscal transparency. The author analyzes the concept and definition, size, and effects of tax expenditures, as well as the fiscal accountability and transparency of tax expenditure spending. In short, tax expenditures affect (1) the budget balance, (2) budget prioritization in allocation, (3) the effectiveness and efficiency of fiscal resources, and (4) the scope for abuse by taxpayers, government officials and legislators. While reviewing the current practices in tax expenditures against the requirements of fiscal accountability and transparency, she finds that this fiscal area must be strengthened. The author sketches four building blocks to strengthen tax expenditures toward fiscal accountability and transparency, based on the literature developed by Surry and McDaniel, the practices from industrial and developin g countries, the Campos and Pradhan fiscal accountability model, and the International Monetary Fund ' s fiscal transparency code. The author argues that normative/benchmark tax structure, a revenue-raising component of the tax system, should be formalized. The normative/benchmark tax structure should be legally defined in the tax law and should be transparent. The tax receipts from this normative/benchmark tax structure should be quantified and published. Presently, many countries could publish imputed tax revenue from normative/benchmark tax structures because such data is available. Only if imputed tax revenue is published in the same way as the other budget components-tax revenue received, tax expenditures, direct expenditures, and fiscal balance-will a budget system be truly transparent in terms of revenue-raising activities and expenditure activities. In addition, when the tax revenue-raising activity is formalized, the inherent spending nature of tax expenditures is further exposed. Therefore, tax expenditures should be added to direct expenditures forming total government expenditures. Furthermore, the conventional concept of the size of government should be remedied by including both direct expenditures and tax expenditures.
    Keywords: Public Sector Economics & Finance,Tax Law,Fiscal Adjustment,Public Sector Fiscal Adjustment,Economic Theory & Research
    Date: 2006–05–01
  43. By: Randy Becker; John Haltiwanger; Ron Jarmin; Shawn Klimek; Dan Wilson
    Abstract: Micro and macro data integration should be an objective of economic measurement as it is clearly advantageous to have internally consistent measurement at all levels of aggregation – firm, industry and aggregate. In spite of the apparently compelling arguments, there are few measures of business activity that achieve anything close to micro/macro data internal consistency. The measures of business activity that are arguably the worst on this dimension are capital stocks and flows. In this paper, we document, quantify and analyze the widely different approaches to the measurement of capital from the aggregate (top down) and micro (bottom up) perspectives. We find that recent developments in data collection permit improved integration of the top down and bottom up approaches. We develop a prototype hybrid method that exploits these data to improve micro/macro data internal consistency in a manner that could potentially lead to substantially improved measures of capital stocks and flows at the industry level. We also explore the properties of the micro distribution of investment. In spite of substantial data and associated measurement limitations, we show that the micro distributions of investment exhibit properties that are of interest to both micro and macro analysts of investment behavior. These findings help highlight some of the potential benefits of micro/macro data integration.
    Date: 2005–05
  44. By: Charlotte Lespagnol (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: Théoriquement, les actions de politique monétaire \textit{via} le maniement des taux courts nominaux se transmettent à l'économie le long de la structure par terme des taux d'intérêt. L'absence de vérification empirique de ces relations entre les taux à différentes maturités, et partant de la transmission de la politique monétaire, remet en cause l'efficacité même des interventions des banques centrales. On peut cependant soutenir que les tests empiriques usuels qui remettent en cause la structure des taux peuvent être sujets à caution. En effet, ils utilisent seulement le passé des taux d'intérêt pour construire les anticipations de taux courts servant à calculer les taux longs théoriques qui sont ensuite comparés aux taux longs historiques. Or, il est commun à présent d'utiliser les règles de politiques monétaires pour modéliser l'action des banques centrales, en observant les évolutions de l'inflation et de l'activité. Nous tentons donc à l'aide d'un modèle macroéconomique et d'une règle monétaire <<~de type Taylor~>> de réconcilier l'idée d'une transmission de la politique monétaire des taux courts aux taux à plus long terme. Dans un premier temps, nous cherchons à déterminer un modèle macroéconomique simplifié de l'Allemagne de 1985 à 1998. Ensuite, nous simulons des séries de taux courts anticipés afin d'en déduire des taux à plus longue maturité. De la proximité constatée entre les taux observés à différentes échéances et les résultats des simulations, nous pourrons alors traiter de la pertinence de la théorie des anticipations de la structure par terme des taux.
    Keywords: Structure par terme des taux ; test de la théorie des anticipations ; modèle macroéconomique ; règle monétaire ; simulations stochastiques
    Date: 2006–05–30
  45. By: John H Munro
    Abstract: A recurrent and indeed persistent problem in European economic history – a veritable deus ex machina -- from medieval to modern times, is Europe’s supposed ‘balance of payments’ problem in trade with the ‘East’. This supposed problem has often been couched in Mercantilist overtones: namely, that export of supposedly large volumes of precious metals, especially, silver to conduct trade with, first the Levant, and then with the rest of Asia meant a serious drainage of wealth from western Europe. This seems to be particularly true in the debate about the late-medieval ‘Great Depression’ in which some contend that this balance of payments ‘deficit’ led to monetary contraction, deflation, and then economic depression. This paper, while not denying periodic problems of monetary contraction and indeed deflation, provides a non-Mercantilist perspective on not just European but global trade from the fourteenth to early eighteenth centuries. It offers the following related theses: (1) That late-medieval monetary contraction was far more related to falling outputs of mined silver and to reductions in the income-velocity of coined money and the related problem of hoarding, the roots of which were the growth of international warfare from the 1290s, significantly financed by coinage debasements; and together they provided serious barriers to the international flow of specie and bullion, and indeed to the emergence of bullionist philosophies, which are the very core of Mercantilism. (2) That, insofar as such monetary contractions did lead to deflation, that deflation, in augmenting the purchasing power of silver (gram for gram), provided the profit motive for the technological solutions to this very same problem: namely, innovations in both mechanical and chemical engineering that produced the South German silver-copper mining boom, which quintupled Europe’s silver supplies from the 1460s to the 1540s, when even cheaper supplies of silver were arriving from the Spanish Americas. (3) That South German silver-copper mining boom, controlled by German merchant bankers who also controlled the now thriving fustian-textile (linen-cotton) industry, had two related consequences: (a) it was a major factor in the revival and expansion of the European economy in general and the growth of the Antwerp market in particular, via new transcontinental trading routes from Venice through Germany to the Brabant Fairs, based on a tripod of English woollens, South German metals, and Portuguese spices. (b) at the same time, it promoted a great expansion in Venetian trade with the Levant, to acquire not only Asian spices but also large quantities of Syrian cotton to feed the booming German fustians industry. (4) While the 15th-century Venetian trade with the Levant did indeed require large amounts of silver, perhaps enough to pay for two thirds of goods acquired in the Levant, the 16th century commerce with not just the Levant but the far larger Ottoman Empire benefited from a very new trade: the exports of fine quality Venetian woollens. This paper examines the reasons for both the rise and fall of the Venetian cloth industry (5) While traditional explanations for the rapid decline of the Venetian cloth industry in the 17th century have focused on Venice’s own ‘internal faults’, this paper offers an alternative explanation: how England’s new Levant Company and the English cloth industries so successfully gained a major share of Ottoman and Persian markets, at the direct expense of Venice: through a combination of diplomacy and superior naval technology. Their success meant that even less silver was required to conduct this trade with the Ottoman Empire, than had been true for Venice. (6) A further major factor in the decline of Venice in the 17th century was the final loss of the Asian spice trades, which had involved close Venetian ties with the Ottomans, to the Dutch and the English, who succeeded where the Portugese had failed. That story in turn allows us, with much more ample data, to examine the nature of vastly larger ‘balance of payments deficits’, so that as much as 80 percent of Asian goods had to be acquired with silver. That silver came not from Europe but principally from the Spanish Americas. Thus the major thesis of the paper is that first the South German and then the Spanish American silver mining booms greatly benefited Europe by promoting a vast increase in truly global trade.
    Keywords: Venice, Levant, Ottoman Empire, South Germany, Antwerp, Portugal, England, Asia, East Indies, balance of payments, gold, silver, international trade,
    JEL: E3 E4 F14 F20 F37 F40 H56 L67 L71 L90 N13 N43 N73
    Date: 2006–04–10
  46. By: Valeria DeBonis; Luca Spataro
    Abstract: The issue of inheritance taxation is very similar to that of capital income taxation, once they are analyzed within the optimal taxation framework: should one tax own future consumption and estate (i.e. perspective heirs’ consumption) more than own present consumption? As for capital income taxation, starting from the seminal works by Judd (1985) and Chamley (1986), the issue of dynamic optimal capital income taxation has been analyzed by a number of researchers. In particular, Judd (1999) has shown that the zero tax rate result stems from the fact that a tax on capital income is equivalent to a tax on future consumption: thus, capital income should not be taxed if the elasticity of consumption is constant over time. However, while in infinitely lived representative agent (ILRA) models this condition is necessarily satisfied in the long run, along the transition path, instead, it holds only if the utility function is assumed to be (weakly) separable in consumption and leisure and homothetic in consumption. Another source of taxation can derive from the presence of externalities, which gives room to nonzero taxation as a Pigouvian correction device. Abandoning the standard ILRA framework in favour of Overlapping Generation models with life cycle (OLG-LC) has delivered another important case of nonzero capital income taxation. This outcome can be understood by reckoning that in such a setup optimal consumption and labor (or, more precisely, the general equilibrium elasticity of consumption) are generally not constant over life and even at the steady state, due to life-cycle behavior. A similar reasoning can be applied to estate taxation. Note that this corresponds to a dierential treatment of savings for own future consumption, on the one hand, and of savings for bequest, on the other hand. Thus, the first aspect to note is that the optimality of a nonzero tax on capital income does not necessarily imply the optimality of a nonzero tax on estates. In fact the latter can be justified on arguments analogous to those presented above: a nonzero estate tax could stem either from the violation of (weak) separability between ”expenditure” on estate and (previous period) leisure or from a dierence between the donor’s and the donee’s general equilibrium elasticities of consumption, according to the framework being analyzed. Another reason for levying a tax on inheritance could be correcting for an externality. Atkinson (1971) and Stiglitz (1987) consider the positive externality deriving from the fact that transfers benefit those who receive them. Holtz-Eakin et al. (1993), Imbens et al. (1999), Joulfaian et al. (1994) consider instead the negative externality deriving, in the presence of an income tax, from a fall in heirs’ labor eorts. In the field of estate and transfers in general, the analysis of the motives for giving is another important aspect. In fact, different motives are associated to dierent forms of utility functions and, as a consequence, to dierent policy eects. Altruism, joy of giving, exchange related motives, accidental bequests have been widely studied in the literature (see Davies, 1996; Masson and Pestieau, 1997; Stark, 1999; Kaplow, 2001). In this paper we consider altruism motivated bequests. However, we introduce an element that is not considered in the existing models, i.e. the presence of migration. Moreover, we allow for a disconnection in the economy, in that we assume altruism to be limited to own descendants4. This element turns out to be a relevant determinant of taxation once it is embedded in the social welfare function, and precisely in the sense that the policymaker takes into account the demographic evolution of the population. In fact, the zero capital income and inheritance tax result applies only if the disconnection of the economy is disregarded. We identify instead a number of ways in which the demographic evolution of the population can be accounted for within the social welfare function via appropriate intergenerational weights, leading to dierent combinations of the inheritance and capital income tax rates, with at least one of them being nonzero. The work proceeds as follows: in section 2 we present the model and derive the equilibrium conditions for the decentralized economy. Next, we characterize the Ramsey problem by adopting the primal approach. Finally, we present the results by focusing on the new ones. Concluding remarks and a technical appendix will end the work.
    Keywords: optimal dynamic taxation, migration, altruism, inheritance taxation, capital income taxation
    JEL: E62 H21
    Date: 2006–05
  47. By: Helge Berger; Stephan Danninger
    Abstract: This study explores the effects of labor and product market deregulation on employment growth. Our empirical results, based on an OECD country panel from 1990-2004, suggest that lower levels of product and labor market regulation foster employment growth, including through sizable interaction effects. Based on these findings, the paper develops a theoretical framework for evaluating deregulation strategies in the presence of reform costs. Optimal deregulation takes various forms depending on the deregulation costs and the strength of reform interactions. Compared to the first best, decentralized decision-making based on a partial market-by-market perspective can lead to excessive or insufficient regulation, depending on the design of the decision process. Securing the first best requires not only coordinating deregulation activities across sectors but also overcoming the partial perspective of decision makers.
    Keywords: product market regulation, labor market regulation, employment growth, policy coordination, sequencing
    JEL: E24 J50 L51
    Date: 2006
  48. By: José Pablo Dapena
    Abstract: The traditional marshallian rule of investing (abandoning) when the value of an underlying asset is above (below) the cost of an alternative investment is modified in the presence of uncertainty and irreversibility giving rise to an option component into decisions. This component is affected by the degree of volatility of underlying assets, which in turn can derive their volatility from the economy as a whole, affecting the investment process and therefore the accumulation of capital and future growth. In the same tense, the evidence of volatility in the returns of the underlying assets of the economy affects the market value of debt contracts, conveying recommendations regarding the financial architecture of the economy and the type of financial instruments better suited. The paper explores the application of contingent claims analysis both to the potential effect of macro volatility on aggregate investment, and to the effect on the presence of high levels of indebtedness of the economy, with a special application to the Argentinean economy where we obtain that economies with high level of volatility would require a significant level of internal saving and capital markets driven mainly by equity instruments of financing, which helps to better accommodate uncertainty by means of the price of assets.
    Keywords: volatility, contingent claims, real options, aggregate investment, saving, capital markets.
    JEL: G00 F36 O16
    Date: 2006–04
  49. By: Andrew Leigh
    Abstract: What impact do income and other demographic factors have on a voter’s partisan choice? Using post-election surveys of 14,000 voters in ten Australian elections between 1966 and 2001, I explore the impact that individual, local and national factors have on voters’ decisions. In these ten elections, the poor, foreign-born, younger voters, voters born since 1950, men, and those who are unmarried are more likely to be left-wing. Over the past 35 years, the partisan gap between men and women has closed, but the partisan gap has widened on three dimensions: between young and old; between rich and poor; and between native-born and foreign-born. At a neighbourhood level, I find that, controlling for a respondent’s own characteristics, and instrumenting for neighbourhood characteristics, voters who live in richer neighbourhoods are more likely to be right-wing, while those in more ethnically diverse or unequal neighbourhoods are more likely to be left-wing. Controlling for incumbency, macroeconomic factors do not seem to affect partisan preferences – Australian voters apparently regard both major parties as equally capable of governing in booms and busts.
    Keywords: elections, voting, partisanship, income, inequality, neighbourhood effects
    JEL: D31 D72 E24
    Date: 2005–04
  50. By: Peter J. Stauvermann (University of Twente, Enschede, The Netherlands)
    Abstract: As a guide to economic policy many countries nowadays have a system of national accounts. The basic system was developed in the post World War II period, and was the outcome of a truly international effort. Involving the United Nations and other international organizations, it has been very successful in developing an international bookkeeping system, nowadays accepted and introduced by all developed and many developing countries. National accounts basically are compiled because policy-makers wish to have an overview of the economic performance of their country. The most well-known indicator for this is Gross Domestic Product. Other important indicators are those for industrial production, investments, consumption and the trade figures. Basically we are dealing with a system where the quantity of goods is measured in physical units valued at market prices. The rise in public sector administration has complicated matters, because of missing market prices. However, here good approximations have been developed. A fundamental problem arose when the wish originated to include nature into this accounting system. The idea was quite clear, i.e. to lend support to policy making when natural functions are included and/or affected. However, a problem that did not go away was which properties to attribute to nature or its functions. The present paper aims to show, first, that environmental accounts are a necessary prerequisite for environmental policy, and second, to explain what kind of environmental accounting system is the most preferable one. In principle, economists have developed two different approaches to account for the environment. One approach is based on the vision that the environment should be valued in monetary terms. The other one is to relate the environment, measured in physical units, to economic variables. The question then is what kind of environmental system should the preferred one. In a certain sense the discussions in the Netherlands concerning environmental accounting are the mirror image of the discussions which have taken place in the rest internationally. In the Netherlands, however, the discussion got a particular twist. In fact, two systems have been discussed and developed in statistical bureaus. In essence, the Dutch discussion reflects the discussion between the two main strands of thought. The decisive difference between both goes back to the question: "Is it possible to value natural functions in monetary units?" If yes, it is possible to calculate something like a Green National Income (GNI), which was proposed by the Dutch national accountant Roefie Hueting (1969, 1974) atfirst. His operationalization of the basic idea was to value all environmental damages in monetary units and then to subtract these numbers from the net national income (NNI). He called this figure the Sustainable National Income (SNI). Only if the difference between NNI and SNI would be zero, the economy would be environmental sustainable. If it is not possible to value the nature in monetary terms, it is impossible to calculate a Green National Income. During the 1990s, the Dutch national accountant Steven Keuning developed an alternative system (the National Accounting Matrix including Environmental Accounts - the so-called NAMEA system), where he related quantities of emissions measured in physical units to figures of the conventional accounting system, e.g. CO2 emissions to GDP. The question then is which system should be preferred to inform policy-makers and the public about the state of the economy concerning the environment. The paper will go into these issues, and come to a conclusion
    JEL: Q56 Q57 E01
    Date: 2006–03
  51. By: Thomas Munthali (Leeds University Business School)
    Abstract: Malawi has been implementing structural adjustment reforms since 1981 in search of a way to revive its declining economic growth triggered by the oil shocks and general world economic recession of the mid and late 1970’s. These structural reforms were meant to liberalise the economy, broaden and diversify the production base towards non-primary products and allocate resources more productively. Since the theory of Structural Adjustment Programmes (SAPs) has industrial growth, manufacturing in particular, at the centre of its argument for reviving economic growth, this paper primarily aims at establishing whether or not the claim that structural adjustments lead to manufacturing growth has been applicable to Malawi. By comparing the before (1960-1980) and after SAP (1981-1998) manufacturing industry’s growth levels, this study has found out that SAPs have assisted in improving manufacturing growth in Malawi though dismally. This dismal performance is evidenced by manufacturing growth volatilities and low average annual growth rates of 2.8% during the SAP implementation period compared to an average of 1.9% per annum before SAPs. However, despite this dismal growth of the manufacturing sector, there has been a production shift in the economy though not much from agriculture to industry as was the thrust of the structural adjustment. The manufacturing sector’s share of GDP has been rising over the SAP implementation period while that of agriculture especially the agricultural tradable sector has been declining giving hope for a structural move towards industry. This is evidenced by increased share of manufacturing in GDP from 16% before SAPs to 23% in the SAP period while decreasing the share of agriculture from 46% to 41% during similar periods. Despite this economy shift towards the industrial sector, however, GDP growth has been both volatile and declining averaging only 2.5% per annum during the entire SAP implementation period unlike the vibrant 6% per annum before SAPs. This only shows how much little effect the SAPs have had in reversing the declining economic growth trend of the Malawi economy with much of the growth still largely dependent on the agricultural sector. Malawi has continued to produce more and more volumes of agricultural produce for exports and yet due to declining terms of trade, the export values have been very small to assist in bringing the economy back on track. The study further reveals that despite the SAPs having assisted in improving manufacturing growth in Malawi, the sector’s growth has been characterised with incessant volatilities especially in the later part of the 1990’s when Malawi’s traditional donors were withholding economic reform funds due to the government’s failure to meet key economic stabilisation targets of low inflation, low interest rates and prudential spending. Malawi, being an agrarian economy dependent on external factors like climatic changes and international terms of trade, already faces volatilities in the availability of foreign exchange at various times of the year. This has in turn led to volatilities in the exchange rates, inflation levels, interest rates and GDP growth rates making sustainable manufacturing industry growth difficult. The study then, amongst others, recommends that Malawi needs to continue to fully implement economic reforms that are aimed at macroeconomic stability and promotion of industrial sector such as the formulation of an industrial policy separate from the Trade policy which can help to shape the course and pace of industrialisation in Malawi. Further, in order to draw meaningful government interventions and sound implementation of SAPs, it is important to conduct a micro-level study on manufacturing firms so as to find out how SAPs have so far impacted on manufacturing firm’s technical efficiency, capacity utilisation, allocative efficiency, market attaining distributive efficiency, and labour efficiency. Such a study would help in identifying if SAPs have been on the right track in helping to achieve their other main purpose of economic efficiency in the manufacturing sector.
    Keywords: Manufacuring, growth, SAPs, economic reforms, malawi
    JEL: E
    Date: 2004–10–14
  52. By: Calvet, Laurent; Campbell, John Y.; Sodini, Paolo
    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 Sweeden.
    Keywords: asset allocation; diversification; familiarity; participation
    JEL: D50 D90 E30 O10
    Date: 2006–01–01
  53. By: Hans-Werner Sinn
    Abstract: Germany is the laggard of Europe, yet the country is world champion in merchandise exports. The paper tries to solve this theoretical and empirical puzzle by diagnosing a “pathological export boom” and a “bazaar effect”. Excessively high wages defended by unions and the welfare state against the forces of international low-wage competition destroy too big a fraction of the labour intensive sectors and drive too much capital and labour into the capital intensive export sectors, causing both unemployment and excessive value added in exports. Moreover, excessive wages induce too much outsourcing of upstream production activities which implies that export quantities grow too much in relation to value added contained in exports. Finally, excessive wages cause capital flight resulting in a too large current account surplus.
    Keywords: trade, wage rigidity, replacement incomes, Germany
    JEL: E24 J65
    Date: 2006
  54. By: Willi Leibfritz; Paul O'Brien
    Abstract: France belongs to the group of OECD countries with relatively high tax levels. In recent years French governments have been increasingly aware that the tax system may have negative effects on growth and employment and some reforms have been introduced to reduce tax distortions. There has, however, been no grand reform design and it is also not clear in which direction it should go. This paper describes the main characteristics and the developments of the French tax system and examines some of its economic distortions and complexities. A future tax reform agenda could focus on the following five elements: First, reduce labour tax distortions by further reductions in social security contributions for low paid workers and reducing the withdrawal rate for in-work benefits, financing these either by increasing the Contribution Sociale Généralisée (CSG) or value added tax. Second, simplify the personal income tax, widening its base to permit lower top rates, and introducing deduction at source. Consider merging it with the CSG if this can be done in an administratively efficient way. Third, reduce capital tax distortions by cutting the corporate tax rate and widening the tax base by reducing the number of special incentives for certain kinds of activity, and also reduce the bias in favour of debt finance. Fourth, increase the role of “green” taxes because of the efficiency gains they offer –- though not as significant sources of revenue. Fifth, improve, and reduce the costs of, tax administration by progressively merging tax administrations where possible. This Working Paper relates to the 2005 OECD Economic Survey of France ( <P>Le système fiscal français La France appartient au groupe des pays de l’OCDE ayant des niveaux d’imposition relativement élevés. Ces dernières années, les autorités françaises ont pris de plus en plus conscience des effets négatifs que le système fiscal peut avoir sur la croissance et l’emploi et des réformes ont été introduites pour réduire les distorsions fiscales. Il n’y a pas eu, toutefois, de grand projet de réforme et on n’appréhende pas encore très bien non plus dans quel sens la réforme devrait aller. La présente étude décrit les caractéristiques et les évolutions du système fiscal français et examine certaines de ses complexités et distorsions économiques. Un programme de réforme fiscale pour l’avenir pourrait être axé sur les cinq objectifs suivants : premièrement, atténuer les distorsions imputables aux prélèvements sur le travail en abaissant encore les cotisations de sécurité sociale pour les bas salaires et en diminuant le taux de réduction en fonction du revenu des prestations subordonnées à l’exercice d’un emploi, ces dernières étant financées par une augmentation de la Contribution sociale généralisée (CSG) ou de la taxe à la valeur ajoutée. Deuxièmement, simplifier l’impôt sur le revenu des personnes physiques, en élargissant sa base de façon à permettre une baisse des taux supérieurs d’imposition et en introduisant le prélèvement à la source. On pourrait envisager de fusionner cet impôt avec la CSG si cela peut être fait de façon administrativement efficiente. Troisièmement, réduire les distorsions imputables à l’impôt sur le capital en baissant le taux d’imposition des sociétés et en élargissant l’assiette fiscale grâce à une diminution du nombre d’incitations spéciales pour certains types d’activité, et également atténuer le parti-pris en faveur du financement par l’emprunt. Quatrièmement, accroître le rôle des impôts écologiques en raison des gains d’efficience qu’ils offrent –même s’il ne s’agit pas d’une source importante de recettes. Cinquièmement, améliorer l’administration de l’impôt, et en réduire les coûts, en fusionnant progressivement les administrations fiscales lorsque c’est possible. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la France, 2005 (
    Keywords: fiscalité, tax policy, politique fiscale, social security, sécurité sociale, tax administration, administration fiscale
    JEL: E62 H2 H71 J32
    Date: 2005–07–28
  55. By: Grigoris Zarotiadis; T. Lynn Riggs
    Abstract: In order to examine the worsening of inequality between workers of different skill levels over the past three decades and to further motivate the theoretical discussion on this issue, we use the decomposition methodology to focus on the interaction of within- and between-industry changes of the relative skill intensity in U.S. manufacturing. Unlike previous work, we use more detailed levels of industry classification (5-digit SIC product codes), and we analyze the impact of plants switching industries as well as of plant births and deaths on these changes. Internal, plant-level data from the U.S. Census Bureau's Longitudinal Research Database and the new Longitudinal Business Database provide us with the requisite information to conduct these studies. Finally, our empirical conclusions are discussed in relation to the inspired theoretical inference, as they enrich the debate concerning the sources of the inequality by justifying the skill-biased character of technical change.
    Keywords: Skill Intensity, Skill-Biased Technical Change, Wage Inequality
    JEL: F10 F16 E24 J21
    Date: 2006–01
  56. By: Rastoin, J.L.
    Abstract: In a process of world economic domination by an agro-industrial and agro-tertiary food system, the author wonders about the feasibility of an alternative model. The intensive agro-industrial model (financiarized, concentrated, specialized and globalized), allows remarkable results in terms of products prices and safety, but generates negative externalities. In the long term, this model could threat the food equilibrium of the populations and ecological balance of our planet. The concept of sustainable development provides some orientations on which the researchers are invited to work: definition of new food basis, design of shorter and more diversified productive and marketing systems, discussion of governance models, on a regional, national and international scale. These prospects imply the definition of voluntarist public policies. ...French Abstract : Dans un monde en voie de domination par un système alimentaire agro-industriel et agro-tertiaire, l'auteur s'interroge sur la faisabilité d'un modèle alternatif. En effet, le modèle agro-industriel intensif, spécialisé, concentré, financiarisé et mondialisé, s'il a permis de remarquables avancées en termes de prix et de sûreté des produits, génère des externalités négatives qui, à terme, menace l'équilibre alimentaire des populations et de la planète. Le concept de développement durable fournit quelques orientations sur lesquelles les chercheurs sont invités à travailler : définition de nouvelles bases alimentaires, conception de système productifs et de commercialisation plus courts et plus diversifiés, discussion des modes de gouvernance à l'échelle régionale, nationale et internationale. Ces perspectives impliquent la définition de politiques publiques volontaristes.
    JEL: E2 F1 L1 L66 N5 O1 Q1
    Date: 2006
  57. By: Staszewska, Anna; Aldrich, John
    Abstract: This paper examines the experiment in macroeconometrics, the different forms it has taken and the rules that have been proposed for its proper conduct. Here an "experiment" means putting a question to a model and getting an answer. Different types of experiment are distinguished and the justification that can be provided for a particular choice of experiment is discussed. Three types of macroeconometric modelling are considered: the Cowles (system of equations) approach, the vector autoregressive model approach and the computational experiment. Keywords; experiment, impulse response analysis, ceteris paribus, structural invariance JEL classification: B41, C5, E37
  58. By: Anne-Marie Brook; Willi Leibfritz
    Abstract: Slovakia’s fundamental tax reform of 2004 considerably improved the simplicity and efficiency of the tax system by eliminating exemptions and special regimes and setting the rates for the personal income tax (PIT), the corporate income tax (CIT) and the value added tax (VAT) all equal to 19%. This paper assesses the impact of this reform in the context of Slovakia's wider package of economic reforms. With respect to economic efficiency, the two key conclusions are as follows: First, the reforms are expected to improve both the level and efficiency of capital investment in Slovakia – although further improvements could be made by eliminating the double taxation on projects financed by retained profits. Second, the combination of the tax and social benefit reforms has enhanced the incentives for unemployed workers to seek work, which should result in higher labour supply. Labour demand should also have increased, thanks to the more flexible labour market. However, as overall taxes on labour remain high, labour demand for very low skilled workers may not pick up without further reforms to reduce the cost of employing such workers. With respect to equity considerations the assessment is less clear cut. On the one hand the flat personal income tax has benefited both low income earners and very high earners, particularly those with families, while middle-income earners, particularly single earners appear to be somewhat worse off. The increase in VAT and the welfare reform also have distributive effects. The net result of these reforms has been a significant cut in the real incomes of social beneficiaries who are not working. On the other hand, by raising labour productivity and reducing structural unemployment the reforms have the potential to benefit the low-skilled population also – provided other public policies are in place to facilitate this outcome. This Working Paper relates to the 2005 OECD Economic Survey of the Slovak Republic ( <P>L'impôt à taux unique dans le contexte de réformes économiques slovaques La réforme fiscale radicale mise en place par la Slovaquie en 2004 a fortement accru la simplicité et l’efficience du système fiscal en supprimant les exemptions et les régimes spéciaux et en fixant un taux uniforme de 19 % pour l’impôt sur le revenu des personnes physiques (IRPP), l’impôt sur le revenu des sociétés (IRS) et la taxe sur la valeur ajoutée (TVA). Ce document évalue l’incidence de cette réforme dans le contexte d’une série plus générale de réformes économiques mises en œuvre par la Slovaquie. Du point de vue de l’efficience économique, les deux principales conclusions sont les suivantes : En premier lieu, les réformes vont sans doute augmenter à la fois le niveau et l’efficience de l’investissement en Slovaquie – même si une amélioration reste possible en supprimant la double imposition des investissements financés par les bénéfices non distribués. En second lieu, la réforme fiscale, conjuguée à une réforme du système de prestations sociales, renforce les incitations pour les chômeurs à chercher du travail, ce qui devrait accroître l’offre de main-d’œuvre. La demande de main-d’œuvre doit aussi avoir augmenté, grâce à la plus grande flexibilité du marché du travail. Cependant, l’imposition totale du travail demeurant élevée, la demande pour les travailleurs très peu qualifiés n’augmentera peut-être pas en l’absence de mesures supplémentaires pour réduire le coût de l’embauche de ces travailleurs. En ce qui concerne les considérations relatives à l’équité, l’évaluation est moins tranchée. D’un côté, le taux uniforme de l’impôt sur le revenu des personnes physiques profite à la fois aux catégories à bas revenus et à aux titulaires de revenus très élevés, en particulier ceux qui ont une famille, tandis que les catégories à revenu moyen, en particulier les célibataires, semblent quelque peu défavorisées. L’alourdissement de la TVA et la réforme de la protection sociale ont aussi des effets redistributifs. Au total, ces réformes se traduisent par une diminution sensible des ressources des bénéficiaires de prestations sociales qui ne travaillent pas. D’un autre côté, en rehaussant la productivité du travail et en réduisant le chômage structurel, les réformes vont sans doute bénéficier aussi à la population peu qualifiée – à condition que des mesures complémentaires soient mises en place pour faciliter ce résultat. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la République slovaque, 2005 (
    Keywords: tax policy, politique fiscale, social security, sécurité sociale, flat tax, labour taxation, capital taxation, impôt uniforme, fiscalité du travail, fiscalité du capital
    JEL: E62 H21 H53 J3
    Date: 2005–10–03

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