nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒06‒10
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Putting the New Keynesian Model to a Test By G. PEERSMAN; R. STRAUB
  2. Plant-Level Nonconvexities and the Monetary Transmission Mechanism By Roman Sustek
  3. Re-examining the Structural and the Persistence Approach to Unemployment By T. BERGER; G. EVERAERT
  4. Bond Yield Compression in the Countries Converging to the Euro By Lucjan T. Orlowski; Kirsten Lommatzsch;
  5. Core inflation at the Bank of Canada A critique By Kevin Clinton
  6. Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank By Jan Strasky
  7. An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs By Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
  8. The Monetary Transmission Mechanism in the Czech Republic (evidence from VAR analysis) By Katerina Arnostova; Jaromir Hurnik
  9. La Política Monetaria en Colombia By Javier Gómez Pineda
  10. Structural and Cyclical Unemployment: What Can We Derive from the Matching Function? By Kamil Galuscak; Daniel Munich
  11. Reasons for Real Appreciation in Central Europe By Michael Brandmeier
  12. Vicious and Virtuous Circles - the Political Economy of Unemployment in Interwar UK and USA By Ruthira Naraidoo; Patrick Minford; Kent Matthews
  13. Testing the New Keynesian Phillips Curve Without Assuming Identification By Sophocles Mavroeidis
  14. Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio By Ivan Baboucek; Martin Jancar
  15. La estimación de un indicador de brecha del producto a partir de encuestas y datos reales By Norberto Rodríguez N.; José Luis Torres T.; Andrés Velasco M.
  16. The Patterns and Determinants of Price Setting in the Belgian Industry By D. CORNILLE; M. DOSSCHE
  17. Technological Progress, Obsolescence and Depreciation By Raouf, BOUCEKKINE; Fernando, DEL RIO; David, DE LA CROIX
  18. Interest Income and Household Savings: Evidence Based on the Maturation of Postal Savings Certificates By Noriko Inakura; Satoshi Shimizutani
  19. The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes By Robert F. Engle; Jose Gonzalo Rangel
  20. Capital Flows and Monetary Policy By Javier Gómez Pineda
  21. Population Aging, Fiscal Policies, and National Saving: Predictions for Korean Economy By Young Jun Chun
  22. The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts By Stephen G. Cecchetti
  23. Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries By Roman Horvath
  24. Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects By Rasmus Fatum; Michael M. Hutchison
  25. Ascesa e declino della nozione di “saggio proprio di interesse” i n Sraffa By Franco DONZELLI
  26. Employment subsidies and substitutable skills : An equilibrium matching approach By Gabriele, CARDULLO; Bruno, VANDERLINDEN
  27. Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind? By Balázs Égert; ;
  28. The Behavioural Equilibrium Exchange Rate of the Czech Koruna By Lubos Komarek; Martin Melecky
  29. Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues By Balázs Égert,; László Halpern; Ronald MacDonald
  30. Evidence of Bank Lending Channel for Argentina and Colombia By José Gómez González; Fernando Grosz
  31. Business Competitiveness Environment In Bangladesh (2005): Domestic Perceptions And Global Comparison By Debapriya Bhattacharya; Khondaker Golam Moazzem; Kazi Mahmudur Rahman; Syed Saifuddin Hossain
  32. Happiness and the Human Development Index : The Paradox of Australia By Blanchflower, David G; Oswald, Andrew J
  33. The Dynamics of the Age Structure, Dependency, and Consumption By David Weil; Heinrich Hock
  34. Gender Differences in Job Separation Rates and Employment Stability: New Evidence from Employer-Employee Data By Anders Frederiksen
  35. A Century of Work and Leisure By Valerie A. Ramey; Neville Francis
  36. The Effects of Labor Market Policies in an Economy with an Informal Sector By James Albrecht; Lucas Navarro; Susan Vroman
  37. Parental unemployment and children's school performance By Öster, Anna
  38. Political Budget Cycles and Fiscal Decentralization By Paula, GONZALEZ; Jean HINDRIKS; Ben, LOCKWOOD
  39. Agriculture-sector Policies and Poverty in the Philippines: a Computable General-Equilibrium (CGE) Analysis By Caesar B. Cororaton; Erwin L. Corong
  40. New Evidence on Real Wage Cyclicality within Employer-Employee Matches By Donggyun Shin; Gary Solon
  41. Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure By Anca Podpiera; Jiri Podpiera
  42. The Impact of Trade Reform in the 1990s on Welfare and Poverty in the Philippines By Caesar B. Cororaton

    Abstract: In recent years, New Keynesian dynamic stochastic general equilibrium (NK DSGE) models have become increasingly popular in the academic literature and in policy analysis. However, it is still disputed how successful these models are in reproducing the dynamic behavior of an economy following structural shocks. This paper is an attempt to shed some light on this issue. We use a VAR with sign restrictions that are robust to model and parameter uncertainty to estimate the effects of monetary policy, preference, government spending, investment, price markup, technology and labor supply shocks on macroeconomic variables in the United States and the euro area. In contrast to the NK DSGE models, the empirical results indicate that technology shocks have a positive effect on hours worked, and investment and preference shocks have a positive impact on consumption and investment, respectively. While the former is in line with the predictions of Real Business Cycle (RBC) models, the latter indicates the relevance of accelerator effects, as described in the earlier Keynesian literature. Furthermore, we show that NK DSGE models might overemphasize the role of cost-push shocks in business cycle fluctuations, while in the same time underestimating the importance of other shocks such as changes in technology and investment adjustment costs.
    Keywords: DSGE models; vector autoregressions; sign restrictions
    JEL: C32 C51 E32 E52
    Date: 2006–03
  2. By: Roman Sustek
    Abstract: Micro-level empirical evidence suggests that plant managers adjust production by utilizing capital along nonconvex margins. Existing models of the monetary transmission mechanism (MTM), however, assume that production units adjust output smoothly. The objective of this paper is to determine whether such plant-level nonconvexities affect the MTM in a quantitatively significant way. To this end we replace the smooth production function in a prototypical model of the MTM with heterogeneous plants that adjust output along three nonconvex margins: intermittent production, shiftwork, and weekend work. We calibrate the model such that steady-state utilization of these margins is in line with U.S. data. We find that the nonconvexities dampen the responses of aggregate economic activity and prices to monetary policy shocks by about 50 percent relative to the standard model, thereby significantly reducing the effectiveness of the MTM. Due to heterogeneity and discrete choices at the plant level, monetary policy affects the output decisions of only “marginal†plants – those close to being indifferent between alternative production plans. In equilibrium the measure of such plants is rather small. In addition, contrary to popular belief, the quantitative effects of monetary policy shocks on aggregate output do not significantly change with the degree of capacity utilization over the business cycle. The effects on inflation, however, do change substantially over the business cycle when monetary policy shocks are persistent.
    Keywords: Asymmetries, heterogenous plants, monetary transmission mechanism, nonconvexities, nonlinear approximation.
    JEL: E22 E23 E32 E52
    Date: 2005–12
    Abstract: This paper examines the relative importance of the structural and the persistence approach to unemployment. We set out a standard imperfect competition model that decomposes observed unemployment into a structural and a persistent cyclical component. The natural rate of unemployment is treated as an unobserved variable that has observable effects on the measured unemployment rate, output and prices. The multivariate unobserved component model is estimated for the US and the euro area using Bayesian techniques and the Kalman filter. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is somewhat lower in the US but demand shocks seem to be more important in explaining variation of unemployment.
    Keywords: natural rate of unemployment, persistence, unobserved components, Kalman filter, Bayesian analysis
    JEL: C11 C32 E24 E31 E32
    Date: 2006–05
  4. By: Lucjan T. Orlowski; Kirsten Lommatzsch;
    Abstract: We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.
    Keywords: term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models
    JEL: E43 E44 F36
    Date: 2005–10–01
  5. By: Kevin Clinton (Queen's University)
    Abstract: Core inflation is a useful concept for the theory and practice of monetary policy. The Bank of Canada maintains, in addition, that core inflation should be, and has in fact been, a useful predictor of headline inflation. Under the bank’s policy of inflation targeting, however, this is incorrect: over horizons of a year or more the best forecast should be the 2 percent target; and core inflation should have no predictive content. Post- 1995 evidence confirms this argument.
    Keywords: TBA
    Date: 2006–05
  6. By: Jan Strasky
    Abstract: This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules.
    Keywords: Exchange rates, inflation targeting, monetary policy rules, open economy.
    JEL: E52 E58 F41
    Date: 2005–12
  7. By: Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
    Abstract: Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy—both the business-cycle regularities and the recent developments associated with the economy’s transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment.
    Keywords: .
    JEL: C32 E32
    Date: 2005–12
  8. By: Katerina Arnostova; Jaromir Hurnik
    Abstract: Due to significant lags between a monetary policy action and the subsequent responses in the economy, understanding the transmission mechanism is of primary importance for conducting monetary policy. This paper analyses the monetary policy transmission mechanism using VAR models - the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy. The results show that an unexpected monetary policy tightening leads to a fall in output, whereas prices remain persistent for a certain time. The exchange rate reaction then heavily depends on the data sample used. Although it is clear that due to the rather short time span of the data, the results should be taken with caution, they at least show that the basic framework of how monetary policy affects the economy does not differ significantly either from what would be predicted by the theory or from the results obtained for more developed economies.
    Keywords: Impulse response, monetary policy, transmission mechanism, vector autoregressions.
    JEL: E37 E52
    Date: 2005–12
  9. By: Javier Gómez Pineda
    Abstract: El artículo hace una narración de la política monetaria en Colombia. Por ser una narración de la política monetaria en una economía abierta, el artículo hace énfasis en los conceptos de "trilema"de la política monetaria, ancla nominal y regimenes monetarios. Además, la narración incluye el período actual de régimen de inflación objetivo, presenta los antecedentes académicos y la definición del régimen de inflación objetivo, y presenta las características actuales de este régimen en Colombia. La principal implicación de política es que el requisito más importante para mantener la estabilidad de precios es que el Banco de la República procure mantener la meta de inflación firme, y dirija las tasas de interés en consecuencia, ante aumentos de la inflación producidos por presiones de demanda, devaluaciones y aumentos en la inflación de alimentos.
    Keywords: Política monetaria; Trilema; Ancla nominal; Régimen monetario; Inflación objetivo.
    JEL: E52 E58 F32 F41
  10. By: Kamil Galuscak; Daniel Munich
    Abstract: We explain movements in the UV space, i.e. the relationship between stocks of unemployment and vacancies known as the Beveridge curve, in the Czech Republic during 1995-2004. While the Beveridge curve is described by labour market stocks, we explain shifts in the Beveridge curve using gross labour market flows by estimating the matching function. We interpret parameter changes in the matching function during the business cycle, distinguishing cyclical and structural changes in the unemployment rate. We find that labour market flows are very good coincidence predictors of turning points in the business cycle. We show that the Czech economy already suffers from the labour market hysteresis common in many other developed market economies in the EU.
    Keywords: Beveridge curve, Czech Republic, matching function, panel data, structural unemployment.
    JEL: E24 E32 J41 J64 C23
    Date: 2005–08
  11. By: Michael Brandmeier
    Abstract: The real economic effects of the considerably high appreciation in Central European Economies (CEE) are controversially disputed in the eve of the European Monetary Union (EMU) entry of several CEE economies. The Balassa-Samuelson-effect was made responsible for the expectation of higher inflation rates in CEE than in the EMU in the next years. Higher inflation rates will deteriorate the price competitiveness of the export sectors in the CEE countries because of real appreciation. This paper focuses on the effects of labour productivity differences in several industrial and service sectors on the consumer prices. Labour productivity changes are affected by the technology impact on labour demand and by the relative wage increases following from tensions of regional labour markets because of rising prices and skilled labour shortage. Real appreciation is determined by labour productivity differences and by capital good imports. We conclude that the negative coherence between real appreciation and the endangered price competitiveness of the export sectors in CEE has to be taken into account, unless the negative experience of loss of competitiveness because of sudden real appreciation in Eastern Germany will take place on a large scale in the eastern part of the enlarged euro area.
    Keywords: European Monetary Union, inflation differences, Balassa-Samuelson-effect, Central and Eastern Europe
    JEL: E31 F33 F41
    Date: 2006–06–02
  12. By: Ruthira Naraidoo (Keele University, Centre for Economic Research and School of Economic and Management Studies); Patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University); Kent Matthews (Cardiff Business School, Aberconway Building, Cardiff University)
    Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.
    Keywords: Equilibrium unemployment, political economy, ‘‘vicious’’ and ‘‘virtuous’’ circles, bootstrapping, forecasting.
    JEL: E24 E27 P16
    Date: 2006–05
  13. By: Sophocles Mavroeidis
    Abstract: We re-examine the evidence on the new Phillips curve model of Gali and Gertler (Journal of Monetary Economics 1999) using the conditional score test of Kleibergen (Econometrica 2005), which is robust to weak identification. In contrast to earlier studies, we find that US postwar data are consistent both with the view that inflation dynamics are forward-looking, and with the opposite view that they are predominantly backward-looking. Moreover, the labor share does not appear to be a relevant determinant of inflation. We show that this is an important factor contributing to the weak identification of the Phillips curve.
    Date: 2006
  14. By: Ivan Baboucek; Martin Jancar
    Abstract: The paper concerns macro-prudential analysis. It uses an unrestricted VAR model to empirically investigate transmission involving a set of macroeconomic variables describing the development of the Czech economy and the functioning of its credit channel in the past eleven years. Its novelty lies in the fact that it provides the first systematic assessment of the links between loan quality and macroeconomic shocks in the Czech context. The VAR methodology is applied to monthly data transformed into percentage change. The out-of-sample forecast indicates that the most likely outlook for the quality of the banking sector's loan portfolio is that up to the end of 2006 the share of non-performing loans in it will follow a slightly downward trend below double-digit rates. The impulse response is augmented by stress testing exercises that enable us to determine a macroeconomic early warning signal of any worsening in the quality of banks' loans. The paper suggests that the Czech banking sector has attained a considerable ability to withstand a credit risk shock and that the banking sector's stability is compatible both with price stability and with economic growth. Despite being devoted to empirical investigation, the paper pays great attention to methodological issues. At the same time it tries to present both the VAR model and its results transparently and to openly discuss their weak points, which to a large degree can be attributed to data constraints or to the evolutionary nature of an economy in transition.
    Keywords: Czech Republic, Macro-prudential analysis, Non-performing loans, VAR model.
    JEL: G18 G21 C51
    Date: 2005–01
  15. By: Norberto Rodríguez N.; José Luis Torres T.; Andrés Velasco M.
    Abstract: Una estimación adecuada de la brecha del producto es un requisito indispensable para la conducción de la política monetaria bajo el régimen de inflación objetivo. Por esta razón, en la literatura y al interior del Banco de la República, se trabaja con una gran variedad de mediciones a partir de técnicas alternativas. Desafortunadamente, como la brecha del producto es una variable no observable, siempre hay gran incertidumbre sobre cualquier estimación. Para sobreponerse a este problema, en el Departamento de Inflación se siguen regularmente una amplia gama de indicadores, en especial encuestas de opinión empresarial y datos de actividad, para mejorar la comprensión de la situación de la economía en el ciclo y para identificar posibles presiones de demanda. Aunque en principio parece razonable y adecuado contar con gran cantidad de medidas y monitorear diversas fuentes de información complementarias, en la práctica resulta problemático poder resumir de manera eficiente la información disponible en una sola medida que pueda ser utilizada para producir pronósticos de inflación y recomendaciones de política. Hasta hace poco, la reducción de la información se hacía a partir del juicio de los expertos sobre los pesos relativos que se asignaban para cada medición y para la información proveniente de encuestas. Lo cual potencialmente podía conducir a un problema de variables omitidas y a sesgar cualquier estimación. Para resolver este problema en este trabajo se estima un indicador de brecha del producto como el factor no observado entre los datos disponibles. Dicho factor se estima utilizando componentes principales estáticos, el cual debe resumir la información contenida en los datos mientras que excluye cualquier error presente en las medidas originales. La calidad del indicador se evalúa posteriormente a partir de su capacidad predictiva de la inflación básica de bienes no transables en Colombia, mediante una Curva de Phillips híbrida. Los resultados sugieren, como se esperaba, que el indicador de brecha del producto es superior a cualquiera de las medidas individuales para señalar presiones de demanda, puesto que combina de manera eficiente la información de varias fuentes. Adicionalmente se encuentra, que los pronósticos fuera de muestra se pueden mejorar si se excluyen para la estimación del indicador aquellas medidas que provienen de filtros estadísticos. Lo cual reafirma la importancia de seguir fuentes alternativas de información, en especial de encuestas de opinión industrial, a pesar de que la industria tan sólo pesa un 15% del PIB en Colombia.
    Keywords: Brecha del producto, componentes principales, Curva de Phillips, Colombia.
    JEL: C32 C43 E31 E37 E52
    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 found 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
  17. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Fernando, DEL RIO; David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We construct a vintage capital model à la Whelan (2002) with both exogenous embodied and disembodied technical progress, and variable utilization of each vintage. The lifetime of capital goods is endogenous and it relies on the associated maintenance costs. We study the properties of the balanced growth paths. First, we show that the lifetime of capital is an increasing (resp. decreasing) function of the rate of disembodied (resp.embodied) technical progress. Second, we show that both the use-related depreciation rate and the scrapping rate incease when embodied technical progress accelerates. However, the latter drops when disembodied technical progress accelerates while the former remains unaffected. A key feature of our model is that the age-related depreciation rate does depend on the obsolescence rate in sharp contrast to the neoclassical model.
    Keywords: Vintage capital; operation costs; embodied technical progress; age-related depreciation; obsolescence
    JEL: E22 E32 O40
    Date: 2006–03–16
  18. By: Noriko Inakura; Satoshi Shimizutani
    Abstract: Japan's traditionally high household saving rate has declined substantially since the early 1990s. While this decline is often explained as a result of the rapid increase in the population share of the elderly who are dissaving, we argue that the cause is a decline in interest income triggered by falling interest rates. To examine our hypothesis, we focus on the effect of the maturation of relatively high-yielding postal savings certificates. Estimating a savings function, we find that the reduction in interest income caused by the maturation of the postal saving certificates reduced household saving rates by 3 percentage points.
    Keywords: interest rate income, household saving rate, postal saving certificate
    JEL: D12 E21 G29
    Date: 2006–05
  19. By: Robert F. Engle; Jose Gonzalo Rangel
    Abstract: 25 years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving deterministic component, represented by an exponential spline, and a unit GARCH. This deterministic component is the unconditional volatility, which is then estimated for nearly 50 countries over various sample periods of daily data. Unconditional volatility is then modeled as an unbalanced panel with a variety of dependence structures. It is found to vary over time and across countries with high unconditional volatility resulting from high volatility in the macroeconomic factors GDP, inflation and short term interest rate, and with high inflation and slow growth of output. Volatility is higher for emerging markets and for markets with small numbers of listed companies and market capitalization, but also for large economies. The model allows long horizon forecasts of volatility to depend on macroeconomic developments, and delivers estimates of the volatility to be anticipated in a newly opened market.
    Keywords: . Arch, garch, global volatility, spline and volatility.
    JEL: C14 C19
    Date: 2005–12
  20. By: Javier Gómez Pineda
    Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under di¤erent policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.
    Keywords: Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability
    JEL: F41 F32 G15 H62 H63
  21. By: Young Jun Chun
    Abstract: This paper evaluates the effects of population aging and fiscal policies on national saving in Korean situation. For the prediction of the national savings rate of Korea for the next several decades, we employ a life-cycle model, which incorporates the generational accounting approach needed to assess the distribution of fiscal burden across generations. We found that the rapid population aging and long-term budgetary imbalance will substantially lower the national savings rate in Korea. A sensitivity analysis based on an alternative model, an altruistic family model, shows that these predictions are robust to the specification of altruism among generations. In addition, the estimation results of consumption functions with respect to various kinds of wealth suggest that the annuitization of wealth due to maturing of public pensions and introduction of reverse annuity mortgage is likely to further decrease the savings rate in the future.
    JEL: H3 H60 E21
    Date: 2006–05
  22. By: Stephen G. Cecchetti
    Abstract: At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this essay I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarize the economic distortions that they create. The evidence suggests increasing our attention on property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.
    Keywords: . Central bank policy, equity price bubbles, housing price bubbles.
    JEL: E5 G0
    Date: 2005–12
  23. By: Roman Horvath
    Abstract: This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro.
    Keywords: Euro Adoption, Exchange Rates, GMM, Optimum Currency Area.
    JEL: F15 F31 E58
    Date: 2005–12
  24. By: Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California Santa Cruz)
    Abstract: Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection” choice made by the intervening central bank. We estimate the “counterfactual” exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect” (ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004.
    Keywords: foreign exchange intervention; Bank of Japan; self-selection, matching methods
    JEL: E58 F31 G15
    Date: 2006–05
  25. By: Franco DONZELLI
    Abstract: Rise and decline of the notion of "own rate of interest" ; in Sraffa. The notion of “commodity rate of interest”, introd uced by Sraffa in a short review-article published in1932, is tak en up by Keynes a few years later under the label of “own rate of interest”. The latter expression soon spreads in the literature, eventually replacing Sraffa’s original name. At its birth Sraffa ’s notion, developed within the framework of a stationary equilib rium model of Wicksellian derivation, appears to be a very promis ing tool of analysis. Sraffa focuses his attention on the phenome non of the possible multiplicity of the “own rates of interest” a ssociated with the various commodities produced and traded in a m onetary economy, suggesting that such phenomenon ought to be inte rpreted as a disequilibrium occurrence, originated by the exogeno us perturbations to which the economy is continuously subjected. By assuming that the agents correctly expect, and the “forward” c ommodity markets perfectly anticipate, the underlying stationary equilibrium prices, Sraffa is able to show that the divergence am ong the “own rates of interest” associated with the various commo dities can be interpreted as an effective market signal, analogou s to the one supposedly provided by the divergence between market and natural prices in classical price theory: such a signal, in fact, would affect producers’ decisions, fostering the appropriat e changes in the production levels of the various “industries” an d thereby promoting the convergence of the economy towards the gi ven stationary equilibrium. At first sight, Sraffa’s analysis se ems to foreshadow interesting theoretical developments in the are a of expectations formation, equilibration processes, the working of “forward” and “futures” commodity markets, and related topics . But such hopes are bound to be disappointed, for Sraffa drops t he notion of “own rate of interest” shortly after its introductio n in 1932, subsequently abstaining from any discussion of both th at notion and any other related concept in all his later writings . In this paper, after dispelling a certain ambiguity surroundin g Sraffa’s original definition of the concept of “own rate of int erest”, we shall explain why Sraffa does not proceed along the ro ad deceptively opened by his 1932 article. In particular, we shal l single out three different reasons explaining why Sraffa almost immediately gives up any kind of research in that area: first, i n the 1932 paper Sraffa’s analysis of expectations formation and the functioning of “forward” markets is not pursued for its own s ake, but only with the purpose of making the adjustment process t owards the stationary equilibrium of the economy more plausible a nd robust; secondly, the constant costs (or constant returns) ass umption, that Sraffa is forced to make in order to analyse the di sequilibrium adjustment process, is an assumption that he will co me to disown in his later work; finally, in the 1932 paper the an alytical treatment of the notion of “own rate of interest” is ser iously incomplete, for Sraffa is unable (or unwilling) to contriv e that sort of “futures” contract, essentially different from the “forward” contract actually envisaged therein, that alone would make the notion of “own rate of interest” applicable to a real (t hat is, a moneyless) economy, as Sraffa pretends to be able to do . Now, since the required sort of “futures” contract, which Sraf fa neglects, is instead systematically employed in modern general equilibrium theory, of both the Arrow-Debreu and the Incomplete Markets type, the paper also examines the peculiar fate of the no tion of “own rate of interest” in such contemporary theoretical m odels.
    Keywords: rate of interest, forward transactions, commodity futures, stationary equilibrium, disequilibrium, expectations
    Abstract: This search-matching model is well suited for an equilibrium evaluation of labor market policies. When those policies are targeted on some groups, the usual juxtaposition of labor markets is however a shortcoming. There is a need for a setting where workers’ productivity depends on employment levels in all markets. This paper provides such a theoretical setting. We first develop a streamlined model and then show that it can be extended to deal with interactions among various labor market and fiscal policies. Simulation results focus on the effects of employment subsidies and in-work benefits and on their interactions with the profile of unemployment benefits and with active labor market programs.
    Keywords: Unemployment; search-matching equilibrium; wage bargaining; reductions of social security contributions; unemployment insurance; labor market programs
    JEL: E24 J3 J41 J64 J65 J68
    Date: 2006–03–28
  27. By: Balázs Égert; ;
    Abstract: This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector’s productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe.
    Keywords: Balassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey
    JEL: E31 O11 P17
    Date: 2005–11–01
  28. By: Lubos Komarek; Martin Melecky
    Abstract: The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and net foreign direct investment.
    Keywords: Czech Republic, equilibrium exchange rate modelling, ERM II, exchange rate misalignments, time-series analysis.
    JEL: C52 C53 E58 E61 F31
    Date: 2005–12
  29. By: Balázs Égert,; László Halpern; Ronald MacDonald
    Abstract: In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.
    Keywords: equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, tradable prices, regulated prices, Fundamental Equilibrium Exchange Rate, Behavioural Equilibrium Exchange Rate, Permanent Equilibrium Exchange Rate, NATREX, CHEER, transitional economies, euro.
    JEL: C15 E31 F31 O11 P17
    Date: 2005–10–01
  30. By: José Gómez González; Fernando Grosz
    Abstract: In this paper we find empirical evidence of bank lending channel for Colombia and Argentina. As for Argentina, we do not find evidence that changes in the interbank interest rate affect the growth rate of total loans directly. However, it does indirectly through interactions: the interbank interest rate affects the loan supply through its interactions with capitalization and liquidity. As for Colombia, there is direct bank lending channel, which is reinforced through interactions with capitalization and liquidity. Also, using a panel data of more than 3300 firms, we provide additional support to the existence of a bank lending channel for Colombia.
    Date: 2006–06–01
  31. By: Debapriya Bhattacharya; Khondaker Golam Moazzem; Kazi Mahmudur Rahman; Syed Saifuddin Hossain
    Keywords: Business Competitiveness Environment, Business, Competitiveness Environment, Bangladesh
    Date: 2006–05
  32. By: Blanchflower, David G (Dartmouth College); Oswald, Andrew J (Warwick University and Harvard University)
    Abstract: According to the well-being measure known as the U.N. Human Development Index, Australia now ranks 3rd in the world and higher than all other English-speaking nations. This paper questions that assessment. It reviews work on the economics of happiness, considers implications for policymakers, and explores where Australia lies in international subjective well-being rankings. Using new data on approximately 50,000 randomly sampled individuals from 35 nations, the paper shows that Australians have some of the lowest levels of job satisfaction in the world. Moreover, among the sub-sample of English-speaking nations, where a common language should help subjective measures to be reliable, Australia performs poorly on a range of happiness indicators. The paper discusses this paradox. Our purpose is not to reject HDI methods, but rather to argue that much remains to be understood in this area.
    Keywords: Well-being ; happiness ; HDI ; macroeconomics
    JEL: E6
    Date: 2005
  33. By: David Weil; Heinrich Hock
    Date: 2006
  34. By: Anders Frederiksen (Hoover Institution, Stanford University, Aarhus School of Business and IZA Bonn)
    Abstract: I analyze the job separation process to learn about gender differences in job separation rates and employment stability. An essential finding is that employer-employee data are required to identify gender differences in job separation probabilities because of labor market segregation. Failure to recognize this may potentially lead to statistical discrimination. Three important empirical results are obtained from the analysis. First, women have higher unconditional job separation probabilities. Second, there are no gender differences in job separation probabilities for employees working in similar workplaces. Finally, women’s employment stability is relatively low because they are more likely to move from a job and into unemployment or out of the labor force, and less likely to make job-to-job transitions.
    Keywords: job separations, employment stability, labor reallocation, employer-employee data
    JEL: C23 E24 J63
    Date: 2006–05
  35. By: Valerie A. Ramey; Neville Francis
    Abstract: Has leisure increased over the last century? Standard measures of hours worked suggest that it has. In this paper, we develop a comprehensive measure of non-leisure hours that includes market work, home production, commuting and schooling for the last 105 years. We also present empirical and theoretical arguments for a definition of “per capita” that encompasses the entire population. The new measures reveal a number of interesting 20th Century trends. First, 70 percent of the decline in hours worked has been offset by an increase in hours spent in school. Second, contrary to conventional wisdom, average hours spent in home production are actually slightly higher now than they were in the early part of the 20th Century. Finally, leisure per capita is approximately the same now as it was in 1900.
    JEL: E2 N1 N3
    Date: 2006–05
  36. By: James Albrecht (Georgetown University and IZA Bonn); Lucas Navarro (Queen Mary, University of London); Susan Vroman (Georgetown University and IZA Bonn)
    Abstract: In many economies, there is substantial economic activity in the informal sector, beyond the reach of government policy. Labor market policies, which by definition apply only to the formal sector, can have important spillover effects on the informal sector. The relative sizes of the informal and formal sectors adjust, the skill composition of the workforce in the two sectors changes, etc. In this paper, we build an equilibrium search and matching model to analyze the effects of labor market policies in an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We analyze the effects of labor market policy on informal- and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, our model allows us to examine the distributional implications of labor market policy; specifically, we analyze how labor market policy affects the distributions of wages and productivities across formal-sector matches.
    Keywords: search, matching, informal sector
    JEL: E26 J64 J65 O17
    Date: 2006–05
  37. By: Öster, Anna (Konjunkturinstitutet)
    Abstract: This study investigates the effect of parental unemployment on children’s school performance. We use individual level data for all children completing lower secondary school in Sweden in 1990 directly moving on to three years of upper secondary school. We control for family and individual heterogeneity by means of lower secondary school GPA. The huge variation in Swedish unemployment during the beginning of the 1990s provides an ideal setting for testing the hypothesis that parental unemployment affects children’s school performance. Our results indicate that having an unemployed father has a negative effect on children’s school performance while having an unemployed mother has a positive effect.
    Keywords: School performance; unemployment
    JEL: E24 I21 J12
    Date: 2006–05–22
    Abstract: In this paper, we study a model à la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion : the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared : voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.
  39. By: Caesar B. Cororaton; Erwin L. Corong
    Abstract: The Philippines has undertaken substantial trade-policy reforms since the 1980s. However, the poverty impact is not very clear and has been the subject of intense debate, most crucial of which is the likely poverty effects of liberalizing the highly protected agricultural sector. A CGE micro-simulation model is employed to estimate and explain these impacts. Tariff reduction induces consumers to substitute cheaper imported agricultural products for domestic goods, thereby resulting in a contraction in agricultural output. In contrast, the prevalence of cheap, imported inputs reduces the domestic cost of production, benefiting the outward-oriented and import-dependent industrial sector as their output and export increases. The national poverty headcount decreases marginally as lower consumer prices outweigh the income reduction experienced by the majority of households. However, both the poverty gap and severity of poverty worsens, implying that the poorest of the poor become even poorer.
    Keywords: Agriculture, International trade, Poverty, Computable general equilibrium, Micro-simulation, Philippines
    JEL: D58 E27 F13 I32 O13 O15 O24 O53 Q10
    Date: 2006
  40. By: Donggyun Shin; Gary Solon
    Abstract: In the most thorough study to date on wage cyclicality among job stayers, Devereux’s (2001) analysis of men in the Panel Study of Income Dynamics produced two puzzling findings: (1) the real wages of salaried workers are noncyclical, and (2) wage cyclicality among hourly workers differs between two alternative wage measures. We examine these puzzles with additional evidence from other sources. Devereux’s finding of noncyclical real wages among salaried job stayers is not replicated in the National Longitudinal Survey of Youth data. The NLSY data, however, do corroborate his finding of a discrepancy for hourly workers between the cyclicality of the two alternative wage measures. Evidence from the PSID Validation Study contradicts Devereux’s conjecture that the discrepancy might be due to a procyclical bias from measurement error in average hourly earnings. Evidence from the Bureau of Labor Statistics establishment survey supports his hypothesis that overtime work accounts for part (but not all) of the discrepancy. We conclude that job stayers’ real average hourly earnings are substantially procyclical and that an important portion of that procyclicality probably is due to compensation beyond base wages.
    JEL: E3 J3
    Date: 2006–05
  41. By: Anca Podpiera; Jiri Podpiera
    Abstract: While it is generally consented that management quality is often the key determinant of banks' success in a risky world, somewhat paradoxically early warning systems are mainly built on financial ratios driving management quality assessment to the periphery. In this paper we show, using estimated cost efficiency scores for the Czech banking sector, that cost inefficient management was a predictor of bank failures during the years of banking sector consolidation, and thus suggest the inclusion of cost efficiency in early warning systems.
    Keywords: Bank failure, cost efficiency, stochastic frontier, hazard model.
    JEL: J21 J28 E58
    Date: 2005–12
  42. By: Caesar B. Cororaton
    Abstract: This paper analyzes the impact of trade reform on welfare and poverty in the Philippines in the 1990s using a CGE model. The results indicate that while welfare rises and poverty falls for all household groups except the poorest (those with rural unskilled private employees as household head), urban households gain more than rural households. Policy experiments involving full tariff reduction and uniform five percent tariff rate indicate generally the same pattern of effects, except that the magnitude of change is relatively larger in the former while all household groups, including the poorest, experience a reduction in poverty in the latter. Since poverty remains high and the disparity between rural and urban poverty is still wide, other poverty-reducing measures have to be designed and implemented to target those households that do not benefit much from this type of market reform.
    Keywords: Computable general equilibrium, International trade, Poverty, Philippines
    JEL: D33 D58 E27 F13 F14 I32 O15 O53
    Date: 2006

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