nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒06‒17
forty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence By Filippo Altissimo; Michael Ehrmann; Frank Smets
  2. Japan's Phillips Curve Looks Like Japan By Gregor Smith
  3. Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis By Bernd Hayo
  4. Generalized Method of Moments and Inverse Control. By Gregory E. Givens; Michael K. Salemi
  5. Stage-specific technology shocks and employment :could we reconcile with the RBC models ?. By Chahnez Boudaya
  6. Monetary Policy When Potential Output is Uncertain: Understanding the Growth Gamble of the 1990s By Yuriy Gorodnichenko; Matthew D. Shapiro
  7. The Dutch business cycle: which indicators should we monitor? By Ard den Reijer
  8. The Open Economy Consequences of U.S. Monetary Policy By John Bluedorn; Christopher Bowdler
  9. Efficient Monetary Allocations and the Illiquidity of Bonds. By Boel, Paola; Camera, Gabriele
  10. The impact of monetary policy signals on the intradaily Euro-dollar volatility. By Darmoul Mokhtar
  11. Stability First: Reflections Inspired by Otmar Issing%u2019s Success as the ECB%u2019s Chief Economist By Vitor Gaspar; Anil K. Kashyap
  12. Market Reactions to Central Bank Communication Policies : Reading Interest Rate Options Smiles. By Marie Brière
  13. Price Rigidity and the Volatility of Vacancies and Unemployment By Rafael Domenech; Javier Andres; Javier Ferri
  14. Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital By Habib Ahmed; C. Paul Hallwood; Stephen M. Miller
  15. Factors Behind Low Long-Term Interest Rates By Rudiger Ahrend; Pietro Catte; Robert Price
  16. Brazil's Fiscal Stance During 1995-2005: The Effect of Indebtedness on Fiscal Policy Over the Business Cycle By Luiz de Mello; Diego Moccero
  17. Inflation Targeting and the Role of Exchange Rate Pass-through By Reginaldo P. Nogueira Jnr
  18. Home Production and the Macro Economy-Some Lessons from Pollak and Wachter and from Transition Russia By Reuben Gronau
  19. The Fiscal Challenge in Portugal By Stéphanie Guichard; Willi Leibfritz
  20. MODELING THE EURO OVERNIGHT RATE By Ángel León; Francis Benito; Juan Nave
  21. Anonymous Markets and Monetary Trading. By Aliprantis, C.D.; Camera, Gabriele; Puzzello, D.
  22. China - Understanding a New Global Economic Player By Horst Siebert
  23. Are House Prices Nearing a Peak?: A Probit Analysis for 17 OECD Countries By OECD
  24. Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections By Christian Bayer
  25. Resolving Macroeconomic Uncertainty in Stock and Bond Markets By Alessandro Beber; Michael W. Brandt
  26. Karl Polanyi et les monnaies modernes = un réexamen By Jérôme Blanc
  27. Sectoral explanations of employment in Europe - the role of services By Antonello D’Agostino; Roberta Serafini; Melanie Ward-Warmedinger
  28. A Note on Behavioral Heterogeneity and Aggregation By Ralf Wilke
  29. Banks'procyclicality behavior : does provisioning matter ?. By Vincent Bouvatier; Laetitia Lepetit
  30. Optimal Monetary and Exchange Rate Policies in Crisis-Prone Small Open Economies By Rajesh Singh; Joydeep Bhattacharya
  31. Base Period, Qualifying Period and the Equilibrium Rate of Unemployment By Elke J. Jahn; Thomas Wagner
  32. Adopting a common currency basket arrangement into the 'ASEAN plus three' By Eiji Ogawa; Kentaro Kawasaki
  33. A tale of the water-supplying plumber: intraday liquidity provision in payment systems By Elisabeth Ledrut
  35. The Effect of Dividends on Consumption By Malcolm Baker; Stefan Nagel; Jeffrey Wurgler
  36. When Does Domestic Saving Matter for Economic Growth? By Philippe Aghion; Diego Comin; Peter Howitt
  37. Even For Teenagers, Money Does Not Grow on Trees: Teenage Substance Use and Budget Constraints By Sara Markowitz; John Tauras
  38. Price Dispersion with Directed Search. By Camera, Gabriele; Selcuk, Cemil
  39. Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties By Bernardo S. de M. Carvalho; Márcio G.P. Garcia
  40. An empirical analysis of UK imports: is there evidence of hysteresis? By Emilia Penkova
  41. GDP growth rate and population By Ivan O. Kitov
  42. A Random Matching Theory. By Aliprantis, C. D.; Camera, G.; Puzzelo, D.

  1. By: Filippo Altissimo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper provides a summary of current knowledge on inflation persistence and price stickiness in the euro area, based on research findings that have been produced in the context of the Inflation Persistence Network. The main findings are - i) Under the current monetary policy regime, the estimated degree of inflation persistence in the euro area is moderate; ii) Retail prices in the euro area are more sticky than in the US; iii) There is significant sectoral heterogeneity in the degree of price stickiness; iv) Price decreases are not uncommon. The paper also investigates some of the policy implications of these findings. JEL Classification: E31, E42, E52.
    Keywords: Price setting, inflation persistence, monetary policy, EMU.
    Date: 2006–06
  2. By: Gregor Smith (Queen's University)
    Keywords: Phillips curve, Japan
    JEL: E31 E24
    Date: 2006–05
  3. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception.
    Keywords: Taylor rule, monetary policy, ECB, European Monetary Union
    JEL: E5
    Date: 2006
  4. By: Gregory E. Givens; Michael K. Salemi
    Abstract: This paper presents a Generalized Method of Moments algorithm for estimating the structural parameters of a macroeconomic model subject to the restriction that the coefficients of the monetary policy rule minimize the central bank's expected loss function. The algorithm combines least-squares normal equations with moment restrictions derived from the first-order necessary conditions of the auxiliary optimization. We assess the performance of the algorithm with Monte Carlo simulations using three increasingly complex models. We find that imposing the optimizing restrictions when they are true improves estimation accuracy and that imposing those restrictions when they are false biases estimates of some of the structural parameters but not of the policy rule coefficients.
    Keywords: GMM, optimal monetary policy, simple rules, policy objectives
    JEL: C32 C61 E31 E32 E52 E61
    Date: 2006–06
  5. By: Chahnez Boudaya (Centre d'Economie de la Sorbonne)
    Abstract: This paper analyses the response of labor input to technology shocks in an estimated two-stage production framework with both price and wage stickiness and stage-specific shocks to productivity. Our model features a vertical input-output structure with imperfect mobility of labors across stages. The estimation uses the maximum likelihood technique applied to the post-war US data. Our findings could easily match the standard RBC models predictions : A shock to productivity in the intermediate good production stage i) leads to an increase in both stage-specific labor and the aggregate labor and ii) explains a large proportion of the volatility of both the real GDP and the aggregate labor. Besides, regarding the output-labor correlation, the model does a very good job in matching the data.
    Keywords: RBC models, sticky prices, sticky wages, production chain, employment, technology shocks, sectoral comovements.
    JEL: E24 E32 E52
    Date: 2006–05
  6. By: Yuriy Gorodnichenko; Matthew D. Shapiro
    Abstract: The Fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record-low unemployment. These interest rates were accommodative by historical standards. Nonetheless, inflation remained low. How did the Fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations? In retrospect, it is evident that the productive capacity of the economy increased. Yet as events unfolded, there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the Fed’s policy. This paper provides an explanation for the success of the Fed in accommodating growth with stable inflation in the late 1990s. It shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism, inflation can remain in check even if the central bank keeps interest rates low because of this optimism. In particular, a price level target—which is a simple way to model a commitment to offset errors—can serve to anchor inflation even if the public does not share the central bank’s optimism about shifts in potential output. The paper shows that price level targeting is superior to inflation targeting in a wide range of situations. The paper also provides econometric evidence that, in contrast to earlier periods, the Fed has recently put substantial weight on the price level in setting interest rates. Moreover, it shows that CPI announcement surprises lead to reversion in the price level. Finally, it provides textual evidence that Alan Greenspan puts relatively more weight on the price level than inflation.
    JEL: E52 E58
    Date: 2006–06
  7. By: Ard den Reijer
    Abstract: In this study we construct a business cycle indicator for the Netherlands. The Christiano-Fitzgerald band-pass .lter is employed to isolate the cycle using the de.nition of business cycle frequencies as waves with lengths longer than 3 years and shorter than 11 years. The main advantage of band-pass .ltering is the unambiguous concept of a business cycle, to which the .ltered approximation will eventually converge as more and more observations become available. The coincident business cycle index is based on industrial production, household consumption and sta¢ ng employment. These three variables represent key macroeconomic developments, which are also analysed by both the CEPR and NBER dating committees. For the indicator to be useful in practice, a timely update and therefore a limited publication delay is a crucial constraint. The composite leading index consists of eleven indicators representing di¤erent sectors in the economy: three .nancial series, four business and consumer surveys and four real activity variables, of which two supply- and two demand-related.
    Keywords: business cycles; leading indicators; band-pass .lter; forecasting.
    JEL: C82 E32 E37
    Date: 2006–05
  8. By: John Bluedorn (Nuffield College and Department of Economics, University of Oxford); Christopher Bowdler (Nuffield College and Department of Economics, University of Oxford)
    Abstract: We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.
    JEL: E52 F31 F41
    Date: 2006–06–01
  9. By: Boel, Paola; Camera, Gabriele
    Abstract: We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with both money and nominal government bonds, but all trades must be monetized. We demonstrate that a deflationary policy a la Friedman cannot sustain the efficient allocation. The reason is that no-arbitrage imposes a stringent bound on the return money can pay. The efficient allocation can be sustained when bonds have positive yields and – under certain conditions – only if they are illiquid. Illiquidity – meaning bonds cannot be transformed into consumption as efficiently as cash – is necessary to eliminate arbitrage opportunities.
    Keywords: Money ; Heterogeneity ; Friedman Rule ; Illiquid Assets
    JEL: E4 E5
    Date: 2004–11
  10. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility.
    Keywords: Exchange rates, official interventions, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2006–06
  11. By: Vitor Gaspar; Anil K. Kashyap
    Abstract: In this paper, we review Otmar Issing's career as the ECB's inaugural chief economist and we document many notable successes. We try to infer some general principles that contributed to these successes and draw some lessons. In doing so, we review the evidence using Woodford’s (2003) recent revival of the Wicksellian approach to monetary policy making. Suitably interpreted the baseline model can rationalize Issing’s three guiding principles for successful policymaking. This baseline model, however, fails to account for the important role that monetary and financial analysis played in the conduct of policy during Issing’s tenure. We propose an extension of the model to account for financial developments and show that this extended model substantially improves our understanding of ECB practice. We conclude by listing six open questions, relevant for the future of central banking in Europe that Issing may want to consider in case leisure allows.
    JEL: E31 E52 E58 E44
    Date: 2006–06
  12. By: Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: This paper compares the communication strategies of the Fed and the ECB and their impact on financial markets. Interest rates options were used to calculate daily probability distributions of market expectations and to examine how they are modified by central banks’ announcements. We found that Greenspan’s speeches have a stronger influence on rate levels and market uncertainty than Duisenberg’s. Moreover, market expectations most significant reaction is to economic indicators central banks mention as being important. Monetary decisions are regularly anticipated thanks to speeches and economic releases and the dominant speech themes were shown to be “monetary policy” and “domestic economy”.
    Keywords: central bank communication, risk neutral density, futures option pricing, event studies.
    JEL: E43 E58 G13 G14
    Date: 2006–05
  13. By: Rafael Domenech (Institute of International Economics, University of Valencia); Javier Andres; Javier Ferri
    Abstract: The successful matching model developed by Mortensen and Pissarides seems to find its hardest task in explaining the cyclical movements of some key labor market variables such as the vacancy rate and the vacancy-unemployment ratio. Several authors have discussed mechanisms compatible with the matching technology that are able to deliver the kind of correlations observed in the data. In this paper we explore four such additional mechanisms embedded in a full blown SDGE model. We find that price rigidity greatly improves the model's empirical performance making it capable of reproducing second moments of the data. Other components such as intertemporal substitution, endogenous match destruction, capital accumulation and distortionary taxes also play a relevant role.
    Keywords: unemployment, vacancies, business cycle, price rigidities
    JEL: E24 E32 J64
    Date: 2006–06
  14. By: Habib Ahmed (Islamic Development Bank); C. Paul Hallwood (University of Connecticut); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: We develop an open economy macroeconomic model with real capital accumulation and microeconomic foundations. We show that expansionary monetary policy causes exchange rate overshooting, not once, but potentially twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firmsâ decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities.
    Keywords: physical capital, open economy macroeconomic, monetary policy, exchange rate
    JEL: F31 F32
    Date: 2006–06
  15. By: Rudiger Ahrend; Pietro Catte; Robert Price
    Abstract: Long-term bond yields have been low in recent years both in nominal and real terms, and . especially in the United States - they have reacted differently to shifts in monetary and fiscal stances relative to previous cycles. This article examines various possible explanations for this behaviour, such as the effects of changes in monetary policy frameworks on inflation and interest rate expectations; developments in ex ante saving-investment balances, and shifts in investors. portfolio preferences (including official reserve accumulation, .petro-dollar. recycling and pension fund demand for longer maturities). The paper finds that it is unlikely that any individual explanation can account for the level and profile of bond yields in recent years, but that an important element has been a compression in term premia, together with shifts in expected short rates. Even though bond yields have started to rise in the early part of 2006, they are unlikely to go back to the levels that prevailed in the 1980s or the early 1990s, as several of the factors that drove them lower are set to persist. <P>Éléments à l’origine de la faiblesse des taux d’intérêt à long terme Au cours des années récentes les rendements des obligations à long terme ont été faibles tant en termes nominaux qu’effectifs. Par rapport aux cycles économiques antérieurs, ils ont réagi différemment aux changements de politique monétaire et budgétaire, notamment aux États-Unis. Cet article examine plusieurs explications potentielles de ces comportements comme les effets d’un changement de cadre de la politique monétaire sur l’inflation et les anticipations de taux d’intérêt; l’évolution des soldes ex ante d’épargne et d’investissement et les changements de préférence dans les placements des investisseurs (y compris l’accumulation des réserves officielles, le recyclage des « pétrodollars » et la demande des fonds de pension pour des obligations à maturité longue). L’article conclut qu’il est improbable qu’une seule explication puisse rendre compte du niveau et du profil des rendements obligataires au cours des dernières années. Toutefois, un élément clef a été la réduction de la prime de risque, accompagnée par des changements dans les anticipations de taux d’intérêt à court terme. Néanmoins, bien que les rendements des obligations aient commencé à remonter au début de l’année 2006, il est peu vraisemblable qu’ils atteignent les niveaux enregistrés dans les années 1980 et au début des années 1990, dans la mesure où plusieurs des facteurs qui ont entraîné leur déclin sont amenés à perdurer.
    Keywords: financial markets, marchés financiers, capital flows, flux de capitaux, credibility, monetary policy, crédibilité, politique monétaire, risk premia, current account
    JEL: E43 F2 G11 G15
    Date: 2006–06–13
  16. By: Luiz de Mello; Diego Moccero
    Abstract: Brazil's fiscal adjustment since the floating of the real in 1999 has been impressive, even in periods of lacklustre growth. This suggests a remarkable fiscal effort to ensure public debt sustainability. To better gauge the magnitude of this adjustment effort, this paper applies the methodology used by the OECD Secretariat to distinguish changes in the fiscal stance that are due to policy action from those that are related to the automatic stabilisers built into the tax code, the social security system and unemployment insurance. The paper's main finding is that discretionary action tends to be essentially pro-cyclical in downturns, underscoring the presence of a strong "sustainability motive" in the conduct of Brazilian fiscal policy. Spending on mandatory items, such as personnel, are pro-cyclical in upturns too, which can create a "ratcheting-up" effect on government spending over time, an issue that will have to be addressed to improve the quality of on-going fiscal adjustment. An increase in the debt-to-GDP ratio by 1 percentage point is associated with a decrease in discretionary federal spending by 0.33 percentage point during 1997-2005. This responsiveness appears to have become stronger after the floating of the real in 1999. This Working Paper relates to the 2005 OECD Economic Survey of Brazil ( <P>Orientation de la politique budgétaire au Brésil sur la période 1995-2005 L'ajustement budgétaire du Brésil depuis l'adoption d'un régime de taux de change flottant en 1999 a été impressionnant, malgré la morosité de la croissance pendant ces années. Cela suggère un remarquable effort budgétaire pour assurer la soutenabilité de la dette publique. Pour mieux évaluer l'ampleur de cet effort d'ajustement, ce document applique la méthodologie utilisée par le Secrétariat de l'OCDE pour distinguer les changements dans la position budgétaire liés à l'orientation de la politique discrétionnaire de ceux liés aux stabilisateurs automatiques du code des impôts, du système de sécurité sociale et de l'assurance chômage. Les calculs sont utilisés pour estimer la sensibilité des initiatives de la politique discrétionnaire à un changement de la dette publique. La politique budgétaire discrétionnaire est essentiellemen procyclique dans les phases de basses conjonctures, ceci est la principale conclusion rapportée dans ce document. Cela souligne que la conduite de la politique budgétaire Brésilienne est fortement motivée par la soutenabilité de la dette publique. Les catégories de dépenses obligatoires, comme les dépenses en personnel,sont également procycliques dans les périodes de reprise. Ceci crée un effet rattrapage en «dents de scie» des dépenses publiques, une question qui devra être abordée pour améliorer la qualité de l'ajustement budgétaire progressif. Une augmentation du ratio de la dette publique sur le PIB de 1% est associé à une baisse de 0.33 point de pourcentage dans les dépenses discrétionnaires au niveau fédéral. Cette réponse paraît s'être renforcée après l'adoption d'un régime de taux de change flottant en 1999. Ce Document de travail se rapporte à l'Étude économique de l'OCDE du Brésil, 2005 (
    Keywords: fiscal policy, politique budgétaire, business cycles, Brazil, Brésil, debt sustainability, soutenabilité de dette, cycle des affaires
    JEL: E32 E62 H60
    Date: 2006–05–22
  17. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on the exchange rate pass-through for a set of emerging and developed economies before and after the adoption of Inflation Targeting. We use an ARDL model for a sample of developed and emerging market economies to estimate the short-run and the long-run effects of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. This reduction, however, does not mean that the pass-through is no longer existent for developed and emerging market economies, especially when it comes to the long-run. This finding highlights the importance of using dynamic models when dealing with the inflation-depreciation relationship. The results also show the important role of foreign producer costs for the imports pricing behaviour in developed economies, and of inflation stability in emerging markets.
    Keywords: Inflation Targeting, Exchange Rate Pass-through
    JEL: E31 E52 F31 F41
    Date: 2006–01
  18. By: Reuben Gronau
    Abstract: Recent years witnessed a flourishing of literature on the implication of shifts from home- production to market production on the macro economy, and in particular, the real business cycle. This literature employs calibration techniques to emulate the fluctuations in market output, labor and capital inputs and productivity over the business cycle, assuming a representative consumer and using stylized parameters of the substitution elasticity between home and market goods, and of the home production function. This paper argues that the parameters used in this literature cannot be verified empirically because of econometric identification problems. Furthermore, using data from the late 90s from transition Russia, it is argued that one cannot capture the fluctuation between the home and the market by using a representative consumer, since there is a distinct difference between males and females in their reaction to loss of employment: men shift most of the time released from market work to leisure while women divide it almost equally between work at home and leisure. Finally it is shown that the switch from a controlled economy to a market economy resulted in significant increase in home productivity and an increase in the free time enjoyed by both Russian men and women.
    JEL: D13 E32 J22 P36
    Date: 2006–06
  19. By: Stéphanie Guichard; Willi Leibfritz
    Abstract: Portugal’s fiscal policy has failed to durably reduce the deficit below the Stability and Growth Pact threshold of 3% of GDP and was submitted to the excessive deficit procedure of the EU Commission for a second time in 2005. The paper describes fiscal developments in Portugal over the past years and explores why earlier attempts of fiscal consolidation have failed. It also examines the new consolidation programme and assesses its chances of success and discusses further necessary steps to ensure consolidation over the longer term. It is argued that reasons for the failures of past consolidation efforts were the pro-cyclical policy during the earlier economic upswing and the reliance on one-off-measures which reduced the sense of urgency and commitment to undertake structural reforms and to address the chronic weak control of public spending. The new consolidation strategy is not relying on one-off measures in a context where Portugal has been granted more time to get its deficit under 3% of GDP. It includes structural reforms on the spending side that are going in the right direction and, if fully implemented, are likely to succeed in bringing the deficit below 3% of GDP over the next few years. But consolidation will only be successful if all measures are implemented immediately and forcefully. The consolidation programme needs to be complemented by additional reforms to strengthen expenditure control and in particular to reform the general pension system. On the revenue side, further simplifying the tax system and refraining from revising the tax legislation from one year to the next, as has happened in recent years, would make the tax system easier to manage and would facilitate long-term decision-making by economic agents. <P>Le défi budgétaire du Portugal La politique budgétaire du Portugal ne lui a pas permis de ramener durablement son déficit sous le seuil de 3 % du produit intérieur brut (PIB) prévu par le Pacte de stabilité et de croissance, si bien que la Commission européenne a déclenché pour la seconde fois la procédure concernant les déficits excessifs contre ce pays en 2005. Nous décrivons dans ce document l’évolution de la situation budgétaire du Portugal ces dernières années, et tentons de cerner les raisons pour lesquelles les précédentes tentatives d’assainissement des finances publiques ont échoué. Nous nous penchons également sur le nouveau programme en la matière et évaluons ses chances de réussite, tout en examinant les mesures complémentaires nécessaires pour assurer l’assainissement des finances publiques à long terme. Nous démontrons que les efforts antérieurs déployés en la matière ont échoué en raison de la politique procyclique menée au cours de la précédente reprise économique, et du recours à des mesures ponctuelles, qui ont atténué le sentiment d’urgence et entamé la détermination nécessaire pour engager des réformes structurelles et remédier aux insuffisances chroniques de la maîtrise des dépenses publiques. La nouvelle stratégie d’assainissement budgétaire ne repose pas sur des mesures ponctuelles, alors que le Portugal s’est vu accorder un délai supplémentaire pour ramener son déficit sous la barre des 3 % du PIB. Elle prévoit au chapitre des dépenses des réformes structurelles qui vont dans la bonne direction et, si elles sont intégralement appliquées, devraient permettre de faire refluer le déficit sous le seuil des 3 % du PIB au cours des prochaines années. Reste que cette stratégie ne sera couronnée de succès que si toutes les mesures prévues sont mises en ?uvre immédiatement et énergiquement. Ce programme d’assainissement doit être complété par d’autres réformes destinées à renforcer la maîtrise des dépenses, notamment en réformant le régime général des pensions. Au chapitre des recettes, en simplifiant davantage le système d’imposition et en s’abstenant de réviser la législation fiscale d’une année à l’autre, comme ce fut le cas ces dernières années, les autorités le rendraient plus simple à gérer et faciliteraient les prises de décisions à long terme des agents économiques.
    Keywords: fiscal policy, politique budgétaire, Portugal, Portugal, déficit budgétaire
    JEL: E62 E65 H20 H6
    Date: 2006–06–07
  20. By: Ángel León (Universidad de Alicante); Francis Benito (Universidad de Alicante); Juan Nave (Universidad de Castilla-La Mancha)
    Abstract: This paper describes the evolution of the daily Euro overnight interestrate (EONIA) by using several models containing the jump component such asa single regime ARCH-Poisson-Gaussian process, with either a piecewisefunction or an autoregressive conditional specification (ARJI) for the jumpintensity, and a two regime-switching process with jumps and time varyingtransition probabilities. To model the jump intensity, we include the followingeffects which are significant for the occurrence of jumps such as: (1) the end ofmaintenance period effect because of reserve requirements, (2) the end ofmonth effect, also known as the calendar day effect, caused mainly by theaccounting adjustments and finally, (3) the meeting effect caused by thefortnightly meetings of the Governing Council of the European Central Bank(ECB). These effects lead to a better performance and several of them are alsoincluded for the behavior of the transition probabilities. Since the target of theECB is keeping the EONIA rate close to the official rate, we have modeled theconditional mean of the overnight rate series as a reversion process to theofficial rate distinguishing two alternative speeds of reversion, in concrete, adifferent speed if EONIA is higher or lower than the official rate. We also studythe jumps of the EONIA rate around the ECB’s meetings by using the ex-postprobabilities of the ARJI model. Finally, we develop an out-of-sampleforecasting analysis to measure the performance of the different candidatemodels.
    Keywords: ARCH-Poisson-Gaussian; Regime switching; mean reversion; Autoregressive conditional jump intensity; Maintenance period; Calendar day effect; ECB’s meeting.
    JEL: C13 C22 E43 E52
    Date: 2006–06
  21. By: Aliprantis, C.D.; Camera, Gabriele; Puzzello, D.
    Abstract: We study an infinite-horizon economy with two basic frictions that are typical in monetary models. First, agents’ trading paths cross at most once due to pairwise trade and other meeting obstacles. Second, actions must be compatible with individual incentives due to commitment and enforcement limitations. We find that, with patient agents, relaxing the first friction by introducing centralized markets, opens the door to an informal enforcement scheme sustaining a non-monetary efficient allocation. Hence, we present a matching environment in which agents repeatedly access large markets and yet the basic frictions are retained. This allows the construction of models based on competitive markets in which money plays an essential role.
    Keywords: Money ; Infinite games ; Matching models ; Social norms
    JEL: C72 C73 D80 E00
    Date: 2005–10
  22. By: Horst Siebert
    Abstract: This paper analyzes China's economic performance in the last 25 years and discusses its prospect for growth in the future. China has enjoyed high annual GDP growth rates of about ten percent in the last 25 years. Exports and investment were the two driving forces of the growth process. FDI plays an important role. However, property rights, a crucial element in transforming a communist society, are far from being clearly developed. Structural issues such as the state-owned firms and the loss-making of the banking industry have to be solved. Monetary policy is complicated by the accumulation of reserves. Major policy issues in the future include the institutional deficit, especially with respect to the rule of law and the lack of democracy.
    Keywords: Growth process, FDI, developing countries, transformation, exchange rate policy, property rights, future scenarios
    JEL: E2 E4 F10 F43 K
    Date: 2006–06
  23. By: OECD
    Abstract: House prices have been moving up strongly in real terms since the mid-1990s in the majority of OECD countries, with the ongoing upswing the longest of its kind in the OECD area since the 1970s. If interest rates were to rise significantly, real house prices may be at risk of nearing a peak. The historical record suggests that the subsequent drops in prices in real terms might be large and that the process could be protracted. To quantify the probability that a peak is nearing in the current situation a probit model was estimated for the period 1970-2005 on a restricted set of what are generally agreed to be the main explanatory variables. Aside from interest rates, these include measures of overheating, such as the gap between real house prices and their long-run trend and the rate of change in real house prices in the recent past. The main finding is that an increase in interest rates by about 1 to 2 percentage points would result in probabilities of a peak nearing of 50% or more in the United States, France, Denmark, Ireland, New Zealand, Spain and Sweden. <P>La hausse des prix des logements touche-t-elle à son terme ? Les prix des logements ont fortement augmenté en termes réels depuis le milieu des années 90 dans la majorité des pays de l'OCDE, et leur augmentation actuelle est la plus longue que la zone OCDE ait connue depuis les années 70. Si les taux d.intérêt venaient à augmenter ensiblement, la progression des prix réels des logements pourrait toucher à sa fin. Les évolutions passées donnent à penser que les baisses de prix qui s'ensuivraient pourraient être importantes en termes réels et que le processus d'ajustement pourrait durer un certain temps. Pour mesurer la probabilité que les prix cessent d'augmenter dans la situation actuelle, un modèle probit a été estimé sur la période 1970-2005 pour un ensemble restreint de ce que l'on considère en général comme les principales variables explicatives. En plus des taux d'intérêt, ces variables comprennent des indicateurs de surchauffe, comme l'écart entre les prix réels des logements et leur tendance de long terme, ainsi que le taux de variation des prix réels des logements au cours de la période récente. L'analyse démontre qu.une hausse de 1 ou 2 points des taux d.intérêt ferait passer à 50 % ou plus la probabilité d'un retournement du marché aux États-Unis, en France, au Danemark, en Irlande, en Nouvelle-Zélande, en Espagne et en Suède.
    Keywords: financial markets, marchés financiers, house prices, prix des logements, business cycles, cycles conjoncturels
    JEL: E32 E52 F42
    Date: 2006–06–01
  24. By: Christian Bayer
    Abstract: In this paper a model of aggregate investment is derived, which incorporates fixed investment costs and capital market imperfections on the micro-level. Aggregate investment reacts nonlinearly with respect to aggregate shocks to productivity and liquidity of firms. Employing nonparamatric kernel estimation methods to analyse a sample of annual account data of UK companies, these nonlinearities also show up empirically. Furthermore a difference in strength between the long- and the short-run effect of liquidity on investment is found, which is inconsistent with models that solely explain the empirical correlation of investment and liquidity as the result of some long-run relationship like liquidity-dependent costs-of-capital or principal-agent problems.
  25. By: Alessandro Beber; Michael W. Brandt
    Abstract: We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.
    JEL: G1
    Date: 2006–06
  26. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Karl Polanyi a établi une célèbre distinction entre "all purpose money", caractéristiques des sociétés modernes, et "special purpose money", caractéristiques des sociétés anciennes. C'est la conception polanyienne des monnaies modernes qui est critiquée dans ce texte : non seulement elle conduit à considérer que les sociétés modernes ne connaissent pas de "special purpose money", mais en plus elle ne permet pas de renouveler la conception courante de la monnaie (sous-entendu moderne) qui en fait un moyen de paiement universel.
    Keywords: Monnaie moderne. Pratiques monétaires. Polanyi. Monnaies parallèles. Fongibilité. Cloisonnements.
    Date: 2006–06–09
  27. By: Antonello D’Agostino (Central Bank and Financial Service Authority of Ireland, PO Box 559, Dame Street, Dublin 2, Ireland.); Roberta Serafini (ISAE and European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Melanie Ward-Warmedinger (IZA and European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the determinants of the service sector employment share in the EU-15, for the aggregate service sector, four sub-sectors and twelve service sector branches. Recently, both Europe and the US have experienced an increase in the share of service-related jobs in total employment. Although converging in all European countries, a significant gap in the share of service jobs in Europe relative to the US persists. Understanding the main factors behind this gap is key to achieving higher employment levels in Europe. This paper focuses on the role of barriers in the EU-15 which may have hindered its ability to absorb labour supply and therefore to adjust efficiently to the sectoral reallocation of labour. We find that a crucial role in this process has been played by the institutional framework affecting flexibility in the labour market and by the mismatch between workers’ skills and job vacancies.
    Keywords: Services, sectoral adjustment, employment share, Europe, US, institutions in the labour and product market.
    JEL: E24 J21 J23 J24 L80
    Date: 2006–05
  28. By: Ralf Wilke
    Abstract: The purpose of this note is to investigate how aggregation of households affects the variation of the index of heterogeneity as recently defined in Hildenbrand and Kneip (1999). We show the degree of heterogeneity of an entire population is at least as high as the smallest degree of heterogeneity of some disjoint subpopulation. We further derive conditions under which aggregation generates heterogeneity. Finally, we show that aggregation weakly generates heterogeneity. Therefore we offer a theoretical framework that helps answering the question how structural properties of aggregate demand are obtained due to aggregation.
  29. By: Vincent Bouvatier (Centre d'Economie de la Sorbonne); Laetitia Lepetit (LAPE, Université de Limoges)
    Abstract: A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. Our finding is consistent with the bank capital channel hypothesis, which means that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover identified credit losses (non discretionary LLP) amplify credit fluctuations. Indeed, non discretionary LLP evolve cyclically. This leads to a misevaluation of expected credit risk which affect banks' incentives to grant new loans since lending costs are misstated. By contrast, LLP use for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of dynamic provisioning in Europe.
    Keywords: Bank lending, loan loss provisions, capital requirement.
    JEL: G21
    Date: 2006–05
  30. By: Rajesh Singh; Joydeep Bhattacharya
    Keywords: banking crises, fixed versus flexible regimes
    JEL: F41
    Date: 2005
  31. By: Elke J. Jahn (Institute for Employment Research (IAB), University of Erlangen-Nuremberg and IZA Bonn); Thomas Wagner (University of Applied Sciences, Nuremberg)
    Abstract: Unemployment benefits, benefit duration, base period and qualifying period are constituent parameters of the unemployment insurance system in most OECD countries. From economic research we know that the amount and duration of unemployment benefits increase unemployment. To analyze the effects of the other two parameters we use a matching model with search frictions and show that there is a trade-off between the qualifying and the base period on the one hand and the amount and duration of the unemployment benefits on the other. A country that combines a high level of unemployment benefits with a long benefit duration can neutralize the effect on the equilibrium rate of unemployment with a long qualifying and/or a short base period.
    Keywords: matching model, unemployment insurance, base period, qualifying period, labor market policy
    JEL: J41 J64 J68
    Date: 2006–05
  32. By: Eiji Ogawa; Kentaro Kawasaki
    Abstract: East Asian countries, for example "ASEAN plus three countries" (China, Korea, and Japan), have been well cognizant of importance of the regional financial cooperation since the Asian currency crisis in 1997. They have established the Chiang Mai Initiative (CMI) to manage currency crises. However, the CMI is not designed for "crisis prevention" because it includes no more than soft surveillance process as well as a network of currency swap arrangements. The surveillance process should be conducted over intra-regional exchange rates and exchange rate policies of the regional countries in order to stabilize intra-regional exchange rates in a situation of a strong economic relationship among the regional countries. On one hand, the regional exchange rate stability is related with an optimum currency area. Based on a Generalized PPP model, which detects a cointegration relationship among real effective exchanges rates, we investigate whether the region composed of "ASEAN plus three countries" is an optimum currency area. In the investigation, our interest is focused on an issue whether the Japanese yen could be regarded as an "insider" currency as well as other East Asian currencies. Or, is the Japanese yen still an "outsider" which is used as a target currency of foreign exchange rate policy for other East Asian countries. We employ a Dynamic OLS to estimate the long-term relationship among the East Asian currencies in a currency basket. Our empirical results indicate that the Japanese yen works as an exogenous variable in the cointegration system during a pre-crisis period while it works as an endogenous one during a post-crisis period. It implies that the Japanese yen could be regarded as an insider currency as well as other East Asian currencies after the crisis although it is regarded as an outsider currency as well as the US dollar and the euro before the Asian crisis.
    Date: 2006–06
  33. By: Elisabeth Ledrut
    Abstract: This paper provides an overview of the literature on intraday credit in payment systems to date and explores the dilemma central banks face when deciding on their intraday credit policies. On the one hand, any strategy in which the costs of liquidity are not fully borne by payment system participants can be expected to yield an inefficient outcome . Participants would consume more credit than optimal and, due to moral hazard, central banks would be faced with larger amounts at risk and a greater risk of default than would otherwise be the case. On the other hand, a strategy making intraday liquidity expensive increases the risk of payment delays and payment system gridlocks, due to participants limiting their intraday borrowings and delaying the sending of payments, which can hamper the well functioning of the payment system. This could further influence the allocation of real resources, as achieving economic efficiency requires intraday credit to be provided without cost, even accounting for default risk and moral hazard. Recent developments in payment system design, which have improved the turnover ratio of reserves, have reduced the stringency of the dilemma in a number of countries.
    Keywords: large-value payment system; intraday credit; liquidity.
    JEL: E51 E58 G21
    Date: 2006–05
  34. By: Francisco J. Mas (Universidad de Alicante); Antonio Ladrón de Guevara Martínez (Universitat Pompeu Fabra); Felipe Ruiz Moreno (Universidad de Alicante)
    Abstract: The main objective of this work is to propose an oligopolistic competition model thatincorporates product differentiation through quality of service in the Spanish bank loansmarket. This model allows us to detect the competitive behavior patterns in terms of the outputof all the financial entities with respect to three strategic groups defined in terms of size. Thismodel of competitive interactions is tested with a sample of 100 firms in the Spanish bank loanmarket between 1992 and 1994. This period of time is characterized by both, the end of a longprocess of deregulation and the integration of the Spanish Banking System in the EuropeanBanking System. The findings evidence a stronger aggressiveness from the larger-size groupwhen the medium and smaller-size groups increase their output. Besides, the results detect anaggressive conduct between the entities within the larger-size group. El objetivo de este trabajo consiste en proponer un modelo de competencia oligopolísticacon diferenciación de producto vía calidad de servicio en el mercado de créditos bancarios, elcual permite detectar el patrón de conducta competitiva del output (variaciones conjeturales anivel de cantidades de créditos vendidos) para todas y cada una de las entidades financierasrespecto de cada uno de los grupos estratégicos definidos por tamaño. Este modelo deinteracciones competitivas es contrastado con 100 entidades del mercado español de créditosbancarios entre 1992 y 1994, período temporal que marca la culminación de un proceso dedesregulación e integración europea del sistema bancario español y que incide directamente enla competencia en términos de cantidades de créditos vendidos. Los resultados obtenidosevidencian que el grupo de entidades de mayor tamaño tiene una actitud agresiva ante unaumento del output de los grupos de entidades pequeñas y medianas. Además, se detecta unaconducta agresiva entre las entidades del grupo de mayor tamaño.
    Keywords: Variación Conjetural, Comportamiento Competitivo, Grupos Estratégicos, Banking; Competition; Strategic Groups.
    Date: 2006–06
  35. By: Malcolm Baker; Stefan Nagel; Jeffrey Wurgler
    Abstract: Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results.
    JEL: E2 G3 D1
    Date: 2006–06
  36. By: Philippe Aghion; Diego Comin; Peter Howitt
    Abstract: Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich.
    JEL: E2 O2 O3
    Date: 2006–06
  37. By: Sara Markowitz; John Tauras
    Abstract: This paper is about the spending choices of youth, with a particular focus on how the demand for cigarettes, alcohol and marijuana are influenced by changes in the prices of other products. Youth tend to have small incomes and limited wants, with the result that many students spend the bulk of their income on only a few items. Fast food, clothing and entertainment make up the majority of products purchased by teenagers. The hypothesis to be tested in this project is that changes in the prices of the other goods commonly bought by teenagers will affect budget allocations and thereby affect the demand for substances. We estimate own and cross price effects using the prices of cigarettes, alcohol, marijuana and other consumer products including gasoline, clothing, entertainment, and fast food. Income effects are also estimated and show that teens with higher incomes and allowances are more likely to use substances. The policy implications of the results are discussed.
    JEL: I0 D0
    Date: 2006–06
  38. By: Camera, Gabriele; Selcuk, Cemil
    Abstract: We study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.
    Keywords: Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion
    JEL: C78 D39 D49 E39
    Date: 2004–12
  39. By: Bernardo S. de M. Carvalho; Márcio G.P. Garcia
    Abstract: We analyze the Brazilian experience in the 1990s to assess the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) showed that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. To check this hypothesis, we conducted interviews with market players. We collected several examples of the financial strategies engineered to avoid the capital controls and invest in the Brazilian fixed income market. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets.
    JEL: E44 F32 F34 F36 G15
    Date: 2006–06
  40. By: Emilia Penkova
    Abstract: The paper re-examines the validity of the hysteresis hypothesis by applying it to the UK import volume from the world's five largest economies: Germany, France, Italy, Japan and the USA, over the period 1975 to 1994. Disaggregated bilateral data (4- digit ISIC) are used and hysteresis is captured by dummy variable which is an extension of work by Parsley and Wei (1993). Panel estimation is undertaken and the Seemingly Unrelated Regression (SUR) technique is employed. There is evidence that hysteresis appears important for UK imports and varies across industries and countries.
  41. By: Ivan O. Kitov (Russian Academy of Sciences)
    Abstract: Real GDP growth rate in developed countries is found to be a sum of two terms. The first term is the reciprocal value of the duration of the period of mean income growth with work experience, Tcr. The current value of Tcr in the USA is 40 years. The second term is inherently related to population and defined by the relative change in the number of people with a specific age (9 years in the USA), (1/2)*dN9(t) /N9(t), where N9(t) is the number of 9-year-olds at time t. The Tcr grows as the square root of real GDP per capita. Hence, evolution of real GDP is defined by only one parameter - the number of people of the specific age. Predictions for the USA, the UK, and France are presented and discussed. A similar relationship is derived for real GDP per capita. Annual increment of GDP per capita is also a combination of economic trend term and the same specific age population term. The economic trend term during last 55 years is equal to $400 (2002 US dollars) divided by the attained level of real GDP per capita. Thus, the economic trend term has an asymptotic value of zero. Inversion of the measured GDP values is used to recover the corresponding change of the specific age population between 1955 and 2003. The population recovery method based on GDP potentially is of a higher accuracy than routine censuses.
    Keywords: economic development, GDP, population, modeling, the USA
    JEL: J1 O11 O51 E37
    Date: 2006
  42. By: Aliprantis, C. D.; Camera, G.; Puzzelo, D.
    Abstract: We develop the theoretical underpinnings of pairwise random matching mechanisms. We formalize the mechanics of matching, and study the links between properties of the different mechanisms and trade frictions. A particular emphasis is placed on providing exact mappings between matching technologies and informational constraints.
    Keywords: Random matching ; frictions ; anonymous trading ; spatial intersections ; search
    JEL: C00 C78 D83 E00
    Date: 2004–08

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