nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒07‒02
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Debt, Deficits, and Destabilizing Monetary Policy in Open Economies By Andreas Schabert; Sweder van Wijnbergen
  2. Lumpy Investment in Dynamic General Equilibrium By Ruediger Bachmann; Ricardo J. Caballero; Eduardo Engel
  3. The Choice of Monetary Regime By Østrup, Finn
  4. Time consistent monetary policy with endogenous price rigidity By Siu, Henry
  5. European Economic Policies at Work : the costs of Price Stability and Budget Consolidation By Carlo Altavilla; Ugo Marani
  6. Implications of ERM2 for Poland’s Monetary Policy By Lucjan Orlowski; Kryzstof Rybinski;
  7. Forecasting ECB Monetary Policy: Accuracy Is (Still) a Matter of Geography By Helge Berger; Michael Ehrmann; Marcel Fratzscher
  8. Impact of regulated price adjustments on price variability in a very low inflation transition economy: Case of Armenia By Aghassi Mkrtchyan
  9. Fiscal Policy and Welfare under Different Exchange Rate Regimes By Østrup, Finn
  10. Macroeconomic Challenges with EU Accession in Southeastern Europe: An Overview By Piritta Sorsa
  11. Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies By Paul R. Masson; Catherine A. Pattillo
  12. Core inflation in a small transition country: choice of optimal measures By Gagik G. Aghajanyan
  13. The Monetary Transmission Mechanism in Jordan By Tushar Poddar; Hasmik Khachatryan; Randa Sab
  14. How Different Is the Cyclical Behavior of Home Production Across Countries? By M. Ayhan Kose; William Blankenau
  15. Why Do Prices in Sierra Leone Change So Often? A Case Study Using Micro-level Price Data By Arto Kovanen
  16. Inflation Targeting in the Context of IMF-Supported Adjustment Programs By Pau Rabanal; Mario I. Bléjer; Alfredo Mario Leone; Gerd Schwartz
  17. Population Aging in Japan: Demographic Shock and Fiscal Sustainability By Hamid Faruqee; Martin Mühleisen
  18. Convergence and shocks in the road to EU: Empirical investigations for Bulgaria and Romania By Jean-Marc Figuet; Nikolay Nenovsky;
  19. A New-Open-Economy Macro Model for Fiscal Policy Evaluation By Dennis P. J. Botman; Dirk Muir; Andrei Romanov; Douglas Laxton
  20. Common Factors in Latin America's Business Cycles By Marco Aiolfi; Allan Timmermann; Luis Catão
  21. High Inflation and Real Wages By Benedikt Braumann
  22. Interest Rate Pass-Through In the Common Monetary Area of the SACU Countries By Sander Harald; Kleimeier Stefanie
  23. The Measurement of Co-Circulation of Currencies and Dollarization in the Republic of Armenia By Hakob Zoryan
  24. The Implications of Trade Barriers for Sectoral Diversification and Macroeconomic Stability in Developing Economies By Gabriel Srour
  25. The effect of monetary policy on asset prices: evidence from Germany and UK By Elena Corallo
  26. Business Cycles and Workers' Remittances: How Do Migrant Workers Respond to Cyclical Movements of GDP at Home? By Serdar Sayan
  27. Monetary Implications of Cross-Border Derivatives for Emerging Economies By Armando Méndez Morales
  28. Pay Inequality in Europe 1995-2000: Convergence Between Countries and Stability Inside By James Galbraith; Enrique Garcilazo
  29. Arbeitsmarkt und Beschäftigung By Schlicht, Ekkehart
  30. Hours Worked: Long-Run Trends By Jeremy Greenwood; Guillaume Vandenbroucke
  31. Foreign aid and fiscal policy By Riccardo Faini
  32. A Model of the Trends in Hours By Guillaume Vandenbroucke
  33. Inflation and breaks: the validity of the Dickey-Fuller test By Manuel G—mez; Daniel Ventosa-Santaularia
  34. Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind? By Balázs Égert
  35. The Eurasian Growth Paradox By Anders Åslund; Nazgul Jenish
  36. The Fall and Recovery of the Cuban Economy in the 1990s: Mirage or Reality? By Ernesto Hernández-Catá
  37. Fiscal uncertainty with donor herding and domestic debt crisis By Yohane Khamfula
  38. Modeling Politics with Economics Tools: A Critical Survey of the Literature By Jan-Peter Olters
  39. The owner-occupiers’ capital structure during a house price boom By Lunde, Jens
  40. Obtstacles to Faster Growth in Transition Economies: The Mongolian Case By Stabley W. Black
  41. Foreign Exchange Risk Premium Determinants: Case of Armenia By Tigran Poghosyan; Evzen Kocenda;
  42. The Trend in Retirement By Karen Kopecky
  43. Malaysian Capital Controls: Macroeconomics and Institutions By Simon Johnson; Todd Mitton; Kalpana Kochhar; Natalia T. Tamirisa

  1. By: Andreas Schabert (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint on stabilizing interest rate policy is tighter the higher the primary deficit and the more open the economy is. If the government cannot borrow from abroad in its own currency, stability requires interest rate policy to be accommodating (passive). Inflation stabilization is nevertheless feasible if the CB uses an instrument not associated with default risk, e.g. money supply.
    Keywords: Fiscal-monetary policy interactions; sovereign default risk; foreign debt; inflation targeting; original sin
    JEL: E52 E63 F41
    Date: 2006–05–17
  2. By: Ruediger Bachmann (Yale University); Ricardo J. Caballero (MIT); Eduardo Engel (Cowles Foundation, Yale University)
    Abstract: Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment.
    Keywords: Ss model, RBC model, Time-varying impulse response function, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs, History dependence, Moment matching
    JEL: E10 E22 E30 E32 E62
    Date: 2006–06
  3. By: Østrup, Finn (Department of Finance, Copenhagen Business School)
    Abstract: The article examines how government spending is determined in a closed economy where the nominal wage is pre-set through contracts and the wage setters have perfect foresight regarding subsequent policy decisions. The monetary regime affects government spending because: (i) with a pre-set nominal wage, a given change in government spending has different effects on employment and inflation under different monetary regimes, and (ii) the authorities’ inclination to expand government spending is affected by the inflation rate which depends on the monetary regime. If the costs related to inflation are high, a comparison between monetary regimes suggests that welfare is highest under nominal income targeting where the nominal income target is determined to bring about price stability.
    Keywords: Monetary regimes; fiscal policy; monetary non-neutrality
    JEL: E42 E61 E62
    Date: 2006–06–27
  4. By: Siu, Henry
    Abstract: In this paper I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria - one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.
    JEL: E31 E52 E61
    Date: 2006–06–15
  5. By: Carlo Altavilla; Ugo Marani
    Abstract: The paper investigates whether the policy framework adopted by the EMU participating countries might create recessive tendencies. First, we check the existence of a deflationary bias by separately analysing monetary and fiscal policy. The analysis of monetary policy focuses on a backward- and a forward-looking monetary rule. The reaction functions are estimated to capture the criteria that a centralized monetary authority should use in setting short-term interest rate. Second, a comparative analysis is made of the ability of different central banks to stabilize output and inflation. Precisely, we compare the strategy followed by the European Central Bank, the Deutsche Bundesbank and the US Federal Reserve. Then, a measure of fiscal bias is retrieved by estimating the impact that a change in the primary surplus to GDP ratio has on the real economy. Finally, we search for a quantitative assessment of the recessive propensity of the European economic policies by estimating an overall policy bias. The results suggest the EU institutional set-up might create and/or amplify the recessive tendencies. The policy constraints the EMU members face were dreamt when the Community was struggling with an inflationary legacy. The danger nowadays is not inflation but rather its opposite, deflation. As a consequence, the EU institutions need to be at least partially reformed
    JEL: E52 C52
    Date: 2005–06–01
  6. By: Lucjan Orlowski; Kryzstof Rybinski;
    Abstract: This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).
    Keywords: inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH
    JEL: E58 E61 F33 P24
    Date: 2005–12–01
  7. By: Helge Berger; Michael Ehrmann; Marcel Fratzscher
    Abstract: Monetary policy in the euro area is conducted within a multicountry, multicultural, and multilingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the European Central Bank (ECB)? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part, this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent.
    Keywords: Monetary policy , Europe , European Central Bank , Economic forecasting , Data collection , Data analysis ,
    Date: 2006–02–17
  8. By: Aghassi Mkrtchyan
    Abstract: This paper examines the impact of monetary policy and administrative price adjustments on price variability in a low inflation economy characterized by relatively frequent administrative price adjustments. Fluctuations of market determined prices, prices of agricultural goods in particular, are linked to poor synchronization between administrative price changes and monetary policy. If monetary policy does not account for expected changes in administrative prices, demand for free goods shifts, causing fluctuation of prices for agricultural goods, because the supply of these goods is highly inelastic in Armenia. The findings contribute to a better understanding of agricultural price variability during 1998-2002. The impact of macroeconomic policy and structural adjustments on income distribution and rural poverty incidence are also examined. This research has immediate policy implications, since Armenia will continue to undergo major upward price adjustments of regulated prices, which may have a negative impact on income distribution unless aggregate demand management is changed.
    JEL: E31 E65 E61
    Date: 2005–06–01
  9. By: Østrup, Finn (Department of Finance, Copenhagen Business School)
    Abstract: The article analyses how government spending is determined under different exchange rate regimes in the context of a small open economy. Assuming nominal wage contracts which last for one period and assuming a benevolent government which determines government spending to optimise a representative individual’s utility, it is demonstrated that there are differences between exchange rate regimes with respect to the level of government spending. These differences arise first because a rise in government spending affects macroeconomic variables differently under different exchange rate regimes, and second because the government’s inclination to expand government spending is affected by inflation which depends on the exchange rate regime. At low rates of inflation, the government is inclined to set a higher level of government spending under a fixed exchange rate regime than under a floating exchange rate regime in which the monetary authority optimises preferences which include an employment target and an inflation target. As government spending affects the representative individual’s utility, the choice of exchange rate regime has an impact on welfare.
    Keywords: exchange rate regimes; fiscal policy; monetary union; inflation targeting
    JEL: E42 E61 E62 F33
    Date: 2005–05–19
  10. By: Piritta Sorsa
    Abstract: The paper reviews key macroeconomic challenges with EU accession in Southeastern Europe (SEE). Most of the countries in the region are years away from EU accession and need substantial progress to meet the key macroeconomic criteria-the establishment of a functioning market economy and macroeconomic stability. The former calls for further structural reforms. While macroeconomic stability is essential throughout the EU accession process, the importance of specific outcomes increases in the last stage of accession, when countries face decisions to apply for entry into the ERM2 and the Maastricht criteria (Bulgaria and Romania). The main challenges with establishing macroeconomic stability in other countries are related to sustainability of their monetary frameworks, risks from rapid financial deepening, and further fiscal consolidation to support growth and stabilization. Most of the SEE countries have room to lower public spending and increase the share of pro-growth spending.
    Keywords: Markets , Europe , European Union , Fiscal policy , Economic stabilization ,
    Date: 2006–02–17
  11. By: Paul R. Masson; Catherine A. Pattillo
    Abstract: Could a West African monetary union (either of the non-CFA countries, or all ECOWAS members) be an effective "agency of restraint" on fiscal policies? We discuss how monetary union could affect fiscal discipline and the arguments for explicit fiscal restraints considered in the European Monetary Union literature, and their applicability to West Africa. The empirical evidence, EMU literature, and CFA experience suggest that monetary union could create the temptation for fiscal profligacy through prospects of a bailout, or costs diluted through the membership. Thus, a West African monetary union could promote fiscal discipline only if the hands of the fiscal authorities are also tied by a strong set of fiscal restraints.
    Keywords: West African Monetary Union , Africa , Fiscal policy , CFA franc , Trade ,
  12. By: Gagik G. Aghajanyan
    Abstract: Several non-monetary (mainly supply) factors affect prices in the short-run. It is widely acknowledged that in countries (especially countries in transition), where the price level is highly volatile and seasonal, it is not expedient for central banks to use official inflation index while formulating monetary policy. For this reason, it is crucial for central banks to work out, study and follow the behavior of core inflation that enables to reflect long-run price movements. This paper presents the application of various methods of calculating core inflation to Armenian data (for 1996:1-2002:12). Each measure is calculated at monthly frequencies and evaluated by different criteria. The analysis shows that core inflation indices, calculated by trimming the distribution of prices at 10 or 15%, are the best and most effective indicators for monetary policy-makers in Armenia, since they capture inflation trends and are closely tied to monetary aggregates. However, the median seems to be the best predictor for forecasting inflation of all core inflation measures discussed in this paper
    JEL: P2 R5 E31 P3
    Date: 2005–06–01
  13. By: Tushar Poddar; Hasmik Khachatryan; Randa Sab
    Abstract: This paper examines monetary transmission in Jordan using the vector autoregressive approach. We find that the real 3-month CD rate, the Central Bank's operating target, affects bank retail rates and that monetary policy, measured by the spread between the 3-month CD rate and the U.S. Federal Funds rate, is effective in influencing foreign reserves. We do not find evidence of monetary policy affecting output. Output responds very little to changes in bank lending rates. Furthermore, equity prices and the exchange rate are not significant channels for transmitting monetary policy to economic activity. The effect of monetary policy on the stock market seems insignificant.
    Keywords: Monetary policy , Jordan , Bank rates , Foreign exchange reserves , Stock markets , Exchange rates , Economic models ,
    Date: 2006–03–02
  14. By: M. Ayhan Kose; William Blankenau
    Abstract: This paper studies stylized business cycle properties of household production in four industrialized countries (Canada, the United States, Germany, and Japan). We employ a dynamic small open economy business cycle model that incorporates a household production sector. We use the model to generate data on home output, hours worked in the home sector, and hours spent on leisure. We find that in each country, home output is more volatile than market output while home sector hours are about as volatile as those in the market sector. In each country, leisure is the least volatile series. Leisure hours and home hours are countercyclical in all countries, and home output is not highly correlated with market output. Home sector variables are generally less persistent than market variables, and cross-country correlations related to home production tend to be lower than those related to market production. These findings demonstrate that despite some well-known structural differences in labor markets, the cyclical features of home sector variables are similar across the countries we consider.
    Keywords: Business cycles , Canada , United States , Germany , Japan , Production , Labor markets , Economic models ,
    Date: 2006–02–28
  15. By: Arto Kovanen
    Abstract: We use cross-section and time-series techniques to analyze pricing behavior in Sierra Leone. In cross-sectional data, we find that inflation volatility and product diversification are the main factors explaining differences in the frequency of price adjustments. We show that variance in the fraction of prices subject to change is a key determinant of inflation volatility in Sierra Leone, indicating that retail prices are sensitive to economic events. We explain variations in this fraction over time with past inflation and monetary growth, which are important policy variables.
    Keywords: Inflation , Sierra Leone , Price adjustments ,
    Date: 2006–03–09
  16. By: Pau Rabanal; Mario I. Bléjer; Alfredo Mario Leone; Gerd Schwartz
    Abstract: This paper argues that the IMF's traditional monetary conditionality-a ceiling on net domestic assets of the central bank and a floor on its net international reserves-should be adapted in IMF-supported adjustment programs with countries which have a framework of explicit inflation targets for the implementation of monetary policy. This adaptation should aim at enhancing correspondence and consistency between the monetary objectives of the central bank and the targets established under the IMF-supported adjustment program, as well as between the different instruments used to achieve the policy objectives and targets. The paper reviews various general options in this regard, and, using the case of Brazil as an example, demonstrates how these options may be implemented in practice.
    Keywords: Inflation targeting , Brazil , Monetary policy , Conditionality , Fund-supported adjustment programs ,
  17. By: Hamid Faruqee; Martin Mühleisen
    Abstract: The paper develops a general equilibrium framework to examine the economic implications of population aging in Japan. Particular attention is paid to aggregate saving behavior which is modeled on the basis of empirical age-earnings profiles using a life-cycle approach. The paper's objectives are to (i) estimate the output loss caused by demographic changes and assess the impact of aging on Japan's government finances; and (ii) compare fiscal policy options with respect to their effects on output growth and economic welfare. The paper develops a general equilibrium framework to examine the economic implications of population aging in Japan. Particular attention is paid to aggregate saving behavior which is modeled on the basis of empirical age-earnings profiles using a life-cycle approach. The paper's objectives are to (i) estimate the output loss caused by demographic changes and assess the impact of aging on Japan's government finances; and (ii) compare fiscal policy options with respect to their effects on output growth and economic welfare. The paper develops a general equilibrium framework to examine the economic implications of population aging in Japan. Particular attention is paid to aggregate saving behavior which is modeled on the basis of empirical age-earnings profiles using a life-cycle approach. The paper's objectives are to (i) estimate the output loss caused by demographic changes and assess the impact of aging on Japan's government finances; and (ii) compare fiscal policy options with respect to their effects on output growth and economic welfare.
    Keywords: Aging , Japan , Savings , Debt , Fiscal policy , Economic models ,
  18. By: Jean-Marc Figuet; Nikolay Nenovsky;
    Abstract: Despite their progress Bulgaria and Romania significantly differ from the EU economies. In this article, on the basis of the theoretical and empirical achievements of the theory of optimal and (endogenous) currency areas we study to what extent the two South European economies are able to adopt the common economic (and above all monetary) policy of the EU, and to what extent the convergence to the EU stimulates the economic development of these countries. Despite the similarities, the two countries now differ fundamentally in their choice of a monetary regime – while Romania uses inflation targeting and a flexible exchange rate, Bulgaria has adopted a currency board regime. For this purpose we analyze: (i) the degree of nominal, real and financial convergence and synchronization of the economic cycle with that of the European Union (using unconditional ß convergence approach). Income and price levels, inflation rate, interest rate, monetary aggregates, credit, productivity etc. are among the studied variables; (ii) the resistance to different external and internal shocks (using VAR model) as well as (iii) the mechanisms for balancing and absorption of these shocks. To give a better comparative picture we compose the panel including Hungary and Czech Republic.
    Keywords: convergence, shocks, EU enlargement, Bulgaria and Romania
    JEL: E3 F4 P2
    Date: 2006–02–01
  19. By: Dennis P. J. Botman; Dirk Muir; Andrei Romanov; Douglas Laxton
    Abstract: We develop a New-Open-Economy-Macro model in which Ricardian equivalence does not hold because of (i) distortionary labor and corporate income taxation; (ii) limited asset market participation; and (iii) because the overlapping-generations structure results in a disconnect between current and future generations. We consider a permanent increase in government debt following a cut in labor or corporate income taxes in a small and large open economy. We analyze the sensitivity of the results to the key structural parameters of the model and argue that under plausible assumptions there will be significant crowding-out effects associated with permanent increases in government debt.
    Keywords: Fiscal policy , Taxes , Public debt , Economic models ,
    Date: 2006–02–28
  20. By: Marco Aiolfi; Allan Timmermann; Luis Catão
    Abstract: This paper constructs new business cycle indices for Argentina, Brazil, Chile, and Mexico based on common dynamic factors extracted from a comprehensive set of sectoral output, external data, and fiscal and financial variables spanning over a century. The constructed indices are used to derive a business cycle chronology for these countries and characterize a set of new stylized facts. In particular, we show that all four countries have historically displayed a striking combination of high business cycle and persistence relative to benchmark countries, and that such volatility has been time-varying, with important differences across policy regimes. We also uncover a sizeable common factor across the four economies which has greatly limited scope for regional risk sharing.
    Keywords: Business cycles , Latin America , Argentina , Brazil , Chile , Mexico , Economic models ,
    Date: 2006–03–07
  21. By: Benedikt Braumann
    Abstract: Empirical data show that real wages fall sharply during periods of high inflation. This paper suggests a simple general equilibrium explanation, without relying on nominal rigidities. It presents an intertemporal two-sector model with a cash-in-advance constraint. In this setting, inflation reduces real wages through (1) a decline of the capital stock, and (2) a shift in relative prices. The two effects are additive and make the decline in real wages exceed the decline in per-capita GDP. This mechanism may contribute to rising poverty during periods of high inflation.
    Keywords: Inflation , Wages , Poverty , Economic models ,
  22. By: Sander Harald; Kleimeier Stefanie (METEOR)
    Abstract: We investigate the interest rate pass-through in the four Common Monetary Area (CMA) countries of the South African Customs Union (SACU). We employ an empirical pass-through model that allows for thresholds, asymmetric adjustment, and structural changes. We show that CMA bank lending markets exhibit quite some degree of homogenization as the pass-through is often fast and complete. Deposit markets are somewhat more heterogeneous by showing differing degrees of interest rate stickiness and asymmetric adjustment. Policy makers should therefore be concerned about imperfect competition which may be at the heart of the remaining cross-country differences in monetary transmission in the CMA.
    Keywords: monetary economics ;
    Date: 2006
  23. By: Hakob Zoryan
    Abstract: This paper attempts to estimate the actual (de facto) level of dollarization in Armenia. "Co-circulation" involves the regular use of two or more currencies within an economy. The existence of an unknown amount of foreign currency in circulation makes the outcome of domestic monetary policy uncertain. The volume of foreign currency deposits is easily obtained from the official statistics. However, it is very hard to determine the stock of foreign currency in circulation. The effective money supply may be much larger than the domestic money supply and is subject to behavioral responses which are very different than the movements of the presently measured money supply. The purpose of this paper is to assess the level of dollarization, that is, to evaluate the size and/or proportion of foreign currency in the total money stock of Armenia as a highly dollarized country.
    JEL: E5 E4 G21 P3 F3 P2
    Date: 2005–06–01
  24. By: Gabriel Srour
    Abstract: The paper examines the implications of lower trade barriers for sectoral diversification and macroeconomic stability in developing economies with a large primary goods sector. It shows that lower trade barriers can have ambiguous effects on macroeconomic stability. It shows also that diversification, in the form of equal distribution of resources between nonprimary sectors, may be counterproductive. In fact, investment in the nonprimary sector with lower trade barriers unambiguously enhances macroeconomic stability in a developing economy that is subject to substantial primary shocks.
    Date: 2006–03–07
  25. By: Elena Corallo (Cattaneo University (LIUC))
    Abstract: The main objective of this paper is to focus on the effect of monetary policy on asset prices for Germany and UK. Studying this relationship is complicated because asset prices and interest rates are endogenously determined, behave simultaneously and can be affected by other variables. In order to test this relation and solve these problems we use the heteroskedasticity based approach developed by Rigobon and Sack (2004) which focuses the analysis on the shift in the variance of policy shocks that occurs on the days of the monetary authority's meetings. The assumption of a shift in the variance, which we believe to be weaker than the restrictions imposed in the traditional literature, allows to identify the effect of monetary policy on asset prices solving the endogeneity and simultaneity problem. The result we find indicate that German and UK monetary policy do not affect the stock market behaviour. Monetary policy seems to be neutral on the economy. While for Germany we have no significant effect on the exchange rate, an increase of British interest rate appreciates the sterling.
    Date: 2006–01
  26. By: Serdar Sayan
    Abstract: Workers' remittances are often argued to have a tendency to move countercyclically with the GDP in recipient countries since migrant workers are expected to remit more during down cycles of economic activity back home. Yet, how much to remit is a complex decision involving other factors, and different variables driving remittance behavior are differently affected by the state of economic activity over the business cycle. This paper investigates the behavior of workers' remittances flows into 12 developing countries over their respective business cycles during 1976-2003 and finds that countercyclicality of receipts is not commonly observed across these countries.
    Keywords: Workers remittances , Business cycles , Consumption , Investment incentives ,
    Date: 2006–03–09
  27. By: Armando Méndez Morales
    Abstract: This paper surveys concepts, practices and analytical literature to assess benefits and risks for monetary stability of cross-border currency and interest rate derivative operations in calm and turbulent periods, with a view of extracting implications for emerging economies. Monetary authorities must prevent one-sided positions in the currency, favor asset substitutability, and incorporate the enriched information set provided by derivative-based transactions into monetary policy design. In some circumstances, the use of derivatives by monetary authorities may help fulfill this role. By contrast, surcharges to compensate for a downward impact of derivatives on the cost of capital appear neither advisable nor necessary.
    Keywords: Financial systems , Currencies , Spot exchange rates , Foreign exchange , Economic models ,
  28. By: James Galbraith; Enrique Garcilazo
    Abstract: This paper measures pay inequality in the EU during the convergence process to the Monetary Union. The decomposability property of Theil's T statistic permits us to construct a three-level hierarchical panel data set of pay inequalities for the years 1995-2000: between and within regions, countries, and for the European continent as a whole. We find a marked pattern of declining pay inequality across Europe for this period, which is due mainly to the rising (initially, negative) position of the United Kingdom and decreasing positive position of Germany.
    JEL: O52 R23 D63 E24 J31
    Date: 2005–12–07
  29. By: Schlicht, Ekkehart
    Abstract: The Labor Market and Employment (Handbook article). The labor market differs from typical markets in important ways. We find job competition and collective mechanisms that set wages and working conditions. Changes in employment bring about changes in wages and prices and entail political and monetary responses. The goals of price stability and full employment cannot, usually, be attained simultaneously under the present conditions.
    Keywords: employment; job competition; stagflation; labor unions; wage setting
    JEL: E12 E61 J12 J38 J50
    Date: 2006–07
  30. By: Jeremy Greenwood (University of Rochester); Guillaume Vandenbroucke (University of Rochester)
    Abstract: For 200 years the average number of hours worked per worker declined, both in the market place and in the home. Technological progress is the engine of such transformation. Three mechanisms are stressed: (i) The rise in real wages and its corresponding wealth effect; (ii) The enhanced value of time off from work, due to the advent of time-using leisure goods; (iii) The reduced need for housework, due to the introduction of time-saving appliances. These mechanisms are incorporated into a model of household production. The notion of Edgeworth-Pareto complementarity/substitutability is key to the analysis. Numerical examples link theory and data.
    Keywords: Hours worked, leisure, housework, household production, Edgeworth-Pareto complementarity/substitutability, technological progress
    JEL: E24 J22 O11 O33
    Date: 2005–06
  31. By: Riccardo Faini (Università di Roma Tor Vergata, Centro Studi Luca d’Agliano, IZA and CEPR)
    Abstract: Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.
    Keywords: foreign aid, fiscal policy
    JEL: F35 E62
    Date: 2006
  32. By: Guillaume Vandenbroucke (University of South California)
    Abstract: During the first half of the 20th century the workweek in the United States declined, and the distribution of hours across wage deciles narrowed. At the same time, the distribution of wages narrowed too. The hypothesis proposed is (i) Households have access to an increasing number of leisure activities which enhance the value of non-market time; (ii) The rise of education accounts for the narrowing of the wage and hours distribution. Such mechanisms, embedded into a neoclassical growth model, quantitatively account for the observations. The rise in wages is the main contributor to the decline in hours. The decline in the price of leisure goods is second in importance, yet its contribution is large.
    Keywords: Hours worked, leisure, home production, technological progress
    JEL: E24 J22 O11 O33
    Date: 2005–07
  33. By: Manuel G—mez (School of Economics, Universidad de Guanajuato); Daniel Ventosa-Santaularia (School of Economics, Universidad de Guanajuato)
    Abstract: We further investigate the properties of the Dickey Fuller test when the Data Generating Process of the variable under consideration is in fact mean stationary with breaks. Asymptotic theory, Monte Carlo simulations and empirical evidence reveal that under plausible values, like the number of breaks and the size of the breaks empirically found, the DF test tends to reject the unit root null hypothesis.
    Keywords: Dickey-Fuller test, Mean Stationary Process, Structural Breaks.
    JEL: C12 C22 E31
  34. 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
    JEL: O11 P17 E31
    Date: 2005–12–07
  35. By: Anders Åslund (Institute for International Economics); Nazgul Jenish (University of Maryland)
    Abstract: In the first decade of postcommunist transition, multiple growth regressions showed that the more radical and comprehensive market economic reform was, the earlier a country returned to economic growth and the more vigorous its growth, and that Central Europe took the lead. Since 2000, however, the Commonweath of Independent States (CIS) countries have had more than 4 percentage points higher annual growth than the Central European countries. A regression analysis for 20 postcommunist countries shows, with strong significance, that reducing public expenditures has most effectively stimulated economic growth. As expected, oil exports are also positive and significant. The distance from the European Union is also positive and significant: that is, the further from the European Union, the higher the economic growth. The effect of corruption is negative for growth but only marginally significant. Neither the laggard effect nor investment reveals any significant effect. The conclusion is that at least among postcommunist countries more emphasis should be given to reducing public expenditures to boost economic growth.
    Keywords: economic systems, transition, economic growth, public sector economy, oil
    JEL: E62 H30 O23 P27 P35 Q43
    Date: 2006–06
  36. By: Ernesto Hernández-Catá
    Abstract: The collapse of the Cuban economy following the cessation of Soviet assistance gave way to a strong recovery in 1994-96. There are three possible explanations for this recovery: (i) that it never took place; (ii) that it reflected a surge in productivity resulting from stabilization and liberalization in 1993-94; or (iii) that it resulted from a favorable aggregate demand shock. The second explanation-the most persuasive-suggests that a strong and durable expansion will probably not be achieved on the basis of present policies, but that the benefits of a full liberalization of the economy are likely to be considerable.
    Keywords: Economic growth , Cuba , Productivity ,
  37. By: Yohane Khamfula (Department of Economics, Stellenbosch University)
    Abstract: This study attempts to analyse how uncertainty about future government spending affects the representative individual’s lifetime utility by using a discrete inter-temporal optimizing model. Intuitively, the study shows that the overall effect of a highly positive domestic-debt repayment gap is such that the expected government spending for the next period will go down. The implication of the reduction in government spending due to uncertainty about future debt servicing is that the output and the corresponding investment for the next period will be expected to go down. This outcome is further reinforced by the higher taxes imposed on consumers in an attempt to minimise the next period’s domestic-debt repayment gap.
    Keywords: Donor herding behavior, domestic debt crisis, fiscal uncertainty, domestic-debt, repayment gap, government spending
    JEL: E6 F3
    Date: 2006
  38. By: Jan-Peter Olters
    Abstract: Whereas the economics discipline possesses a highly refined theoretical apparatus to analyze the effects of government behaviour on the economy, it has not (yet) managed to fully develop a positively formulated "economic theory of politics" that would permit the integration of the decision-making processes of voters, parties and governments with those of consumers and firms. Considerable recent advances notwithstanding, the large and heterogeneous body of literature has (so far) remained outside the economic mainstrain. The paper surveys the main approaches used to endogenize democratic elements and assesses the underlying reasons for researchers' renewed interest in this field.
    Keywords: Economic policy , Public sector , Business cycles , Economic models ,
  39. By: Lunde, Jens (Department of Finance, Copenhagen Business School)
    Abstract: House and flat prices have been through a tremendous bust and boom cycle in Denmark. From 1986 to 1993 real prices for houses and flats dropped by one third on average, foreclosures accounted for around 1/6 of the house and flat turnovers in numbers, and in reality the market for owner-occupied houses and flats was in a crisis. Initiated by a strong interest rate drop and by an expansive finance policy, the market turned. From 1993H1 to 2004H1 real house prices increased 76% and real flat prices 128%. Moreover, Denmark has a leading position in the international household debt race and as in many other countries the fear of the consequences of a strong interest rate increase for the housing market is widespread. Therefore, in order to examine the financial stability among owner-occupiers, a sample of approx. 40,000 owner-occupier families with data at household level has been drawn from the tax statistics for each year from 1987 to 2003. Through the analysis it is shown that the distributions of the owner-occupiers’ capital structure, measured by the net liability/housing wealth ratios, have more or less been the same throughout the 16 years, even during the long-lasting steep house and flat price rise. Moreover, since 1994 the median value of the net liability/income ratio has increased by 71% for all owner-occupiers and by 54% for owner-occupiers between 30-39 years of age.Finally, one last, important aspect of the financial stability of owner-occupiers, namely, their capacity to service their debt has been analysed. The owner-occupiers’ net interest expenditures/ income ratios before tax have been nearly halved from 1987 to 2003. Most of the drop happened during the years of the “housing market failure. From 1994 on the ratios were more slightly reduced and were in 2003 at 8.8% (median value) for all owner-occupiers and 12.2% for owner-occupiers between 30-39 years of age. However, if the reductions of the tax rates for deducting interest expenditures are taken into account, the 2003 after-tax-ratios are only about 2 percentage points below the 1987 after-tax ratios. At March 2005, a new challenge facing Danish owner-occupiers is that 50% of their mortgages carry interest adjustment.
    Keywords: house prices; housing wealth; real estate wealth; housing debt; mortgage debt; personal wealth; personal finance; loan-to-value; debt-to-income; interest expenditures; interest-to-income; financial stability
    JEL: D14 E44 G21 R20 R31
    Date: 2006–05–01
  40. By: Stabley W. Black
    Abstract: The obstacles to economic growth in Mongolia are modeled with a supply-side growth model calibrated to represent inefficient use of resources and intermediation. Progressive removal of inefficiencies over time by means of privatization of banks and industrial enterprises potentially leads to increased productivity and increased capital accumulation, raising economic growth and per capita output.
    Keywords: Transition economies , Economic growth , Mongolia , Capital , Labor , Privatization , Economic models ,
  41. By: Tigran Poghosyan; Evzen Kocenda;
    Abstract: This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined.
    Keywords: “forward discount” puzzle, exchange rate risk, affine term structure models, foreign and domestic deposits, transition and emerging markets, Armenia
    JEL: E43 E58 F31 G15 O16 P20
    Date: 2006–02–01
  42. By: Karen Kopecky (University of Rochester)
    Abstract: A model with leisure production and endogenous retirement is used to explain the declining labor-force participation rates of elderly males. Using the Health and Retirement Study, the model is calibrated to cross-sectional data on the labor-force participation rates of elderly US males by age and their average drop in market consumption in the year 2000. Running the calibrated model for the period 1850 to 2000, a prediction of the evolution of the cross-section is obtained and compared with data. The model is able to predict both the increase in retirement since 1850 and the observed drop in market consumption at the moment of retirement. The increase in retirement is driven by rising real wages and a falling price of leisure goods over time.
    Keywords: retirement, leisure, home production, consumption-drop,technological progress
    JEL: E13 J26 O11 O33
    Date: 2005–07
  43. By: Simon Johnson; Todd Mitton; Kalpana Kochhar; Natalia T. Tamirisa
    Abstract: We analyze the capital controls imposed in Malaysia in September 1998. In macroeconomic terms, these controls neither yielded major benefits nor were costly. At the same time, the stock market interpreted the capital controls (and associated events) as favoring firms with stronger political connections, and some connected firms reportedly received advantages immediately following the crisis. Analysis of financial accounts indicates that connected firms outperformed unconnected firms before the 1997-98 crisis but not afterward. After the crisis, connected firms were either not supported as much as the market had expected or the benefits they received were not manifest in their published accounts.
    Keywords: Capital controls , Malaysia , Financial crisis , Political economy , Stock markets ,
    Date: 2006–03–07

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