nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒09‒23
fifty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Simple efficient policy rules and inflation control in Iceland By Ben Hunt
  2. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis J. Snower
  3. Monetary Policy Strategy: How Did We Get Here? By Frederic S. Mishkin
  4. Inflation, Variability, and the Evolution of Human Capital in a Model with Transactions Costs By Dimitrios Varvarigos
  5. Endogenous Monetary Policy Regime Change By Troy Davig; Eric M. Leeper
  6. Generalizing the Taylor Principle By Troy Davig; Eric M. Leeper
  7. A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous? By Fabio Milani
  8. The Evolution of the Fed's Inflation Target in an Estimated Model under RE and Learning By Fabio Milani
  9. Can a time-varying equilibrium real interest rate explain the excess sensitivity puzzle? By Alexius, Annika; Welz, Peter
  10. Expansionary fiscal consolidations in Europe - new evidence By António Afonso
  11. Estimating the Inflation-Output Variability Frontier with Inflation Targeting: A VAR Approach By W. Douglas McMillin; James S. Fackler
  12. Axel Leijonhufvud and the Quest for Micro-foundations -- Some Reflections By David Laidler
  13. The Elastic Provision of Liquidity by Private Agents By Saunders, Drew
  14. Banks’ regulatory buffers, liquidity networks and monetary policy transmission By Merkl, Christian; Stolz, Stéphanie
  15. Do actions speak louder than words? Household expectations of inflation based on micro consumption data By Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
  16. Growth, Cycles and Welfare: A Schumpeterian Perspective By Patrick Francois; Huw Lloyd-Ellis
  17. Macroeconomic Effects of Fiscal Policies: Empirical Evidence from Bangladesh, China, Indonesia and the Philippines By Geoffrey Ducanes; Marie Anne Cagas; Duo Qin; Pilipinas Quising; Mohammad Abdur Razzaque
  18. International Lessons for the Property Price Boom in South Africa By Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
  19. The Euro and the Transatlantic Capital Market Leadership: A Recursive Cointegration Analysis By Enzo Weber
  20. Generic Determinacy and Money Non-Neutrality of International Monetary Equilibria By Dimitrios P. Tsomocos
  21. The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy By Thorvardur Tjörvi Ólafsson
  23. What do “residuals” from first-order conditions reveal about DGE models? By Alok Johri and Marc-André Letendre
  25. The Cyclical Behaviour of Fiscal Surpluses in The OECD Countries – A Panel Study By Michal Mackiewicz
  26. Making The Stability Pact More Flexible: Does It Lead to Procyclical Fiscal Policies? By Michal Mackiewicz
  27. Pension Sytems and the Allocation of Macroeconomic Risk By Lans Bovenberg; Harald Uhlig
  28. Economic growth and its price: some tendencies of Belarus economy transformation, 1990-2005 By Aliaksei P. Smolski
  29. Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating' By Reginaldo P. Nogueira Jnr
  30. The within-distribution business cycle dynamics of German firms By Döpke, Jörg; Weber, Sebastian
  31. On the Cyclicality of Labor Market Mismatch and Aggregate Employment Flows By Kenneth Beauchemin; Murat Tasci
  32. The optimal degree of exchange rate flexibility: A target zone approach By Jesús Rodríguez López; Hugo Rodríguez Mendizábal
  33. Was There A British House Price Bubble? Evidence from a Regional Panel By Gavin Cameron; John Muellbauer; Anthony Murphy
  34. Financial Development and Inequality: Brazil 1985-99 By Meyer Bittencourt, Manoel F. Meyer
  35. A Note on the (In)stability of Diamond’s By Blomgren-Hansen, Niels
  36. Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation By Christopher House; Matthew D. Shapiro
  37. Dynamic models with non clearing markets By Jean-Pascal Bénassy
  38. Keynes on sustainable development (In French) By Eric BERR (CED-IFReDE-GRES)
  39. Capital-Skill Complementarity and Rigid Relative Wages By Skaksen, Jan Rose; Sørensen , Anders
  40. Macroeconomic Implications of Early Retirement in the Public Sector: The Case of Brazil By Gerhard Glomm; Juergen Jung; Chung Tran
  41. Better policy analysis with better data. Constructing a Social Accounting Matrix from the European System of National Accounts. By Susana Santos
  42. A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? By Ray C. Fair
  43. Why exporters can be financially constrained in a recently liberalised economy? A puzzle based on Argentinean firms during the 1990s By Espanol, Paula
  44. Intraday Seasonalities and Macroeconomic News Announcements By Harju, Kari; Hussain, Mujahid
  45. Does Employment Protection Create Its Own Political Support? By Björn Brügemann
  46. Employment Protection: Tough to Scrap or Tough to Get? By Björn Brügemann
  47. Tendencies and problems of economical insolvency (bankruptcy) institution development in Belarus: 1991 - 2005 By Aliaksei P. Smolski
  48. Rich States, Poor States: Convergence and Polarisation in India By Sanghamitra Bandyopadhyay
  49. Energy Expenses in Households with Different Standards of Living By Anton Laur; Koidu Tenno; Mare Viies
  50. Moving up and moving down: A New Way of Examining Country Growth Dynamics By Rockmore, Marc; Zhang, Xiaobo
  51. From Groundnuts to Globalization: A Structural Estimate of Trade and Growth By Christian Broda; Joshua Greenfield; David Weinstein

  1. By: Ben Hunt
    Abstract: In March 2001 Iceland introduced inflation targeting. In the three years that followed, inflation was quickly stabilized at the target rate and fluctuated well within the Central Bank's tolerance band. However, since February 2005 inflation has often been above the upper tolerance limit. This raises the question of how tightly is it feasible to control inflation in a very small open economy like Iceland. This paper attempts to provide some empirical answers to this question using small estimated macroeconomic models of Iceland, New Zealand, Canada, the United Kingdom and the United States. These models are used to derive efficient monetary policy frontiers that trace of the locus of the lowest combinations of inflation and output variability that are achievable under a range of alternative rules for operating monetary policy. These efficient policy frontiers illustrate that inflation stabilization is a considerably more daunting challenge in Iceland than in other industrial countries, even other very small industrial countries like New Zealand. The key reason for this result is the relative magnitudes of the shocks to which the economy is subjected. If inflation outside the target band undermines the credibility of monetary policy, thereby increasing the real cost of maintaining price stability, these results suggest that the inflation targeting framework will need to continue to evolve to reduce the probability that targeted inflation will breach the tolerance range. Further, other macroeconomic policy changes, such more systematic coordination between monetary and fiscal policy, should be considered to help further reduce inflation and output variability in Iceland.
    Date: 2006–08
  2. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Institute for World Economics, CEPR and IZA)
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies that these phenomena can be analysed by separate branches of economics. The macro literature tries to explain inflation dynamics and estimates the NAIRU. The labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment. We show that the orthodox view that the New Keynesian Phillips curve is vertical in the long-run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate. In the light of these results, we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment.
    Keywords: Natural rate of unemployment, NAIRU, New Keynesian Phillips Curve, Inflation-unemployment tradeoff, Inflation dynamics, Unemployment dynamics
    JEL: E24 E31
    Date: 2006–09
  3. By: Frederic S. Mishkin
    Abstract: This paper, which is the introductory chapter in my book, Monetary Policy Strategy, forthcoming from MIT Press, outlines how thinking in academia and central banks about monetary policy strategy has evolved over time. It shows that six ideas that are now accepted by monetary authorities and governments in almost all countries of the world have led to improved monetary performance: 1) there is no long-run tradeoff between output (employment) and inflation; 2) expectations are critical to monetary policy outcomes; 3) inflation has high costs; 4) monetary policy is subject to the time-inconsistency problem; 5) central bank independence helps improve the efficacy of monetary policy; and 6) a strong nominal anchor is the key to producing good monetary policy outcomes.
    JEL: E52 E58
    Date: 2006–09
  4. By: Dimitrios Varvarigos (Dept of Economics, Loughborough University)
    Abstract: In a monetary growth model, I show that average inflation inhibits growth while inflation volatility enhances it. The effect of nominal volatility on human capital accumulation depends on the response of money demand and the corresponding extent of transactions costs rather than from a direct, precautionary motive.
    Keywords: money; growth; volatility.
    JEL: E32 E60 O42
    Date: 2006–07
  5. By: Troy Davig (Federal Reserve Bank of Kansas City); Eric M. Leeper (Indiana University Bloomington)
    Abstract: This paper makes changes in monetary policy rules (or regimes) endogenous. Changes are triggered when certain endogenous variables cross specified thresholds. Rational expectations equilibria are examined in three models of threshold switching to illustrate that (i) expectations formation effects generated by the possibility of regime change can be quantitatively important; (ii) symmetric shocks can have asymmetric effects; (iii) endogenous switching is a natural way to formally model preemptive policy actions. In a conventional calibrated model, preemptive policy shifts agents’ expectations, enhancing the ability of policy to offset demand shocks; this yields a quantitatively significant “preemption dividend.”
    Keywords: Markov switching, Taylor rule, expectations formation
    JEL: E31 E32 E52 E58
    Date: 2006–08
  6. By: Troy Davig (Federal Reserve Bank of Kansas City); Eric M. Leeper (Indiana University Bloomington)
    Abstract: The paper generalizes the Taylor principle—the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation—to an environment in which reaction coefficients in the monetary policy rule evolve according to a Markov process. We derive a long-run Taylor principle that delivers unique bounded equilibria in two standard models. Policy can satisfy the Taylor principle in the long run, even while deviating from it substantially for brief periods or modestly for prolonged periods. Macroeconomic volatility can be higher in periods when the Taylor principle is not satisfied, not because of indeterminacy, but because monetary policy amplifies the impacts of fundamental shocks. Regime change alters the qualitative and quantitative predictions of a conventional new Keynesian model, yielding fresh interpretations of existing empirical work.
    Keywords: regime change, indeterminacy, monetary policy
    JEL: E31 E52 C62
    Date: 2006–08
  7. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears a crucial determinant of inflation inertia.
    Keywords: Infinite-horizon learning; DSGE model; Bayesian estimation; Non-rational expectations; Inflation persistence; Habit formation
    JEL: C11 D84 E30 E50 E52
    Date: 2005–12
  8. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper aims to infer the evolving Fed's inflation target by estimating a monetary model under the assumptions of RE and learning. The results emphasize how different assumptions about expectations may have important effects on the inferred target movements.
    Keywords: Time-varying inflation target; Learning, Expectations, Bayesian estimation
    JEL: E50 E52 E58
    Date: 2006–09
  9. By: Alexius, Annika (Department of Economics); Welz, Peter (Riksbanken)
    Abstract: The strong response of long-term interest rates to macroeconomic shocks has typically been explained in terms of informational asymmetries between the central bank and private agents. The standard models assume that the equilibrium real interest rate is constant over time and independent of structural shocks. We incorporate time-variation in the equilibrium real interest rate as function of structural shocks to e.g. productivity and demand. This extended model implies that forward interest rates at long horizons move about 40 basis points as the short-term interest rate increases one percentage point. In terms of regressions of changes in long-term interest rates on changes in the short-term interest rate, including a time-varying equilibrium real interest rate explains about half of the puzzle.
    Keywords: Term structure; equilibrium real interest rate; unobserved components model
    JEL: C51 E43 E52
    Date: 2006–09–11
  10. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In order to assess the existence of expansionary fiscal consolidations in Europe, panel data models for private consumption are estimated for the EU15 countries, using annual data over the period 1970–2005. Three alternative approaches to determine fiscal episodes are used, and the level of government indebtedness is also taken into account. The results show some evidence in favour of the existence of expansionary fiscal consolidations, for a few budgetary spending items (general government final consumption, social transfers, and taxes), depending on the specification and on the time span used. On the other hand, the possibility of asymmetric effects of fiscal episodes does not seem to be corroborated by the results. JEL Classification: C23, E21, E62.
    Keywords: fiscal policy, expansionary fiscal consolidations, non-Keynesian effects, panel data models, European Union.
    Date: 2006–09
  11. By: W. Douglas McMillin; James S. Fackler
    Abstract: This paper (i) illustrates how a VAR model can be used to evaluate inflation targeting, (ii) derives the policy frontier available to the central bank using counterfactual experiments with real time data, and (iii) estimates how this frontier has changed over time in terms of the position and slope of the available tradeoff between output gap variability and inflation variability under inflation targeting. Various inflation targets are considered as are tolerance bands of varying width around these targets. The results indicate that over time (i) a given reduction in inflation variability is associated with a smaller rise in output variability and that (ii) a given inflation variability is achieved with smaller interest rate volatility. Consistent with the data, our results require federal funds rate persistence, though no instrument instability was observed. One interpretation of these results is that they reflect the growing credibility of the Federal Reserve.
  12. By: David Laidler (University of Western Ontario)
    Abstract: Axel Leijonhufvud's On Keynesian Economics and the Economics of Keynes (1968) was a seminal contribution to the literature on what came to be known as the micro-foundations of macro-economics, but its Marshallian approach, which involved analysing the disequilibrium dynamics of markets in which trade at non-market clearing prices would occur, was not that eventually adopted in the early 1970s. Instead, a Walrasian development of monetarism, namely new- classical macroeconomics, which combined the postulate of continuously clearing markets with the rational expectations hypothesis became dominant. Even so, Leijonhufvud's subsequent work on the costs of inflation had an important influence in establishing this phenomenon's policy importance, and, along with his earlier analysis of employment fluctuations, provides still important insights about why the relevance of now-orthodox economics might be limited to helping us understand the economy's performance within a corridor whose boundaries lie close to its full-employment-price-stability equilibrium.
    Keywords: macroeconomics; micro-foundations; Keynesian economics; monetarism; new-classical economics; general equilibrium; disequilibrium; auctioneer; false prices; money; unemployment; inflation
    JEL: B22 B31 D50 D80 D90 E12 E31
    Date: 2006
  13. By: Saunders, Drew
    Abstract: I study a model of entrepreneurial investment in which investment projects are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is affected by the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of the unaffected firm may earn a liquidity premium due to their fungibility; and, because they are backed by productive investment, their supply is elastic to the demand. The segmentation implies that an aggregate liquidity shock has different consequences across sectors. The unaffected firm plays a role like that of a bank by supplying liquidity to other firms; this mechanism recalls the “real bills” doctrine of classical monetary theory.
    Keywords: Liquidity ; Money Supply Elasticity
    JEL: E44 E51 E22
    Date: 2006–08
  14. By: Merkl, Christian; Stolz, Stéphanie
    Abstract: Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers.
    Keywords: monetary policy transmission, bank lending channel, bank capital channel, liquidity networks
    JEL: C23 E52 G21 G28
    Date: 2006
  15. By: Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
    Abstract: Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households’ implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households’ implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers’ expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.
    Keywords: Inflation Expectations, Consumer Expenditure Survey, Michigan Survey of Consumers, Survey of Professional Forecasters, Euler Equation
    JEL: D12 D84 E31
    Date: 2006
  16. By: Patrick Francois (University of British Columbia); Huw Lloyd-Ellis (Queen's University)
    Abstract: We use a Schumpeterian model in which both the economy's growth rate and its volatility are endogenously determined to assess some welfare and policy implications associated with business cycle fluctuations. Because it features a higher average growth rate than its acyclical counterpart, steady-state welfare is higher along the cyclical equilibrium growth path of the model. We assess the impact of alternative stabilization policies designed to smooth cyclical fluctuations. Although, it is possible to significantly reduce the variance of output growth via simple policy measures, the welfare benefits are at best negligible and at worst completely offset by the resulting reduction long-term productivity growth.
    Keywords: Endogenous cycles, Endogenous growth, Welfare, Stabilization policy
    JEL: E0 E1 O3 O4
    Date: 2006–09
  17. By: Geoffrey Ducanes (University of the Philippines); Marie Anne Cagas (Asian Development Bank and University of the Philippines); Duo Qin (Queen Mary, University of London and Asian Development Bank); Pilipinas Quising (Asian Development Bank); Mohammad Abdur Razzaque (University of Dhaka, Bangladesh)
    Abstract: This paper studies macroeconomic effects of fiscal policies in four Asian countries – Bangladesh, China, Indonesia, and the Philippines – by means of structural macroeconometric model simulations. It is found that short-term fiscal multipliers from an untargeted increase in government expenditure are positive but much less than those from an increased expenditure targeted to capital spending. The multiplier effects from fiscal expansion via a tax rate reduction are found to be typically much less than through higher spending. The effectiveness of automatic stabilizers in general, and more specifically whether expenditure or tax-side stabilizer is more effective, differs across countries.
    Keywords: Fiscal policy, Growth, Public finance, Deficit
    JEL: E62 E17 C53 P52
    Date: 2006–09
  18. By: Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
    Abstract: South Africa appears to share some of the characteristics (property price boom, easing of monetary policy, strong domestic demand growth) of asset price booms in industrial countries that were often followed by a period of weak growth. The international experience suggests that a number of practical obstacles need to be overcome before a more proactive role of monetary policy is warranted. However, a larger variety of available mortgage contracts, including longer-term fixed-rate contracts, should allow for a more efficient allocation of interest rate risks. Also, a more systematic nationwide collection of property price data, including data on commercial property price developments, would provide a more representative basis for analysis.
    Keywords: Asset Prices, property prices, monetary policy, economic development
    JEL: E44 E52 E58
    Date: 2006
  19. By: Enzo Weber
    Abstract: In this paper, the capital market relations between the Euro area and the USA are subject to investigation. Formally based on the uncovered interest rate parity (UIP), first a longrun equilibrium between Euro and US government bond yields is established in backward recursively estimated vector error correction models (VECMs). Subsequently, the focus lies on interest rate leadership and adjustment as well as capital market integration. One major finding shows, that the foundation of the European Monetary Union (EMU) strengthened its role relative to the USA. Furthermore, the transatlantic connections have become closer in the course time.
    Keywords: Capital Market, UIP, Euro, Transatlantic Relations
    JEL: E44 F36 C32
    Date: 2006–09
  20. By: Dimitrios P. Tsomocos
    Abstract: I address the issue of the 'number' of International Monetary Equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace (1981) extend the O.L.G. indeterminacy result to a monetary model of the international economy. However, the role of monetary sector together with the market and agent heterogeneity remove real and nominal indeterminacy in the Geanakoplos and Tsomocos model. In particular, nominal indeterminacy abruptly disappears when private liquid wealth is non-zero. Finally, monetary policy becomes non-neutral since monetary changes affect nominal variables which in turn determine different real allocations. Lucas did not find these non-neutral effects in his model of international finance because he postulated a 'sell-all model' in which every agent sells everything he owns in every period. Thus, the number of transactions remain unaffected by definition regardless of any policy changes. Instead, when transactions emerge endogenously in equilibrium monetary policy has non-neutral effects provided that there exist potential gains to trade at the initial allocation of goods.
    Keywords: Determinacy, exchange rates, liquid wealth, non-neutrality, monetary policy
    JEL: D5 E5 E6 F1 F2 F3
    Date: 2006
  21. By: Thorvardur Tjörvi Ólafsson
    Abstract: This paper provides a survey on the recent literature on the new Keynesian Phillips curve: the controversies surrounding its microfoundation and estimation, the approaches that have been tried to improve its empirical fit and the challenges it faces adapting to the open-economy framework. The new Keynesian Phillips curve has been severely criticized for poor empirical dynamics. Suggested improvements involve making some adjustments to the standard sticky price framework, e.g. introducing backwardness and real rigidities, or abandoning the sticky price model and relying on models of inattentiveness, learning or state-dependant pricing. The introduction of openeconomy factors into the new Keynesian Phillips curve complicate matters further as it must capture the nexus between price setting, inflation and the exchange rate. This is nevertheless a crucial feature for any model to be used for inflation forecasting in a small open economy like Iceland.
    Date: 2006–09
  22. By: Jim Engle-Warnick; Nurlan Turdaliev
    Abstract: We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics.
    JEL: C91 E42
    Date: 2006–09
  23. By: Alok Johri and Marc-André Letendre
    Abstract: The first-order condition (FOC) associated with labour in many dynamic general equilibrium models involves only current period variables. Residuals constructed from this FOC are inconsistent with aggregate US data in that they are very large and highly persistent. The persistence suggests that models which introduce dynamic terms in the labour FOC may be more consistent with the data. Three such models (one with learning by doing, one with habit formation, and one with labour adjustment costs) confirm that they can reduce the persistence in the residuals making the models more consistent with the joint dynamics of consumption, output and hours.
    Keywords: dynamic general equilibrium models, real business cycles, first-order conditions.
    JEL: E32 C52
    Date: 2006–09
  24. By: Jan Libich
    Abstract: This paper shows an avenue through which a numerical inflation target ensures low inflation and high credibility: one that is independent of the usual Walsh incentive contract. Our novel game theoretic framework - a generalization of alternating move games - formalizes the fact that since the target is explicit/legislated, it cannot be frequently reconsidered. The "explicitness" therefore serves as a commitment device. There are two key results. First, it is shown that if the inflation target is sufficiently rigid (explicit) relative to the public's wages, low inflation is time consistent and hence credible even if the policymaker's output target is above potential. Second, it is found that the central banker's optimal explicitness level is decreasing in the degree of her patience/independence (due to their substitutability in achieving credibility). Our analysis therefore offers an explanation for the "inflation and credibility convergence" over the past two decades as well as the fact that inflation targets were legislated primarily by countries that had lacked central bank independence like New Zealand, Canada and the UK rather than the US, Germany, or Switzerland. We show that there exists fair empirical support for all the predictions of our analysis.
    JEL: E42 E61 C70 C72
    Date: 2006–09
  25. By: Michal Mackiewicz (Institute of Economics, University of Lodz)
    Abstract: The main objective of this paper is to examine differences in the cyclical behaviour of fiscal policy in the OECD countries empirically using a new method developed to compare directly the explanatory power of two groups of theories that try to explain why some countries run pro-cyclical fiscal policies. The analysis shows that stronger anticyclical fiscal policies are typically run by countries with better institutions, lower deficits, and a lower stock of public debt. However, the index of regulatory quality performs best in explaining the variance of output elasticity of budget surpluses, which contradicts the conventional view that financial constraints are the main reason behind fiscal procyclicality.
    Keywords: procyclical fiscal policy, stabilization policy, panel estimation
    JEL: E60 E63
    Date: 2006–01
  26. By: Michal Mackiewicz (Institute of Economics, University of Lodz)
    Abstract: One of the often discussed negative aspects of the Stability and Growth Pact is the rigidity of its deficit rule. Several reform proposals aim currently at alleviating the rule in order to allow the automatic stabilizers to operate freely. However, such a reform is likely to cause even further deterioration of fiscal balances in the member countries. The empirical evidence presented in this paper shows that, in the past, increasing the structural deficit had a strong negative impact on a degree of anti-cyclical fiscal stabilization. This suggests that the reform of the Pact, through higher structural deficits, can decrease rather then increase the scope of anti-cyclical fiscal actions in the EMU member countries.
    Keywords: fiscal policy, stabilization policy, fiscal rules
    JEL: E60 E63
    Date: 2005–03
  27. By: Lans Bovenberg; Harald Uhlig
    Abstract: This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall ``life-cycle´´ risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.
    Keywords: Social optimum, pension systems, risk sharing, overlapping generations
    JEL: E21 E61 E62 O40 H21 H55
    Date: 2006–09
  28. By: Aliaksei P. Smolski (Belarus State Economic University)
    Abstract: In article some tendencies and features of Belarus economy transformation are analyzed. Macroeconomic processes and conditions are esteemed as external environment elements, in which one the enterprises of country operates. The financial state and a number of other enterprises activity performances as objective reasons of their economic insolvency are investigated. The features of Belarus economy are disclosed, which remind of socialist system. The question about the price of reached rates of economic growth for enterprises and society is examined.
    Keywords: Belarus, economic growth, investments, output, transition economy, unemployment
    JEL: E60 H30 J60 L16 O11 P30
  29. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect 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. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.
    Keywords: Inflation Targeting; Exchange Rate Pass-Through, 'Fear of Floating'
    JEL: E31 E52 F31 F41
    Date: 2006–09
  30. By: Döpke, Jörg; Weber, Sebastian
    Abstract: We analyse stylised facts for Germany’s business cycle at the firm level. Based on longitudinal firm-level data from the Bundesbank’s balance sheet statistics covering, on average, 55,000 firms per year from 1971 to 1998, we estimate transition probabilities of a firm in a certain real sales growth regime switching to another regime in the next period, e.g. whether a firm that has witnessed a high growth rate is likely to stay in a regime of high growth or is bound to switch in a regime of low growth in the subsequent period. We find that these probabilities depend on the business cycle position.
    Keywords: business cycles, firm growth, Markov chains
    JEL: D21 D92 E32
    Date: 2006
  31. By: Kenneth Beauchemin; Murat Tasci
    Abstract: This paper combines a discrete-time dynamic general equilibrium articulation of the standard model of labor market search with observed U.S. time series measures on employment, vacancies, and aggregate output to uncover the cyclical properties of three unobserved forcing variables that comprise the exogenous state of the aggregate labor market: labor productivity, the rate of job separation, and the allocational efficiency of the labor market. We posit the latter variable to be inversely related to the degree of mismatch in the pool of searching workers and vacancies, given numbers of each, and identify its movements as scalar shifts in the standard matching function. Given that the model exactly reconciles observed net employment changes, our procedure also implies measured time series of the flows into and out of employment. We find that labor productivity, the job separation rate and allocational efficiency are all procyclical with the latter two highly variable. These cyclical patterns lead to procyclical implied gross employment flows, thereby concentrating labor force reallocation during booms. We discuss the implications for conventional views of business cycle fluctuations and for the standard search theories of labor market behavior.
    Date: 2005
  32. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Hugo Rodríguez Mendizábal (Department of Economics, Universidad Autónoma de Barcelona)
    Abstract: This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.
    Keywords: Target zones, exchange rate agreements, monetary policy, time consistency.
    JEL: E52 F31 F33
    Date: 2006–09
  33. By: Gavin Cameron; John Muellbauer; Anthony Murphy
    Abstract: This paper investigates the bubbles hypothesis with a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment, and interaction effects between an index of credit availability and real and nominal interest rates. No evidence for a recent bubble is found.
    Keywords: House Prices, Bubble, Spatial Economics
    JEL: C51 E39
    Date: 2006
  34. By: Meyer Bittencourt, Manoel F. Meyer
    Abstract: We examine the impact that financial development had on earnings inequality in Brazil in the 1980’s and 90’s. The empirical evidence, based on panel time series and time series data, shows that more broad access to financial and credit markets had a significant and robust effect in reducing inequality during the period investigated. We suggest that this is not only because the poor can invest the acquired credit in all sorts of productive activities, but also because those with access to financial markets can insulate themselves against recurrent poor macroeconomic performance, which is exemplified by extreme inflation rates. The main implication of the results is that a seemingly non-distortionary policy, such as more credit aimed at the poor, alleviates the high inequality present in Brazil and consequently improves welfare without distorting economic efficiency.
    Keywords: Financial development and markets, credit, inequality and welfare, inflation
    JEL: D31 E44 O11 O54
    Date: 2006
  35. By: Blomgren-Hansen, Niels (Department of Economics, Copenhagen Business School)
    Abstract: Diamond’s two-period OLG growth model is based on the assumption that the stock of capital in any period is equal to the wealth accumulated in the previous period by the generation of pensioners. This stock equlibrium condition may appear an innocuous paraphrase of the ordinary macro-economic flow equilibrium condition, S = I. This is not the case. In this note I demonstrate that Diamond’s solution is unstable in a monetary market economy where households and firms make independent decisions as to how much to save and how much to invest. An increase in the rate of interest above the Diamond long-run equilibrium level will cause saving to fall by more than investment and, hence, result in excess demand for loanable funds and an upward pressure on the rate of interest. However, substituting the ordinary S = I flow equilibrium condition for Diamonds stock equilibrium condition reveals that the model has another solution - the rate of interest equals the rate of growth - and that this solution is stable in a capital-based economy (contrary to the pure consumption loan model of interest suggested by Samuelson(1958)). The model has interesting implications. Diamond’s model predict that an increase in rate of time preference causing the young generation to save less will reduce the capital stock and raise the rate of interest. However,the S = I based two period OLG model reveals that the old generation’s consumption falls by more than the the young generation’s consumption increases. Consequently, excess supply of loanable funds will drive down the rate of interest. If the rate of interest is equal to the rate of growth an increase in the time preference has no effect on the supply of loanable funds and, consequently, neither on the rate of interest or the stock of capital. Whether people prefer to consume as young or old should not be a matter of public concern (although the transition from one state to another may be).
    Keywords: None
    JEL: H00
    Date: 2005–09–13
  36. By: Christopher House; Matthew D. Shapiro
    Abstract: Investment decisions are inherently forward-looking. The payoff of acquiring capital goods, particularly long-lived capital goods, is governed almost exclusively by events in the far future. Because the timing of the investment itself does not affect future payoffs, there are strong incentives to delay or accelerate investment to take advantage of predictable intertemporal variations in cost. For sufficiently long-lived capital goods, these incentives are so strong that the intertemporal elasticity of investment demand is nearly infinite. As a consequence, for a temporary tax change, the shadow price of long-lived capital goods must reflect the full tax subsidy regardless of the elasticity of investment supply. While price data provide no information on the elasticity of supply, they can reveal the extent to which adjustment costs are internal or external to the firm. In contrast, the elasticity of investment supply can be inferred from quantity data alone. The bonus depreciation allowance passed in 2002 and increased in 2003 presents an opportunity to test the sharp predictions of neoclassical investment theory. In the law, certain types of long-lived capital goods qualify for substantial tax subsides while others do not. The data show that investment in qualified properties was substantially higher than for unqualified property. The estimated elasticity of investment supply is high--between 10 and 20. Market prices do not react to the subsidy as the theory dictates. This suggests either that internal (unmeasured) adjustment costs play a significant role or that measurement problems in the price data effectively conceal the price changes. While the policy noticeably increased investment in types of capital that benefited substantially from bonus depreciation, the aggregate effects of the policy were modest. The analysis suggests that the policy may have increased output by roughly 0.1 percent to 0.2 percent and increased employment by roughly 100,000 to 200,000 jobs.
    JEL: E22 E62 E66
    Date: 2006–09
  37. By: Jean-Pascal Bénassy
    Abstract: This article studies a new class of models which synthesize the two traditions of general equilibrium with nonclearing markets and imperfect competition on the one hand, and dynamic stochastic general equilibrium (DSGE) models on the other hand. This line of models has become a central paradigm of modern macroeconomics for at least three reasons: (a) it displays solid microeconomic foundations, (b) it is a highly synthetic theory, which combines in a unified framework general equilibrium, nonclearing markets, imperfect competition, growth theory and rational expectations, (c) it is also an empirical success, leading to substantial progress towards matching real world statistics.
    Date: 2006
  38. By: Eric BERR (CED-IFReDE-GRES)
    Abstract: Since the beginning of the 1970s, the questions related to ecology come in the forefront and progressively led to the adoption of the concept of sustainable development, which now appears to be a new world-wide objective. We argue that numerous writings of Keynes contain the premises of such a sustainable development. We present his views relatively to the three pillars of sustainability: ecological, social and financial. Indeed, Keynes’ positions on uncertainty, money, the place of economics, arts, financing, philosophy, etc. are consistent with a strong sustainability. Finally, we try to give some insights for an indispensable 21st century post Keynesian sustainable development program.
    Keywords: Keynes, sustainable development, Post Keynesian
    JEL: B31 E12
    Date: 2006
  39. By: Skaksen, Jan Rose (Department of Economics, Copenhagen Business School); Sørensen , Anders (Department of Economics, Copenhagen Business School)
    Abstract: The relative demand for skills has increased considerably in many OECD countries during recent decades. This development is potentially explained by capital-skill complementarity and high growth rates of capital equipment. When production functions are characterized by capital-skill complementarity, relative wages and employment of skilled labor are countercyclical because capital equipment is a quasi-fixed factor in the short run. The exact behavior of the two variables depends on relative wage flexibility. Relative wages are rigid in Denmark, implying that the employment share of skills should be countercyclical. The labor market is competitive in the United States and therefore relative wages of skilled labor are expected to be countercyclical. We find that the business cycle development of the two economies is consistent with capital-skill complementarity.
    Keywords: capital-skill complementarity; relative wages; business cycle
    JEL: H00
    Date: 2006–09–08
  40. By: Gerhard Glomm (Indiana University Bloomington); Juergen Jung (Indiana University Bloomington); Chung Tran (Indiana University Bloomington)
    Abstract: In Brazil generous public sector pensions have induced civil servants to retire on average at age 55. In this paper we use an OLG model to assess the effects of such policy induced early retirement on capital accumulation and long-run income levels. We calibrate the model to data from Brazil and then conduct policy experiments changing the generosity of (early) public sector pensions. We find that the current generosity of public sector pensions which induces civil servants to retire 10 years prematurely (at age 55 rather than at age 65) is often associated with decreases in steady state output (GDP) of over 2 percent and welfare losses in the private sector of more than 1 percent of consumption.
    Keywords: Early Retirement, Pension Reform, Capital Accumulation
    JEL: H55
    Date: 2006–09
  41. By: Susana Santos
    Abstract: This paper will discuss the importance of the SAM (Social Accounting Matrix) as a consistent and flexible database for economic modelling to be used for the purpose of ensuring a better policy analysis. It will be shown how the SAM represents the circular flow of income and how it can support disaggregated economy-wide modelling. It will further be demonstrated how a SAM can be constructed from the SNA 93 (1993 version of the United Nations System of National Accounts) in an ESA 95 framework (European System of National and Regional Accounts in the European Community of 1995), and, using an example for Portugal, how it can be implemented in the European Union.
    Keywords: Social Accounting Matrix; National Accounts; Economic Modelling
    JEL: C82 E61 C68
  42. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper examines the performances of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is judged by the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the basis of the actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. The results suggest that Greenspan was indeed the best, but followed closely by Martin. Volcker also does well, but probably not quite as well as Greenspan and Martin. However, Volcker does much better than one would conclude he did by just looking at the actual state of the economy during his term. Miller and Burns do poorly; they should have been considerably tighter than they were.
    Keywords: Fed chairmen, Optimal control, Economic performance
    JEL: E52
    Date: 2006–09
  43. By: Espanol, Paula
    Abstract: Trade-related characteristics have only been recently started to be included in empirical studies analysing the determinants of the financial constraints faced by firms. A result broadly shared by these studies is that exporting firms tend to be those less financially constrained. In this paper we test this result using panel data built up from quarterly balance sheet information for 74 Argentinean big firms covering the years of the currency board regime (1992-2001). We estimate an investment equation splitting up the sample between exporters and non-exporters. Using three alternative econometric models (random effects, fixed effects and instrumental variables) we find that, contrary to what is commonly stressed in the literature, exporting firms are the ones facing larger financial constraints on investment. We propose an explanation for this original result based on the currency appreciation that follows financial liberalisation processes in emerging countries, particularly in Argentina, which triggers a profit squeeze phenomenon for exportable firms, reducing their investment capacity.
    Keywords: financial constraint, investment, foreign trade, Argentine
    JEL: E22 O16 O54
    Date: 2006
  44. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.
    Keywords: Macroeconomic surprises; intraday seasonality; Flexible Fourier Form; conditional mean; conditional volatility; information spillover
    Date: 2006–09–13
  45. By: Björn Brügemann (Yale University and IZA Bonn)
    Abstract: This paper investigates the ability of employment protection to generate its own political support. A version of the Mortensen-Pissarides model is used for this purpose. Under the standard assumption of Nash bargaining, workers value employment protection because it strengthens their hand in bargaining. Workers in high productivity matches benefit most from higher wages as they expect to stay employed for longer. By reducing turnover employment protection shifts the distribution of match-specific productivity toward lower values. Thus stringent protection in the past actually reduces support for employment protection today. Introducing involuntary separations is a way of reversing this result. Now workers value employment protection because it delays involuntary dismissals. Workers in low productivity matches gain most since they face the highest risk of dismissal. The downward shift in the productivity distribution is now a shift towards ardent supporters of employment protection. In a calibrated example this mechanism sustains both low and high employment protection as stationary political outcomes. A survey of German employees provides support for employment protection being more strongly favored by workers likely to be dismissed.
    Keywords: employment protection, wage determination, search and matching, political economy
    JEL: E24 J41 J65
    Date: 2006–09
  46. By: Björn Brügemann (Yale University and IZA Bonn)
    Abstract: Differences in employment protection across countries appear to be quite persistent over time. One mechanism that could explain this persistence is the so called constituency effect: high employment protection creates a mass of workers in favor of maintaining high protection because deregulation would mean that they would lose their jobs. To the extent that this mechanism is at work, employment protection would appear to be a policy that is difficult to deregulate once it has been introduced. In this paper I consider an alternative mechanism generating persistence that makes employment protection a policy that is difficult to introduce. If a legislative process is initiated to introduce employment protection, it is reasonable to assume that firms have an opportunity to lay off workers before employment protection becomes effective. Firms would have an incentive to do so in order to avoid the cost associated with stringent employment protection in the future. Anticipating this, workers whose situation is already precarious may not find it in their best interest to support the legislative process to introduce employment protection in the first place. The main result of the paper is that the ability of firms to adjust employment before an increase in employment protection becomes effective may give rise to situations in which both low and high employment protection are stationary political outcomes.
    Keywords: employment protection, job creation and destruction, political economy
    JEL: E24 J41 J65
    Date: 2006–09
  47. By: Aliaksei P. Smolski (Belarus State Economic University)
    Abstract: The paper investigates becoming and development of bankruptcy institution in Republic of Belarus after USSR disintegration. It shows the approaches of government to regulation of bankruptcy at different stages of transitional economy development and its current state. The economical, legal and political problems of bankruptcy institution application in Belarus are reviewed.
    Keywords: bankruptcy, Belarus, insolvency, transition economy
    JEL: E61 G33 K12 P21
  48. By: Sanghamitra Bandyopadhyay
    Abstract: The distribution dynamics of incomes across Indian states are examined using the entire income distribution rather than using standard regression approaches. The period 1965 to 1997 exhibits twin-peaked dynamics: there are two income convergence clubs at 50% and 125% of the national average income. Disparities across the states declined over the sixties and then increased. The observed polarisation is explained by the disparate distribution of infrastructure, in particular, that of education, irrigation and literacy in the formation of the lower convergence club. Parametric analysis establishes irrigation, education, roads, industrial power consumption and bank deposits as infrastructure components explaining cross-state variation in growth.
    Keywords: Convergence Clubs, Distribution Dynamics, Education, Infrastructure, Panel Data, India
    JEL: C23 E62 O23
    Date: 2006
  49. By: Anton Laur (Centre for Economic Research at Tallinn University of Technology); Koidu Tenno (Centre for Economic Research at Tallinn University of Technology); Mare Viies (Centre for Economic Research at Tallinn University of Technology)
    Abstract: This article provides results of an analysis of energy expenses in households with different income and expenditure levels. The authors have used the Statistical Office of Estonia Household Income and Expenditure Survey data for the period 2000-2005. The analysis was conducted across household income deciles, expenditure deciles and also across regions (counties). For background information the authors have examined the development of electricity consumption and electricity price trends. Price dynamics of boiler fuels used in energy enterprises in the period 2000-2005 have also been analysed, with the main focus on price trends of renewable energy sources. The structure of Estonian households’ dwelling expenditure has been compared to Finland’s respective data in 2003
    Keywords: energy expenses, household member, income and expenditure deciles, dwelling expenses, energy prices, renewable energy sources
    JEL: D1 D31 E31 P22 Q43
    Date: 2006
  50. By: Rockmore, Marc; Zhang, Xiaobo
    Abstract: "Do the countries which grow share the same features as those which decline? How can some countries achieve such long-term sustainable growth while others fail so badly? This paper builds on the emerging literature on growth asymmetries by examining movement across income categories in the World Development Reports over a significant period of time. The results confirm the existence of asymmetries and find that the factors which are correlated with movement upwards or downwards are markedly different. Evidence is presented which suggests that growth episodes share some common features while economic collapse may occur for a broader range of reasons." Authors' Abstract
    Keywords: economic growth, income growth, Growth dynamics, Growth asymmetries, trade, Economic policy, Conflict, Institutions, Geography,
    Date: 2006
  51. By: Christian Broda; Joshua Greenfield; David Weinstein
    Abstract: Starting with Romer [1987] and Rivera-Batiz-Romer [1991] economists have been able to model how trade enhances growth through the creation and import of new varieties. In this framework, international trade increases economic output through two channels. First, trade raises productivity levels because producers gain access to new imported varieties. Second, increases in the number of varieties drives down the cost of innovation and results in ever more variety creation. Using highly disaggregate trade data, e.g. Gabon's imports of Gambian groundnuts, we structurally estimate the impact that new imports have had in approximately 4000 markets per country. We then move from groundnuts to globalization by building an exact TFP index that aggregates these micro gains to obtain an estimate of trade on productivity growth for each country. We find that in the typical country in the world, new imported varieties account for 15 percent of its productivity growth. These effects are larger in developing countries where the median impact of new imported varieties equals a quarter of national productivity growth.
    JEL: E00 F43 O4
    Date: 2006–09

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