nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒09‒30
63 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Finland`s Experiences and Challenges in the Euro Zone By Markku Kotilainen
  2. UK monetary regimes and macroeconomic stylised facts By Luca Benati
  3. The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model By Alex Brazier; Richard Harrison; Mervyn King; Tony Yates
  4. Macroeconomic Aspects of Structural Labor Market Reforms in Germany By Jonas Dovern; Carsten-Patrick Meier
  5. Determinants of long-term interest rates in the Scandinavian countries By Suzan Hol
  6. The New Keynesian Phillips Curve for a Small Open Economy By Pål Boug, Ådne Cappelen and Anders Rygh Swensen
  7. The price puzzle: fact or artefact? By Efrem Castelnuovo; Paolo Surico
  8. Bank capital, asset prices and monetary policy By David Aikman; Matthias Paustian
  9. 'Real-world' mortgages, consumption volatility and the low inflation environment By Sebastian Barnes; Gregory Thwaites
  10. Investment-Specific Technology Shocks in a Small Open Economy By Mulraine, Millan L. B.
  11. Foreign exchange market interventions as monetary policy By Post, Erik
  12. Financial Structure and its Impact on the Convergence of Interest Rate Pass-through in Europe. A Time-varying Interest Rate Pass-through Model By Schwarzbauer, Wolfgang
  13. Why are federal central banks more activist? By Hein Roelfsema
  14. Real and Nominal UK Interest Rates, ERM Membership and Inflation Targeting By Reschreiter, Andreas
  15. Monetary policy and private sector misperceptions about the natural level of output By Jarkko J""skel"; Jack McKeown
  16. Misperceptions and monetary policy in a New Keynesian model By Jarkko J""skel"; Jack McKeown
  17. Will it float? The New Keynesian Phillips curve tested on OECD panel data By Roger Bjørnstad and Ragnar Nymoen
  18. Pricing-to-market, sectoral shocks and gains from monetary cooperation By Bastiaan Verhoef
  19. A model of bank capital, lending and the macroeconomy: Basel I versus Basel II By Lea Zicchino
  20. Monetary Cooperation in the North American Economy By David Laidler
  21. A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run By Hian Teck Hoon; Edmund S Phelps
  22. Panel Cointegration and the Neutrality of Money By Westerlund, Joakim; Costantini, Mauro
  23. The Welfare Cost of Macroeconomic Uncertainty in the Post-War Period By João Victor Issler; Afonso Arinos de Mello Franco; Osmani Teixeira de Carvalho Guillén
  24. Fiscal Policies, External Deficits, and Budget Deficits By Michel Normandin
  25. Supply shocks and currency crises : the policy dilemma reconsidered By García-Fronti, Javier; Miller, Marcus; Zhang, Lei
  26. Industry Diversification, Financial Development and Productivity-Enhancing Investments By Schclarek, Alfredo
  27. Empirical Phillips Curves in OECD Countries: Has There Been A Common Breakdown? By Doyle, Matthew
  28. Business Cycle Regimes in CEECs Production: a Threshold SUR Approach By Nektarios Aslanidis
  29. Monetary reform in times of Charles II (1679-1686): Aspects concerning the issued dispositions. By Cecilia Font de Villanueva
  30. The Euro Changeover and its Effects on Price Transparency and Inflation. By Giovanni Mastrobuoni; Wioletta Dziuda
  31. The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsurable, Idiosyncratic Risk By R. Anton Braun; Harald Uhlig
  32. Procyclicality, collateral values and financial stability By Prasanna Gai; Peter Kondor; Nicholas Vause
  33. Consumption, house prices and expectations By Orazio Attanasio; Laura Blow; Robert Hamilton; Andrew Leicester
  34. The New Keynesian Phillips Curve in the United States and the euro area: aggregation bias, stability and robustness By Bergljot Barkbu; Vincenzo Cassino; Aileen Gosselin-Lotz; Laura Piscitelli
  35. What Affects the Remittances of Turkish Workers : Turkish or German Output? By Sule Akkoyunlu; Konstantin A. Kholodilin
  36. Future Targets and Multiple Equilibria By Ashok S Guha; Brishti Guha
  37. Reflexiones sobre la política cambiaria en México By Guerrero, Carlos; Urzúa, Carlos M.
  38. A welfare state funded by nature and OPEC. A guided tour on Norway's path from an exceptionally impressive to an exceptionally strained fiscal position By Kim Massey Heide, Erling Holmøy, Ingeborg Foldøy Solli and Birger Strøm
  39. Seasonal Cycles in European Agricultural Commodity Prices By Jumah, Adusei; Kunst, Robert M.
  40. On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare By Dirk Krueger; Alexander Ludwig
  41. Accounting for the Rise in Consumer Bankruptcies By Igor Livshits; James MacGee; Michele Tertilt
  42. The influence of the business cycle on bankruptcy probability By Suzan Hol
  43. Monetary policy and data uncertainty By Jarkko J""skel"; Tony Yates
  44. Stress tests of UK banks using a VAR approach By Glenn Hoggarth; Steffen Sorensen; Lea Zicchino
  45. Real Exchange Rate Dynamics With Endogenous Distribution Costs By Mulraine, Millan L. B.
  46. Wealth and consumption: an assessment of the international evidence By Vincent Labhard; Gabriel Sterne; Chris Young
  47. Modelling the cross-border use of collateral in payment systems By Mark J Manning; Matthew Willison
  48. Regime transplants in GDP growth forecasting: A recipe for better predictions? By Lennard van Gelder; Ad Stokman
  49. Disentangling the Importance of the Precautionary Saving Motive By Arthur Kennickell; Annamaria Lusardi
  50. Increased Price Markup from Union Coordination. OECD Panel Evidence By Roger Bjørnstad and Kjartan Øren Kalstad
  51. Precautionary Savings and the Importance of Business Owners By Erik Hurst; Arthur Kennickell; Annamaria Lusardi; Francisco Torralba
  52. Forecasting Monthly GDP for Canada By Annabelle Mourougane
  53. Consumption excess sensitivity, liquidity constraints and the collateral role of housing By Andrew Benito; Haroon Mumtaz
  54. On Irreversible Investment By Xia Su; Frank Riedel
  55. Consumption Theory with Reference Dependent Utility By Andersson, Fredrik W.
  56. Credit Cards: Facts and Theories By Carol C. Bertaut; Michael Haliassos
  57. Constitutions and the resource curse By Jørgen Juel Andersen; Silje Aslaksen
  58. Determinantes del crecimiento en una economía pequeña y abierta: El caso de México, 1986-2003 By Guerrero, Carlos
  59. Information Acquisition and Portfolio Performance By Luigi Guiso; Tullio Jappelli
  60. Sesgo de medición del PIB derivado de los cambios en la calidad del sector TI: México, 2000-2004 By Guerrero, Carlos
  61. La venganza de los no comerciables: Competencia doméstica en México desde la adopción del TLCAN By García Alba, Pascual
  62. Endogenous Skill Bias in Technology Adoption: City-Level Evidence from the IT Revolution By Paul Beaudry; Mark Doms; Ethan Lewis
  63. Removing policy based comparative advantage for energy intensive production. Necessary adjustments of the real exchange rate and industry structure By Torstein Bye, Erling Holmøy and Kim Massey Heide

  1. By: Markku Kotilainen
    Keywords: Economic and Monetary Union, EMU, Finland
    JEL: E30 E32 E42 E52 F33 F41 F42
    Date: 2006–09–27
  2. By: Luca Benati
    Abstract: We exploit the marked changes in UK monetary arrangements since the metallic standards era to investigate continuity and changes across monetary regimes in key macroeconomic stylised facts in the United Kingdom. We find that, historically, inflation persistence has been the exception, rather than the rule, with inflation estimated to have been highly persistent only during the period between the floating of the pound, in June 1972, and the introduction of inflation targeting, in October 1992. As a corollary, our results clearly reject Mishkin's explanation for time variation in the extent of the Fisher effect, favouring instead Barsky's theory. We document a remarkable stability across regimes in the correlation between inflation and the rates of growth of both narrow and broad monetary aggregates at the very low frequencies, thus countering the Whiteman-McCallum criticism of Lucas. The post-1992 inflation-targeting regime appears to have been characterised, to date, by the most stable macroeconomic environment in recorded UK history, with the volatilities of the business-cycle components of real GDP, national accounts aggregates, and inflation measures having been, post-1992, systematically lower than for any of the pre-1992 monetary regimes/historical periods, often markedly so, as in the case of inflation and real GDP. The Phillips correlation between inflation and unemployment was flattest under the gold standard, steepest between 1972 and 1992. In line with Ball, Mankiw and Romer, evidence points towards a positive correlation between mean inflation and the steepness of the trade-off. We show how Keynes, in his dispute with Dunlop and Tarshis on real wage cyclicality, was entirely right: during the inter-war period, real wages were strikingly countercyclical. By contrast, under inflation targeting they have been, so far, strongly procyclical.
  3. By: Alex Brazier; Richard Harrison; Mervyn King; Tony Yates
    Abstract: The volatility of inflation and output has fallen in most advanced economies in the 1990s and 2000s. We use a monetary overlapping generations model to discuss the cause and durability of this macroeconomic change. In that model, agents' decision rules require them to make forecasts of future inflation, which, because of shocks to productivity, is uncertain. Agents make forecasts of inflation using two rules of thumb or 'heuristics'. One is based on lagged inflation, the other on an inflation target announced by the central bank. They switch between those heuristics based on an imperfect assessment of how each has performed in the past. The way the economy propagates productivity shocks into inflation depends on the proportion of agents using each. Movements in that proportion generate fluctuations in small sample measures of economic volatility. We use this simple model of heuristic switching to contrast the performance of monetary policy rules. We find that, relative to the rule that would be optimal under rational expectations, a rule that responds to both productivity shocks and inflation expectations better stabilises the economy but does not prevent agents switching between heuristics. Finally, we study the impact of introducing an explicit inflation target, which can be used by agents as a simple heuristic, into an economy that did not previously have one. Depending on the heuristics agents have access to before the introduction of the target, this can result in reduced inflation volatility.
  4. By: Jonas Dovern; Carsten-Patrick Meier
    Abstract: Using a newly constructed macroeconometric model for Germany and the rest of the Euro area, we investigate the macroeconomic effects of structural labor market reforms in Germany. We find that neither the fact that Germany can no longer pursue an independent monetary policy nor the possibility that other countries in the Euro area might react to reforms in Germany by implementing labor market reforms themselves constitute impediments to successful reforms. Reforms would relative quickly bring down unemployment and increase GDP significantly. Even former labor market “insiders” would gain as net wages increase due to falling unemployment insurance contributions.
    Keywords: labor market reforms, macroeconometric model, Germany, Euro area
    JEL: E24 J64
    Date: 2006–09
  5. By: Suzan Hol (Statistics Norway)
    Abstract: The financial markets in a small open economy like the Scandinavian countries are influenced by international economic developments, especially in their major trading partners. This paper investigates to which degree nominal long-term interest rates in Norway, Sweden and Denmark are determined by fundamental domestic macroeconomic variables and by international economic conditions. Relating the level of interest rates to international macroeconomic variables also sheds some light on the degree of financial marketintegration. In Norway the currency risk, exchange rate regime, international debt and unemployment in Europe are significant in explaining the interest rate differential. In Sweden domestic and US inflation are important, while for Denmark domestic debt, domestic and US money stock, and less significantly US inflation are determinants of the interest rate differential. In these three countries with quite different economies the expectations hypothesis, the effect of domestic growth and unemployment and of international growth are not supported as determinants of long-term interest rate differentials.
    Keywords: long-term interst rates; expectation hypothesis; international macroeconomic influence; crowding out
    JEL: E43 E44
    Date: 2006–08
  6. By: Pål Boug, Ådne Cappelen and Anders Rygh Swensen (Statistics Norway)
    Abstract: The New Keynesian Phillips Curve (NKPC) has become the benchmark model for understanding inflation in modern monetary economics. One reason for the popularity is the microfoundation of the model, which decomposes agents' behaviour into price adjustments and deviations of the price level from its target. The empirical relevance of the NKPC is, however, a matter of debate as recent studies reveal that some supportive evidence depends crucially on the econometric methods applied. We show how to evaluate the features of the model using cointegration techniques and tests based on both single-behavioural equations and cointegrated VAR models. Our results indicate that the forward-looking part of the NKPC is most likely at odds with Norwegian data. By contrast, we establish a well-specified dynamic model interpreted as a standard backward-looking mark-up price equation. We also demonstrate that the dynamic mark-up model forecasts well post-sample and during a major change in the monetary policy regime, which certainly is strong evidence in favour of this model. Consequently, we conclude that taking account of forward-looking behaviour when modelling consumer price inflation in Norway seems unnecessary to arrive at a well-specified model by econometric criteria.
    Keywords: The New Keynesian Phillips Curve; mark-up pricing; single-equation estimation methods; encompassing tests; cointegrated vector autoregressive models and equilibrium correction models.
    JEL: C51 C52 E31 F31
    Date: 2006–05
  7. By: Efrem Castelnuovo; Paolo Surico
    Abstract: This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs and two different identification strategies based on zero restrictions and sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the subsamples associated with a weak central bank response to inflation. These subsamples correspond to the pre-Volcker period for the United States and the period prior to the introduction of the inflation targeting framework for the United Kingdom. Using a micro-founded New Keynesian monetary policy model for the US economy, we then show that the structural VARs are capable of reproducing the price puzzle from artificial data only when monetary policy is passive and hence multiple equilibria arise. In contrast, this model never generates on impact a positive inflation response to a policy shock. The omission in the VARs of a variable capturing the high persistence of expected inflation under indeterminacy is found to account for the price puzzle observed in actual data.
  8. By: David Aikman; Matthias Paustian
    Abstract: We study a general equilibrium model in which informational frictions impede entrepreneurs' ability to borrow and banks' ability to intermediate funds. These financial market frictions are embedded in an otherwise-standard dynamic New Keynesian model. We find that exogenous shocks have an amplified and more persistent effect on output and investment, relative to the case of perfect capital markets. The chief contribution of the paper is to analyse how these financial sector imperfections - in particular, those relating to the banking sector - modify our understanding of optimal monetary policy. Our main finding is that optimal monetary policy tolerates only a very small amount of inflation volatility. Given that similar results have been reported for models that abstract from banks, we conclude that assigning a non-trivial role for banks need not materially affect the properties of optimal monetary policy.
  9. By: Sebastian Barnes; Gregory Thwaites
    Abstract: This paper considers the interaction between the microeconomic decisions facing households and the macroeconomic environment in a setting where households have `real-world' mortgage contracts. In particular, we consider the possible consequences of the important changes in the framework for setting monetary policy in the United Kingdom in recent decades that have coincided with a more stable and low inflation environment. We set a model of households with 'real-world' mortgages in a partial equilibrium overlapping generations framework calibrated to UK data. We find that the welfare gains of the change of regime would have been considerable. However, the baseline calibration of the model implies that the volatility of aggregate consumption growth would actually be higher in the steady state in the more stable environment of the 1990s regime. This is due to greater synchrony in the response of households to shocks, offsetting the smaller magnitude of macroeconomic shocks. This effect is amplified by higher levels of debt in the 1990s. The result that aggregate consumption volatility could be higher in the current regime suggests that the observed fall in aggregate consumption volatility cannot necessarily be attributed to the more stable macroeconomic environment and the role of mortgage debt. If this result applies, this would suggest that the observed fall in volatility may be due either to other factors or may be a transitional phenomenon rather than a feature of the new steady state.
  10. By: Mulraine, Millan L. B.
    Abstract: In this paper we examine the behavioral responses of key macroeconomic variables in Canada to exogenous innovations to investment specific technology. This is done by developing a stylized international real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can quantitatively replicate the key dynamic features of the post-war Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. Moreover, when the model was augmented with an endogenous utilization rate it was able to generate the counter-cyclical behavior of the external accounts - without appealing to an adjustment cost parameter and/or a propagation mechanism whose volatility and persistence are artificially low.
    Keywords: Endogenous rate of time preference; Investment-specific shocks; Relative price of investment goods
    JEL: E32 F41 E37
    Date: 2005–01
  11. By: Post, Erik (Department of Economics)
    Abstract: This paper sets up a simple model for interventions and interest rate setting assuming that the policy maker cares about deviations in inflation from a target level. Under a quadratic cost of interest rate adjustments and interventions the policy maker should use a combination of interest rate adjustment and interventions. According to the model interventions (purchases of foreign currency) will be negatively correlated with interest rate deviations from the steady state level but positively correlated with interest rate deviations pertaining to non-stabilizing motives or a binding zero lower bound. The model also predicts that interventions will be decreasing in inflation expectations and in the real exchange rate but increasing the expected interventions. Interventions are shown to be positively serially correlated if the policy maker cares about the future. Following the theoretical model closely two sets of regression results are presented using both Two Stage Least Squares and an Ordered Probit model. The empirical analysis uses daily intervention data for Australia, Japan and Sweden. Overall, the predictions of the model is supported in most dimensions indicating that interventions have been used in a way that is consistent with monetary policy considerations.
    Keywords: foreign exchange interventions; monetary policy; central banks
    JEL: E52 E58 F31
    Date: 2006–09–26
  12. By: Schwarzbauer, Wolfgang (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: So far studies concerned with the interest pass-through of monetary policy have not taken into account one central issue that arose in Europe in the late 1990s: the importance of financial structure for the convergence of monetary transmission. This study addresses this shortcoming. We estimate a time varying interest pass-through allowing us to test for the importance of financial structure and its impact on the convergence of the effects of monetary policy. We find convergence in banks' reaction to money market movements, which is additionally reduced in groups of countries with similar financial structure. Furthermore, there is a significant impact of financial structure on the extent of transmission of monetary policy impulses within the same month. Thus, differences in financial structure between countries must not be ignored when considering convergence of monetary transmission in Europe.
    Keywords: Convergence, Interest rate pass-through, EMU, Financial structure, Money and bank interest rates, Transmission mechanism
    JEL: E43 G21 E52
    Date: 2006–09
  13. By: Hein Roelfsema
    Abstract: This paper analyzes monetary policy making by a committee of regional representatives in a currency union with asymmetric shocks. By considering strategic delegation of monetary policy making, we show that regional representatives in a federal policy making committee may be more activist than the average citizen in their district. Hence, in our model federal central banks such as the ECB and the FED respond more aggressively to output shocks when compared to individual central banks.
    Keywords: Central Banking, Asymmetric Shocks, Federations, Strategic Delegation
    JEL: F33 F53 E58
    Date: 2006–09
  14. By: Reschreiter, Andreas (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper models the time-varying mean of the UK real and nominal short-term interest rate. Both rates mean revert to a time-varying central tendency in continuous-time interest rate models. Before and during British membership in the ERM, the mean of the real and nominal short rate have a strong negative correlation. Afterwards, when the UK implemented an inflation targeting policy, the mean of the real and nominal short rate are no longer negatively correlated, but instead have a strong positive correlation. The paper also reports empirical evidence of a relationship between the mean of the real and nominal short rate and inflation in the period before the departure from the ERM.
    Keywords: ERM, Inflation targeting, Nominal and real rates, Term structure model, UK
    JEL: E52 F33 G12
    Date: 2006–09
  15. By: Jarkko J""skel"; Jack McKeown
    Abstract: In this paper we illustrate, using a simple model of monetary policy, the welfare costs of the private sector and/or the central bank being uncertain about the natural level of output. It turns out that monetary policy strategies that put less weight on output stabilisation can offset some of these welfare costs.
  16. By: Jarkko J""skel"; Jack McKeown
    Abstract: This paper studies the consequences for the monetary policy design of information shortages on the part of the private sector. We model these shortages as exogenous shocks to expected output, which through an IS curve, disturb demand and output themselves. We constrain policymakers to follow Taylor-like rules but allow them to optimise coefficients: we find that the presence of misperceptions makes the optimised Taylor rule respond more aggressively to inflation and the output gap. We also find that if the policymaker is uncertain about misperceptions, then it is less costly to assume they are pervasive when they are not than the reverse. In other words, setting policy on the basis that the private sector is subject to misperceptions is a 'robust' policy
  17. By: Roger Bjørnstad and Ragnar Nymoen (Statistics Norway)
    Abstract: Galí, Gertler and Lòpez-Salido (2005), GGL, assert that the hybrid New Keynesian Phillips curve, NPC, is robust to different choices of estimation procedure and so some forms of specification bias. Specifically, the dominance of forward-looking behavior is robust according to GGL. We assess the NPC on a panel data set from OECD countries and find that the forward rate of inflation dominates also on the panel data set. However, when variables consistent with alternative inflation models are introduced in the models, the forward term is no longer significant. Such an outcome is predicted by the incomplete competition model of inflation, ICM, meaning that the ICM encompasses the NPC. The opposite does not apply. The non-robustness of the OECD panel data NPC is in alignment with a previous encompassing test on euro-area data, as well as tests on data from the UK and from Norway. GGL on their part do not test the robustness of the NPC features with respect to existing inflation models.
    Keywords: New Keynesian Phillips Curve; forward looking price setting; panel data model; encompassing
    JEL: C23 C52 E12 E31
    Date: 2006–07
  18. By: Bastiaan Verhoef
    Abstract: Recent literature states that international monetary cooperation results in substantial welfare gains in an environment with imperfectly correlated sectoral shocks and with prices only set in firms (domestic) currency. However, empirical studies provide evidence that firms not only set their prices in their own currency, but in foreign currency as well. The question is whether the result of substantial welfare gains due to imperfectly correlated sector-specific shocks applies to the case where firms in the tradable sector apply pricing-to-market, i.e. prices are set in both domestic and foreign currency. This paper finds that this is not the case. For imperfectly correlated sectoral shocks and local currency pricing, welfare benefits of international monetary cooperation are fairly small.
    Keywords: nominal rigidities; international cooperation; local currency pricing
    JEL: E31 E52 F42
    Date: 2006–08
  19. By: Lea Zicchino
    Abstract: The revised framework for capital regulation of internationally active banks (known as Basel II) introduces risk-based capital requirements. This paper analyses the relationship between bank capital, lending and macroeconomic activity under the new capital adequacy regime. It extends a model of the bank-capital channel of monetary policy - developed by Chami and Cosimano - by introducing capital constraints . la Basel II. The results suggest that bank capital is likely to be less variable under the new capital adequacy regime than under the current one, which is characterised by invariant asset risk-weights. However, bank lending is likely to be more responsive to macroeconomic shocks.
  20. By: David Laidler (University of Western Ontario)
    Abstract: The economic integration of North America, unlike that of Europe, has no parallels on the political front, and U.S. economic and political interests are world-wide, while those of Canada and Mexico are predominantly regional. These facts have important implications for the degree of policy integration, not least in monetary matters, that is feasible within NAFTA. Each member has an interest in the monetary stability of the others, but a common currency -- even a pegged exchange rate system -- is not desirable without a significantly greater degree of labour market integration than currently exists, and without a willingness on the part of the U.S. authorities to subordinate national to regional interests in their policy making. Absent these preconditions, monetary stability within NAFTA is best achieved by each country pursuing its own domestic stability, while maintaining the current high degree of formal and informal communications about economic conditions and policy intentions implicit in current arrangements.
    Keywords: NAFTA; economic integration; currency unions; exchange rate regimes; monetary policy; inflation targets
    JEL: E41 E58 E61 F15 F33 F42
    Date: 2006
  21. By: Hian Teck Hoon (School of Economics and Social Sciences, Singapore Management University); Edmund S Phelps (Columbia University)
    Abstract: Open-economy macroeconomics contains a monetary model in the Keynesian tradition that is deemed serviceable for analyzing the short run and a nonmonetary neoclassical model thought capable of handling the long run. But do the Keynesian and neoclassical models meet the challenges thrown out by the main events of the past few decades—the ’80s shock to Europe from the sharp increase of external real interest rates; the kind of speculative shock experienced in the U.S. and parts of northern Europe in the second half of the ’90s: the prospect of new industries emerging in the future with needs for new capital; and what may have been an important shock in the U.S.: the large Kennedy cut in income taxes in 1964? We first indicate that the effects of these shocks on the open economy are not well captured by either the standard Keynesian model or the standard neoclassical theory. Next we provide a careful development of a nonmonetary model of the equilibrium path of the real exchange rate, share price level,as well as natural output, employment and interest that contains “trading frictions” of the customer-market type. We then examine its implications for the above kinds of shocks not only over the medium run but over the short run and the long run as well. The structuralist model we develop also provides an explanation for the dollar’s weakening and accompanying decline in U.S. employment from early 2002 to late 2004 (and prediction of subsequent recovery) resting on belated apprehensions over the scheduled explosion over future decades of Medicare and Social Security outlays for the baby boomers and alarm over the large tax cuts enacted in spite of this prospect.
    Keywords: structuralist model; share price; real exchange rate; employment
    JEL: E24 F3 F4
    Date: 2005–05
  22. By: Westerlund, Joakim (Department of Economics, Lund University); Costantini, Mauro (Department of Public Economics)
    Abstract: Most econometric methods for testing the proposition of long-run monetary neutrality rely on the assumption that money and real output do not cointegrate, a result that is usually supported by the data. This paper argues that these results can be attributed in part to the low power of univariate tests, and that a violation of the noncointegration assumption is likely to result in a nonrejection of the neutrality proposition. To alleviate this problem, two new and more powerful panel cointegration tests are proposed that can be used under very general conditions. The tests are then applied to a panel covering 10 countries between 1870 and 1986. The results suggest money and real output are cointegrated, and that the neutrality proposition therefore must be rejected.
    Keywords: Monetary Neutrality; Panel Cointegration Testing
    JEL: C12 C22 C23 E30 E50
    Date: 2006–08–09
  23. By: João Victor Issler (EPGE/FGV); Afonso Arinos de Mello Franco; Osmani Teixeira de Carvalho Guillén
    Date: 2006–09
  24. By: Michel Normandin
    Abstract: This paper studies the effects of fiscal policies on external and budget deficits. From a tractable small open-economy, overlapping-generation model, the effects are measured by the responses of the external deficit to an increase in the budget deficit due to a tax-cut. The responses are positively affected by the birth rate and the degree of persistence of the budget deficit. Empirical results for the G7 countries over the post-1975 period reveal that the values of birth rate are small for all, but one, countries; but the responses of external and budget deficits are substantial and persistent for most countries. In particular, the fiscal policy has the most important effects on the external deficits for Canada, Japan, and the United States; somewhat smaller impacts for France, Germany, and the United Kingdom; and negligible effects for Italy.
    Keywords: Agents' Superior Information, Birth Rate, Impact and Dynamic Responses, G7 Countries, Orthogonality Restrictions
    JEL: E62 F32 F41
    Date: 2006
  25. By: García-Fronti, Javier (University of Warwick and CSGR, University of Warwick); Miller, Marcus (University of Warwick, Centre for Economic Policy Research and CSGR, University of Warwick); Zhang, Lei (University of Warwick and CSGR, University of Warwick)
    Abstract: The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided.
    Keywords: Supply and demand shocks ; financial crises ; contractionary devaluation ; Keynesian recession
    JEL: E12 E4 E51 F34 G18
    Date: 2006
  26. By: Schclarek, Alfredo (Department of Economics, Lund University)
    Abstract: This paper theoretically studies the role of the financial system in promoting macroeconomic stability and growth. It also explains endogenously the development of the financial system as part of the growth process. The productive sector engages in R\&D activities, and finances its activities through access to the financial system. While vertical innovation spurs economic growth, horizontal innovation creates new industry sectors, and thus enhances industry diversification. Higher industry diversification deepens the financial system by improving its ability to finance the productive sector. Economies that are more diversified, and thus more financially developed, have higher growth rates and are less volatile. There is a role for the government to subsidize innovation, especially horizontal innovation.
    Keywords: vertical innovation; horizontal innovation; industry diversification; financial development; economic growth; imperfect information
    JEL: E22 E32 E44 O16 O30 O41
    Date: 2006–09–20
  27. By: Doyle, Matthew
    Abstract: Recent work on U.S. data calls into question the ability of simple Phillips curve models to forecast inflation. This paper asks whether there is similar evidence of a breakdown in the forecasting ability of Phillips curve models in other OECD countries. The results suggests that the ability of a Phillips curve to out-forecast simpler models has deteriorated in many OECD countries. The evidence is less clear as to whether this breakdown can be attributed to structural breaks in the parameters of the Phillips curve
    Keywords: Phillips curve, structural breaks, forecast breakdown
    JEL: E3
    Date: 2006–09–25
  28. By: Nektarios Aslanidis
    Abstract: The aim of this paper is to study economic activity in CEECs and to look at the transmission of economic activity between the euro area and CEECs. Econometric techniques appropriate for a threshold seemingly unrelated regressions specification are developed to take account of factors that are common to all CEECs. This methodology also allows for asymmetries in the activity of the CEECs governed by the overall euro area activity. The results show slow growth for most CEECs when the euro area economy decelerates, but high growth when the euro area economy grows.
    Keywords: threshold SUR, asymmetry, business cycles
    JEL: C50 E32
  29. By: Cecilia Font de Villanueva
    Abstract: During the reign of Carlos II drastic monetary reform was carried out, which once and for all ended the tremendous monetary instability that took place in Castile throughout the whole Seventeenth century. Between 1680 and 1686, six monetary rules were adopted. The path chosen to attain the stability was not easy due to the state of the coinage. The reform tried to provide the Kingdom with a currency properly valued for which it was later decreed the devaluation and then the subsequent removal of the circulating copper coins. Simultaneously, along with the gathered metal, new purely copper made coins were ordered with adjusted value. Once the stability of the lesser value coinage was obtained, the reach of the reform was extended to the gold and silver pieces to equate them to the new monetary values.
    Date: 2006–09
  30. By: Giovanni Mastrobuoni; Wioletta Dziuda
    Abstract: Despite the expectations of economists that the euro changeover would have no effect on prices, we show that European consumers perceived the contrary. The data indicate that consumers based their perceptions about inflation on goods that are cheaper and more frequently purchased. We use this insight to develop and estimate a model of imperfect information that explains why these goods were subject to higher price growth after the changeover. The data indicate that some retailers, aware of the consumers' diffculties in adopting the new currency, used the changeover to increase profits by increasing prices. We also propose an explanation of why this effect was smaller in more concentrated retail markets.
    Keywords: euro, currency changeover, imperfect information, search costs, price setting.
    JEL: D83 F33 L11
    Date: 2005
  31. By: R. Anton Braun; Harald Uhlig
    Abstract: This paper poses the following question: Is it possible to improve welfare by increasing taxes and throwing away the revenues? This paper demonstrates that the answer to this question is “yes.” We show that there may be welfare gains from taxing capital income even when the additional capital income tax revenues are wasted or consumed by a selfish government. Previous literature has assumed that government expenditures are exogenous or productive, or allowed for redistribution of tax revenue either via lump-sum transfers, unemployment compensation or other redistributive schemes. In our model a selfish government taxes capital above a given threshold and then consumes the proceeds. This raises the before-tax real return on capital and and thereby enhances the ability of agents to self-insure when they are long-term unemployed and have low savings. Since all agents have positive probability of finding themselves in that state there are cases where all agents prefer a selfish government to no government at all.
    Keywords: capital income tax, selfish government, welfare improvement, redistribution
    JEL: H20 H21 H23 D31 D33 E21 E62
    Date: 2006–09
  32. By: Prasanna Gai; Peter Kondor; Nicholas Vause
    Abstract: This paper analyses how the risk-sharing capacity of the financial system varies over the business cycle, leading to procyclical fragility. We show how financial imperfections contribute to underinsurance by entrepreneurs, generating an externality that leads to the build-up of systematic risk during upturns. Increased asset price uncertainty emerges as a symptom of the sectoral concentration that builds up during booms. The liquidity of the collateral asset is shown to play a key role in amplifying the financial cycle. The welfare costs of financial stability, in terms of the efficiency costs due to financial frictions and the volatility costs due to amplification, are also illustrated.
  33. By: Orazio Attanasio; Laura Blow; Robert Hamilton; Andrew Leicester
    Abstract: Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households' wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, and that the consumption of homeowners and renters are equally aligned with the house price cycle. This suggests that neither the wealth nor the collateral channels have been the principal cause of the relationship between house prices and consumption - instead, the most important factor is likely to have been common causality.
  34. By: Bergljot Barkbu; Vincenzo Cassino; Aileen Gosselin-Lotz; Laura Piscitelli
    Abstract: In the recent past, the empirical literature on the New Keynesian Phillips Curve (NKPC) has grown rapidly. The NKPC has been shown to describe satisfactorily the relationship between inflation and marginal cost both for the United States and the euro area. However, little attention has been given so far to the stability and robustness of the parameters in the estimated NKPC. In this paper, we aim to help fill this gap. After estimating hybrid NKPCs on US and euro-area data using the generalised method of moments and having found that our results are broadly in line with previous findings, we subject our estimated NKPCs to a thorough stability analysis. We find that the estimated coefficients for the United States are stable, whereas those for the euro area are considerably less stable. We then investigate the possible reasons for this instability. One explanation, explored using the Andrews' test, is the presence of structural breaks. Another possibility is the presence of an aggregation bias, which we investigate by estimating NKPCs for the three largest euro-area economies: Germany, France and Italy. At this disaggregated level, the fit of the NKPC improves, but the coefficients are still unstable. Furthermore, the disaggregated analysis indicates the presence of structural breaks in the three largest euro-area economies.
  35. By: Sule Akkoyunlu; Konstantin A. Kholodilin
    Abstract: In this paper we examine the interactions between the remittances of the Turkish workers in Germany and the output both in Turkey and in Germany. In our analysis we use the new data set provided by the German monetary authorities, which was never before employed in the literature and which we consider as a more reliable source than the data sets used in the other studies. We show that the remittances positively respond to the changes in the German output and do not react at all to the changes in Turkish output. This finding is consistent with the "remittance maximization" and "inheritance" motives of the migrants' behavior.
    Keywords: Migration, remittances, Turkey, Germany
    JEL: F22 J61 E32
    Date: 2006
  36. By: Ashok S Guha (Jawaharlal Nehru University); Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Multiple Pareto-rankable equilibria may obtain in an overlapping generations model where consumers save to reach a fixed target. Existence and uniqueness conditions are discussed. The model displays excess consumption sensitivity to current income and perfect old-age insurance.
    Keywords: Multiple equilibria, saving, overlapping generations, excess sensitivity.
    JEL: E21 D91
    Date: 2005–10
  37. By: Guerrero, Carlos (Tecnológico de Monterrey, Campus Ciudad de México); Urzúa, Carlos M. (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: El documento pasa revista a cinco posibles alternativas cambiarias que podrían contemplar las autoridades en el momento actual. La primera es seguir con el actual status quo. Una segunda alternativa es la dolarización unilateral. La tercera es dar más mandatos al Banco de México. Una cuarta alternativa es la fijación de una tasa de inflación socialmente óptima. Y una quinta alternativa, que nos parece la más razonable, es que la Comisión de Cambios establezca un régimen que permita la restauración de la competitividad del tipo de cambio.
    Keywords: México, política cambiaria, política monetaria, autonomía del banco central, tipo de cambio real
    JEL: E52 E58 F31 F41
    Date: 2006–03
  38. By: Kim Massey Heide, Erling Holmøy, Ingeborg Foldøy Solli and Birger Strøm (Statistics Norway)
    Abstract: Large petroleum revenues make Norway an enviable fiscal loner. The fiscal policy rule adopted from 2001 transforms petroleum wealth into foreign assets, and only the real return on the financial fund should be spent annually. Despite this ambitious saving of the petroleum wealth, we find it unlikely that present tax rates and welfare schemes are sustainable in a long run perspective. Rather, the results from combining detailed models of demography and government expenditures with a detailed CGE model, suggest that Norway is exceptional also with respect to strong growth in government expenditures. In our baseline scenario the payroll tax rate must be increased continuously when ageing sets in after 2020, passing twice the present level about 2045. This is required even if the pension fund reaches 1.4 times GDP, commanding an unprecedented degree of fiscal discipline.
    Keywords: Population ageing; Fiscal sustainability; Computable general equilibrium model; Dynamic micro simulation
    JEL: H30 H55 H62
    Date: 2006–07
  39. By: Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, University of Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, University of Vienna, Austria)
    Abstract: This paper explores the seasonal cycles of European agricultural commodity prices. We focus on three food crops (barley, soft and durum wheat) and on beef. We investigate whether seasonality is deterministic or unit-root stochastic and whether seasonal cycle for specific agricultural commodities have converged over time. Finally, we develop time-series models that are capable of forecasting agricultural prices on a quarterly basis. Firstly, we find that seasonal cycles in agricultural commodity prices are mainly deterministic and that evidence on common cycles across countries varies over agricultural commodities. The prediction experiments, however, yield a ranking with respect to accuracy that does not always match the statistical in-sample evidence.
    Keywords: Seasonal cycles, Seasonal unit roots, Forecasting, Agricultural commodities
    JEL: C32 C53 Q11
    Date: 2006–09
  40. By: Dirk Krueger (University of Frankfurt, CEPR, CFS, MEA, and NBER); Alexander Ludwig (University of Mannheim and MEA,)
    Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is “importing” the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
    Keywords: Population Aging, International Capital Flows, Distribution of Welfare
    JEL: E17 E25 D33 C68
    Date: 2006–08–07
  41. By: Igor Livshits (University of Western Ontario); James MacGee (University of Western Ontario); Michele Tertilt (Stanford University)
    Abstract: Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
    Keywords: consumer bankruptcy; uncertainty; credit markets; stigma
    JEL: E21 E44 G18 K35
    Date: 2006
  42. By: Suzan Hol (Statistics Norway)
    Abstract: I combine two fields of research on default prediction by empirically testing a bankruptcy prediction function where unlisted firms are evaluated on the basis of both their financial statement analysis and the macroeconomic environment. This combination is found to improve the default prediction compared to financial statements alone. The GDP-gap, a production index and the money supply M1 in combination with some financial health indicators for individual firms are found to be significant predictors on default for Norwegian firms during both a recovery and expansion in the 1990’s.
    Keywords: bankruptcy prediction; macroeconomic environment; financial ratios; logit model
    JEL: G32 G33
    Date: 2006–08
  43. By: Jarkko J""skel"; Tony Yates
    Abstract: One of the problems facing policymakers is that recent releases of data are liable to subsequent revisions. This paper discusses how to deal with this, and is in two parts. In the normative part of the paper, we study the design of monetary policy rules in a model that has the feature that data uncertainty varies according to the vintage. We show how coefficients on lagged variables in optimised simple rules for monetary policy increase as the relative measurement error in early vintages of data increases. We also explore scenarios when policymakers are uncertain by how much measurement error in new data exceeds that in old data. An optimal policy can then be one in which it is better to assume that the ratio of measurement error in new compared to old data is larger, rather than smaller. In the positive part of the paper, we show that the response of monetary policy to vintage varying data uncertainty may generate evidence of apparent interest rate smoothing in interest rate reaction functions: but we suggest that it may not generate enough to account for what has been observed in the data.
  44. By: Glenn Hoggarth; Steffen Sorensen; Lea Zicchino
    Abstract: This paper adopts a new approach to stress testing the UK banking system. We attempt to account for the dynamics between banks' write-offs and key macroeconomic variables, through conditioning our stress test on the historical correlation between the variables and allowing for feedback effects from credit risk to the macroeconomy. In contrast to most existing empirical stress testing work, this paper uses a direct measure of banks' fragility - the write-off to loan ratio. We find that both UK banks' total and corporate write-offs are significantly related to deviations of output from potential. Following an adverse output shock, total and corporate write-off ratios increase. Mortgage arrears, on the other hand, appear to be mainly dependent on household income gearing. The results suggest that, even if the most extreme economic stress conditions witnessed over the past two decades were repeated, the UK banking sector should remain robust.
  45. By: Mulraine, Millan L. B.
    Abstract: The importance of distribution costs in generating the deviations from the law of one price has been well documented. In this paper we show that a two-country flexible price dynamic general equilibrium model driven by exogenous innovations to technology, and with a localized distribution services sector can replicate the key dynamic features of the real exchange rate. In doing so, the paper identifies the importance of two key channels for real exchange rate dynamics. That is, we show: (i) that shocks in the real sector are important contributors to movements in the real exchange rate, and (ii) that the endogenous wedge created by distribution costs of traded goods is a significant source of fluctuation for the real exchange rate, and the overall macro-economy as a whole. The evidence presented here demonstrates that this model - without any nominal rigidities, can account for up to 89% of the relative volatility in the real exchange rate.
    Keywords: Distribution costs; Real exchange rate dynamics; Law of one price
    JEL: E32 F41 E37
    Date: 2006–09
  46. By: Vincent Labhard; Gabriel Sterne; Chris Young
    Abstract: The main objective of this paper is to offer a critique of the existing literature on the link between wealth and consumption, as captured by the long-run marginal propensity to consume from financial wealth (mpcw). The international evidence suggests that the mpcw varies considerably across countries, and new estimates are presented, based on structural vector autoregressions (VARs) for eleven OECD countries, which tend to confirm this finding. It is argued that there is little theoretical rationale for a wide cross-country dispersion of the mpcw, and that the cross-country differences in empirical estimates may in fact reflect difficulties in the measurement of wealth across countries and a failure to account for the shocks causing changes in both consumption and wealth. Using a suitable panel technique, it is found that the hypothesis of a common long-run mpcw across countries cannot be rejected consistently, and a plausible estimate is obtained for the cross-section of eleven OECD countries. This estimate is a little over 6%, broadly consistent with estimates used in a wide range of policy models.
  47. By: Mark J Manning; Matthew Willison
    Abstract: Banks often rely on collateralised intraday liquidity from the central bank in order to be able to effect payments in a real-time gross settlement (RTGS) payment system. If a bank is holding insufficient eligible collateral in a particular country, and therefore cannot obtain credit from the local central bank, it may have to delay payments. This constitutes a liquidity risk to the system. Furthermore, a bank operating in multiple systems may face a mismatch between the location of its collateral holdings and liquidity needs. In this paper, we examine the extent to which the liquidity risk arising from such a mismatch may be mitigated by allowing cross-border use of collateral. We develop a two-country, two-bank model in which risk-neutral banks minimise expected costs with respect to their collateral choice in each country. In our baseline model, in which each bank faces a liquidity need in only one country, we find that liquidity risk is indeed reduced by cross-border use of collateral. This result holds despite the fact that banks may find it optimal to economise on their total holdings of collateral. However, when we extend the model to allow for the possibility that a bank faces liquidity needs in both countries simultaneously, the total quantum of collateral held is important. Indeed, when a bank finds it optimal to reduce its total holdings, there may be an increase in liquidity risk in at least one country when simultaneous liquidity demands are realised.
  48. By: Lennard van Gelder; Ad Stokman
    Abstract: Formal testing and estimation of nonlinear relations require a substantial number of observations which are typically lacking in annual models. In this paper, a novel two-step procedure is introduced to model nonlinearities in yearly asset-price based leading indicator models for growth. In the first step, quarterly data are explored to test for the presence of regime switches, the identif ication of transition variables and estimation of the accompanying thresholds. In the second step, we implement the quarterly thresholds in the annual indicator models. Results for the US and the Netherlands show that the annual forecasts improve compared to the linear model, despite the poor out-of-sample performance of the quarterly regime switching models.
    Keywords: leading indicators; gdp growth; non-linear models.
    JEL: C53 E37
    Date: 2006–08
  49. By: Arthur Kennickell (Board of Governors of the Ferderal Reserve System); Annamaria Lusardi (Dartmouth College, Department of Economics)
    Abstract: We evaluate the importance of the precautionary saving motive by relying on a direct question about precautionary wealth from the 1995 and 1998 waves of the Survey of Consumer Finances. In this survey, a new question has been designed to elicit the amount of desired precautionary wealth. This allows us to assess the amount of precautionary accumulation and to overcome many of the problems of previous works on this topic. We find that a precautionary saving motive exists and affects virtually every type of household. However, precautionary savings account for only 8 percent of total wealth holdings. Even though this motive does not give rise to large amounts of wealth, particularly for young and middle-age households, it is particularly important for two groups: older households and business owners. Overall, we provide strong evidence that we need to take the precautionary saving motive into account when modeling saving behavior.
    Keywords: Risk, Buffer-stock Models of Saving, Old Cohorts Wealth, Business Owners Wealth
    JEL: D91 E21 C21
    Date: 2006–06–20
  50. By: Roger Bjørnstad and Kjartan Øren Kalstad (Statistics Norway)
    Abstract: Existing literature have focused on the influence of institutional factors on wage determination when explaining the prolonged cross-country differences in unemployment. Although coordination of wage bargaining probably affects entry barriers and competition in product markets as well, research on price determination has typically not considered such factors. In this paper, an imperfect competition model - where the price markup depends on coordination of wage bargaining (and relative prices) - is set up and estimated on a panel of 15 OECD-countries. We derive a hypothesis that coordination has two separate effects on prices, i.e. an indirect effect through its effect on wages and a direct effect on the price markup. The estimates show that when we correct for the effect of coordination on wages, consumer prices may be as much as 21 percent higher in countries like Italy, the Netherlands, Ireland, Austria and Norway as compared to Canada, the US and the UK, due to the effect of coordination on the price markup. Since coordination probably has a dampening effect on wages, this may explain why many researchers have been unable to find any clear effect of coordination on unemployment in reduced form analysis.
    Keywords: Imperfect competition model; price markup; labor market institutions; unemployment; panel data model.
    JEL: C23 E31 J51
    Date: 2006–09
  51. By: Erik Hurst (University of Chicago and NBER); Arthur Kennickell (Board of Governors of the Ferderal Reserve System); Annamaria Lusardi (Dartmouth College, Department of Economics); Francisco Torralba (University of Chicago)
    Abstract: In this paper, we show the pivotal role business owners play in estimating the importance of the precautionary saving motive. The fact that business owners hold higher-than-average wealth while facing higher income risk than other households leads to a correlation between wealth and labor income risk regardless of whether or not a precautionary motive is important. Using data from the Panel Study of Income Dynamics in the 1980s and the 1990s, we show that within separate samples of both business owners and non-business owners the size of precautionary savings with respect to labor income risk is modest and accounts for less than ten percent of total household wealth. However, pooling together these two groups leads to an artificially high estimate of the importance of precautionary savings. Data from the Survey of Consumer Finances further confirms that precautionary savings account for less than ten percent of total wealth for both business owners and non-business owners. Thus, while a precautionary saving motive exists and affects all households, it does not give rise to high amounts of wealth in the economy, particularly among those households who face the most volatile labor earnings.
    Keywords: Income Risk, Household Wealth, Entrepreneurship
    JEL: D91
    Date: 2006–06–20
  52. By: Annabelle Mourougane
    Abstract: The objective of this paper is to develop a short-term indicator-based model to predict quarterly GDP in Canada by efficiently exploiting all available monthly information. To this aim, monthly forecasting equations are estimated using the GDP series published every month by Statistics Canada as well as other monthly indicators. The procedures are automated and the model can be run whenever major monthly data are released, allowing the appropriate choice of the model according to the information set available. The most important gain from this procedure is for the current-quarter forecast when one or two months of GDP data are available, with all monthly models estimated in the paper outperforming a standard quarterly autoregressive model in terms of size of errors. The use of indicators also appears to improve forecasting performance, especially when an average of indicator-based models is used. Real-time forecasting performance of the average model appear to be good, with an apparent stability of the estimates from one update to the next, despite the extensive use of monthly data. The latter result should nonetheless be interpreted with caution and will need to be re-assessed when more data become available. <P>Prévoir le PIB mensuel au Canada <BR>L’objectif de cet article est de développer un modèle d’indicateurs conjoncturels pour prédire le PIB trimestriel au Canada en utilisant de manière efficace toute l’information mensuelle disponible. À cette fin, des équations mensuelles de prévisions de court terme sont estimées en utilisant la série de PIB publiée chaque mois par Statistique Canada et d’autres indicateurs conjoncturels. Les procédures ont été automatisées et le modèle peut être mis à jour chaque fois qu’une donnée importante est publiée, la spécification du modèle variant ainsi en fonctions de l’ensemble des données disponibles. Le gain le plus important de la procédure développée est obtenue pour les prévisions du trimestre courant quand un ou deux mois de données du PIB mensuel sont disponibles. Dans ce cas, tous les modèles mensuels estimés dans cet article ont des erreurs de prévisions inférieures à celle d’un modèle trimestriel autorégressif standard. L’utilisation d’indicateurs conjoncturels améliore les performances en termes de prévisions, en particulier lorsqu’une moyenne de tous les modèles d’indicateurs conjoncturels est utilisée. Les prévisions réalisées en temps réel en faisant la moyenne des différents modèles d’indicateurs conjoncturels se sont avérées de qualité satisfaisante, avec une stabilité apparente des estimations successives, malgré l’utilisation extensive de données mensuelles. Ces résultats doivent toutefois être interprétés avec prudence et devront être vérifiés quand plus de données seront disponibles.
    Keywords: Canada, Canada, indicator models, modèle d'indicateurs conjoncturels, monthly GDP, short-term forecasts, real-time estimations, PIB mensuel, prévisions de court terme, estimations en temps réel
    JEL: C52 C53 E37
    Date: 2006–09–13
  53. By: Andrew Benito; Haroon Mumtaz
    Abstract: Using a switching regression technique we provide unique evidence on three questions concerning the consumption behaviour of UK households. First, what percentage of households display excess sensitivity to income? Second, what affects the likelihood of being in that group? Third, is there a collateral channel from house prices to consumption? We find 20%-40% of households display excess sensitivity. These households may be liquidity constrained or saving for other precautionary reasons. This is found to be more likely for those without liquid assets, with negative home equity, the young, unmarried, non-white and the degree-educated. According to the 'collateral channel', house prices influence consumption by allowing households that would otherwise be liquidity constrained to borrow on more attractive terms. A key implication of that view is that capital gains on housing should influence the consumption of the liquidity constrained/precautionary saving households, but not other households. We test that implication for the first time and find direct evidence in support.
  54. By: Xia Su; Frank Riedel
    Abstract: This paper develops a general theory of irreversible investment of a single firm that chooses a dynamic capacity expansion plan in an uncertain environment. The model is set up free of any distributional or any parametric assumptions and hence encompasses all the existing models. As the first contribution, a general existence and uniqueness result is provided for the optimal investment policy. Based upon an alternative approach developed previously to dynamic programming problems, we derive the optimal base capacity policy such that the firm always keeps the capacity at or above the base capacity. The critical base capacity is explicitly constructed and characterized via a stochastic backward equation. This method allows qualitative insights into the nature of the optimal investment under irreversibility. It is demonstrated that the marginal profit is indeed equal to the user cost of capital in free intervals where investment occurs in an absolutely continuous way at strictly positive rates. However, the equality is maintained only in expectation on average in blocked intervals where no investment occurs. Whenever the uncertainty is generated by a diffusion, the investment is singular with respect to Lebesgue measure. In contrast to the deterministic and Brownian motion case where lump sum investment takes place only at time zero, the firm responses in general more frequently in jumps to shocks. Nevertheless, lump sum investments are shown to be possible only at information surprises which is defined as unpredictable stopping time or unanticipated information jump even at the predictable time. Furthermore, general monotone comparative statics results are derived for the relevant ingredients of the model. Finally, explicit solutions are derived for infinite time horizon, a separable operating profit function of Cobb--Douglas type and an exponential Levy process modelled economic shock.
    Keywords: Sequential Irreversible Investment, Capacity Expansion, Singular Control Problem, Levy Processes
    JEL: C61 D81 E22 G11
    Date: 2006–06
  55. By: Andersson, Fredrik W. (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper presents a closed form consumption function for an individual when he derives utility from both his current and previous consumption and from the consumption of his relevant others. I show that the traditional definition of an individual's marginal propensity to consume (MPC) is too narrow. With existing knowledge we would call for a broader definition of the MPC that I coin as the individual's total MPC, which also takes into account the consumption change of the relevant others, and this affects that total MPC is smaller than the traditional MPC. <p>
    Keywords: Consumption decision; consumption of relevant others; habit- formation behavior; marginal propensity to consume; excess smoothness
    JEL: D91 E21
    Date: 2006–09–22
  56. By: Carol C. Bertaut (Board of Governors of the Federal Reserve System); Michael Haliassos (University of Frankfurt and CFS)
    Abstract: We use data from several waves of the Survey of Consumer Finances to document credit and debit card ownership and use across US demographic groups. We then present recent theoretical and empirical contributions to the study of credit and debit card behavior. Utilization rates of credit lines and portfolios of card holders present several puzzles. Credit line increases initiated by banks lead households to restore previous utilization rates. High-interest credit card debt co-exists with substantial holdings of low-interest liquid assets and with accumulation of retirement assets. Although available evidence disputes ignorance of credit card terms by card holders, credit card rates do not respond to competition. There is a rising trend in bankruptcy and delinquency, partly attributable to an increased tendency of households to declare bankruptcy associated with reduced social stigma, ease of procedures, and financial incentives. Co-existence of credit card debt with retirement assets can be explained through self-control hyperbolic discounting. Strategic default motives contribute partly to observed co-existence of credit card debt with low-interest liquid assets. A framework of “accountant-shopper” households, in which a rational accountant tries to control an impulsive shopper, seems consistent with both types of co-existence and with observed utilization of credit lines.
    Keywords: Credit Cards, Debit Cards, Revolving Debt, Consumer Credit, Portfolios
    JEL: G11 E21
    Date: 2006–09–19
  57. By: Jørgen Juel Andersen (Department of Economics, Norwegian University of Science and Technology); Silje Aslaksen (Department of Economics, Norwegian University of Science and Technology)
    Abstract: Recent advances in the political economy literature suggests that constitutional arrangements determine a wide range of economic pol icy outcomes. In particular, it is argued that different forms of government (presidential versus parliamentary) induce more or less 'growth promoting' policies. However, effects on long run growth have proved harder to identify. We exploit the fact that natural resources are randomly distributed to identify differences in the long-term performance of economies with different constitutional forms. Existing theory suggests that the presence of vast natural resources should affect growth differently in countries with different constitutional designs. Empirically we find strong support for this hypothesis - constitutions indeed seem to matter for how natural resource abundance affects long run growth. In fact, the form of government matters more than democratic rule. We also find interaction effects of electoral rules (majority versus proportional voting) and resource abundance on growth, although these effects are less clear-cut and less robust.
    Keywords: Growth; Political economy; Constitution; Resource curse; Institutions.
    JEL: E61 F43 O13 P51 Q32
    Date: 2006–04–29
  58. By: Guerrero, Carlos (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: Utilizando como variables explicativas a la economía de los Estados Unidos, al capital externo, al tipo de cambio real, y a las elasticidades ingreso y precio de las exportaciones e importaciones, proponemos una explicación del funcionamiento de la economía mexicana bajo su nuevo modelo de desarrollo. El análisis enfatiza dos distintas estrategias de crecimiento, una instrumentada entre 1986 y 1994, y otra de 1995 a la fecha. El ejercicio cuantitativo simula adecuadamente la dinámica del PIB.
    Keywords: crecimiento económico, liberalización económica, modelos VAR
    JEL: E12 C50
    Date: 2006–06
  59. By: Luigi Guiso (University of Rome Tor Vergata, Ente Luigi Einaudi and CEPR); Tullio Jappelli (Università di Salerno, CSEF and CEPR)
    Abstract: Rational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of their own information, and thus attain a lower Sharpe ratio. We contrast the implications of the two models using a unique survey of customers of an Italian leading bank with portfolio data and measures of financial information. We find that the portfolio Sharpe ratio is negatively associated with investment in information. The negative correlation is stronger for men than women and for those who claim they know stocks well, arguably because these investors are more likely to be overconfident. We also show that investment in information is associated with more frequent trading, less delegation of portfolio decisions and less diversified portfolios. In each case, the effect of information is stronger for investors who, a priori, are suspected to be more overconfident.
    Keywords: Portfolio Choice, Rationality, Overconfidence, Behavioral Finance
    JEL: E2 D8 G1
    Date: 2006–10–01
  60. By: Guerrero, Carlos (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: Our aim is to quantify the GDP measurement bias derive from quality improvements in information technology sector. Using hedonic price indexes for IT goods, our results show that between 2000 and 2004 economic growth rate was approximately 2.18% on average per year –and not 1.60% as is established by the Mexican National Account System. The sensitivity of our results is explored applying IT price indexes of United States.
    Keywords: price index, quality change, IT sector, economic growth
    JEL: C43 E31 O47
    Date: 2006–04
  61. By: García Alba, Pascual (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: La experiencia mexicana es prueba irrefutable de que la apertura comercial no es suficiente para superar los problemas de una economía. Hay tareas igualmente importantes que deben ser acometidas al mismo tiempo. Estas pasan por la apertura al sector privado de actividades reservadas al Estado. Pero esa apertura debe ser acompañada de acciones complementarias. La etapa fácil de las reformas es la privatización, luego viene lo difícil: asegurar la competencia y el acceso abierto a esas actividades, en casos de monopolio natural, de externalidades, de economías de red; y que si se dejan sin atender, terminarán por propiciar abusos de poder de mercado, estancamiento (los monopolios frenan la producción para aumentar precios), y mermas en la distribución del ingreso (pues si los monopolios públicos simplemente se convierten en monopolios privados, muchos tendrán que pagar precios excesivos, en beneficio de unos cuantos).
    Keywords: crecimiento económico, competencia económica, México, monopolios, TLCAN
    JEL: E12 C50
    Date: 2006–06
  62. By: Paul Beaudry; Mark Doms; Ethan Lewis
    Abstract: This paper focuses on the bi-directional interaction between technology adoption and labor market conditions. We examine cross-city differences in PC-adoption, relative wages, and changes in relative wages over the period 1980-2000 to evaluate whether the patterns conform to the predictions of a neoclassical model of endogenous technology adoption. Our approach melds the literature on the effect of the relative supply of skilled labor on technology adoption to the often distinct literature on how technological change influences the relative demand for skilled labor. Our results support the idea that differences in technology use across cities and its effects on wages reflect an equilibrium response to local factor supply conditions. The model and data suggest that cities initially endowed with relatively abundant and cheap skilled labor adopted PCs more aggressively than cities with relatively expensive skilled labor, causing returns to skill to increase most in cities that adopted PCs most intensively. Our findings indicate that neo-classical models of endogenous technology adoption can be very useful for understanding where technological change arises and how it affects markets.
    JEL: E13 J31 O33
    Date: 2006–09
  63. By: Torstein Bye, Erling Holmøy and Kim Massey Heide (Statistics Norway)
    Abstract: National and international expansion of transmission networks and diminishing returns to scale in hydropower capacity expansion has raised the opportunity cost of electricity. The resulting changes in comparative advantage between industries have in many countries been counteracted by government assistance to energy intensive industries. A good example is the implicit electricity price subsidies offered to energy intensive manufacturing in Norway through the state owned power company Statkraft. We use firm data to assess the share of firms that will survive in the long run when these subsidies are removed, highlighting that large cost heterogeneity within the industries may imply diminishing returns to scale at the industry level. This feature is incorporated in a multisectoral CGE model, which is used to estimate the equilibrium adjustments of the industry structure and relative prices of removing the subsidies. Such a policy will lead to a less specialised industry structure and reduces gross trade. The positive public budget effect allows the government to cut other taxes, which fuels the real exchange rate depreciation necessary to meet the national budget constraint.
    Keywords: Industry policy; Comparative advantage; Structural change
    JEL: D21 E23 E27 E62 F13 F18 F41 F43
    Date: 2006–07

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