nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒10‒07
67 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Macroeconomic Effects of Non-Zero Trend Inflation By Robert Amano; Steve Ambler; Nooman Rebei
  2. Forecast errors and the macroeconomy — a non-linear relationship? By Ulrich Fritsche; Joerg Doepke
  3. The New Keynesian Model and the Long-run Vertical Phillips Curve: Does it hold for Germany? By Ulrich Fritsche; Jan Gottschalk
  4. Optimal Opportunistic Monetary Policy in a New-Keynesian Model By Marzo, Massimiliano; Strid, Ingvar; Zagaglia, Paolo
  5. Banks’ Riskiness Over the Business Cicle: a Panel Analysis on Italian Intermediaries By Mario Quagliariello
  6. Does ECB Communication Help in Predicting its Interest Rate Decisions? By David-Jan Jansen; Jakob de Haan
  7. Demand for money in transition: Evidence from China's dis-inflation By Mehrotra , Aaron
  8. Pursuing financial stability under an inflation-targeting regime By Q. Farooq Akram; Gunnar Bårdsen; Kjersti-Gro Lindquist
  9. Inflation in mainland China – modelling a roller coaster ride By Funke, Michael
  10. A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares? By Fidrmuc , Jarko; Korhonen, Iikka
  11. The Transitional Dynamics of Fiscal Policy in Small Open Economies By Ben J. Heijdra; Jenny Ligthart
  12. Ex-ante dynamics of real effects of monetary policy: Theory and evidence for Poland and Russia, 2001-2003 By Charemza , Wojciech W.; Makarov, Svetlana
  14. Non-Robust Dynamic Inferences from Macroeconometric Models: Bifurcation Stratification of Confidence Regions By William Barnett; Evgeniya Aleksandrovna Duzhak
  15. Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity By Gillman, Max; Otto, Glen
  16. Econometric Issues in Estimating User Cost Elasticity By Schaller, Huntley
  17. (S,s) Pricing: Does the Heterogeneity Wipe Out the Asymmetry on Micro Level? By Babutsidze, Zakaria
  18. Sticky Information Phillips Curves: European Evidence By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  19. Does the ECB respond to the stock market? By Wouter Botzen, W.J.; Marey, Philip S.
  20. Business Cycles in India By Pami Dua; Anirvan Banerji
  21. The inflationary consequences of real exchange rate targeting via accumulation of reserves By Sosunov, Kirill; Zamulin, Oleg
  22. The Dynamics of European Inflation Dynamics By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  23. A Non-linear "Inflation-Relative Prices Variability" Relationship: Evidence from Latin America By Mª Ángeles Caraballo Pou; Carlos Dabús; Diego Caramuta
  24. Has EMU had any Impact on the Degree of Wage Restraint? By Adam Posen; Daniel Popov Gould
  25. Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China By Mehrotra, Aaron
  26. Survey of Price-Setting Behaviour of Canadian Companies By David Amirault; Carolyn Kwan; Gordon Wilkinson
  27. The Term Structure of Interest Rates in the European Union By Minoas Koukouritakis; Leo Michelis
  28. The Relevance of Supply Shocks for Inflation: The Spanish Case By María Ángeles Caraballo; Carlos Usabiaga
  30. Financial Liberalization in a Small Open Economy By Jürgen von Hagen; Haiping Zhang
  31. Financial Development and Monetary Policy Efficiency By Stefan Krause; Felix Rioja
  32. Supply of Money By William Barnett
  33. Bank profitability and the business cycle By Ugo Albertazzi; Leonardo Gambacorta
  34. Divisia Monetary Index By William Barnett
  35. ¿No importa la cantidad de dinero?: “Inflation Targeting” y la teoría cuantitativa By Carlos Estaban Posada; Andrés Felipe García
  36. Liquidity provision in transition economy: the lessons from Russia By Dorbec , Anna
  37. Taking the temperature – forecasting GDP growth for mainland China By Curran , Declan; Funke, Michael
  38. Local currencies in European History : an analytical framework By Jérôme Blanc
  39. How bad is Divergence in the Euro-Zone? Lessons from the United States of America and Germany By Sebastian Dullien; Ulrich Fritsche
  41. A Spatio-Temporal Model of House Prices in the US By Sean Holly; M. Hashem Pesaran; Takashi Yamagata
  42. A note on exchange rate pass-through in CIS countries By Korhonen, Iikka; Wachtel, Paul
  43. Bank supervision Russian style: Rules versus enforcement and tacit objectives By Claeys, Sophie; Lanine , Gleb; Schoors, Koen
  44. FLAT TAX REFORMS IN THE U.S.: A BOON FOR THE INCOME POOR By Javier Díaz-Giménez; Josep Pijoan-Mas
  45. Choice of the substitution currency in Russia: How to explain the dollar's dominance? By Dorbec, Anna
  46. On the Theory and Practice of Fiscal Decentralization By Wallace E. Oates
  47. Growth expectations and banking system fragility in developing economies By Proto, Eugenio
  48. Education, Growth, and Redistribution in the Presence of Capital Flight By Debajyoti Chakrabarty
  49. Transmisiones gratuitas de riqueza "mortis causa" e "inter vivos"; análisis diferenciado de su comportamiento respecto al objetivo de la redistribución By Miguel Ángel Barberán Lahuerta
  50. Formal Contracts, Relational Contracts, and the Holdup Problem By Hideshi Itoh; Hodaka Morita
  51. On the Speed of Economic Reform: Tale of the Tortoise and the Hare By Merlevede , Bruno; Schoors, Koen
  52. Current Account Imbalances and Real Exchange Rates in the Euro Area By Arghyrou, Michael G; Chortareas, Georgios
  53. Intangible Capital, Corporate Valuation and Asset Pricing By Jean-Pierre DANTHINE; Xiangrong JIN
  55. Russian equity market linkages before and after the 1998 crisis: Evidence from time-varying and stochastic cointegration tests By M. Lucey , Brian; Voronkova, Svitlana
  56. How Reasonable is the ‘Reasonable’ Royalty Rate? Damage Rules and Probabilistic Intellectual Property Rights By Jay Pil Choi
  57. Do soccer teams have to be compensated for releasing star players to the national teams? By Men-Andri Benz; Egon Franck
  58. Francis Ysidro Edgeworth 1845-1926 By John Creedy
  59. Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter? By Havrylchyk , Olena; Jurzyk, Emilia
  60. Mod et balanceret arbejdsbegreb By Korsgaard, Steffen
  61. Ambiance Factors, Emotions, and Web User Behaviour:a Model Integrating and Affective and Symbolical Approach By Lambert, Brice
  62. Tail Conditional Expectation for vector-valued Risks By Imen Bentahar
  63. On optimal growth models whent the discount factor is near 1 or equal to 1 By Cuong Le Van; Lisa Morhaim
  64. The Ship of Fools - a society of selfish individuals By Petersen, Verner C.
  65. Impacto de la liberalización comercial de Marruecos y de la inmigración marroquí sobre las exportaciones de las CCAA españolas hacia Marruecos By José Vicente Blanes Cristóbal; Juliette Milgram Baleix
  66. Welfare Dependency among Danish Immigrants. By Blume, Kræn; Verner, Mette
  67. Stability and Manipulation in Representative Democracies By Sebastian Bervoets; Vincent Merlin

  1. By: Robert Amano; Steve Ambler; Nooman Rebei
    Abstract: The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled, but they are quantitatively much stronger under Calvo pricing.
    Keywords: Business fluctuations and cycles; Economic models; Inflation and prices; Inflation targets
    JEL: E24 E32
    Date: 2006
  2. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Joerg Doepke (Fachhochschule Merseburg)
    Abstract: The paper analyses reasons for departures from strong rationality of growth and inflation forecasts based on annual observations from 1963 to 2004. We rely on forecasts from the joint forecast of the so-called "six leading" forecasting institutions in Germany and argue that violations of the rationality hypothesis are due to relatively few large forecast errors. These large errors are shown - based on evidence from probit models - to correlate with macroeconomic fundamentals, especially on monetary factors. We test for a non-linear relation between forecast errors and macroeconomic fundamentals and find evidence for such a non-linearity for inflation forecasts.
    Keywords: forecast error evaluation, non-linearities, business cycles
    JEL: E32 E37 C52 C53
    Date: 2006–02
  3. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jan Gottschalk (International Monetary Fund)
    Abstract: New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without.
    Keywords: Cointegration, Vector error Correction Model, Unemployment, Phillips Curve, Hysteresis
    JEL: B22 C32 E24
    Date: 2006–04
  4. By: Marzo, Massimiliano (University of Bolonga and Johns Hopkins University); Strid, Ingvar (Stockholm School of Economics); Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: The present paper compares the performance in terms of second order accurate welfare of opportunistic non-linear Taylor rules and with respect to traditional linear Taylor rules. The macroeconomic model representing the benchmark for the analysis includes capital accumulation (with quadratic costs of adjustment), price rigidities (quadratic approach), along the standard New-Keynesian approach. The model is solved up to second order approximation and welfare is evaluated according to several criteria (conditional to the non-stochastic steady state, unconditional, and according to a linear ad hoc function). The results show that: (i) the opportunistic rule is a Pareto improvement with respect to other monetary policy rules traditionally considered in the literature; (ii) the computation of welfare costs reveals that the burden of adjustment is almost entirely on labor supply fluctuations; (iii) increasing the degree of price rigidities and the degree of competition in the final goods markets, makes the opportunistic rule even more preferable with respect to the alternatives. Business Cycle statistics for the model with opportunistic rule show a large volatility in labor supply, with a limited volatility for the nominal interest rate.
    Keywords: disinflation; monetary policy rules; nonlinear rules; Taylor rules
    JEL: E31 E61
    Date: 2006–09–20
  5. By: Mario Quagliariello (Banca d'Italia)
    Abstract: Supervisors and policy makers pay increasing attention to the possible procyclical nature of banks’ behaviour. Indeed, to guarantee macro and financial stability, it is important to understand whether, and to what extent, banks are affected by the macroeconomy and second round effects occur. This paper provides a comprehensive investigation of these issues using a large dataset of Italian intermediaries over the period 1985-2002. In particular, estimating both static and dynamic models, it investigates whether loan loss provisions and non-performing loans show a cyclical pattern. The estimated relations may be employed to carry out stress tests to assess the effects of macroeconomic shocks on banks’ balance sheets.
    Keywords: procyclicality, banks, loan loss provisions, non-performing loans, business cycle
    JEL: E30 E32 E44 G28
    Date: 2006–09
  6. By: David-Jan Jansen; Jakob de Haan
    Abstract: We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged.
    Keywords: ECB communication, interest rate decision, Taylor rule, ordered probit models
    JEL: E43 E52 E58
    Date: 2006
  7. By: Mehrotra , Aaron (BOFIT)
    Abstract: We examine money demand in the Chinese economy during a period characterized by significant disinflation and outright deflation, coupled with strong output growth. Our study establishes a stable money demand system for broad money M2. Inflation affects the adjustment of the system towards equilibrium, and shocks to broad money are found to lead to higher inflation in the context of an impulse response analysis. No evidence of non-linearity in money demand is found for the disinflationary period. The results provide support for the PBoC’s policy of specifying intermediate targets for money growth. Importantly, our results suggest that movements in the nominal effective exchange rate should be taken into account in a successful implementation of such a policy.
    Keywords: money demand; disinflation; deflation; China
    JEL: E31 E41
    Date: 2006–08–18
  8. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Gunnar Bårdsen (Norwegian University of Science and Technology and Norges Bank); Kjersti-Gro Lindquist (Norges Bank (Central Bank of Norway))
    Abstract: We evaluate two main views on pursuing financial stability within a flexible inflation targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output.
    Keywords: Monetary policy, financial stability
    JEL: C51 C52 C53 E47 E52
    Date: 2006–09–26
  9. By: Funke, Michael (Hamburg University)
    Abstract: The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy.
    Keywords: China; inflation; New Keynesian Phillips curve
    JEL: C22 E31
    Date: 2005–07–08
  10. By: Fidrmuc , Jarko (Oesterreichische Nationalbank); Korhonen, Iikka (BOFIT)
    Abstract: We review the literature on business-cycle correlation between the euro area and Central and Eastern European countries (CEECs), a topic that has gained attention in recent years as new EU entrants prepare for participation in the monetary union. Our meta-analysis suggests several CEECs already have comparably high correlation with the euro area business cycle. We also find that estimation methodologies can have a significant effect on correlation coefficients. While central bankers are more conservative in their estimates, we find no evidence of a geographical bias in the studies.
    Keywords: monetary union; optimum currency area; business cycles; meta-analysis
    JEL: C42 E32 F15 F31
    Date: 2004–12–30
  11. By: Ben J. Heijdra; Jenny Ligthart
    Abstract: The paper studies the dynamic macroeconomic effects of fiscal shocks of various duration (permanent and temporary) under different financing methods (lump-sum tax and government debt). To this end, we develop an intertemporal macroeconomic model for a small open economy, featuring monopolistic competition in the intermediate goods market, endogenous (intertemporal) labor supply, and finitely lived households. Endogenous labor supply is crucial in generating cyclical adjustment paths and yields faster convergence to the new steady state compared with exogenous labor supply. The quantitative output effects and transitional dynamics of fiscal policy differ substantially from those of an infinitely lived representative agent model. In addition, government debt is key in making the timing of shocks matter, thus yielding permanent output effects of temporary fiscal shocks.
    Keywords: fiscal policy, output multipliers, Blanchard-Yaari overlapping generations, monopolistic competition, small open economy
    JEL: E12 E63 L16
    Date: 2006
  12. By: Charemza , Wojciech W. (National Bank of Poland and University of Leicester, UK); Makarov, Svetlana (European University at St. Petersburg, Russia and National Bank of Poland)
    Abstract: The paper proposes a new indicator of expected real effects of a policy aimed at controlling inflation. The indicator, called real effect of inflation targeting (REIT), involves the comparison of expected and output-neutral inflation. It is shown that it can be derived from a simple two-dimensional vector autoregressive model of inflation and output gap. The microdynamics of such model are explained in terms of the foundations of Taylor-type staggered wage contracts. It is assumed that the monetary authority has some discretion regarding the timing of monetary actions. Here REIT can be used to set the optimal times for such actions, if the control of output is regarded as a secondary policy target. A simulation experiment illustrates the rationale of such a device for timing monetary measures. The REIT has been used by the Polish Monetary Policy Council since 2001 in it's inflation targeting and is thought to have contributed to a substantial decline in Polish inflation in 2003 and to an increase in output growth in 2004. A similar indicator computed for Russia as a means of monitoring monetary policy rather than as an active tool confirms that active expansionary policy in 2002 and 2003 might have contributed to Russian economic growth in 2004 and 2005, whereas similar policy measures for 2004 are likely to prove ineffective.
    Date: 2005–12–30
  13. By: Juan Manuel Julio Román
    Abstract: We distinguish two types of monetary policy rules: those depen- dent on particular models and loss functions and those robust to them. While dependent rules are useful for monetary policy implementation, robust rules are powerful tools to characterize the behavior of the monetary authority over a time span. Robust rules are estimated directly from observable data usually under the assumption that the targets, the nominal interest rate and the in°a- tion rate are stationary. During the transition from a moderately high level of in°ation to a stable, internationally accepted level ¼, the commitment with this goal imply that the in°ation rate, targets, nominal interest rates and nominal equilibrium interest rates are non-stationary. Acknowledging this later fact has important implications for the dynamic behavior of transmission mechanisms models during the transition. In this note we set up a robust monetary policy rule useful to characterize the behavior of a central bank during the transition to a stable in°ation level. As in previous research, estimation may be carried out by GMM on a nonlinear equation. We illustrate these results by charac- terizing the behavior of the Colombian central bank during the period of full in°ation targeting, that is after 2000. Our results agree with the prevailing policy in the sample span: A gentle in°ation stabilization program, a stronger one on the output gap, and a high degree of interest rate smoothing. Combin- ing these evidence with that of previous works our results suggests that the policy rule is time varying, a useful fact for policy implementation.
    Date: 2006–09–20
  14. By: William Barnett (Department of Economics, The University of Kansas); Evgeniya Aleksandrovna Duzhak (Department of Economics, The University of Kansas)
    Abstract: Grandmont (1985) found that the parameter space of the most classical dynamic models are stratified into an infinite number of subsets supporting an infinite number of different kinds of dynamics, from monotonic stability at one extreme to chaos at the other extreme, and with all forms of multiperiodic dynamics between. The econometric implications of Grandmont¡¯s findings are particularly important, if bifurcation boundaries cross the confidence regions surrounding parameter estimates in policy-relevant models. Stratification of a confidence region into bifurcated subsets seriously damages robustness of dynamical inferences. But Grandmont provided his result with a model in which all policies are Ricardian equivalent, no frictions exist, employment is always full, competition is perfect, and all solutions are Pareto optimal. Hence he was not able to reach conclusions about the policy relevance of his dramatic discovery. As a result, Barnett and He (1999, 2001, 2002) investigated a Keynesian structural model, and found results supporting Grandmont¡¯s conclusions within the parameter space of the Bergstrom-Wymer continuous-time dynamic macroeconometric model of the UK economy. That highly regarded, prototypical Keynesian model was produced from a system of second order differential equations. The model contains frictions through adjustment lags, displays reasonable dynamics fitting the UK economy¡¯s data, and is clearly policy relevant. Criticism of Keynesian structural models by the Lucas critique have motivated development of Euler equations models having policy-invariant deep parameters, which are invariant to policy rule changes. Hence, Barnett and He (2006) chose to continue the investigation of policy-relevant bifurcation by searching the parameter space of the best known of the Euler equations macroeconometric models: the Leeper and Sims (1994) model. The results further confirm Grandmont¡¯s views. Even more recently, interest in policy in some circles has moved to New Keynesian models. As a result, in this paper we explore bifurcation within the class of New Keynesian models. We develop the econometric theory needed to locate bifurcation boundaries in log-linearized New-Keynesian models with Taylor policy rules or inflation-targeting policy rules. Empirical implementation will be the subject of a future paper, in which we shall solve numerically for the location and properties of the bifurcation boundaries and their dependency upon policy-rule parameter settings. Central results needed in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the cases that we consider. We provide the proofs of those propositions in this paper. One surprising result from these proofs is the finding that a common setting of a parameter in the future-looking New-Keynesian model can put the model directly onto a Hopf bifurcation boundary. Beginning with Grandmont¡¯s findings with a classical model, we continue to follow the path from the Bergstrom-Wymer policy-relevant Keynesian model, then to the Euler equation macroeconomic models, and now to the New Keynesian models. So far, all of our results suggest that Barnett and He¡¯s initial findings with the path-breaking policy-relevant Bergstrom-Wymer model appear to be generic.
    Keywords: Bifurcation, inference, dynamic general equilibrium, Pareto optimality, Hopf bifurcation, Euler equations, New Keynesian macroeconometrics, Bergstrom-Wymer model.
    JEL: C14 C22 E37 E32
    Date: 2006–10
  15. By: Gillman, Max (Cardiff Business School); Otto, Glen
    Abstract: The paper presents and tests a theory of the demand for money that is derived from a general equilibrium, endogenous growth economy, which in effect combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induce agents to substitute away from money towards exchange credit. The implied interest elasticity of money demand rises with the inflation rate and financial innovation rather than being constant as is typical in shopping time specifications. Using quarterly data for the US and Australia, we find evidence of cointegration for the money demand model. This money demand stability results because of the extra series that capture financial innovation; included are robustness checks and comparison to a standard money demand specification.
    JEL: C23 E41 O42
    Date: 2006–09
  16. By: Schaller, Huntley (Department of Economics, Carleton University, Ottawa, Canada)
    Abstract: The user cost elasticity is a parameter of considerable importance in economics, with implications for the effects of budget deficits, tax-based savings incentives, monetary policy, corporate taxes, and tariffs and quotas on capital goods. This paper analyzes the econometric issues that account for differences in the estimated elasticity between the two existing papers that estimate the long-run elasticity on aggregate data. The preferred estimate that results from this analysis is substantially higher than most previous estimates. The empirical evidence suggests that, when adjustment frictions are important, long-run estimates of key parameters are less biased – and the details of the econometrics matter. In particular, DOLS estimates appear less biased than the alternatives considered here. The econometric issues that are analyzed in this paper have wide-ranging implications for research areas where adjustment frictions are important, including nominal price stickiness, habit formation, and sticky information models, among others.
    Keywords: User cost elasticity, Capital stock, Investment, Adjustment frictions, Cointegration and long-run econometrics
    JEL: E22 E44 H25
    Date: 2006–09
  17. By: Babutsidze, Zakaria (UNU-MERIT)
    Abstract: In this paper I present a model of asymmetric pricing. Firms here follow the (S,s) pricing rule with different lengths of tails. I use numerical simulations with four-state shocks to detect the link between the present asymmetry in pricing on the micro level and asymmetry in aggregate output movements. This paper investigates whether the asymmetry on firm level can result in asymmetry on the macro level and what is the role of heterogeneity of agents in the process. It looks at two kinds of asymmetries on the aggregate level: (i) asymmetric output responses to positive and negative monetary shocks and (ii) asymmetric responses to shocks during different phases of business cycle. The basic conclusion is that to some extent the first type of asymmetry can be attributed to the asymmetry of adjustment bands and that heterogeneity softens the effect, but the second type of asymmetry is the result of (S,s) pricing behaviour of firms, thus of heterogeneity itself.
    Keywords: (S,s) pricing, Asymmetry, Four-state shocks, Heterogeneity
    JEL: E31 E37
    Date: 2006
  18. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We estimate the sticky information Phillips curve model ofMankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.
    Keywords: Inflation expectations, sticky information, Phillips curve, inflation persistence
    JEL: D84 E31
    Date: 2006–10
  19. By: Wouter Botzen, W.J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Marey, Philip S.
    Abstract: The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the impact of adding stock prices to the standard Taylor rule of the ECB. The GMM estimations of a standard Taylor rule and augmented Taylor rules for the Euro area indicate that the ECB considered stock price developments in setting interest rates. Monetary policy of the ECB stabilized asset prices by raising interest rates when the stock market index was above average and lowering rates when the index was below average. Stock prices are not only relevant as instruments but also as arguments in the ECB policy rule. The empirical plausibility of the Taylor rule improves when it allows for a reaction to the stock market. These results challenge previous studies.
    Keywords: Taylor rules; Asset prices; ECB monetary policy
    JEL: E4 E5
    Date: 2006
  20. By: Pami Dua (Delhi School of Economics); Anirvan Banerji (Director of Research, Economic Cycle Research Institute)
    Abstract: This paper describes business and growth rate cycles with special reference to the Indian economy. It uses the classical NBER approach to determine the timing of recessions and expansions in the Indian economy, as well as the chronology of growth rate cycles, viz., the timing of speedups and slowdowns in economic growth. The reference chronology for business as well as growth rate cycles is determined on the basis of the consensus of key coincident indicators of the Indian economy, along with a composite coincident index comprised of those indicators, which tracks fluctuations in current economic activity. Finally, it describes the performance of the leading index – a composite index of leading economic indicators, designed to anticipate business cycle and growth rate cycle upturns and downturns.
    Keywords: business cycles; growth rate cycles; coincident index; leading index, Indian economy
    JEL: E32
    Date: 2006–08
  21. By: Sosunov, Kirill (Higher School of Economics, Moscow); Zamulin, Oleg (New Economic School)
    Abstract: The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves. We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare them to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-off between the steady state levels of the real exchange rate and inflation. After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency. Predicted inflation is found to match observed levels.
    Keywords: real exchange rate targeting; foreign exchange reserves; Dutch disease
    JEL: E52 F41
    Date: 2006–08–24
  22. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
    Keywords: Inflation expectations, sticky information, inflation persistence
    JEL: D84 E31
    Date: 2006–07
  23. By: Mª Ángeles Caraballo Pou (Universidad de Sevilla); Carlos Dabús (CONICET y Universidad Nacional del Sur); Diego Caramuta (Universidad Nacional del Sur)
    Abstract: This paper presents evidence on a non-linear "inflation-relative prices variability" relationship in three Latin American countries with very high inflation experiences: Argentina, Brazil and Peru. More precisely, and in contrast to results found in previous literature for similar countries, we find a non-concave relation at higher inflation regimes, i.e. when inflation rate surpasses certain threshold. This non-concavity is mainly explained by the unexpected component of inflation, which suggests that the uncertainty associated to very high inflation periods can be quite relevant to understand the non neutrality of inflation in extreme price instability.
    Keywords: Non-linearities, inflation regimes, relative prices variability, unexpected inflation.
    JEL: E0 E3
    Date: 2006
  24. By: Adam Posen; Daniel Popov Gould
    Abstract: We find in cross-sectional investigations that wage restraint is either unchanged or increased following EMU in the vast majority of countries. This contradicts the predictions of a widely-cited family of models of labor market bargaining. In those, Germany would have been expected to display the greatest decline in wage restraint post-EMU, and we find no indication of such a decline. The time-series evidence on Italy shows a significant increase in wage restraint after eurozone entry. This pattern is consistent with the models that emphasise the gains from monetary credibility. The eurozone increase in wage restraint is matched by the increase seen in the UK and Sweden after adopting inflation targeting, another means to credibility.
    Keywords: EMU, wage bargaining, monetary credibility, productivity
    JEL: E25 E58 J58
    Date: 2006
  25. By: Mehrotra, Aaron (BOFIT)
    Abstract: We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China. We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness. In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong. Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap. The importance of the interest rate channel is also found to be high in Japan and Hong Kong. In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments.
    Keywords: deflation; zero lower bound; SVAR
    JEL: E31 F41
    Date: 2005–12–30
  26. By: David Amirault; Carolyn Kwan; Gordon Wilkinson
    Abstract: In many mainstream macroeconomic models, sticky prices play an important role in explaining the effects of monetary policy on the economy. Various theories have been set forth to explain why prices are sticky. This study takes a firm-level survey approach, in a spirit similar to Blinder et al. (1998), to shed some light on the question of why prices are sticky. In particular, the Bank of Canada's regional offices surveyed 170 Canadian firms for their views on price dynamics. The authors find that the most important motivators of price changes are price changes by competitors, changes in domestic input costs, and changes in demand. Surprisingly, but consistent with the results reported in Bils and Klenow (2002), the survey evidence suggests that more than 50 per cent of firms change their prices more than four times a year. Moreover, the survey indicates that prices change more frequently than they did ten years ago, because of more intense competition and advances in information technology.
    Keywords: Inflation and prices; Transmission of monetary policy
    JEL: D40 E30 L11
    Date: 2006
  27. By: Minoas Koukouritakis (Department of Economics, University of Crete); Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates among the original 15 EU countries. By decomposing each term structure into its transitory and permanent components, we also examine whether the short or the long rate is weakly exogenous and thus determine the long run behavior of each term structure. The empirical results support the expectations theory of the term structure of interest rates for all the EU-15 countries. They also indicate that the long term interest rates are weakly exogenous for almost all the countries in our sample. Further, we investigate if the expectation theory of the term structure of interest rates is affected by other exogenous variables such as nominal and real exchange rates, inflation rates, inflation variance, money growth and its variance. Our evidence suggests that the inclusion of the other exogenous variables does not affect the expectations hypothesis for most of the EU-15 countries.
    Keywords: Term Structure, European Union, Cointegration, Common Trends, Weak Exogeneity
    JEL: E43 F15 F42
    Date: 2006–05
  28. By: María Ángeles Caraballo (Universidad de Sevilla); Carlos Usabiaga (Universidad de Pablo de Olavide)
    Abstract: This paper analyses the effects of supply shocks on the Spanish inflation rate. The methodology applied is based on Ball and Mankiw (1995). These authors assume that a good proxy for supply shocks is the third moment of the distribution of price changes, and show that nominal rigidities imply a positive relation between inflation and skewness, that is magnified by the variance of the distribution. The main data used are the monthly consumer price indexes of each region, disaggregated in 57 categories, for the 1993-2005 period. We estimate the relation between mean inflation and the higher moments of the distribution, including several control variables. The analysis has been carried out in two ways: firstly, each region is analysed separately and, secondly, we have used panel data techniques in order to test the homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to the nominal rigidities detected, and that the Spanish economy is vulnerable to supply shocks.
    Keywords: Inflation, nominal rigidities, skewness, supply shocks, Spanish regions
    JEL: E31
    Date: 2006
  29. By: Jose Ceron; Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper examines the experience of fourteen developed countries for which there are about thirty years of quarterly inflation-adjusted housing price data. Price dynamics is modelled as a combination of a country-specific component and a cyclical component is a two-state variable captures previously undocumented changes in the volatility of real housing price increases. These volatility phases are quite persistent (about six years,on average) and occur with about the same unconditional frequency over time. In line with previous studies, the mean of real housing price increases can be predicted to be larger when lagged values of those increases are large, real GDP growth is high, unemployment falls, and interest rates are low or have declined. Our findings have important implications for risk management in regard to residential property markets.
    Keywords: Housing prices, cycles, volatility, Markov switching.
    JEL: E32 G15 R31
    Date: 2006–01
  30. By: Jürgen von Hagen; Haiping Zhang
    Abstract: We analyze the long-run and short-run implications of financial liberalization in a small open economy. Our main results are as follows. First, whether financial deregulation in one sector can improve production efficiency may depend on financial regulation in other sectors. Second, financial liberalization may have opposite welfare implications to domestic agents with different productivity in the long run. Third, although some domestic agents lose in the long run, they benefit from financial liberalization during the transitional process of deregulation. Finally, a gradual implementation helps achieve a smooth transition.
    Keywords: financial frictions, financial liberalization, foreign borrowing, macroeconomic fluctuations, overshooting
    JEL: E32 E44 F34 F41
    Date: 2006
  31. By: Stefan Krause; Felix Rioja
    Abstract: We study how financial development is related to short run stabilization. Specifically, our objective is to derive monetary policy efficiency measures (PEMs) for 37 industrialized and developing countries, and analyze the impact that the size and depth of the banking sector and the capital sector have on policy performance. It is our contention that a more developed financial sector increases the scope of action of policy, resulting in improved policy performance. In our empirical analysis we use three financial development measures: private credit, liquid liabilities, and a financial aggregate index that comprises banking and stock market measures. Our findings suggest that more developed financial markets, controlling for central bank independence, inflation targeting and membership to the Economic and European Monetary Union, significantly contribute to explaining a more efficient monetary policy implementation.
    Date: 2006–09
  32. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This short paper is the encyclopedia entry on Supply of Money to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale).
    Keywords: monetary aggregation, index number theory, Divisia index, encyclopedia entry, aggregation theory, supply of money.
    JEL: E4 E5 C43 G12
  33. By: Ugo Albertazzi (Bank of Italy - Economic Research Department); Leonardo Gambacorta (Bank of Italy - Economic Research Department)
    Abstract: An important element of the macro-prudential analysis is the study of the link between business cycle fluctuations and banking sector profitability and how this link is affected by institutional and structural characteristics. This work estimates a set of equations for net interest income, non-interest income, operating costs, provisions, and profit before taxes, for banks in the main industrialized countries and evaluates the effects on banking profitability of shocks to both macroeconomic and financial factors. Distinguishing mainly the euro area from Anglo-Saxon countries, the analysis also identifies differences in the resilience of the respective banking systems and relates them to the characteristics of their financial structure.
    Keywords: bank profitability, economic cycle, macro-prudential analysis
    JEL: C53 G21
    Date: 2006–09
  34. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This short paper is the encyclopedia entry on Divisia Monetary Indexes to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale).
    Keywords: monetary aggregation, index number theory, Divisia index, encyclopedia entry, aggregation theory.
    JEL: E4 E5 C43 G12
  35. By: Carlos Estaban Posada; Andrés Felipe García
    Abstract: La literatura referente a los modelos de inflación y política monetaria anti-inflacionaria del tipo denominado “Inflation Targeting” (IT) ha reforzado una opinión popular: que la inflación tiene poca o ninguna relación con el aumento de la cantidad de dinero. Esta opinión es contraria a una de las más viejas teorías económicas: la teoría cuantitativa del dinero (TCD). En las siguientes páginas se establece la relación entre un modelo básico de IT y la TCD, y se aclaran un caso de irrelevancia de la cantidad de dinero: el de la “trampa de liquidez” o caso “keynesiano-radical”. Este caso se contrapone a los otros casos, que sí son compatibles con la TCD. Por último, se reporta evidencia favorable a la hipótesis de pertinencia de la TCD para el caso colombiano reciente (1986: I – 2005:III)
    Date: 2006–09–20
  36. By: Dorbec , Anna (Université Paris X Nanterre)
    Abstract: This paper provides micro and macroeconomic analysis of the economic role of banks in the Russian economy. Using a large panel containing Russian enterprises’ balance sheet and income statement data, we evaluate the determinants of bank financing. Econometric model put out the existence of liquidity providing activity of Russian banks. Even though the overall liquidity provision system suffers from certain deficiencies, we demonstrate its importance in the macroeconomic context, using time series econometric analysis. Bank credit appears to be a significant factor in explaining the non-payment dynamics and use of informal financing. Finally, the uncertainty concept helps us to understand the reasons for a limitation of Russian banks in their liquidity providing role.
    Keywords: liquidity; finance; transition; Russia; uncertainty; banks; inter-enterprise credit
    JEL: D80 G21
    Date: 2004–11–01
  37. By: Curran , Declan; Funke, Michael (Hamburg University, Germany)
    Abstract: We present a new composite leading indicator of economic activity in mainland China, es-timated using a dynamic factor model. Our leading indicator is constructed from three se-ries: exports, a real estate climate index, and the Shanghai Stock Exchange index. These series are found to share a common, unobservable element from which our indicator can be identified. This indicator is then incorporated into out-of-sample one-step-ahead forecasts of Chinese GDP growth. Recursive out-of-sample accuracy tests indicate that the small-scale factor model approach leads to a successful representation of the sample data and provides an appropriate tool for forecasting Chinese business conditions.
    Keywords: forecasting; China; leading indicator; factor model; growth cycles
    JEL: C32 C52 E32 E37
    Date: 2006–06–02
  38. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Although today's main organisation principle of monetary spaces is the nation-state's one, everyone can see it is not totally the case because of the existence and the development of local and social currencies and other sorts of parallel currencies. European history gives very useful lessons on this matter. One can distinguish, indeed, three historical periods : firstly, an “old regime” with a great diversity of money, including forms of local currencies ; secondly, the building of nation states and, consequently, what Benjamin Cohen (1998) calls a “westphalian model of geography of money”, centred on the principle of one nation, one money, excluding local currencies different from national currencies ; thirdly, the contesting of such a regime of monetary sovereignty. European history gives, then, evidences that the contemporary dynamics of local currencies is not a new one, but that it is undoubtedly the most important of the third period. <br />European history leads however to make significant differences between forms of monetary localisms. Those differences are analyzed within the following framework. First, we have to make a distinction between the nature of issuers : public authorities, groups of citizens, businesses and banks. Monetary localisms before the Westphalian era were mainly organized by public authorities (lords) and religious orders, whereas today's monetary localisms mainly come from citizens and businesses (except from emergency issues and secessions logics). Second, we have to make a distinction between the rationales for monetary localisms : sovereignty, seignoriage and financing needs, protecting spaces, revitalizing spaces, transforming the nature of exchanges and money. Monetary localisms before the Westphalian era were mainly organized in order to capture money and dynamize spaces, whereas one can find the four rationales in today's monetary localisms. <br />The paper, after presenting the analytical framework, concentrates on three sorts of local currencies : local currencies as a result of necessities, local currencies issued by banks and local currencies aiming to change money. It concludes on the differences between local currencies in European history and contemporary local currencies.
    Keywords: Local currencies;monetary history;Europe;Owen;Gesell;Banks of issue
    Date: 2006–10–03
  39. By: Sebastian Dullien (Financial Times Deutschland); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin)
    Abstract: This paper compares relative unit labour cost developments in the countries of the euro-area since the beginning of the European Monetary Union (EMU) both with historical developments and with intra-regional unit labour cost developments in the United States of America and Germany. To this end, unit labour cost indices for the US states and census regions from 1977 to 1997 as well as for the German Länder from 1970 to 2004 have been constructed. Against this benchmark, it is found that unit labour cost increases since 1999 in Portugal and to a lesser extent in Spain and Greece can be judged as excessive, pointing at labour market rigidities which might impair smooth working of EMU in the future.
    Keywords: Unit labor costs, divergence, convergence, Euro-zone, inflation
    JEL: F2 F4 N2
    Date: 2006–10
  40. By: Pami Dua (Delhi School of Economics); Partha Sen (Delhi School of Economics)
    Abstract: This paper examines the relationship between the real exchange rate, level of capital flows, volatility of the flows, fiscal and monetary policy indicators and the current account surplus for the Indian economy for the period 1993Q2 to 2004Q1. The estimations indicate that the variables are cointegrated and each granger causes the real exchange rate. The generalized variance decompositions show that determinants of the real exchange rate, in descending order of importance include net capital inflows and their volatility (jointly), government expenditure, current account surplus and the money supply. A preliminary analysis suggests that a similar analysis can be performed for the foreign exchange reserves held by the RBI.
    Keywords: real exchange rate, capital flows, foreign exchange reserves, cointegration,
    JEL: C32 F31 F41
    Date: 2006–08
  41. By: Sean Holly; M. Hashem Pesaran; Takashi Yamagata
    Abstract: In this paper we model the dynamic adjustment of real house prices using data at the level of US States. We consider interactions between housing markets by examining the extent to which real house prices at the State level are driven by fundamentals such as real income, as well as by common shocks, and determine the speed of adjustment of house prices to macroeconomic and local disturbances. We take explicit account of both cross sectional dependence and heterogeneity. This allows us to find a cointegrating relationship between house prices and incomes and to identify a small role for real interest rates. Using this model we examine the role of spatial factors, in particular the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors.
    Keywords: House Price, Cross Sectional Dependence, Spatial Dependence
    JEL: C21 C23
    Date: 2006–09
  42. By: Korhonen, Iikka (BOFIT); Wachtel, Paul (Stern School of Business, New York University)
    Abstract: We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant. The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.
    Keywords: exchange rate pass-through; inflation; exchange rate regime; transition countries
    JEL: E31 E42 F31 F42
    Date: 2005–06–10
  43. By: Claeys, Sophie (CERISE); Lanine , Gleb (CERISE); Schoors, Koen (CERISE)
    Abstract: We focus on the conflict between two central bank objectives – individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) during 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately, and banks that are active on the interbank market enjoy protection from license withdrawal, which suggests a tacit concern for systemic stability. The CBR is also found reluctant to with-draw licenses from banks that violate the individual's deposits-to-capital ratio as this conflicts with the tacit CBR objective to secure depositor confidence and systemic stability.
    Keywords: bank supervision; bank crisis; Russia
    JEL: E50 G20 N20
    Date: 2005–09–05
  44. By: Javier Díaz-Giménez; Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In this article we queantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4 percent increase in steady-state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6 percent reduction is steady-state output and a distribution of aftertax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17 percent of consumption, and in the more progessive flat-tax economy it increases by 0.45 percent of consumption. In both flat-tax refoms the income poor pay less income taxes and obtain sizeable welfare gains.
    Keywords: Flat-tax reforms, efficiency, inequality, earnings distribution, income distributions, wealth distribution.
    JEL: D31 E62 H23
    Date: 2006–07
  45. By: Dorbec, Anna (University of Paris X Nanterre)
    Abstract: The analysis of external economic relations of Russia reveals a paradox: while Europe is the main trade and direct investment partner of Russia, this is far from being the case concerning its currency’s role in Russia's financial activities. The dollar is much preferred by economic agents for financial operations. This paper proposes a disaggregated approach to this issue by separating the ‘means of exchange’ and ‘store of value’ components of the use of substitution currencies. The influence of three main factors (inertial component, real trade relations and exchange rate fluctuations) on the relative demand for the euro by Russian economic agents is tested for the period 1999-2004. Finally we suggest a theoretical interpretation of the results based on the conventions theory approach.
    Keywords: dollarisation; euroisation; transition; Russia; currency substitution; asset substitution; network externalities; hysteresis; conventions
    JEL: E41 E52 F31 F41 G20
    Date: 2005–12–01
  46. By: Wallace E. Oates (Department of Economics, University of Maryland, 3105 Tydings Hall College Park, MD 20742)
    Date: 2006–09
  47. By: Proto, Eugenio (University of Warwick, Department of Economics)
    Abstract: The likelihood of a banking crisis appears to be higher in fast-developing countries. An explanation is provided in a Diamond and Dybvig framework, where banks are vehicles of consumption-smoothing, offering insurance against shocks to the consumption path of consumers. The theoretical model shows that the higher consumer growth expectations, the higher the optimal level of illiquidity insurance — even if it implies higher exposure bank runs. Empirical evidence supports this result and suggests that the effect of deposit interest rates on the probability of crisis is stronger after a period of high, uniterrupted growth. Policies of providing bail-outs or deposit insurance are demonstrated to be efficient even when they increase the fragility of the banking system.
    Date: 2005–11–07
  48. By: Debajyoti Chakrabarty
    Abstract: We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive politics in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital accumulation suggesting that the wisdom does not apply. In an augmented version of the model, we show that a modern sector, characterized by positive levels of investment in education, may not exist unless capital controls are sufficiently high. In particular, higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. These results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.
    Keywords: Capital Flight, Economic Growth, Human Capital, Income Distribution, Long Term Capital Movements, Optimal Taxation
    JEL: D33 E62 F21 O19 O40
    Date: 2006–09
  49. By: Miguel Ángel Barberán Lahuerta (Universidad de Zaragoza)
    Abstract: La imposición sobre las transmisiones gratuitas de riqueza ha venido aplicando un tratamiento muy similar, especialmente en lo referente a la tarifa del impuesto, a las transmisiones "mortis causa" y aquellas otras realizadas "inter vivos". No obstante, las particularidades que concurren en cada caso son muy diferentes. Esto es así, no sólo porque dependiendo de los casos podemos asistir a la transferencia global de un patrimonio o de algunos de sus elementos aislados, sino por las distintas posibilidades de planificación fiscal que pueden tener lugar en una u otra modalidad. Pues bien, en torno a estas cuestiones versa el contenido de este trabajo. En él pretendemos analizar un aspecto muy concreto de la funcionalidad real del ISSD, como es valorar las diferencias que respecto a la redistribución efectiva de la riqueza transmitida tienen lugar entre transmisiones hereditarias y donaciones. Para ello utilizaremos un panel de datos propio, elaborado a partir expedientes que se han gestionado en la Oficina Liquidadora de Tributos de la Diputación General de Aragón en la ciudad de Zaragoza y, también, una metodología basada en índices de progresividad globales y estructurales. Las conclusiones obtenidas serán muy oportunas en el debate sobre un impuesto que se encuentran en un continúo proceso de reforma y cuyo futuro es hoy incierto, dado que diversos sectores de la sociedad han propuesto, abiertamente, la posibilidad de su supresión.
    Keywords: Sistema fiscal óptimo, financiación territorial, neutralidad fiscal, flexibilidad, patrimonio familiar, redistribución de la riqueza
    JEL: H21 H23
    Date: 2006
  50. By: Hideshi Itoh; Hodaka Morita
    Abstract: We study the holdup problem in repeated transactions between a seller and a buyer such that the seller makes relation-specific investments in each period. We show that where, under spot transaction, formal contracts have no value because of the cooperative nature of investment, writing a simple fixed-price contract can be valuable under repeated transactions: There is a range of parameter values in which a higher investment can be implemented only if a formal price contract is written and combined with a relational contract. We also show that there are cases in which not writing a formal contract but entirely relying on a relational contract increases the total surplus of the buyer and the seller. The key condition is how the investment affects the renegotiation price in general, and the alternative-use value in particular.
    Keywords: holdup problem, formal contract, relational contract, cooperative investment, fixed-price contract, relation-specific investment, renegotiation, repeated transactions, long-term relationships
    JEL: D23 L14 L22 L24
    Date: 2006
  51. By: Merlevede , Bruno (CERISE); Schoors, Koen (CERISE)
    Abstract: We analyse how the choice of reform speed and economic growth affect one another. We estimate a system of three equations where economic growth, economic reform and FDI are jointly determined. New reforms affect economic growth negatively, whereas the level of past reform leads to higher growth and attracts FDI. This means that the immediate adjustment cost of new reforms is counterbalanced by a future increase in FDI inflows and higher future growth through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model, we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. The case for gradualism gains strength if policymakers are short-sighted, but weakens if voters are myopic.
    Keywords: policy reform; gradualism; big bang; FDI; economic growth
    JEL: O57 P21 P26 P27
    Date: 2005–09–05
  52. By: Arghyrou, Michael G (Cardiff Business School); Chortareas, Georgios
    Abstract: Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU. After controlling for the effects of income growth, we find the relationship between real exchange rates and the current account to be substantial in size and subject to non-linear effects. Overall, we argue that real exchange rates can offer further insights, beyond the effects of the income catch-up process, relevant to current account determination in the EMU.
    Keywords: current account; real exchange rate; EMU; nonlinearities
    JEL: C51 C52 F31 F32 F41
    Date: 2006–09
  53. By: Jean-Pierre DANTHINE; Xiangrong JIN
    Abstract: Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.
    Keywords: intangible capital; corporate valuation; stock return volatility
    JEL: D24 D50 G12
    Date: 2006–09
  54. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In recent years, some papers hav tried to bridge the gap between the two main approaches in credit risk modelling: structural and reduced form models. Based on incomplete information versions of standard structural models, they are able to obtain reduced form models in which the intensity of default is not given exogenously but determined endogenously within the model and it is a function of the firm's characteristics and the level of informtion that investors posses. They key element to link both approaches lies in the model's information assumptions. Using a specification of a structural model where investors do not have complete information about the dynamics of the processes which trigger the firm's default, these models derive a cumulative rate of default consistent with a reduced form model. This paper pretends to be an introduction to this literature, providing some of basic insights of the modelling structure and the main conclusion and results.
    Date: 2006–04
  55. By: M. Lucey , Brian (BOFIT); Voronkova, Svitlana (BOFIT)
    Abstract: This paper examines the relationships between the Russian and other Central European (CE) and developed countries’ equity markets over the 1995-2004 period. Along with the traditional Johansen and Juselius (1990) multivariate cointegration tests, we apply novel cointegration approaches, including Gregory-Hansen (1996) test, which allows for a structural break in the relationships, as well as the newly developed stochastic cointegration test by Harris, McCabe and Leybourne (2002) and the non-parametric cointegration method of Breitung (2002). The latter tests point to a significant agreement that in the aftermath of the Russian crisis of 1998 there was an increasing degree of comovements of the Russian market with other developed markets, but not with CE developing markets. This result is further confirmed by dynamic conditional correlation modeling, which allows us to investigate graphically the evolution of comovements in the system. The results of detailed cointegration analysis suggest a. that the time-varying nature of equity markets comovements should be explicitly accounted for while modeling long run relationships b. that there is a decline in diversification benefits for foreign investors seeking to invest in Russian equities over the long horizon.
    Keywords: Stock Market Integration; CEE Stock markets; Russian Stock Market; Cointegration
    JEL: G10 G15
    Date: 2005–10–20
  56. By: Jay Pil Choi
    Abstract: This paper investigates how different damage rules in patent infringement cases shape competition when intellectual property rights are probabilistic. I develop a simple model of oligopolistic competition to compare two main liability doctrines that have been used in the US to assess infringement damages – the unjust enrichment rule and the lost profit rule. It also points out the logical inconsistency in the concept of the “reasonable royalty rates” when intellectual property rights are not ironclad.
    Keywords: probabilistic intellectual property rights, damage rules, reasonable royalty rates
    JEL: D80 K40 L10 L40 O30
    Date: 2006
  57. By: Men-Andri Benz; Egon Franck (Institute for Strategy and Business Economics, University of Zurich; Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Despite its long tradition the practice of releasing star players for association matches without compensating the clubs has become increasingly controversial. The clubs claim that their players play in the tournaments organized by the associations while earning club money. However, the clubs do not receive any shares of the relevant revenues. Additionally they claim that they have to bear costs that arise from fatigued or injured players. The clubs want to be compensated for these (external) costs arising from association games. The purpose of this paper is to evaluate the extent to which it is necessary to compensate clubs for the releasing of star players to the national team. Using a contract theory based model one can show that compensation may not be necessary, since clubs are able to write efficient contracts with their player. Externalities do not occur under the assumption of efficient contracting.
    Keywords: Soccer, Long-Term Contracts, Reputation
    JEL: D83 D62 J31 J44
    Date: 2005
  58. By: John Creedy
    Abstract: no abstract
    Keywords: Edgeworth
    Date: 2006
  59. By: Havrylchyk , Olena; Jurzyk, Emilia (K.U. Leuven, Belqium)
    Abstract: Using data for 265 banks in Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and for-eign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in CEECs also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing de-terminants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.
    Keywords: foreign banks; bank profits; multinational banking; transition economies
    JEL: F36 G15 G21
    Date: 2006–04–25
  60. By: Korsgaard, Steffen (Department of Management, Aarhus School of Business)
    Abstract: No abstract
    Keywords: No keywords;
    Date: 2006–06–01
  61. By: Lambert, Brice (ESSEC Business School)
    Abstract: The present paper addresses the efficiency of manipulating music in a merchant website, and it:- proposes a review of the literature on ambiance factors in advertising & shopping behaviour, capitalizing on it to:- propose a theoretical framework that enhances our understanding of the web-user behaviour in specific ambiance factors such as music, with a specific attention devoted to his loyalty, & affiliation behaviour;- a model of is proposed.
    Keywords: Ambiance Factors; Emotions; Fit & Symbolism; On-line Behaviour
    JEL: M31 M37
    Date: 2006–09
  62. By: Imen Bentahar
    Abstract: In his paper we introduce a quantile-based risk measure for multivariate financial positions "the vector-valued Tail-conditional-expectation (TCE)". We adopt the framework proposed by Jouini, Meddeb, and Touzi [9] to deal with multi-assets portfolios when one accounts for frictions in the financial market. In this framework, the space of risks formed by essentially bounded random vectors, is endowed with some partial vector preorder >= accounting for market frictions. In a first step we provide a definition for quantiles of vector-valued risks which is compatible with the preorder >=. The TCE is then introduced as a natural extension of the "classical" real-valued tail-conditional-expectation. Our main result states that for continuous distributions TCE is equal to a coherent vector-valued risk measure. We also provide a numerical algorithm for computing vector-valued quantiles and TCE.
    Keywords: Risk measures, vector-valued risk measures, coherent risk-measures, quantiles, tail-conditional-expectation
    JEL: C60 G13
    Date: 2006–04
  63. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Lisa Morhaim (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: The aim of this paper is to fill the gap between intertemporal growth models when the discount factor beta is close to one and when it equals one.<br />We show that the value function and the policy function are continuous with respect both to the discount factor and the initial stock of capital<br />x0. We prove that the optimal policy g(x0) is differentiable and that Dg(x0) is continuous with respect to (beta, x0). As a by-product, a global<br />turnpike result is proved.
    Keywords: Optimal growth, discount factor, value function, policy function,differentiability, turnpike.
    Date: 2006–09–27
  64. By: Petersen, Verner C. (Department of Management, Aarhus School of Business)
    Abstract: No abstract
    Keywords: No keywords;
    Date: 2006–09–01
  65. By: José Vicente Blanes Cristóbal (Universidad Pablo de Olavide); Juliette Milgram Baleix (Universidad de Granada)
    Abstract: En este trabajo hemos analizado los efectos de la progresiva implantación de un acuerdo de libre comercio entre Marruecos y la UE sobre las exportaciones de las CCAA españolas a ese país. También nos interesamos por el efecto de la inmigración marroquí en España sobre dichos intercambios comerciales. Para ello, en primer lugar, hemos estimado mediante una ecuación de gravedad los determinantes de esas exportaciones con datos del periodo 1999-2002 desagregados por CCAA y ramas de actividad. Como principal aportación metodológica, nuestro modelo incluye los aranceles aplicados por Marruecos sobre los bienes procedentes de la UE desagregados por ramas de actividad. Ello no sólo nos permite una mejor estimación si no también realizar, a continuación, simulaciones del desmantelamiento arancelario teniendo en cuenta el distinto ritmo y cuantía en la reducción de los aranceles para cada rama de actividad y año.
    Keywords: International trade, Free trade agreements, Economic integration, Commercial Policy, Migration, Spain, CCAA, Morocco, European Union.
    JEL: F10 F13 F14 F15 F17 F22
    Date: 2006
  66. By: Blume, Kræn (AKF); Verner, Mette (Department of Economics, Aarhus School of Business)
    Abstract: In this paper, we investigate determinants of the welfare dependency among immigrants in an assimilation framework. The duration of stay is a major determinant of welfare dependency. Also, assimilation patterns vary substantially across immigrants from developed and less devel-oped countries, respectively. The late arriving immigrants are relatively more dependent on transfers, explaining part of the general increase in welfare dependency during the latest years. This is partly attributed to the large variation in qualifications across cohorts of immigrants. Fur-thermore, the business cycle effects of immigrants appear to be considerably larger than for na-tives.
    Keywords: Welfare dependency; transfers; immigrants; assimilation; two-limit tobit
    JEL: C23 C33 D31 I21
    Date: 2006–09–27
  67. By: Sebastian Bervoets; Vincent Merlin
    Abstract: This paper is devoted to the analysis of all constitutions equipped with electoral systems involving two step procedures. First, one candidate is elected in every jurisdiction by the electors in that jurisdiction, according to some aggregation procedure. Second, another aggregation procedure collects the names of the jurisdictional winners in order to designate the final winner. It appears that whenever individuals are allowed to change jurisdiction when casting their ballot, they are able to manipulate the result of the election except in very few cases. When imposing a paretian condition on every jurisdiction?s voting rule, it is shown that, in the case of any finite number of candidates, any two steps voting rule that is not manipulable by movement of the electors necessarily gives to every voter the power of overruling the unanimity on its own. A characterization of the set of these rules is next provided in the case of two candidates.
    Keywords: Gerrymandering, manipulation, two-tiers voting systems
    JEL: D71 D72
    Date: 2006–09–24

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