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on Macroeconomics |
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Issue of 2006‒10‒14
eighty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Saki Bigio (New York University and Central Bank of Peru); Jorge Salas (Central Bank of Peru) |
| Abstract: | We study whether monetary policy and real exchange rate shocks have non-linear effects on output and inflation in a partially dollarized economy such as Peru. For this purpose, we use a Smooth Transition Vector Autoregression methodology and then report impulse-response functions for shocks of different sign and size, and conditional to the initial position in the business cycle. We find evidence of non-linearities which imply a convex aggregate supply curve: in particular, monetary policy is more likely to affect the output during recessions than in booms, while the opposite is found for the inflation. Regarding real exchange rate shocks, we show that depreciations have greater negative effects during economic downturns and a higher pass-through rate in the positive side of the business cycle. |
| Keywords: | Non-linearities, Monetary Policy, Smooth Transition VAR, Dollarization |
| JEL: | E32 E52 E58 C32 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2006-008&r=mac |
| By: | Tatiana Kirsanova; Simon Wren-Lewis |
| Abstract: | We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However this fiscal stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare. |
| Keywords: | Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation |
| JEL: | E52 E61 E63 F41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0609&r=mac |
| By: | Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser |
| Abstract: | This paper presents a New Keynesian model that dwells on the role of banks in the cost channel of monetary policy. Banks extend loans to firms in an environment of monopolistic competition by setting the loan rate according to a Calvo-type staggered price setting approach, which means that the adjustment of the aggregate loan rate to a monetary policy shock is sticky. We estimate the model for the Euro area by adopting a minimum distance approach. Our findings exhibit that, first, frictions on the loan market influence the propagation of monetary policy shocks as the pass-through of a change in the money market rate to the loan rate is incomplete, and, second, the cost channel is operating, but the effect is weak since inflation is driven by real unit labor costs rather than the loan rate. Our main conclusion is that the strength of the cost channel is mitigated as banks shelter firms from monetary policy shocks by smoothing lending rates. |
| Keywords: | bank behavior, cost channel, minimum distance estimation |
| JEL: | E44 E52 E58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1813&r=mac |
| By: | Peter N. Smith; Mike Wickens |
| Abstract: | In this paper we examine whether or not the NKM is .t for the purpose of providing a suitable basis for the conduct of monetary policy through inflation targeting. We focus on a number of issues: the dynamic response of inflation to interest rates in a theoretical NKM under discretion and commitment to a Taylor rule; the implications for the specification of the New Keynesian Phillips equation of alternative models of imperfect competition in a closed and an open economy; the general equilibrium underpinnings of the IS function; the extent of empirical support for the NKM; what the empirical evidence on the NKM implies for inflation targeting. Our findings reveal a number of problems with the NKM. Theoretically, the NKM predicts that a discretionary increase in interest rates will increase inflation, not reduce it. This is supported by our VAR evidence. Estimates of the NKM indicate a negative relation between interest rates and inflation, but the signs in the structural equations are inconsistent with the theory. We conclude that the standard specifications of the inflation and output equations are inadequate and that these equations should be embedded in a larger model. |
| Keywords: | Inflation targeting, monetary policy, New Keynesian model |
| JEL: | E3 E5 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0610&r=mac |
| By: | Roland Meeks (Nuffield College, University of Oxford) |
| Abstract: | This paper asks how well a general equilibrium agency cost model describes the dynamic relationship between credit variables and the business cycle. A Bayesian VAR is used to obtain probability intervals for empirical correlations. The agency cost model is found to predict the leading, countercyclical correlation of spreads with output when shocks arising from the credit market contribute to output fluctuations. The contribution of technology shocks is held at conventional RBC levels. Sensitivity analysis shows that moderate prior calibration uncertainty leads to significant dispersion in predictedcorrelations. Most predictive uncertainty arises from a single parameter. |
| Keywords: | agency costs, credit cycles, calibration, shocks. |
| JEL: | C11 C32 E32 E37 E44 |
| Date: | 2006–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0611&r=mac |
| By: | Michael D. Bordo; David C. Wheelock |
| Abstract: | This paper studies the macroeconomic conditions and policy environments under which stock market booms occurred among ten developed countries during the 20th Century. We find that booms tended to occur during periods of above-average growth of real output, and below-average and falling inflation. We also find that booms often ended within a few months of an increase in inflation and monetary policy tightening. The evidence suggests that booms reflect both real macroeconomic phenomena and monetary policy, as well as the extant regulatory environment. |
| Keywords: | Monetary policy ; Stock exchanges |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-051&r=mac |
| By: | Szilárd Benk; Max Gillman; Michal Kejak |
| Abstract: | The explanation of velocity has been based in substitution and income effects, since Keynes’s (1923) interest rate explanation and Friedman’s (1956) application of the permanent income hypothesis to money demand. Modern real business cycle theory relies on a goods productivity shocks to mimic the data’s procyclic velocity feature, as in Friedman’s explanation, while finding money shocks unimportant and not integrating financial innovation explanations. This paper sets the model within endogenous growth and adds credit shocks. It models velocity more closely, with significant roles for money shocks and credit shocks, along with the goods productivity shocks. Endogenous growth is key to the construction of the money and credit shocks since they have similar effects on velocity, through substitution effects from changes in the nominal interest rate and in the cost of financial intermediation, but opposite effects upon growth, through permanent income effects that are absent with exogenous growth. |
| Keywords: | Velocity, business cycle, credit shocks, endogenous growth. |
| JEL: | E13 E32 E44 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0604&r=mac |
| By: | José Alberto Fuinhas (Departamento de Gestão e Economia, Universidade da Beira Interior) |
| Abstract: | This paper investigates the role of bank lending in the monetary transmission process in Portugal. We estimate a small sectoral VAR model of the Portuguese macroeconomy. This model is then used to simulate the effects of an exogenous monetary policy shock upon asset prices, bank balance sheet variables and final target variables (activity and prices), for the personal and corporate sectors. Significant sectoral differences are found among the channels of monetary transmission. In addition, the use of sectoral data facilitates the identification of distinct money and credit channels in the transmission of monetary policy. These results contrast with the ambiguous findings on the roles of money and credit in the literature to date. Our study suggests that there is a bank-lending channel in Portugal. |
| Keywords: | Credit channel; bank lending; and monetary transmission |
| JEL: | C32 E44 E51 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:csh:wpecon:e01/2006&r=mac |
| By: | Jan Marc Berk; Gerbert Hebbink |
| Abstract: | This paper analyses the usefulness of direct measures of consumers’ perceptions and expectations of inflation for monetary policy and investigates the degree to which these variables are anchored. We inter alia seek to xplore whether there is a difference in reaction of consumers in countries with more credible central banks and those from countries with less credible central banks. We moreover investigate whether the introduction of euro coins and banknotes in 2002, that can be interpreted as a structural shock, has significantly affected the inflation rate as perceived by consumers. We find that European inflation expectations are relatively robust to sudden changes in inflation or monetary policy surprises, regardless of the credibility of the central bank. The introduction of the euro, however, significantly affected the inflation perception of European consumers. |
| Keywords: | Inflation expectations; Monetary policy; Survey data |
| JEL: | C31 C32 E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:116&r=mac |
| By: | Jean-Pierre Allegret; Alain Sand-Zantman (Observatoire Français des Conjonctures Économiques) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:0615&r=mac |
| By: | Tesfaselassie,Mewael F.; Schaling,Eric; Eijffinger,Sylvester (Tilburg University, Center for Economic Research) |
| Abstract: | In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has e®ects on the optimal interest rate rule followed by the central bank. For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target. On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies. |
| Keywords: | Learning;Rational Expectations;Separation Principle;Term Structure of Interest Rates |
| JEL: | C53 E43 E52 F33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200688&r=mac |
| By: | Kirdan Lees (Reserve Bank of New Zealand) |
| Abstract: | Typical New Keynesian open economy models suggest a limited response to the exchange rate. This paper examines the role of the open economy in determining robust rules when the central bank fears various model misspecification errors. The paper calibrates a hybrid New Keynesian model to broadly fit the economies of three archetypal open economy inflation targeters - Australia, Canada, and New Zealand - and seeks robust time-consistent policy. We find that policies robust to model misspecification react more aggressively to not only the exchange rate, but also inflation, the output gap and their associated shocks. This result generalizes to the context of a flexible inflation targeting central bank that cares about the volatility of the real exchange rate. However, when the central bank places only a small weight on interest rate smoothing and fears misspecification in only exchange rate determination, a more cautious policy is recommended for all but an exchange rate shock. It is also shown that the benefits of an exchange rate channel far outweigh the concomitant costs of uncertain exchange rate determination. |
| JEL: | C51 E52 F41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/08&r=mac |
| By: | Roc Armenter; Martin Bodenstein |
| Abstract: | The Barro-Gordon inflation bias has provided the most influential argument for fixed exchange rate regimes. However, with low inflation rates now widespread, credibility concerns seem no longer relevant. Why give up independent monetary policy to contain an inflation bias that is already under control? We argue that credibility problems do not end with the inflation bias and they are a larger drawback for flexible exchange rates than usually thought. Absent commitment, independent monetary policy can induce expectation traps---that is, welfare ranked multiple equilibria---and perverse policy responses to real shocks, i.e., an equilibrium policy response that is welfare inferior to policy inaction. Both possibilities imply that flexible exchange rates feature unnecessary macroeconomic volatility. |
| Keywords: | Foreign exchange rates ; Inflation (Finance) ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:865&r=mac |
| By: | Enrique G. Mendoza |
| Abstract: | The current account reversals, large recessions, and price collapses that define Sudden Stops contradict the predictions of a large class of models in which the current account is a vehicle for consumption smoothing and investment financing. This paper shows that the quantitative predictions of a business cycle model with collateral constraints are consistent with the key features of Sudden Stops. Standard shocks to imported input prices, the world interest rate, and productivity trigger collateral constraints on debt and working capital when borrowing levels are high relative to asset values, and these high-leverage states are endogenous outcomes. In these situations, Irving Fisher's debt-deflation mechanism causes Sudden Stops as the deflation of Tobin's Q leads to a spiraling decline in the prices and holdings of collateral assets. This has immediate effects on output and factor demands because collapsing collateral values cut access to working capital. In contrast with previous findings, collateral constraints induce significant amplification in the responses of macroaggregates to shocks. Because of precautionary saving, Sudden Stops are infrequent events nested within normal cycles in the long run, but they remain a positive probability event. |
| JEL: | D52 E44 F32 F41 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12564&r=mac |
| By: | van den Hauwe, Ludwig |
| Abstract: | This article reviews the first English edition of Prof. Jesús Huerta de Soto´s book `Dinero, Crédito Bancario y Ciclos Económicos´ which first appeared in Spain in 1998. |
| Keywords: | Business Cycle Theory; Law and Economics of Money and Banking; Austrian school; new institutional economics; financial markets; history of money; credit and banking; deregulation of financial institutions; economics of transition |
| JEL: | E32 B53 P34 N23 G18 N24 E5 K39 E00 E42 G0 K0 P3 N2 H11 |
| Date: | 2006–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49&r=mac |
| By: | Francis E. Warnock; Veronica Cacdac Warnock |
| Abstract: | Foreign official purchases of U.S. government bonds have an economically large and statistically significant impact on long-term interest rates. Federal Reserve credibility, as evidenced by dramatic reductions in both long-term inflation expectations and the volatility of long rates, contributed much to the decline of long rates in the 1990s. More recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10-year Treasury yield would currently be 90 basis points higher. Our results are robust to a number of alternative specifications. |
| JEL: | E43 E44 F21 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12560&r=mac |
| By: | Nir Jaimovich; Sergio Rebelo |
| Abstract: | We propose a model that generates an economic expansion in response to good news about future total factor productivity (TFP) or investment-specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that exhibit a weak short-run wealth effect on the labor supply. These preferences nest the two classes of utility functions most widely used in the business cycle literature as special cases. Our model can generate recessions that resemble those of the post-war U.S. economy without relying on negative productivity shocks. The recessions are caused not by contemporaneous negative shocks but rather by lackluster news about future TFP or investment-specific technical change. |
| JEL: | E24 E32 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12537&r=mac |
| By: | Richard G. Anderson |
| Abstract: | This brief essay is a working draft of an article in preparation for the forthcoming International Encyclopedia of the Social Sciences, 2nd ed., examining the role of the monetary base in monetary economics and monetary policymaking. Comments are welcome. |
| Keywords: | Money supply ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-049&r=mac |
| By: | Edward Nelson |
| Abstract: | This paper considers the Great Inflation of the 1970s in Japan and Germany. From 1975 onward these countries had low inflation relative to other large economies. Traditionally, this success is attributed to a stronger discipline on the part of Japan and Germany*s monetary authorities*for example, more willingness to accept temporary unemployment, or stronger determination not to monetize government deficits. I instead attribute the success of these countries from the mid-1970s to their governments* and monetary authorities* acceptance that inflation is a monetary phenomenon. Symmetrically, their higher inflation in the first half of the 1970s is attributable to the fact that their policymakers over this period embraced nonmonetary theories of inflation. |
| Keywords: | Inflation (Finance) ; Economic conditions - Japan ; Economic conditions - Germany |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-052&r=mac |
| By: | van den Hauwe, Ludwig |
| Abstract: | Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes several conceptual flaws in this proposal. In particular several claims of the fractional-reserve free bankers with respect to the purported working characteristics of this system are criticized from the perspective of economic theory. In particular, the claim that a fractional-reserve free banking system would lead to the disappearance of the business cycle is recognized as false. Furthermore an invisible-hand analysis is performed, reinforcing the conclusion that fractional-reserve free banking is incompatible with the ethical and juridical principles underlying a free society. |
| Keywords: | monetary and banking regimes; comparative institutional analysis; central banking versus free banking controversy; fractional-reserve free banking; Law and Economics of money and banking; |
| JEL: | E50 E32 E42 B53 K39 G18 P34 H11 |
| Date: | 2006–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120&r=mac |
| By: | Thomas A. Lubik; Paolo Surico |
| Abstract: | This paper re-considers the empirical relevance of the Lucas critique using a DSGE sticky price model in which a weak central bank response to inflation generates equilibrium indeterminacy. The model is calibrated on the magnitude of the historical shift in the Federal Reserve’s policy rule and is capable of generating the decline in the volatility of inflation and real activity observed in U.S. data. Using Monte Carlo simulations and a backward-looking model of aggregate supply and demand, we show that shifts in the policy rule induce breaks in both the reduced-form coefficients and the reduced-form error variances. The statistics of popular parameter stability tests are shown to have low power if such heteroskedasticity is neglected. In contrast, when the instability of the reduced-form error variances is accounted for, the Lucas critique is found to be empirically relevant for both artificial and actual data. |
| Keywords: | Monetary policy ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:06-05&r=mac |
| By: | Nir Jaimovich; Sergio Rebelo |
| Abstract: | We explore the business cycle implications of expectation shocks and of two well-known psychological biases, optimism and overconfidence. The expectations of optimistic agents are biased toward good outcomes, while overconfident agents overestimate the precision of the signals that they receive. Both expectation shocks and overconfidence can increase business-cycle volatility, while preserving the model's properties in terms of comovement, and relative volatilities. In contrast, optimism is not a useful source of volatility in our model. |
| JEL: | E32 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12570&r=mac |
| By: | Monastiriotis, Vassilis |
| Abstract: | This paper explores the macroeconomic determinants of UK regional unemployment and their relation to the influences on unemployment exerted by the levels and types of employment flexibility in the country. Theoretically the paper draws on Keynesian and monetarist explanations of unemployment and elaborates on how the two main theoretical approaches perceive the role of price stability, accumulation, macroeconomic shocks and labour market rigidities for unemployment. Empirically, the analysis relies on a novel set of flexibility indicators and examines their impact on regional unemployment, unemployment persistence, and adjustment to economic shocks. The results provide useful insights into the explored relationships and highlight the areas and conditions under which employment flexibility helps achieve favourable employment outcomes. The implications of the findings are discussed in the concluding section. |
| Keywords: | Employment flexibility; regional unemployment; persistence; NAIRU and Keynesian explanations of unemployment |
| JEL: | R38 J64 R11 E24 E12 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:44&r=mac |
| By: | Troy Davig; Eric Leeper |
| Abstract: | This paper makes changes in monetary policy rules (or regimes) endogenous. Changes are triggered when certain endogenous variables cross specified thresholds. Rational expectations equilibria are examined in three models of threshold switching to illustrate that (i) expectations formation effects generated by the possibility of regime change can be quantitatively important; (ii) symmetric shocks can have asymmetric effects; (iii) endogenous switching is a natural way to formally model preemptive policy actions. In a conventional calibrated model, preemptive policy shifts agents’ expectations, enhancing the ability of policy to offset demand shocks; this yields a quantitatively significant “preemption dividend.” |
| Keywords: | Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-11&r=mac |
| By: | David Cobham |
| Abstract: | This paper attempts to assess the relative activism of these three central banks, with reference to the debate on interest rate smoothing. It investigates smoothing in terms of the pattern of interest rate changes, and estimates a series of Taylor-type policy rules for each bank, using quarterly and monthly data, with ‘backward’ and ‘forward’-looking arguments, and with and without lagged dependent variables. It also examines the effect of introducing an auto-correlated error term. There is some (non-robust) evidence that the FRB is more activist, but it also seems to be more smooth; the ECB seems to adjust faster but less strongly in the long run; and the BoE’s behaviour is more difficult to identify. However, these standard policy rules are out of kilter with central banks’ own descriptions of what they do, while the long lags involved raise questions about the relevance of the Taylor principle as conventionally applied. It is therefore suggested that researchers should pay more attention to the institutional context of central banks’ behaviour, in order to produce better estimates of their policy rules which would in turn shed more light on the issues of activism and smoothing. |
| Keywords: | Monetary policy, activism, interest rate smoothing, central banks. |
| JEL: | E43 E52 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0602&r=mac |
| By: | Stephen G. Cecchetti |
| Abstract: | Modern central bankers are the risk managers of the financial system. They take actions based not only on point forecasts for growth and inflation, but based on the entire distribution of possible macroeconomic outcomes. In numerous instances monetary policymakers have acted in ways designed to avert disasters. What are the implications of this approach for managin the risks posed by asset price booms? To address this question, I study data from a cross-section of countries to examine the impact of equity and property booms on the entire distribution of deviation in output and price-level from their trends. The results suggest that housing booms worsen growth prospects, creating outsized risks of very bad outcomes. By contrast, equity booms have very little impact on the expected mean and variance of macroeconomic performance, but worsen the worst outcomes. |
| JEL: | E5 G0 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12542&r=mac |
| By: | Martin Schneider (Oesterreichische Nationalbank, Economic Studies Division); Markus Leibrecht (WU Wien) |
| Abstract: | This paper gives an overview of the current version of the quarterly macroeconomic model of the Oesterreichische Nationalbank for Austria. The model is a small to medium size macroeconomic model. It is in the tradition of the neoclassical synthesis and is therefore in line with most models used by euro system central banks. The model has been extended in several ways compared with the previous version. The most important changes concern the use of oil and import competitor’s prices in the supply block, a more detailed treatment of government receipts, the use of tax rates as policy instruments as well as a dynamic import demand indicator. In the empirical part, the paper presents some simulation results to show the impact of tax increases on the Austrian economy and the reaction of the model to five standard macroeconomic shocks: Increases of the value added tax, the personal income tax and the corporate income tax by the same amount have different effects on the Austrian economy. The reaction of the model to macroeconomic shocks is characterized by a high demand multiplier and a low negative impact of price competitiveness on exports. |
| Keywords: | Macroeconometric Model, AUstria |
| JEL: | C3 C5 E1 E2 |
| Date: | 2006–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:132&r=mac |
| By: | Roger E. A. Farmer; Daniel F. Waggoner; Tao Zha |
| Abstract: | This paper is about the properties of Markov switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria which exist even when the MSRE model satisfies a 'generalized Taylor principle'. Our result suggests that it may be more difficult to rule out non-fundamental equilibria in MRSE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness. |
| JEL: | E31 E4 E52 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12540&r=mac |
| By: | Cambell Leith; Simon Wren-Lewis |
| Abstract: | A common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, which appears to pose a dilemma for policy makers. In this paper we develop a small open economy model which features traded and non-traded goods sectors with which to assess the extent to which monetary policy should respond to exchange rate misalignments. To do so we initially contrast the efficient outcome of the model with that under flexible prices and find that the flex price equilibrium exhibits an excessive exchange rate appreciation in the face of a positive UIP shock. By introducing sticky prices in both sectors we provide a role for policy in the face of UIP shocks. We then derive a quadratic approximation to welfare which comprises quadratic terms in the output gaps in both sectors as well as sectoral rates of inflation. These can be rewritten in terms of the usual aggregate variables, but only after including terms in relative sectoral prices and/or the terms of trade to capture the sectoral composition of aggregates. We derive optimal policy analytically before giving numerical examples of the optimal response to UIP shocks. Finally, we contrast the optimal policy with a number of alternative policy stances and assess the robustness of results to changes in model parameters. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0605&r=mac |
| By: | Akhmed Akhmedov (CEFIR) |
| Abstract: | Classical theory considers political business cycle as a result of either opportunistic behavior of government (opportunistic cycle) or aiming policy on certain constituency (partisan cycle). In this paper, we propose an alternative explanation of the phenomenon of political business cycle — experience of government. We propose an illustration that shows that elections infer cycles without any opportunism or ideology of incumbents. We also build a model with endogenous ego-rent. The model explains a channel to increase incentives, when none has commitment — governors need to develop skills to increase their value for public and increase probability to get re-elected. Using fiscal monthly data of Russian regions from 1996 to 2004, we got evidence both of positive effect of experience on performance and opportunistic component of the cycle. We also got evidence of diminishing return on experience. |
| Keywords: | Elections, opportunistic business cycle, experience, sunk cost, Russian regions. |
| JEL: | D72 E32 H72 P16 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0087&r=mac |
| By: | William T. Gavin; Kevin L. Kliesen |
| Abstract: | Decision makers, both public and private, use forecasts of economic growth and inflation to make plans and implement policies. In many situations, reasonably good forecasts can be made with simple rules of thumb that are extrapolations of a single data series. In principle, information about other economic indicators should be useful in forecasting a particular series like inflation or output. Including too many variables makes a model unwieldy and not including enough can increase forecast error. A key problem is deciding which other series to include. Recently, studies have shown that Dynamic Factor Models (DFMs) may provide a general solution to this problem. The key is that these models use a large data set to extract a few common factors (thus, the term #data-rich*). This paper uses a monthly DFM model to forecast inflation and output growth at horizons of 3, 12 and 24 months ahead. These forecasts are then compared to simple forecasting rules. |
| Keywords: | Inflation (Finance) ; Forecasting |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-054&r=mac |
| By: | Arabinda Basistha (Department of Economics, West Virginia University) |
| Abstract: | Recent studies debate the effect of a permanent productivity shock on hours per capita within a structural VAR context. This paper examines the issue using a correlated unobserved components (UC) framework. The estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours. This result is robust for non-stationary, levels stationary and differenced stationary specifications of hours. A comparison of the UC framework to the structural VAR framework shows that the UC framework with hours in levels performs better. |
| Keywords: | Stochastic trend, Correlated unobserved components model |
| JEL: | E31 E32 E50 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wvu:wpaper:06-02&r=mac |
| By: | Howard J. Wall |
| Abstract: | This paper uses a Markov-switching model with structural breaks to characterize and compare regional business cycles in Japan for 1976-2005. An early 1990s structural break meant a reduction in national and regional growth rates in expansion and recession, usually resulting in an increase in the spread between the two phases. Although recessions tended to be experienced across a majority of regions throughout the sample period, the occurrence and lengths of recessions at the regional level have increased over time. |
| Keywords: | Business cycles ; Economic conditions - Japan |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-053&r=mac |
| By: | Basher, Syed A.; Westerlund, Joakim |
| Abstract: | Time series unit root evidence suggests that inflation is nonstationary. By contrast, when using more powerful panel unit root tests, Culver and Papell (1997) find that inflation is stationary. In this paper, we test the robustness of this result by applying a battery of recent panel unit root tests. The results suggest that the stationarity of inflation holds even after controlling for crosssectional dependence and structural change. |
| Keywords: | Unit Root; Inflation; Cross-Sectional Dependence; Structural Change. |
| JEL: | C32 E31 C33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:136&r=mac |
| By: | Stephen Quinn; William Roberds |
| Abstract: | The Bank of Amsterdam, founded in 1609, was the first public bank to offer accounts not directly convertible to coin. As such, it can be described as the first true central bank. The debut of central bank money did not result from any conscious policy decision, however, but instead arose almost by accident, in response to the chaotic monetary conditions during the early years of the Dutch Republic. This paper examines the history of this momentous development from the perspective of modern monetary theory. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-13&r=mac |
| By: | Jorge Braga de Macedo; Joaquim Oliveira Martins |
| Abstract: | This paper discusses the design of structural policies by relating second-best results and the complementarity of reforms. It computes a complementarity index based on structural reform indicators compiled by the EBRD for transition countries, assuming that the run-up to EU integration corresponds to a nearly complete policy cycle. Using econometric panel estimates, the level of reforms and changes in their complementarity are found to be positively related to output growth, corrected for endogeneity, and given initial conditions and the extent of macroeconomic stabilisation. |
| JEL: | P2 O40 C33 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12544&r=mac |
| By: | Dirk Krueger (University of Frankfurt, CEPR, CFS and NBER); Hanno Lustig (University of California Los Angeles and NBER); Fabrizio Perri (University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR and NBER) |
| Abstract: | We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of the limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints in that state of the world. These unconstrained households have lower consumption growth rates than constrained households, i.e. they are located in the lower tail of the crosssectional consumption growth distribution. We use household consumption data from the U.S. Consumer Expenditure Survey to estimate the pricing kernel implied by the model and to evaluate its performance in pricing aggregate risk. We employ the same data to construct aggregate consumption and to derive the standard complete markets pricing kernel. We find that the limited enforcement pricing kernel generates a market price of risk that is substantially larger than the standard complete markets asset pricing kernel. |
| Keywords: | Limited Commitment, Equity Premium, Stochastic Discount Factor, Household Consumption Data |
| JEL: | G12 D52 E44 |
| Date: | 2006–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000622&r=mac |
| By: | Arnold, Ivo (Nyenrode Business Universiteit) |
| Abstract: | Index-linked bonds (ILBs) constitute a small but growing segment of the eurozone bond market. Issuers of index-linked bonds face a choice between linking to either a eurozone or a national price index. This paper examines this choice both theoretically and empirically and ends up with the following conclusions. First, ILBs linked to eurozone inflation are much less useful for diversification purposes than nationally indexed ILBs. This is hard to square with the intended use of these bonds. Second, ILBs linked to national price indices are imperfect hedges for national inflation. The latter finding is counterintuitive and arises because of monetary union. |
| Keywords: | Index-linked bonds; inflation; EMU |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2006-10&r=mac |
| By: | Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division); Peter Kugler (University of Basel, WWZ, Petersgraben 51, CH-4003 Basel) |
| Abstract: | This paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard flexible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an influence of expected future money on prices, leads to a cointegrating relationship between (log) prices and the (log of the) money-income ratio with a switching intercept term. Of course, this likely leads to a rejection of cointegration by standard tests and to the erroneous conclusion of an unstable money demand. Second, a more general model allowing for endogeneity and more general dynamics is estimated with Bayesian methods for euro area data from 1975-2003. This exercise provides support for our model and a stable demand for M3 in the euro area. |
| Keywords: | Bayesian cointegration analysis, Markov trend, Markov chain Monte Carlo, money demand. |
| JEL: | C11 C32 E41 |
| Date: | 2006–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:131&r=mac |
| By: | Linnea Polgreen; Pedro Silos |
| Abstract: | Higher oil price shocks benefit unskilled workers relative to skilled workers: Over the business cycle, energy prices and the skill premium display a strong negative correlation. This correlation is robust to different detrending procedures. We construct and estimate a model economy with energy use and heterogeneous skills and study its business cycle implications, in particular the cyclical behavior of oil prices and the skill premium. In our model economy, the skill premium and the ratio of hours worked by skilled workers to hours worked by unskilled workers are both negatively correlated with oil prices over the business cycle. For the skill premium and energy prices to move in opposite directions, the key ingredient is the larger substitutability of capital for unskilled labor than for skilled labor. The negative correlation arises even when energy and capital are fairly good substitutes. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-14&r=mac |
| By: | Casero, Paloma Anos; Seshan, Ganesh |
| Abstract: | Limited fiscal space limits Djibouti ' s ability to meet the Millennium Development Goals and improve the living conditions of its population. Djibouti ' s fiscal structure is unique in that almost 70 percent of government revenue is denominated in foreign currency (import taxes, foreign aid grants, and military revenue) while over 50 percent of government expenditure is denominated in local currency (wages, salaries, and social transfers). Djibouti ' s economic structure is also unusual in that merchandise exports of local origin are insignificant, and the country relies heavily on imported goods (food, medicines, consumer and capital goods). A currency devaluation, by reducing real wages, could potentially generate additional fiscal space that would help meet Djibouti ' s fundamental development goals. Using macroeconomic and household level data, the authors quantify the impact of a devaluation of the nominal exchange rate on fiscal savings, real public sector wages, real income, and poverty under various hypothetical scenarios of exchange-rate pass-through and magnitude of devaluation. They find that a currency devaluation could generate fiscal savings in the short-term, but it would have an adverse effect on poverty and income distribution. A 30 percent nominal exchange rate devaluation could generate fiscal savings amounting between 3 and 7 percent of GDP. At the same time, a 30 percent nominal devaluation could cause nearly a fifth of the poorest households to fall below the extreme poverty line and pull the same fraction of upper middle-income households below the national poverty line. The authors also find that currency devaluation could generate net fiscal savings even after accounting for the additional social transfers needed to compensate the poor for their real income loss. However, the absence of formal social safety nets limits the government ' s readiness to provide well-targeted and timely social transfers to the poor. |
| Keywords: | Economic Theory & Research,Economic Stabilization,Rural Poverty Reduction,Fiscal & Monetary Policy,Macroeconomic Management |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4028&r=mac |
| By: | Laura Veldkamp; Justin Wolfers |
| Abstract: | When similar patterns of expansion and contraction are observed across sectors, we call this a business cycle. Yet explaining the similarity and synchronization of these cycles across industries remains a puzzle. Whereas output growth across industries is highly correlated, identifiable shocks, like shocks to productivity, are far less correlated. While previous work has examined complementarities in production, we propose that sectors make similar input decisions because of complementarities in information acquisition. Because information about driving forces has a high fixed cost of production and a low marginal cost of replication, it can be more efficient for firms to share the cost of discovering common shocks than to invest in uncovering detailed sectoral information. Firms basing their decisions on this common information make highly correlated production choices. This mechanism amplifies the effects of common shocks, relative to sectoral shocks. |
| Keywords: | Business cycles |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-26&r=mac |
| By: | Svitlana Maksymenko |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:254&r=mac |
| By: | Jim Malley; Hassan Molana |
| Abstract: | We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at an inefficient, or ‘low-effort’, state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960-2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilization policies and a positive demand shock might have adverse effects on employment. |
| Keywords: | Efficiency wages, effort supply, Kalman filter, monopolistic competition, Okun’s law. |
| JEL: | E62 J41 H3 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0607&r=mac |
| By: | Lucia Alessi; Matteo Barigozzi; Marco Capasso |
| Abstract: | We use the Generalized Dynamic Factor Model proposed by Forni et al. [2000] in order to study the dynamics of the rate of growth of output and investment. By using quarterly firm level data relative to hundreds of US firms for 20 years, we investigate the number and the features of the underlying forces leading economic growth: evidence suggests the main shock to be the same across sectors and for the economy as a whole, thus more likely a demand shock than a technology shock. Moreover, we disentangle the component of industrial dynamics which is due to economy-wide factors, the common component, from the component which relates to sectoral or firm-specific phenomena, the idiosyncratic component. We assess the relative importance of these two components at different frequencies and compare common components across sectors. Finally, we investigate the comovements of the common component of output and investment series both at firm level and at sectoral level. |
| Keywords: | Dynamic Factor Analysis, Business Cycle, Comovements |
| Date: | 2006–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2006/27&r=mac |
| By: | Andy Snell; Jonathan Thomas |
| Abstract: | This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labor market. Using sectoral productivity data from the post-war US economy, we assess the ability of the model to match actual unemployment and wage series. We also show that equal treatment follows in our model from the assumption of at-will employment contracting. |
| JEL: | E32 J41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0603&r=mac |
| By: | Peter Sinclair |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0608&r=mac |
| By: | OECD |
| Abstract: | Social safety nets protect citizens against hardship. By offering compensation, social safety nets may help overcome the political resistance to trade liberalisation and structural reform, but they can also weaken the incentives to work and save. Depending on their design, safety nets may also ease or impair adjustment to changing economic circumstances. Against this backdrop, the paper looks at the impact of social safety nets on output and employment and on the ability of economies to absorb adverse shocks. Dependent on their design, the presence of extensive social safety nets is often associated with more limited labour resource use and lower per capita GDP levels, even though activation policy can provide offsets. Moreover, many of the characteristics of social safety nets that reduce output and employment levels heighten the persistence of slack in the wake of adverse shocks. By contrast, the impact of social safety nets on business investment and household saving, and by extension the current account balance, is not clear-cut. <P>Systèmes de protection sociale et ajustement structurel <BR>Les systèmes de protection sociale ont pour but de protéger la population contre certaines difficultés. En offrant une compensation, les systèmes de protection sociale peuvent contribuer à surmonter la résistance politique à la libéralisation des échanges et aux réformes structurelles, mais ils peuvent aussi affaiblir les incitations au travail et à l'épargne. Dans ce contexte, cet article examine l’impact des systèmes de protection sociale sur la production et sur l’emploi et également du point de vue de la capacité d’absorption de chocs négatifs par l’économie. La présence de larges systèmes de protection sociale, selon leur conception, se traduit souvent par une utilisation plus limitée des ressources en main d’oeuvre et par des niveaux plus faibles de PIB par habitant, même si les mesures d’activation peuvent avoir un effet compensateur. De surcroît, un grand nombre des caractéristiques des systèmes de protection sociale qui réduisent les niveaux de production et d’emploi accentuent la persistance d’une sous-utilisation des ressources à la suite d’un choc négatif. En revanche, l’impact des systèmes de protection sociale sur l’investissement des entreprises et l’épargne des ménages et, partant, sur le solde de balance courante, n’est pas bien défini. |
| Keywords: | structural policy, politique structurelle, economic convergence, convergence économique, social safety net, economic resilience, système de protection sociale, résilience économique |
| JEL: | E21 E24 E32 F42 H55 O47 O57 |
| Date: | 2006–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:517-en&r=mac |
| By: | Serajul Hoque |
| Abstract: | This paper uses a large-scale computable general equilibrium model of Bangladesh to simulate the economic effects of attracting foreign investment by improved business confidence. The simulation results indicate that if all revenue of newly arrived capital accrues to foreign investors and the government maintains budget neutrality, in the long-run this would expand GDP slightly. In general, capital-intensive sectors experience robust expansion and labour-intensive sectors suffer a contraction in output and employment. Urban households experience increases in consumption because they are relatively heavily concentrated in manufacturing sectors that are favourably affected. In contrast, rural households experience decreases in consumption because they are relatively concentrated in the agriculture sector which is adversely affected. |
| Keywords: | Business confidence foreign direct investment computable general equilibrium model Bangladesh |
| JEL: | C68 E22 F21 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-159&r=mac |
| By: | Jahyeong Koo; W. Michael Cox |
| Abstract: | Suicide rates in Japan have increased dramatically in recent years, making Japan's male rate the highest among developed economies. This study revises the standard economic model of suicide to accommodate Japan's experience, focusing on the change in human capital for the unemployed. We then use the new model and de-trended data to emperically investigate the relationship between the suicide cycle and the unemployment cycle. Unlike previous aggregate time series studies, we find that the relationship between the suicide rate and the unemployment rate is significantly and robustly positive for both males and females even after controlling for several social variables. |
| Keywords: | Human capital ; Unemployment |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0603&r=mac |
| By: | Shigeru Fujita; Garey Ramey |
| Abstract: | In this paper the authors study the cyclical behavior of job loss and hiring using CPS worker flow data, adjusted for margin error and time aggregation error. The band pass filter is used to isolate cyclical components. They consider both total worker flows and transition hazard rates within a unified framework. Our results provide overwhelming support for a "separation-driven" view of employment adjustment, whereby total job loss and hiring rise sharply during economic downturns, initiated by increases in the job loss hazard rate. Worker flows and transition hazard rates are highly volatile at business cycle frequencies. These patterns are especially strong among prime-age workers. For young workers, job loss and hiring adjust procyclically due to movements into and out of the labor force. |
| Keywords: | Employment |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-17&r=mac |
| By: | David N. DeJong; Hariharan Dharmarajan; Roman Liesenfeld; Jean-Francois Richard |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:214&r=mac |
| By: | Richard B. Freeman |
| Abstract: | This paper assesses the claim the the US faces an impending labor shortage due to the impending retirement of baby boomers and slow growth of the US work force, and that the country should orient labor market and educational policies to alleviate this prospective shortage. I find that this analysis is flawed, by making growth of GDP the target of economic policy and by paying inadequate attention to the huge supply of qualified low wage workers in the global economy. My analysis shows that the projections of future demands for skills lack the reliability to guide policies on skill development, and that contrary to the assumption implicit in the shortage analyses, demographic changes have not historically been consistently associated with changes in labor market conditions. I argue that if there is to be a shortage, the country should allow the competitive market to raise labor compensation rather than to adopt policies to keep labor costs low. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12541&r=mac |
| By: | Jianhuai Shi |
| Abstract: | The Chinese economy has been in a state of external and internal imbalances for some years, which has something to do with the undervaluation of renminbi (RMB). But the Chinese Government hesitates to allow RMB to appreciate because of the worry that RMB appreciations are contractionary thus have negative impact on China's economic growth and employment. The purpose of this paper is to empirically assess the effects of RMB real exchange rate on China's output. The econometric results of the paper show that (1) even after source of spurious correlation is controlled for, RMB appreciation has led to a decline in China’s output, suggesting that RMB appreciations are contractionary, and that (2) once the international finance linkage of Chinese economy is accounted for, the effect of RMB real exchange rate shocks on China’s output and the power of the shocks in explaining the change of China’s output are diminished. The paper gives some possible explanations to those findings, and points out that the findings do not necessarily imply that China should continue maintaining the undervaluation of RMB. |
| JEL: | F31 F41 O53 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12551&r=mac |
| By: | Jörg Lingens; Klaus Wälde |
| Abstract: | We investigate how continental European unemployment can be reduced without reducing unemployment benefits and without reducing the net income of low-wage earners. Lower unemployment replacement rates reduce unemployment, the net wage and unemployment benefits. A lower tax on labour increases net wages and - for certain benefit-systems - unemployment benefits as well. Combining these two policies allows to reduce unemployment in countries with “net-Bismarck” and Beveridge systems without reducing net income of workers or of the unemployed. Such a policy becomes self-financing under realistic parameter constellations when taxes are reduced only for low-income workers. |
| Keywords: | inequality, unemployment, taxation, policy reform |
| JEL: | E60 H23 J38 J51 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1807&r=mac |
| By: | Athanasoglou, P.; Brissimis, S.; Delis, M. |
| Abstract: | The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle. |
| JEL: | G21 C23 L20 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:153&r=mac |
| By: | Marco Cagetti; Mariacristina De Nardi |
| Abstract: | In the United States wealth is highly concentrated and very unequally distributed: the richest 1% hold one third of the total wealth in the economy. Understanding the determinants of wealth inequality is a challenge for many economic models. We summarize some key facts about the wealth distribution and what economic models have been able to explain so far. |
| JEL: | D3 D58 D64 E2 E20 E23 H0 H31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12550&r=mac |
| By: | Beck, Thorsten; Hesse, Heiko |
| Abstract: | Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure, and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank variation in spreads and margins. Further, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins. |
| Keywords: | Banks & Banking Reform,Economic Theory & Research,Investment and Investment Climate,Financial Crisis Management & Restructuring,Financial Intermediation |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4027&r=mac |
| By: | Patrick J. Kehoe |
| Abstract: | The common approach to evaluating a model in the structural VAR literature is to compare the impulse responses from structural VARs run on the data to the theoretical impulse responses from the model. The Sims-Cogley-Nason approach instead compares the structural VARs run on the data to identical structural VARs run on data from the model of the same length as the actual data. Chari, Kehoe, and McGrattan (2006) argue that the inappropriate comparison made by the common approach is the root of the problems in the SVAR literature. In practice, the problems can be solved simply. Switching from the common approach to the Sims-Cogley-Nason ap-proach basically involves changing a few lines of computer code and a few lines of text. This switch will vastly increase the value of the structural VAR literature for economic theory. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:379&r=mac |
| By: | Mariacristina De Nardi; Eric French; John Bailey Jones |
| Abstract: | People have heterogenous life expectancies: women live longer than men, rich people live longer than poor people, and healthy people live longer than sick people. People are also subject to heterogenous out-of-pocket medical expense risk. We construct a rich structural model of saving behavior for retired single households that accounts for this heterogeneity, and we estimate the model using AHEAD data and the method of simulated moments. We find that the risk of living long and facing high medical expenses goes a long way toward explaining the elderly's savings decisions. Specifically, medical expenses that rise quickly with both age and permanent income can explain why the elderly singles, and especially the richest ones, run down their assets so slowly. We also find that social insurance has a big impact on the elderly's savings. |
| JEL: | D1 D31 E2 H31 H51 I1 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12554&r=mac |
| By: | Yongsung Chang; Andreas Hornstein; Pierre-Daniel G. Sarte |
| Abstract: | Whether technological progress raises or lowers aggregate employment in the short run has been the subject of much debate in recent years. Using a simple model of industry employment, we show that cross-industry differences of inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories, the more elastic industry demand is, and the more flexible prices are. Using data on 458 4-digit U.S. manufacturing industries over the period 1958-1996, we find statistically significant effects of variations in inventory holdings and demand elasticities on short-run employment responses, but find less evidence pertaining to the effects of measured price stickiness. |
| Keywords: | Employment ; Productivity |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:06-06&r=mac |
| By: | Clive Bowsher (Nuffield College, University of Oxford); Roland Meeks (Nuffield College, University of Oxford) |
| Abstract: | Functional Signal plus Noise (FSN) models are proposed for analysing the dynamics of a large cross-section of yields or asset prices in which contemporaneous observations are functionally related. The FSN models are used to forecast high dimensional yield curves for US Treasury bonds at the one month ahead horizon. The models achieve large reductions in mean square forecast errors relative to a random walk for yields and readily dominate both the Diebold and Li (2006) and random walk forecasts across all maturities studied. We show that the Expectations Theory (ET) of the term structure completely determines the conditional mean of any zero-coupon yield curve. This enables a novel evaluation of the ET in which its 1-step ahead forecasts are compared with those of rival methods such as the FSN models, with the results strongly supporting the growing body of empirical evidence against the ET. Yield spreads do provide important information for forecasting the yield curve, especially in the case of shorter maturities, but not in the manner prescribed by the Expectations Theory. |
| Keywords: | Yield curve, term structure, expectations theory, FSN models, functional time series, forecasting, state space form, cubic spline. |
| JEL: | C33 C51 C53 E47 G12 |
| Date: | 2006–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0612&r=mac |
| By: | Chetan Ghate |
| Abstract: | This paper constructs a dynamic analysis of the growth and distribution models of Das and Ghate (2004) and Alesina and Rodrik (1994) when leisure is valued by agents. When leisure enters the utility function, we show that the tax rate on capital income chosen in a political equilibrium is lower than the growth maximizing tax rate. This slows growth down, but for a very different reason than in Alesina and Rodrik (1994). Here, unanimity holds, and slower growth comes together with valued leisure, while in AR, slower growth comes from conflicting choices over the tax rate, with a capital poor median voter prevailing. Our results generalize the work of Alesina and Rodrik (1994) and Das and Ghate (2004) in two ways. First, we assess the impact of redistributive politics on growth by looking at the effect of income inequality on the tax rate and labor supply. Second, using the set up of Das and Ghate (2004), we provide a dynamic analysis of Alesina and Rodrik (1994) where majority voting determines the extent of distribution, and thus, a relationship between inequality and growth. The general insight gained from the analysis is that characterizing the transitional dynamics in a model of redistributive politics and growth with endogenous leisure is not intractable. |
| Keywords: | Distributive Conflict, Endogenous Distribution, Median Voter Theorem, Endogenous Growth, Positive Political Economy |
| JEL: | E62 O40 P16 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:esi:egpdis:2006-22&r=mac |
| By: | Feng, Dai |
| Abstract: | Stating from the intrinsic characteristics of macroeconomic process, this paper puts forward the concept of developwer and its theoretical frame. The developwer is the potential and invisible motivities to push economy to progress. By means of the developower theory, we can explain some important problems in macro-economy. We discuss the basic properties of developower and obtain some interesting inferences. The evaluating approaches are given for one or more developowers, and then we can measure them in analytic way and analyze the correlated effects among them. Finally, we illustrate that the developower movements exist widely in the social and economic development. |
| Keywords: | developower; macroeconomic process |
| JEL: | E10 O40 |
| Date: | 2006–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115&r=mac |
| By: | David Joulfaian |
| Abstract: | This paper explores the effects of inheritances on the saving of recipients. Information on inheritances and heirs is obtained from estate tax records of decedents which are linked to the income tax records of beneficiaries. The observed pattern of wealth mobility within two years of the receipt of inheritances and multivariate analyses show that wealth increases by less than the full amount of the inheritance received. Similarly, and consistent with previous findings, large inheritances are found to depress labor force participation. |
| JEL: | E21 H31 J26 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12569&r=mac |
| By: | Fabio C. Bagliano; Claudio Morana |
| Abstract: | In this paper a new approach to factor vector autoregressive estimation, based on Stock and Watson (2005), is introduced. Relative to the Stock-Watson approach, the proposed method has the advantage of allowing for a more clear-cut interpretation of the global factors, as well as for the identi.cation of all idiosyncratic shocks. Moreover, it shares with the Stock-Watson approach the advantage of using an iterated procedure in estimation, recovering, asymptotically, full effciency, and also allowing the imposition of appropriate restrictions concerning the lack of Granger causality of the variables versus the factors. Finally, relative to other available methods, our modelling approach has the advantage of allowing for the joint modelling of all variables, without resorting to long-run forcing hypotheses. An application to large-scale macroeconometric modelling is also provided. |
| Keywords: | dynamic factor models, vector autoregressions, principal components analysis. |
| JEL: | C32 G1 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:28&r=mac |
| By: | James Feigenbaum |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:230&r=mac |
| By: | Antonis Adam; Thomas Moutos |
| Abstract: | In this paper we construct a political economy model in which minimum wages are determined according to the wishes of the median voter. Using the minimum wage scheme as the status quo, we show that the replacement of minimum wages by wage subsidies guaranteeing the same (pre-tax) level of income (achieved by the government supplementing the wage income of workers by a subsidy equal to the difference between the competitive wage rate and the minimum wage rate), is not likely to receive political support unless it is supplemented by increased taxation of profits (after-tax profits are also likely to increase). Moreover, we show that the likelihood of implementation of wage subsidies is undermined by the existence of a heterogeneous labour force. |
| Keywords: | minimum wages, wage subsidies, median voter, political economy |
| JEL: | D72 E24 E62 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1810&r=mac |
| By: | James Feigenbaum |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:228&r=mac |
| By: | James Feigenbaum |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:231&r=mac |
| By: | James Feyrer; Bruce Sacerdote |
| Abstract: | Using a new database of islands throughout the Atlantic, Pacific and Indian Oceans we examine whether colonial origins affect modern economic outcomes. We argue that the nature of discovery and colonization of islands provides random variation in the length and type of colonial experience. We instrument for length of colonization using wind direction and wind speed. Wind patterns which mattered a great deal during the age of sail do not have a direct effect on GDP today, but do affect GDP via their historical impact on colonization. The number of years spent as a European colony is strongly positively related to the island's GDP per capita and negatively related to infant mortality. This basic relationship is also found to hold for a standard dataset of developing countries. We test whether this link is directly related to democratic institutions, trade, and the identity of the colonizing nation. While there is substantial variation in the history of democratic institutions across the islands, such variation does not predict income. Islands with significant export products during the colonial period are wealthier today, but this does not diminish the importance of colonial tenure. The timing of the colonial experience seems to matter. Time spent as a colony after 1700 is more beneficial to modern income than years before 1700, consistent with a change in the nature of colonial relationships over time. |
| JEL: | E21 O11 O4 O40 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12546&r=mac |
| By: | James Feigenbaum |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:227&r=mac |
| By: | Parantap Basu |
| Abstract: | Labour market friction is viewed as the Tobin’s Q of an employed worker as opposed to the position of the Beveridge curve. This Tobin’s Q is inversely proportional to the average quality of the match between employers and workers. Based on this measure, I find that the labour market friction behaves procyclically in the US, which is indicative of the fact that firms compromise on the quality of the skill match during an expansion. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0601&r=mac |
| By: | Zoltan Acs; Pamela Mueller |
| Abstract: | This paper examines the relationship between business dynamics and employment effects in 320 U.S. Metropolitan Statistical Areas (MSA). Much of the theoretical work on industry dynamics focuses on the role of noisy selection and incomplete information on entry and survival. We extend this research by looking at the impact of firm heterogeneity on employment persistence. We find that only start-ups with greater than twenty employees have persistent employment effects over time and only in large diversified metropolitan regions. Therefore, both the type of entry and the characteristics of the region are important for employment growth. |
| Keywords: | Industry dynamics, new business formation, employment effects, regions |
| JEL: | J6 L6 L8 M13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:esi:egpdis:2006-23&r=mac |
| By: | Felicity Pang; G.A. Meagher; G.C. Lim |
| Abstract: | A social accounting matrix is a framework for organising information about income, expenditure and financial flows in the economy. This paper describes a methodology for compiling such a matrix for the Australian economy as it existed in 1996-97. It distinguishes between five institutions, namely, households, non-financial corporations, financial corporations, the general government and the external sector, and identifies linkages between them. The matrix is so constructed that i) for every row there is a corresponding column; ii) the totals of corresponding rows and columns are equal; iii) every entry is a receipt when read in its row context and a payment when read in its column context. However, it does not distinguish between different industries or commodities and, to that extent, is properly regarded as an aggregate matrix. It forms part of the database for ORANI-ID, an applied general equilibrium model of the Australian economy designed for analysing the effect of changes in the economic environment on the distribution of income. |
| Keywords: | Social Accounting Matrix, Applied General Equilibrium, Income Distribution |
| JEL: | D30 D50 E10 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-158&r=mac |
| By: | Stijn Van Nieuwerburgh; Pierre-Olivier Weill |
| Abstract: | We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. In equilibrium, workers flow towards exceptionally productive metropolitan areas and drive house prices up. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large. |
| JEL: | E24 R12 R13 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12538&r=mac |
| By: | Bowen, H.P.; Munandar, H.; Viaene, J.M. |
| Abstract: | We show that in a fully integrated economy, in which there is free mobility of goods and factors, each member’s share of total output will equal its shares of total stocks of productive factors (i.e., physical and human capital). We label this result the equal-share relationship. This relationship also holds in the presence of technological differences or costs of factor mobility among members if outputs or inputs are properly measured to reflect such differences or costs. The equal-share relationship is the limiting distribution of output and factors among members of a fully integrated economy, and it constraints the set of policies that can affect each member’s relative growth within an integrated economy. We empirically examine for the equal-share relationship for alternative economic groups (i.e., US states, EU countries, Developing Countries and a World comprising 55 countries). Our findings indicate that the equal-share relationship holds strongly for US states, holds weakly for EU countries, but does not hold for Developing Countries or the World. |
| Keywords: | Distribution of production, economic growth, economic convergence, factor mobility, integrated economy |
| JEL: | E13 F15 F21 F22 O57 |
| Date: | 2006–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:vlg:vlgwps:2006-32&r=mac |
| By: | Morten L. Bech; Bart Hobijn |
| Abstract: | We examine the diffusion of real-time gross settlement (RTGS) technology across all 174 central banks. RTGS reduces settlement risk and facilitates financial innovation in the settlement of foreign exchange trades. In 1985, only three central banks had implemented RTGS systems, and by year-end 2005, that number had increased to ninety. We find that the RTGS diffusion process is consistent with the standard S-curve prediction. Real GDP per capita, the relative price of capital, and trade patterns explain a significant part of the cross-country variation in RTGS adoption. These determinants are remarkably similar to those that seem to drive the cross-country adoption patterns of other technologies. |
| Keywords: | Banks and banking, Central ; Foreign exchange ; Technological innovations |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:260&r=mac |
| By: | Cheng,Xiaoqiang; Degryse,Hans (Tilburg University, Center for Economic Research) |
| Abstract: | This paper provides evidence on the relationship between finance and growth in a fast growing country, such as China. Employing data of 27 Chinese provinces over the period 1995-2003, we study whether the financial development of two different types of institutions - banks and non-bank financial institutions - have a (significantly different) impact on local economic growth. Our findings indicate that only banking development shows a statistically significant and economically relevant impact on local economic growth. |
| Keywords: | growth;financial development;Chinese provinces;banks |
| JEL: | E44 G21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200682&r=mac |
| By: | Paul Söderlind |
| Abstract: | Survey and option data are used to take a fresh look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data suggests that investors perhaps overestimate the volatility of equity returns. Both facts reduce the puzzle. However, data on beliefs about output volatility (Survey of Professional Forecasters) shows marked overconfidence. On balance, the equity premium is somewhat less of a puzzle than in ex post data. |
| Keywords: | equity premium puzzle, Livingston survey, S&P 500 options, Survey of Professional Forecasters |
| JEL: | G12 E13 E32 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2006:2006-22&r=mac |