nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒10‒28
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Conservatism and Fiscal Policy By Adam, Klaus; Billi, Roberto M
  2. The Timing of Monetary Policy Shocks By Olivei, Giovanni; Tenreyro, Silvana
  3. Inflation Targeting under Imperfect Knowledge By Orphanides, Athanasios; Williams, John C
  4. How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and Central Bank Independence By Buiter, Willem H
  5. Review of Monetary Policy in South Africa: 1994-2004 By Aron, Janine; Muellbauer, John
  6. Understanding the Link between Money Growth and Inflation in the Euro Area By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  7. Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden By Gürkaynak, Refet S.; Levin, Andrew; Swanson, Eric T
  8. Money Growth, Output Gaps and Inflation at Low and High Frequency: Spectral Estimates for Switzerland By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  9. Note on zero lower bound worries By Cees Ullersma; Gerben Hieminga
  10. Aggregate Wage Flexibility in Selected New EU Member States By Ian Babetskii
  11. Menu Costs and Asymmetric Price Adjustment By Ellingsen, Tore; Friberg, Richard; Hassler, John
  12. The Economic Importance of Fiscal Rules By Artis, Michael J; Onorante, Luca
  13. The Brevity and Violence of Contractions and Expansions By McKay, Alisdair; Reis, Ricardo
  14. Financial Structure and Macroeconomic Volatility: Theory and Evidence By Huizinga, Harry; Zhu, Dantao
  15. Money Creation in a Random Matching Model By Alexei Deviatov
  16. Do Actions Speak Louder than Words? Household Expectations of Inflation Based on Micro Consumption Data By Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
  17. The Stabilizing Role of Government Size By Rafael Domenech; Javier Andres; Antonio Fatas
  18. On the Relevance of Exchange Rate Regimes for Stabilization Policy By Adao, Bernardino; Correia, Maria Isabel Horta; Teles, Pedro
  19. Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model By Bayoumi, Tamim; Sgherri, Silvia
  20. The Inflationary Consequences of Real Exchange Rate Targeting via Accumulation of Reserves By Kirill Sosunov; Oleg Zamulin
  21. Financial Innovations and Macroeconomic Volatility By Jermann, Urban; Quadrini, Vincenzo
  22. Expectational business cycles By Guse , Eran
  23. Monetary Persistence, Imperfect Competition and Staggering Complementarities By Merkl, Christian; Snower, Dennis J.
  24. An Alternative Trend-Cycle Decomposition using a State Space Model with Mixtures of Normals: Specifications and Applications to International Data By Tatsuma Wada; Pierre Perron
  25. Monetary Policy and the Stock Market: Some International evidence By Christos Ioannidis and Alexandros Kontonikas
  26. Aggregate Shocks or Aggregate Information? Costly Information and Business Cycle Comovement By Laura Veldkamp; Justin Wolfers
  27. A Stable International Monetary System Emerges: Bretton Woods, Reversed By Rose, Andrew K
  28. Mass Consumption, Exclusion and Unemployment By Foellmi, Reto; Zweimüller, Josef
  29. INTEREST RATE PASS-THROUGH IN COLOMBIA: A MICRO- BANKING PERSPECTIVE By Rocío Betancourt; Hernando Vargas; Norberto Rodríguez Niño
  30. Seemingly Irrelevant Events Affect Perceptions and Expectations - The FIFA World Cup 2006 as a Natural Experiment By Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
  31. Labour Contracts, Equal Treatment and Wage-Unemployment Dynamics By Andy Snell; Jonathan Thomas
  32. How Far Are We From the Slippery Slope? The Laffer Curve Revisited By Trabandt, Mathias; Uhlig, Harald
  33. Does Information Help Recovering Structural Shocks from Past Observations? By Giannone, Domenico; Reichlin, Lucrezia
  34. How Much Information Should Interest Rate-Setting Central Banks Reveal? By Gosselin, Pierre; Gosselin-Lotz, Aileen; Wyplosz, Charles
  35. What Do We Now Know About Currency Unions? By Artis, Michael J
  36. Cyclical Wages in a Search-and-Bargaining Model with Large Firms By Rotemberg, Julio
  37. Fiscal Policy and the Term Structure: Evidence from the Case of Italy in the EMS and the EMU Periods By Favero, Carlo A; Giglio, Stefano W
  39. Political Budget Cycles and Fiscal Decentralization By Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
  40. The Caring Hand that Cripples: The East German Labour Market after Reunification By Merkl, Christian; Snower, Dennis J.
  41. Fiscal Policy in Europe: The Past and Future of EMU Rules from the Perspective of Musgrave and Buchanan By Buti, Marco; Sapir, André
  42. The Limit Distribution of the CUSUM of Square Test Under Genreal MIxing Conditions* By Ai Deng; Pierre Perron
  43. Foreign Aid and Fiscal Policy By Faini, Riccardo
  44. The Home Bias and Capital Income Flows between Countries and Regions By Artis, Michael J; Hoffmann, Mathias
  45. On the Consequences of Demographic Change for Rates of Return to Capital, and the Distribution of Wealth and Welfare By Krüger, Dirk; Ludwig, Alexander
  46. Firms’ Heterogeneous Sensitivities to the Business Cycle, and the Cross-Section of Expected Returns By François Gourio;
  47. The Marginal Worker and The Aggregate Elasticity of Labor Supply By François Gourio; Pierre-Alexandre Noual
  48. Flat Tax Reforms in the US: A Boon for the Income Poor By Díaz-Giménez, Javier; Pijoan-Mas, Josep
  49. Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations By Bindseil, Ulrich; Nyborg, Kjell G.; Strebulaev, Ilya A.
  50. The Consumption-Tightness Puzzle By Ravn, Morten O.
  52. Generational Accounts in the Czech Republic By Kamil Dybczak
  53. From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules By Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
  54. A Spatio-Temporal Model of House Prices in the US By Sean Holly; M. Hashem Pesaran; Takashi Yamagata
  55. Expectations and Exchange Rate Policy By Devereux, Michael B; Engel, Charles M
  56. Stable Finite-State Markov Sunspots By George W. Evans; Bruce McGough
  57. The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk By Hanno Lustig; Adrien Verdelhan
  58. Shocking Aspects of Canadian Labour Markets By Bayoumi, Tamim; Sutton, Bennett; Swiston, Andrew J.
  59. Public Investment in Transportation Infrastructures and Industry Performance in Portugal By Alfredo M. Pereira; Jorge M. Andraz
  60. Should Measures of Fiscal Stance be Adjusted for Terms of Trade Effects? By OECD
  61. Labour productivity developments in the euro area By Ramon Gomez-Salvador; Alberto Musso; Marc Stocker; Jarkko Turunen
  62. Drift and Breaks in Labour Productivity By Benati, Luca
  64. Life-Cycle Housing and Portfolio Choice with Bond Markets By van Hemert, Otto
  65. Reform Redux: Measurement, Determinants and Reversals By Campos, Nauro F; Horváth, Roman
  66. Crises, What Crises? By Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
  67. Real Wage Cyclicality of Female Stayers and Movers in Part-Time and Full-Time Jobs By Robert A. Hart
  68. Implications of the Modigliani-Miller Theorem for the Study of Exchange Rate Regimes By Alexandre B. Cunha
  69. Telecommunications Dynamics, Output and Employment By Andre Jungmittag; Paul J.J. Welfens
  70. Does financial intermediation matter for macroeconomic efficiency? By Pierre-Guillaume Méon; Laurent Weill
  71. Tax Rate Variability and Public Spending as Sources of Inderterminacy By Lloyd-Braga, Teresa; Modesto, Leonor; Seegmuller, Thomas
  72. Inflation, Price Competition and Consumer Search Technology By Makoto Watanabe
  73. Women Prefer Larger Governments: Growth, Structural Transformation and Government Size By Cavalcanti, Tiago; Tavares, José
  74. The Macroeconomics of Targeting: The Case of an Enduring Epidemic By Bell, Clive; Gersbach, Hans
  75. Institutional Weakness and Stock Price Volatility By Hale, Galina B; Razin, Assaf; Tong, Hui

  1. By: Adam, Klaus; Billi, Roberto M
    Abstract: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. Exclusive focus on inflation by the central bank recoups large part - in some cases all - of the steady state welfare losses associated with lack of monetary and fiscal commitment. An inflation conservative central bank tends to improve also the conduct of stabilization policy.
    Keywords: conservative monetary policy; discretionary policy; sequential non-cooperative policy games; time consistent policy
    JEL: E52 E62 E63
    Date: 2006–07
  2. By: Olivei, Giovanni; Tenreyro, Silvana
    Abstract: A vast empirical literature has documented delayed and persistent effects of monetary policy shocks on output. We show that this finding results from the aggregation of output impulse responses that differ sharply depending on the timing of the shock: When the monetary policy shock takes place in the first two quarters of the year, the response of output is quick, sizable, and dies out at a relatively fast pace. In contrast, output responds very little when the shock takes place in the third or fourth quarter. We propose a potential explanation for the differential responses based on uneven staggering of wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show that a very modest amount of uneven staggering can generate differences in output responses similar to those found in the data.
    Keywords: business cycles; impulse-response function; monetary policy; nominal rigidity
    JEL: E1 E31 E32 E52 E58
    Date: 2006–06
  3. By: Orphanides, Athanasios; Williams, John C
    Abstract: A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank’s goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.
    Keywords: bond prices; learning; monetary policy rules; natural rate of interest; natural rate of unemployment; rational expectations; uncertainty
    JEL: D83 D84 E52 E58
    Date: 2006–05
  4. By: Buiter, Willem H
    Abstract: Flexible inflation targeting cannot be rationalised using conventional welfare economic criteria, except in a single, practically uninteresting special case. New-Keynesian DSGE models imply that optimal monetary policy implements the Bailey-Friedman Optimal Quantity of Money rule and that actual inflation fully validates or accommodates core inflation. Flexible inflation targeting is also inconsistent with the mandates of leading inflation targeters like the Bank of England and the ECB. These mandates are lexicographic in price stability and therefore does not permit a trade-off between inflation volatility and output gap volatility in the monetary policy maker's objective function. Operational independence of the central bank is limited by the central bank's intertemporal budget constraint. Price stability, or an externally imposed inflation target, may not be independently financeable by the central bank. In that case, active budgetary support from the Treasury is necessary to make the inflation target financeable. Independent monetary policy is fully compatible with coordinated and cooperative monetary and fiscal policy. Central bank operational independence precludes substantive accountability; it is compatible only with a weak form of formal accountability: reporting obligations. Central bank independence will only survive if it is viewed as legitimate by the polity and its citizens. A necessary condition for this is that the central bank restricts its activities and public discourse to its natural core mandate: price stability and the capacity and willingness to act as lender of last resort. The Protocol on the Statute of the ESCB and the ECB has given the ECB a mandate that goes beyond this natural core mandate. Such behaviour represents a threat to its continued independence.
    Keywords: accountability; central bank intertemporal budget constraint; flexible inflation targeting
    JEL: D6 E3 E4 E5 H0
    Date: 2006–07
  5. By: Aron, Janine; Muellbauer, John
    Abstract: This paper examines the evolution of monetary policy in South Africa in 1994-2004 in terms of design, the operational framework, the South African Reserve Bank’s (SARB) understanding of monetary policy transmission and the transparency, credibility and predictability of monetary policy. Quantitative indexes of transparency in 1994 and 2004 are compared and expectations data and forward interest rate data used to assess the credibility and predictability of policy under inflation targeting. The forecasting performance of the SARB is evaluated, and monetary policy decisions taken in response to external and domestic shocks assessed. The impact of monetary policy on the level of real interest rates and the role for complementary policies are examined.
    Keywords: inflation targeting; monetary policy; South Africa
    JEL: E52 E58
    Date: 2006–09
  6. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: Announced in the autumn of 1998, the monetary policy strategy of the European Central Bank (ECB) quickly became controversial, arguably because the ECB provided neither an explicit representation of the inflation process nor an explanation for why it necessitated the adoption of a two-pillar framework. Several reduced-form empirical models that seek to do so have subsequently been presented in the literature. The hallmark of these models is the hypothesis that inflation can be decomposed into a 'trend', which is explained by a smoothed measure of past money growth, and a deviation from that trend, which is accounted for by the output gap. In this paper we survey this literature, discuss how it relates to the monetary transmission mechanism and extend the inflation equations by introducing cost-push shocks. We find that changes in import prices, oil prices and exchange rates are statistically significant in euro-area inflation equations but that they leave intact the earlier findings that money growth and the output gap matter.
    Keywords: frequency domain; Philipps curve; quantity theory; spatial regression
    JEL: C22 E3 E5
    Date: 2006–05
  7. By: Gürkaynak, Refet S.; Levin, Andrew; Swanson, Eric T
    Abstract: We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behaviour of daily bond yield data in the United Kingdom and Sweden—both inflation targeters—to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that inflation compensation has been insensitive to economic news over the whole period for which we have data. We show that these observations are also matched by the relative means and volatilities of the time series of far-ahead forward inflation compensation in these three countries. Our findings support the view that a well-known and credible inflation target helps anchor the private sector’s views regarding the distribution of long-run inflation outcomes.
    Keywords: inflation targeting
    JEL: E31 E52 E58
    Date: 2006–08
  8. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: While monetary targeting has become increasingly rare, many central banks attach weight to money growth in setting interest rates. This raises the issue of how money can be combined with other variables, in particular the output gap, when analysing inflation. The Swiss National Bank emphasises that the indicators it uses to do so vary across forecasting horizons. While real indicators are employed for short-run forecasts, money growth is more important at longer horizons. Using band spectral regressions and causality tests in the frequency domain, we show that this interpretation of the inflation process fits the data well.
    Keywords: frequency domain; Phillips curve; quantity theory; spectral regression
    JEL: C22 E3 E5
    Date: 2006–06
  9. By: Cees Ullersma; Gerben Hieminga
    Abstract: Although some authors have suggested that monetary expansion is still possible when the monetary policy interest rate cannot be reduced further, central banks tend to avoid interest rates close to the zero lower bound. Taking into account central banks.aversion to very low interest rates, we investigate optimal monetary policy in a New-Keynesian macro-economic model. Our analysis shows that appointing a central banker with a high aversion to low interest rate levels can mitigate the zero bound risk at the cost of persistent in.ation deviations from target. If fear of the zero lower bound is unfounded, it is better to appoint a central banker with no aversion to the zero lower bound, who will not shy away from unorthodox policies when the policy interest rate cannot be reduced further.
    Keywords: zero lower bound; inflation bias.
    JEL: E58 E52 E31
    Date: 2006–10
  10. By: Ian Babetskii
    Abstract: A fixed exchange rate regime eliminates one degree of freedom in absorbing macroeconomic shocks. Therefore, there is a call for higher labor market flexibility in countries which are members of the monetary union or those which intend to join the monetary union. Focusing on the cross-country analysis of labor markets in the enlarged European Union, this paper aims to assess empirically the role of aggregate wages as a correction mechanism for dealing with economic disturbances. A comparable quarterly data-set is constructed covering 1995–2004 for four central European states (CE-4), four new EU members already participating in the Exchange Rate Mechanism-II (ERM-II participants), and three peripheral members of the euro area (EMU- 3). We apply classical time series/panel, Bayesian, and cointegration techniques to determine the extent to which aggregate wages can accommodate shocks in the economy. The macroeconomic data does not seem to support the argument that real wages are flexible in the CE-4, the ERM-II participants, and the EMU-3.
    Keywords: . ERM-II, euro adoption, labor market, wage flexibility.
    JEL: E24 E52 C22 C33 P20
    Date: 2006–04
  11. By: Ellingsen, Tore; Friberg, Richard; Hassler, John
    Abstract: We study optimal price setting by a monopolist in an infinite horizon model with stochastic costs, moderate inflation, and costly price adjustment. For realistic parameters, chosen to replicate observed frequencies of price changes, the model fits numerically several empirical regularities. In particular, price reductions are larger but less frequent than price increases, and prices respond considerably faster to cost increases than to cost decreases. The associated kink in the steady state short-run Phillips curve implies that the output loss associated with a small negative inflation surprise is about twice as large as the output gain associated with a small positive inflation surprise.
    Keywords: asymmetric price adjustment; downward rigidity; menu costs; Phillips curve
    JEL: D42 E31 E32
    Date: 2006–07
  12. By: Artis, Michael J; Onorante, Luca
    Abstract: The paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each Eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the SGP in its old and reformed versions. The results suggest that fiscal policy has had in the past a limited smoothing effect on the cycle and therefore the cost of the old rules in the “corrective” arm of the Pact was also limited. As for the reform of the Pact the analysis is overall supportive of the new country-specific Medium term Objectives. The modified rules of the excessive deficit procedure are likely to give governments only a limited extra leeway to reduce the variability of the cycle.
    Keywords: European Monetary Union; fiscal-monetary interactions; Stability and Growth Pact
    JEL: E61 E62 E63
    Date: 2006–05
  13. By: McKay, Alisdair; Reis, Ricardo
    Abstract: Early studies of business cycles argued that contractions in economic activity were briefer (shorter) and more violent (rapid) than expansions. This paper systematically investigates this claim and in the process discovers a robust new business cycle fact: expansions and contractions in output are equally brief and violent but contractions in employment are briefer and more violent than expansions. The difference arises because employment typically lags output around peaks but both series roughly coincide in their troughs. We discuss the performance of existing business cycle models in accounting for this fact, and conclude that none can fully account for it. We then show that a simple model that combines three familiar ingredients - labor hoarding, a choice of when to scrap old technologies, and job training or job search - can account for the business cycle fact.
    Keywords: asymmetric cycles; business cycles; economic expansions and contractions; unemployment
    JEL: E23 E24 E32 J60
    Date: 2006–07
  14. By: Huizinga, Harry; Zhu, Dantao
    Abstract: This paper presents a simple model capturing differences between debt and equity finance to examine how financial structure matters for macroeconomic volatility. Debt finance is relatively cheap in the sense that debt holders need to verify relatively few profitability states, but debt finance may lead to costly bankruptcy. At the aggregate level, a more debt-based financial structure leads to a higher bankruptcy rate. Therefore, aggregate output is more variable in case of a heavy reliance on debt finance. This paper provides empirical evidence that countries with more equity finance have a lower variance of GDP and a lower probability of episodes of negative economic growth.
    Keywords: bankruptcy costs; financial structure; macroeconomic volatility
    JEL: C24 E32 E44 G33
    Date: 2006–06
  15. By: Alexei Deviatov (New Economic School)
    Abstract: I study money creation in versions of the Trejos-Wright (1995) and Shi (1995) models with indivisible money and individual holdings bounded at two units. I work with the same class of policies as in Deviatov and Wallace (2001), who study money creation in that model. However, I consider an alternative notion of implementability–the ex ante pairwise core. I compute a set of numerical examples to determine whether money creation is beneficial. I find beneficial e?ects of money creation if individuals are su?ciently risk averse (obtain su?ciently high utility gains from trade) and impatient.
    Keywords: inflation; Friedman rule; optimal monetary policy
    JEL: E31
    Date: 2006–09
  16. By: Inoue, Atsushi; Kilian, Lutz; Kiraz, Fatma Burcu
    Abstract: Survey data on household expectations of inflation are routinely used in economic analysis, yet it is not clear to what extent households are able to articulate their expectations in survey interviews. We propose an alternative approach to recovering households' implicit expectations of inflation from their consumption expenditures. We show that these implicit expectations have predictive power for CPI inflation. They are better predictors of CPI inflation than survey responses, except for highly educated consumers. Moreover, households' implicit inflation expectations respond to inflation news, consistent with recent work on the transmission of information across consumers. The response of consumers' expectations to inflation news tends to increase with their level of education. Our evidence strengthens the case for macroeconomic models with sticky information.
    Keywords: consumer expenditure survey; Euler equation; inflation expectations; Michigan survey of consumers; survey of professional forecasters
    JEL: D12 D84 E31
    Date: 2006–08
  17. By: Rafael Domenech (Institute of International Economics, University of Valencia); Javier Andres (Institute of International Economics, University of Valencia); Antonio Fatas (INSEAD)
    Abstract: This paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. However, in the model, we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output. Given that empirically we also observe a negative correlation between government size and the volatility of consumption, we modify the model by introducing rule-of-thumb consumers. In this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in OECD economies over the last 45 years.
    Keywords: Government size, output volatility, automatic stabilizers.
    JEL: E32 E52 E63
    Date: 2006–10
  18. By: Adao, Bernardino; Correia, Maria Isabel Horta; Teles, Pedro
    Abstract: This paper assesses the relevance of the exchange rate regime for stabilization policy. This regime question cannot be dealt with independently of other institutions, in particular how fiscal policy is designed. We show that once fiscal policy is taken into account, the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international financial markets. The only relevant condition is labour mobility. The immobility of labour across countries is a necessary condition for our results.
    Keywords: fiscal and monetary policy; fixed exchange rates; labour mobility; monetary union; nominal rigidities; stabilization policy
    JEL: E31 E63 F20 F33 F41 F42
    Date: 2006–08
  19. By: Bayoumi, Tamim; Sgherri, Silvia
    Abstract: We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.
    Keywords: discount rates; fiscal multipliers; fiscal policy; Ricardian equivalence
    JEL: E21 E63
    Date: 2006–09
  20. By: Kirill Sosunov (Higher School of Economics); Oleg Zamulin (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 the results to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-o 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 F4
    Date: 2006–08
  21. By: Jermann, Urban; Quadrini, Vincenzo
    Abstract: The volatility of US business cycle has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatile in the financial structure of firms.
    Keywords: business cycle; debt-equity finance; financing constraints
    JEL: E3 G1 G3
    Date: 2006–06
  22. By: Guse , Eran (Department of Applied Economics, University of Cambridge)
    Abstract: I introduce Expectational Business Cycles where aggregate activity fluctuates due to learning, heterogeneous updating rules and random changes in the social norm predictor. Agents use one of two updating rules to learn the equilibrium values while heterogeneity is dictated via an evolutionary process. Uncertainty of a new equilibrium, due to a shock to the structure of the economy, results in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. These business cycles arrive faster, are longer and more severe as agents possess less rationality.
    Keywords: adaptive learning; aggregate fluctuations; heterogeneous expectations; multiple equilibria; rational expectations
    JEL: C62 D84 E37
    Date: 2005–07–18
  23. By: Merkl, Christian; Snower, Dennis J.
    Abstract: This paper explores the influence of wage and price staggering on monetary persistence. We show that, for plausible parameter values, wage and price staggering are highly complementary in generating monetary persistence. We do so by proposing the new measure "quantitative persistence," after discussing weaknesses of the "contract multiplier," which is generally used to compare persistence. The existence of complementarities means that beyond understanding how wage and price staggering work in isolation, it is important to explore their interactions. Furthermore, our analysis indicates that the degree of monetary persistence generated by wage vis-à-vis price staggering depends on the relative competitiveness of the labour and product markets. We show that the conventional wisdom that wage staggering can generate more persistence than price staggering does not necessarily hold.
    Keywords: monetary persistence; monetary policy; price staggering; wage staggering
    JEL: E40 E50 E52
    Date: 2006–05
  24. By: Tatsuma Wada (Department of Economics, Boston University); Pierre Perron (Department of Economics, Boston University)
    Abstract: This paper first generalizes the trend-cycle decomposition framework of Perron and Wada (2005) based on an unobserved components models with innovations having a mixtures of Normals distribution, which is able to handle sudden level and slope changes to the trend function as well as outliers. We investigate how important are the differences in the implied trend and cycle compared to the popular decomposition based on the Hodrick and Prescott (HP) (1997) filter. Our results show important qualitative and quantitative differences in the implied cycles for both real GDP and consumption series for the G7 countries. Most of the differences can be ascribed to the fact that the HP filter does not handle well slope changes, level shifts and outliers, while our method does so. Third, we assess how such different cycles affect some socalled “stylized facts” about the relative variability of consumption and output across countries. Our results show again important differences. In particular, the crosscountry consumption correlations are generally higher than the output correlations, except for the period from 1975 to 1985, provided Canada is excluded. Our results therefore provide a partial solution to this puzzle. The evidence is particularly strong for the most recent period.
    Keywords: Trend-Cycle Decomposition, Unobserved Components Model, International Business Cycle, Non Gaussian Filter.
    JEL: C22 E32
    Date: 2005–10
  25. By: Christos Ioannidis and Alexandros Kontonikas
    Abstract: This paper investigates the impact of monetary policy on stock returns in thirteen OECD countries over the period 1972-2002. Our results indicate that monetary policy shifts significantly affect stock returns, thereby supporting the notion of monetary policy transmission via the stock market. Our contribution with respect to previous work is threefold. First, we show that our findings are robust to various alternative measures of stock returns. Second, our inferences are adjusted for the non-normality exhibited by the stock returns data. Finally, we take into account the increasing co-movement among international stock markets. The sensitivity analysis indicates that the results remain largely unchanged.
    JEL: E44 E52 E60
  26. By: Laura Veldkamp (Stern School, New York University); Justin Wolfers (Wharton School, University of Pennsylvania, CEPR, NBER and IZA Bonn)
    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, comovement puzzle, information markets
    JEL: E32 D82
    Date: 2006–09
  27. By: Rose, Andrew K
    Abstract: A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent “sudden stops” of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has yet abandoned an inflation-targeting regime in crisis. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.
    Keywords: capital; controls; durable; exchange; finance; fixed; inflation; rate; regime
    JEL: F02 F10 F34
    Date: 2006–09
  28. By: Foellmi, Reto; Zweimüller, Josef
    Abstract: We introduce non-homothetic preferences into a general equilibrium model of monopolistic competition and explore the impact of income inequality on the medium-run macroeconomic equilibrium. We find that (i) a sufficiently high extent of inequality divides the economy into mass consumption sectors (where firms charge low prices and hire many workers) and exclusive sectors (where firms charge high prices and hire few workers). (ii) High inequality may lead to a situation of underemployment and that underemployment could be "Keynesian" in the sense that it cannot be cured by downward-flexible real wages. (iii) A redistribution of income from rich to poor (by means of progressive taxation) leads to higher employment and such a redistribution is Pareto-improving. (iv) An exogenous increase in (minimum) real wages have a cost effect (that lets firms reduce their employment) and a purchasing power effect (that creates an incentive for mass production and raises aggregate employment) with ambiguous net effects. (v) The economy may feature multiple equilibria where full-employment and unemployment equilibria co-exist.
    Keywords: exclusion; income distribution; mark-ups; monopolistic competition
    JEL: D30 D42 E24 E25 L16
    Date: 2006–09
  29. By: Rocío Betancourt; Hernando Vargas; Norberto Rodríguez Niño
    Abstract: Banks and other credit institutions are key players in the transmission of monetary policy, especially in emerging market economies, where the responses of deposit and loan interest rates to shifts in policy rates are among the most important channels. This pass-through depends on the conditions prevailing in the loan and deposit markets, which are, in turn, affected by macroeconomic factors. Hence, when setting their policy, monetary authorities must take into account those conditions and the behavior of banks. This paper illustrates this point by means of a theoretical micro-banking model and shows empirical evidence for Colombia suggesting that some aspects of the model might be relevant features of the transmission mechanism.
    Date: 2006–10–01
  30. By: Dohmen, Thomas J; Falk, Armin; Huffman, David; Sunde, Uwe
    Abstract: Prominent economic theories have emphasized the role of commonly held perceptions and expectations for determining macroeconomic outcomes. A key empirical question is how such collectively held beliefs are formed. We use the FIFA World Cup 2006 as a natural experiment. We provide direct evidence that seemingly irrelevant events (the outcomes of soccer matches) can systematically affect individual perceptions about economic prospects, both on a personal and economy-wide level.
    Keywords: expectation formation; macroeconomic outcomes; psychology; soccer World Cup; sunspots
    JEL: D0 D8 E0
    Date: 2006–09
  31. By: Andy Snell; Jonathan Thomas
    Abstract: This paper analyses a model in which .rms cannot pay discriminate based on year of entry to a .rm, 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.
    Keywords: Labor contracts, business cycle, unemployment, equal treatment, cohort effects
    JEL: E32 J41
  32. By: Trabandt, Mathias; Uhlig, Harald
    Abstract: The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.
    Keywords: Laffer curve; US and EU-15 economy
    JEL: E0 E60 H0
    Date: 2006–05
  33. By: Giannone, Domenico; Reichlin, Lucrezia
    Abstract: This paper asks two questions. First, can we detect empirically whether the shocks recovered from the estimates of a structural VAR are truly structural? Second, can the problem of non-fundamentalness be solved by considering additional information? The answer to the first question is 'yes' and that to the second is 'under some conditions'.
    Keywords: identification; information; invertibility; structural VAR
    JEL: C32 C33 E00 E32 O3
    Date: 2006–06
  34. By: Gosselin, Pierre; Gosselin-Lotz, Aileen; Wyplosz, Charles
    Abstract: Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.
    Keywords: central bank transparency
    JEL: E42 E52 E58
    Date: 2006–05
  35. By: Artis, Michael J
    Abstract: The paper presents the text of a lecture given at the Bank of England in December 2005 as the first in a series of lectures in memory of John Flemming. It provides a personal view of what the profession has learnt about currency unions as a result of the establishment and operation of the European Monetary Union. It argues that the salience of business cycle concurrence as a criterion for participation is probably less than used to be understood and for some countries borders on irrelevance. In any case the effects of union upon business cycle concurrence are themselves not obvious. It also appears that, after a period in which very large estimates of the trade effect of currency unions were widespread, more modest estimates are in order. The most unlooked-for effect is probably that which has occurred in the financial markets; country premia within the EMU are very small, offering a means for insurance against asymmetric shocks. Finally, the lessons of another, local, experiment in currency union is examined. But the useful lessons from this experiment (Ecco L’Euro) are found to be limited.
    Keywords: currency union; EMU; optimal currency area theory
    JEL: E0 E4 F1
    Date: 2006–05
  36. By: Rotemberg, Julio
    Abstract: This paper presents a complete general equilibrium model with flexible wages where the degree to which wages and productivity change when cyclical employment changes is roughly consistent with postwar U.S. data. Firms with market power are assumed to bargain simultaneously with many employees, each of whom finds himself matched with a firm only after a process of search. When employment increases as a result of reductions in market power, the marginal product of labor falls. This fall tempers the bargaining power of workers and thus dampens the increase in their real wages. The procyclical movement of wages is dampened further if the posting of vacancies is subject to increasing returns.
    Keywords: cyclical wages; matching models
    JEL: E24 E37 J64
    Date: 2006–08
  37. By: Favero, Carlo A; Giglio, Stefano W
    Abstract: We study the relationship between the term structure of interest rates and fiscal policy by considering the Italian case. Empirical analysis has been so far rather inconclusive on this important topic. We abscribe such evidence to three problems: identification, regime-switching and maturity effects. All these aspects are particularly relevant to the Italian case. We propose a parsimonious model with three factors to represent the whole yield curve, and we consider yield differentials between Italian and German Government bonds. To take into account the possibility of regime-switching, we explicitly include a hidden two-state Markov chain that represents market expectations. The model is estimated using Bayesian econometric techniques. We find that government debt and its evolution significantly influence the yield of government bonds, that such effects are maturity dependent and regime-dependent. Hence when investigating the effect of fiscal policy on the term-structure it is of crucial importance to allow for multiple regimes in the estimation.
    Keywords: Bayesian estimation; fiscal policy; regime switching; term structure
    JEL: E0 G0
    Date: 2006–08
  38. By: Paz Rico Belda (Universitat de València)
    Abstract: This paper investigates whether threshold effects exist in the relationship between dollar-euro real exchange rate and real interest differential, over the period January 1984 to December 2004. We specify a three-regime threshold model and the results provide evidence that there is no threshold effect in the short term, but the nonlinear behaviour of real exchange rate implies threshold effect in the long term. On the other hand, the nonlinearity into the behaviour of real exchange rates can be modelled by a Band-TAR which implies a symmetric response to the real interest differential outside the bank. Finally, into the threshold band the behaviour of real exchange rate is near to follow a random walk, so monetary shocks are more persistence than outside this region. En este trabajo se analiza si existe efecto umbral en la relación entre el tipo de cambio real dólar-euro y el diferencial de intereses reales, durante el periodo comprendido entre enero de 1984 y diciembre de 2004. Para ello se específica un modelo threshold de tres regímenes y los resultado evidencian que no existe efecto umbral corto plazo pero si a largo plazo. El comportamiento no lineal del tipo de cambio real conlleva en el largo plazo una respuesta al diferencial de intereses reales que es diferente fuera que dentro de la banda umbral. Asimismo, el comportamiento del tipo de cambio real sigue un proceso Band-TAR, de tal forma que reacciona igual por arriba que por debajo de la banda al diferencial de intereses reales. Finalmente, dentro de la banda umbral el tipo de cambio real muestra un comportamiento cercano a presentar raíz unitaria, por lo que los shocks monetarios generan desviaciones de su nivel de equilibrio más persistentes que fuera de la banda.
    Keywords: banda umbral, tipo de cambio real, diferencial de intereses reales, paridad de poder adquisitivo, no linealidad Threshold, real exchange rates, real interest differentials, purchasing power parity, nonlinearity.
    JEL: F30 F47 C53
    Date: 2006–10
  39. By: Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
    Abstract: In this paper, we study a model a la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.
    Keywords: fiscal decentralization; local public goods; political budget cycle
    JEL: D72 E32 E62 H41
    Date: 2006–04
  40. By: Merkl, Christian; Snower, Dennis J.
    Abstract: The East German labor market has hardly made any progress since German reunification, despite massive migration flows and support from the West. We argue that East Germany is in trouble precisely because of the support it has received. This paper explores the phenomenon of 'the caring hand that cripples,' arising from bargaining by proxy, the adoption of the West German welfare system and the associated employment persistence. Even the steady decrease of labour cost (normalized by productivity) since the beginning of the 1990s did not help to kick start the East. We suggest that labor force participants fell into 'traps,' concerning low skills, ageing of the workforce, labour-saving capital and skills, capital underutilization, and unemployment arising from the decline of the tradeable sector.
    Keywords: German unification; labour market traps; labour markets
    JEL: E24 J3 P2
    Date: 2006–05
  41. By: Buti, Marco; Sapir, André
    Abstract: During the ‘Golden Age’ that lasted until the mid-1970s, Europe witnessed a "public finance" phase, when the three sides of Musgrave’s triangle - allocative efficiency, redistribution and cyclical stabilisation - seemed to reinforce one another. EMU's fiscal rules - embodied in the Maastricht Treaty and the Stability and Growth Pact - can be regarded as the attempt by European governments to overcome the subsequent "public choice" phase à la Buchanan which was characterised by increasing budget deficits and trade offs between allocative efficiency and redistribution. The original Stability Pact delivered only partly. A rigorous enforcement of the reformed Pact will depend on two conditions: the renewed ownership of the rules by key players and the relative weight of the perceived negative externalities of fiscal misbehaviour versus the political costs of attempting to limit the partner countries’ room for manoeuvre.
    Keywords: EMU; fiscal policy; Stability Pact
    JEL: E6 H3 H6
    Date: 2006–09
  42. By: Ai Deng (Department of Economics, Boston University); Pierre Perron (Department of Economics, Boston University)
    Abstract: We consider the CUSUM of squares test in a linear regression model with general mixing assumptions on the regressors and the errors. We derive its limit distribution and show how it depends on the nature of the error process. We suggest a corrected version that has a limit distribution free of nuisance parameters. We also discuss how it provides an improvement over the standard approach to testing for a change in the variance in a univariate times series. Simulation evidence is presented to support this. We illustrate the usefulness of our method by analyzing changes in the variance of stock returns and a variety of macroeconomic time series, as well as by testing for change in the variance of the residuals in a typical four-variable VAR model. Our results show the widespread prevalence of changes in the variance of such series and the fact that the variability of shocks affecting the U.S. economy has decreased.
    Keywords: Change-point, Variance shift, Recursive residuals, Dynamic models, Conditional heteroskedasticity.
    JEL: D80 D91 G11 E21
    Date: 2005–11
  43. By: Faini, Riccardo
    Abstract: Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.
    Keywords: fiscal policy; foreign aid
    JEL: E62 F35
    Date: 2006–06
  44. By: Artis, Michael J; Hoffmann, Mathias
    Abstract: This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other’s output (Shiller securities). This model allows us to identify the channels through which improvements in international risk sharing have come about. The model predicts crosscountry and cross-regional income flows with considerable precision. Both international income flows as well as consumption risk sharing have increased since 1990, in line with the gradual removal of country portfolio home bias documented elsewhere. Still, the increase in international income flows falls short of explaining all of the consumption risk sharing we see in international data. We show that heterogeneity in countries’ gross foreign asset positions is important in explaining this result. While countries with less portfolio home bias enjoy better consumption risk sharing, our findings also suggest that heterogeneity in country portfolios opens a separate channel for consumption risk sharing, possibly through asymmetric valuation effects that have been emphasized in the recent literature.
    Keywords: consumption risk sharing; home bias; international and regional business cycles; non-stationary panel data
    JEL: C23 E21 F36
    Date: 2006–05
  45. By: Krüger, Dirk; Ludwig, Alexander
    Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labour productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the US as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the US were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the US is 'importing' the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labour productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
    Keywords: distribution of welfare; international capital flows; population aging
    JEL: C68 D33 E17 E25
    Date: 2006–09
  46. By: François Gourio (Department of Economics, Boston University);
    Abstract: In this paper, I propose and test a simple technology-based theory of firms’ sensitivities to aggregate shocks. I show that when the elasticity of substitution between capital and labor is below unity, low profitability firms are more sensitive to aggregate shocks, i.e. to the business cycle. Since the wage is smoother than productivity, revenues are more procyclical than costs, making profits, the residual procyclical. Firms with low profitability are more procyclical since the residual is smaller and the amplification greater. I study the asset pricing implications of this technology and find that it can explain the riskiness of small and “value” firms (Fama and French 1996). These firms are less profitable and are thus more procyclical. I find empirically that the cross-section of expected returns is well explained by differences in sensitivities of firms’ earnings to GDP growth, or by differences in profitability. The model yields rich empirical implications by linking a firm’s real behavior (the elasticity of output, employment and profits to an aggregate shock) to its financial characteristics (the firm’s betas and its average return). I next embed my partial equilibrium model in a full DSGE model to conduct a GE analysis. Empirically I show that firms with low margins are indeed more sensitive to the business cycle in their employment, sales or profits.
    Keywords: Cross-Section of Returns, Book-to-Market, Value Premium, Productivity Heterogeneity.
    JEL: E44 G12
    Date: 2006–02
  47. By: François Gourio (Department of Economics, Boston University); Pierre-Alexandre Noual (University of Chicago.)
    Abstract: This paper attempts to reconcile the high apparent aggregate elasticity of labor supply with small micro estimates. We elaborate on Rogerson’s seminal work (1988) and show that his results rely neither on complete markets nor on lotteries, but rather on the indivisibility of labor supply and the marginal homogeneity of the workforce. We derive two robust implications of a setup with indivisible labor but without lotteries, using either a complete markets model or an incomplete markets model. Implication (1) is that agents with reservation wages far above or below the market wage are less responsive (in labor supply) to the business cycle than agents whose reservation wage is around the market wage. Implication (2) is that the aggregate elasticity is given by the marginal homogeneity of the workforce. We test implication (1) using the PSID and find support for it. We build an incomplete market model and calibrate it to cross-sectional moments of hours worked. We show that it can reproduce the feature (1). This allows us to use the model to evaluate the importance of feature (2), i.e. to estimate the aggregate elasticity of labor supply implied by the marginal homogeneity.
    Keywords: indivisible labor, reservation wage distribution, labor supply, business cycles.
    Date: 2006–03
  48. By: Díaz-Giménez, Javier; Pijoan-Mas, Josep
    Abstract: In this article we quantify 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% 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% reduction in steady state output and a distribution of after-tax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17% of consumption, and in the more progressive flat-tax economy it increases by 0.45% of consumption. In both flat-tax reforms the income poor pay less income taxes and obtain sizeable welfare gains.
    Keywords: earnings distribution; efficiency; flat-tax reforms; income distribution; inequality; wealth distribution
    JEL: D31 E62 H23
    Date: 2006–09
  49. By: Bindseil, Ulrich (European Central Bank); Nyborg, Kjell G. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Strebulaev, Ilya A. (Graduate School of Business, Stanford University)
    Abstract: Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfill reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral.
    Keywords: Repo auctions; multiunit auctions; reserve requirements; loser’s nightmare; money markets; central bank; collateral; open market operations
    JEL: D44 E43 E50 G12 G21
    Date: 2005–12–22
  50. By: Ravn, Morten O.
    Abstract: This paper introduces a labour force participation choice into a standard labour market matching model embedded in a dynamic stochastic general equilibrium set-up. The participation choice is modelled as a trade-off between forgoing the expected benefits of being search active and engaging in costly labour market search. In contrast to models with constant labour force participation, the model that we analyse induces a symmetry in firms' and workers' search decision since both sides of the labour market vary search effort at the extensive margins. We show that this set-up is (a) of considerable analytical convenience, and (b) that the introduction of a participation choice leads to a strong tendency for procyclical unemployment, very low volatility of labour market tightness, and for a positively sloped Beveridge curve. These implications are summarized by a linear relationship between the vu-ratio and the marginal utility of consumption that we refer to as the consumption-tightness puzzle given its counterfacutal implications. Moreover, we show that this relationship survives a number of extentions of the standard model and that it derives from the allowance for an endogeneous labour market participation choice.
    Keywords: homework; intensive search margin; labour market participation; labour market tightness; matching models; unemployment
    JEL: E24 E32 J20 J41 J64
    Date: 2006–05
  51. By: Marc Hofstetter
    Abstract: This paper challenges the conventional view according to which disinflations in Latin America —even from low and moderate peaks— have been carried out at no cost to output. After suggesting a new methodology that overcomes some of the shortcomings of the traditional methods used to measure the costs of disinflations, large sacrifice ratios are obtained for the 1970s and 80s. While the disinflation costs for the 90s remain negative, it is shown that an unusual combination of circumstances —i.e., factors related to capital inflows, structural reforms, and the peculiar recent inflation history— can explain this fortunate result.
    Date: 2006–01–10
  52. By: Kamil Dybczak
    Abstract: The government intertemporal budget constraint states that all public liabilities have to be financed by either current or future generations. The generational accounting approach incorporates the expected demographic development and the parameters of the current fiscal policy into the intertemporal government budget constraint. By contrast with the public debt and deficit, the indicators based on generational accounting are forward looking and provide us with additional information about the current fiscal policy. To assess the sustainability of public budgets we constructed the first set of generational accounts for the Czech Republic. We found that a representative living agent obtains more benefits than he/she pays in taxes in 2004, i.e. the generational account of this representati ve agent is negative. In addition, the total amount of the government liabilities resulting from the current fiscal policy pursued to 2150 reaches about 300% of GDP in 2004. Finally, the costs of postponed adjustment of government revenues and expenditures seem to be considerable. We conclude that the present fiscal policy is not sustainable, i.e. public budgets in the Czech Republic should be stabilized by changing the current system of taxes and benefits to reflect potential demographic development.
    Keywords: . Fiscal sustainability, generational accounting.
    JEL: H61 H62
    Date: 2006–05
  53. By: Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
    Abstract: Under numerical fiscal rules, such as those underpinning EMU, governments have strong temptations to use accounting tricks to meet the fiscal constraints. Given these political incentives, fiscal variables that in the past were regarded as a mere residual acquire a strategic role. This is the case of the so-called stock-flow adjustment (SFA) which reconciles deficit and debt developments. We develop a simple theoretical model where deficits and two distinct SFA components (one that could be used to reduce the deficit figures and the other to impact debt figures instead) are determined as a result of a constrained optimization by fiscal authorities. Econometric evidence provides results consistent with the model findings. The SFA component related to the purpose to hide deficits rises with the recorded deficit, while the sales of financial assets designed to keep the debt under control rise with debt and deficit. Such practices have greatly contributed to the loss of credibility of EMU’s fiscal rules. If properly implemented, the reformed Pact, which stresses durable adjustment and long-run sustainability, should help curb such perverse incentives.
    Keywords: fiscal gimmicks; government accounting; Stability and Growth Pact; stock-flow adjustment
    JEL: E61 H62 H87
    Date: 2006–08
  54. By: Sean Holly (CIMF, University of Cambridge); M. Hashem Pesaran (CIMF, University of Cambridge and IZA Bonn); Takashi Yamagata (CIMF, University of Cambridge)
    Abstract: The purpose of this paper is to apply recent advances in the econometrics of panel data to a problem that has a clear spatial dimension. We model the dynamic adjustment of real house prices using data at the level of US States. In the last decade, in most OECD countries there has been a significant rise in real house prices. This attracted the attention of many international organisations and central banks. In this paper 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 then 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
  55. By: Devereux, Michael B; Engel, Charles M
    Abstract: Both empirical evidence and theoretical discussion have long emphasized the impact of `news' on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in determining the relative price of non-durable goods when nominal goods prices are sticky. In this paper we argue that these two roles may conflict with one another. If news about future asset returns causes movements in current exchange rates, then when nominal prices are slow to adjust, this may cause changes in current relative goods prices that have no efficiency rationale. In this sense, anticipations of future shocks to fundamentals can cause current exchange rate misalignments. Friedman's (1953) case for unfettered flexible exchange rates is overturned when exchange rates are asset prices. We outline a series of models in which an optimal policy eliminates the effects of news on exchange rates.
    Keywords: exchange rate; expectations; monetary policy
    JEL: F3 F31 F33
    Date: 2006–07
  56. By: George W. Evans (University of Oregon Economics Department); Bruce McGough (Oregon State University Economics Department)
    Abstract: We consider a linear univariate rational expectations model, with a predetermined variable, and study existence and stability of solutions driven by an extraneous finite-state Markov process. We show that when the model is indeterminate there exists a new class of k-state dependent sunspot equilibria in addition to the k-state sunspot equilibria (k-SSEs) already known to exist in part of the indeterminacy region. The new type of equilibria, which we call ergodic k-SSEs, are driven by a finite-state sunspot but can have an infinite range of values even in the nonstochastic model. Stability under econometric learning is analyzed using representations that nest both types of equilibria. 2-SSEs and ergodic 2-SSEs are learnable for parameters in proper subsets of the regions of their existence. Our results extend to models with intrinsic random shocks.
    Keywords: Markov sunspots, Learning, Indeterminacy, Expectational stability
    JEL: C62 E32 D83 D84
    Date: 2006–10–09
  57. By: Hanno Lustig (UCLA/NBER); Adrien Verdelhan (Department of Economics, Boston University)
    Abstract: Aggregate consumption growth risk explains why low interest rate curren- cies do not appreciate as much as the interest rate di®erential and why high interest rate currencies do not depreciate as much as the interest rate di®er- ential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreci- ate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.
    JEL: F31 G12
    Date: 2006–02
  58. By: Bayoumi, Tamim; Sutton, Bennett; Swiston, Andrew J.
    Abstract: We analyze the flexibility of the Canadian labour market across provinces in both an inter- and intra-national context using macroeconomic data on employment, unemployment, participation, and (for Canada) migration and real wages. We find that Canadian labour markets respond in a similar manner to their U.S. counterparts and are more flexible than those in major euro area countries. Within Canada, the results indicate that labour markets in Ontario and provinces further west are more flexible, particularly with regard to migration, while those further east are less so.
    Keywords: economic flexibility; labour market; migration
    JEL: E24 J21 J61
    Date: 2006–09
  59. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: The objective of this paper is to evaluate the effects at the industry level of public investment in transportation infrastructures in Portugal. The empirical results are based on VAR/ECM models for the Portuguese economy and for eighteen industries covering the whole spectrum of economic activity in the country. These models consider private-sector output, employment and investment as well as public investment. Empirical results at the aggregate level indicate that public investment has a positive effect on both private inputs as well as on private output and that it affects labor productivity positively. These aggregate results, however, hide a wide variety of industry-level effects. In absolute terms, the industries that benefit the most from public investment are Construction, Trade, Transportation, Finance, Real Estate, and Services. In turn, relative to their size, the industries that benefit the most are Mining, Non-Metal Products, Metal Products, Construction, Restaurants, Transportation, and Finance, and, therefore, public investment tends to shift the industry mix toward these industries. Accordingly, our empirical results suggest that although public investment has been a powerful instrument to enhance the long-term economic performance in Portugal it does so in a way that is rather unbalanced across industries.
    Keywords: infrastructure, industry performance, Portugal
    JEL: C32 E62 H54
    Date: 2006–10–08
  60. By: OECD
    Abstract: This paper considers the case for adjusting measures of the cyclically-adjusted fiscal balance for exceptional movements in the terms of trade for those countries where production of commodities is a substantial share of output. For such countries exceptional movements in commodity prices, such as have occurred in recent years, are likely to lead to higher tax revenues, most immediately from the companies directly involved in extracting or producing the commodities, but also less directly as the consequent rise in the terms of trade increases real incomes more broadly. A simple method is proposed to allow for exceptional developments in commodity prices using an adjustment based on a concept of the real income gap rather than a real output gap. This method is subsequently applied to Australia -- one of the world?s leading producers of mined commodities -- and the results contrasted with the standard OECD method of calculating the cyclically-adjusted fiscal balance. It is shown that over much of history the two methods generate similar results, but during exceptional periods of rapid change in commodity prices the measures can be very different. The analysis highlights that a key assumption needed to adjust for commodity price developments concerns the equilibrium level of the terms of trade. While the assumption that the terms of trade returns to long-run historical trends might appear a natural benchmark, recent sustained strong growth in demand for commodities from China and other developing Asian economies raises the question as to whether this has led to a permanent increase in the terms of trade of major commodity producers like Australia and has thus permanently raised government revenues. This Working Paper relates to the 2006 OECD Economic Survey of Australia ( <P>Faut-il ajuster les indicateurs budgétaires pour tenir compte de l'incidence des termes de l'échange ? <BR>Ce document examine s'il y a lieu d'ajuster les indicateurs du solde budgétaire corrigé des fluctuations conjoncturelles afin de tenir compte de variations exceptionnelles des termes de l'échange, pour les pays où les produits de base représentent une part importante de la production. Dans ces pays, il est probable que des hausses exceptionnellement prononcées des cours des produits de base, telles que celles qui se sont produites ces dernières années, entraînent un accroissement des recettes fiscales, d'abord en provenance des entreprises qui participent directement à l'extraction ou à la production desdits produits de base puis, plus indirectement, lorsque l'amélioration des termes de l'échange induit une augmentation plus générale des revenus réels. Une méthode simple est proposée pour tenir compte des variations exceptionnelles des cours des produits de base en procédant à un ajustement fondé sur un concept d'écart de revenu réel, et non d'écart de production réelle. Cette méthode est ensuite appliquée à l'Australie -- l'un des premiers producteurs mondiaux de produits d'extraction -- et les résultats sont comparés à ceux que l'on obtient avec la méthode habituellement utilisée à l'OCDE pour calculer le solde budgétaire corrigé des fluctuations conjoncturelles. On constate que d'une manière générale, les deux méthodes aboutissent à des résultats similaires, mais que pendant les périodes exceptionnelles se caractérisant par des mouvements rapides des cours des produits de base, les indicateurs peuvent être très différents. L'analyse révèle que l'une des principales hypothèses à poser pour tenir compte de l'évolution des cours des produits de base concerne le niveau d'équilibre des termes de l'échange. Bien que l'hypothèse selon laquelle les termes de l'échange retrouvent leurs tendances historiques de long terme puisse paraître la plus valable, la croissance vigoureuse et soutenue de la demande de produits de base émanant de la Chine et d'autres économies d'Asie en développement au cours de la période récente incite à examiner si cette évolution n'a pas entraîné une augmentation permanente des termes de l'échange pour de grands producteurs de produits de base comme l'Australie. Ce document de travail se rapporte à l'Étude économique de l'Australie 2006 (
    Keywords: taxation, fiscalité, fiscal policy, public finances, politique budgétaire, finances publiques, Australia, Australie, commodity, produit de base
    JEL: E62 H30 H60
    Date: 2006–10–06
  61. By: Ramon Gomez-Salvador (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marc Stocker (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides a description and a discussion of some important aspects relating to recent productivity developments in the euro area. Following decades of stronger gains in the euro area than in the US, labour productivity growth has fallen behind that in the US in recent years. This reflects a decline in average labour productivity growth observed in the euro area since the mid-1990s, which stands in sharp contrast with opposite developments in the US. The decline in labour productivity growth experienced in the euro area since the mid-1990s resulted from both lower capital deepening and lower total factor productivity growth. From a sectoral perspective, industries not producing or using intensively information and communication technology (ICT) would appear mostly responsible for the decline in average labour productivity growth since the mid-1990s. These developments were broadly experienced by most euro area countries. A comparison with developments in the US suggests that the euro area economy seems to have benefited much less from increased production and use of ICT technologies, in particular in the services sector. Diverging trends in labour productivity growth between the euro area and the US in recent years mainly reflect developments in a number of specific ICT-using services such as retail, wholesale and some financial services where strong gains were registered in the US. The evidence presented in this paper suggests that, in order to support economic growth in the euro area, emphasis should be given to both policy measures that directly address the determinants of productivity and, given the interactions among the various factors of growth, to policies that raise labour utilisation.
    Date: 2006–10
  62. By: Benati, Luca
    Abstract: We use tests for multiple breaks at unknown points in the sample, and the Stock-Watson (1996, 1998) time-varying parameters median-unbiased estimation methodology, to investigate changes in the equilibrium rate of growth of labor productivity–both per hour and per worker–in the United States, the Eurozone Australia, and Japan over the post-WWII era. Results for the U.S. well capture the 'conventional wisdom’ of a golden era of high productivity growth, the 1950s and 1960s; a marked deceleration starting from the beginning of the 1970s; and a strong growth resurgence starting from mid-1990s. Interestingly, evidence suggests the 1990s’ productivity acceleration to have reached a plateau over the last few years. Results for the Eurozone point towards a marked deceleration since the beginning of the 1980s, with the equilibrium rate of growth of output per hour falling to 0.9% in 2004:4. Results based on Cochrane’s variance ratio estimator suggest a non-negligible fraction of the quarter-on-quarter change in labor productivity growth to be permanent. From a technical point of view, we propose a new method for constructing confidence intervals for variance ratio estimates based on spectral bootstrapping. Preliminary Monte Carlo evidence suggests such a method to possess good coverage properties.
    Keywords: bootstrapping; frequency domain; median-unbiased estimation; Monte Carlo integration; structural break tests; time-varying parameters; variance ratio
    JEL: E30 E32
    Date: 2006–08
  63. By: Vladimir Popov (NES)
    Abstract: This paper starts by separating the transformational recession (reduction of output in most transition economies in the first half of the 1990s) from the process of economic growth (recovery from the transformational recession) in 28 transition economies (including China,Vietnam and Mongolia). It is argued that the former (the collapse of output during transition) can be best explained as adverse supply shock caused mostly by a change in relative prices after their deregulation due to distortions in industrial structure and trade patterns accumulated during the period of central planning, and by the collapse of state institutions during transition period, while the speed of liberalization, to the extent it was endogenous, i.e. determined by political economy factors, had an adverse effect on performance. In contrast, at the recovery stage the ongoing liberalization starts to affect growth positively, whereas the impact of pre-transition distortions disappears. Institutional capacity and reasonable macroeconomic policy, however, continue to be important prerequisites for successful performance.
    Date: 2006–08
  64. By: van Hemert, Otto (NYU Stern)
    Abstract: I study optimal housing and portfolio choice under stochastic inflation and real interest rates. Renters allocate financial wealth to stocks and bonds with different maturities. Homeowners also choose the mortgage type. I show that hedge demands and financial constraints vary over an investor's lifetime, giving rise to a pronounced life-cycle pattern in the optimal housing, stock, bond, and mortgage choice. Young homeowners take an adjustable-rate mortgage (ARM) and invest financial wealth predominantly in stocks. Later in the life cycle bonds play an important role, mainly as a hedge against changing real interest rates and house prices. Fairly risk-tolerant homeowners still prefer an ARM, while more risk-averse investors rather choose a combination of an ARM and a fixed-rate mortgage.
    Keywords: Portfolio choice; mortgage; housing; term structure of interest rates
    JEL: E43 G11
    Date: 2006–09–15
  65. By: Campos, Nauro F; Horváth, Roman
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and OECD growth increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: political economy; privatization; reform; transition
    JEL: D72 E23 H26 O17
    Date: 2006–05
  66. By: Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
    Abstract: Recent research convincingly shows that crises beget reform. Although the consensus is that economic crises foster macroeconomic stabilization, it is silent on which types of crises cause which types of reform. Is it economic or political crises that are the most important drivers of structural reforms? To answer this question we put forward evidence on trade and labour market liberalization from panel data on more than 100 developed and developing countries from 1950 to 2000. We find important differences in the effects of the two types of crises on the two reforms across regions and even from one measure of crisis to another. Yet, in general, we consistently find that political considerations (political crises as well as political institutions) are more important determinants of these reforms than economic crises. This finding is robust to the inclusion of interdependencies between the two types of crises, feedbacks between the two types of reform, the use of alternative measures of political and economic crises and whether or not the data are pooled across all countries or only across regions.
    Keywords: economic crisis; economic reform; labour market reform; political crisis; trade liberalisation
    JEL: E32 H11 K20 O40
    Date: 2006–08
  67. By: Robert A. Hart (University of Stirling and IZA Bonn)
    Abstract: Based on the British New Earnings Survey Panel Data for 1975-2001, this paper investigates the real hourly wage cyclicality of part-time and full-time females. Relative degrees of wage responsiveness are estimated in respect of job stayers, movers between jobs (involving either retaining part-time or full-time job status or switching from one to the other), and movers within existing jobs (switching between part-time and full-time status within the same job). The work also incorporates separate estimates of the probabilities of changing jobs for the various mover categories. It is shown that distinguishing between private and public sector employment is important to work along these lines.
    Keywords: wage cycles, females, part-time jobs, full-time jobs, stayers, movers
    JEL: J30 J62 E32
    Date: 2006–10
  68. By: Alexandre B. Cunha (IBMEC Business School - Rio de Janeiro)
    Abstract: In this paper we extend the Modigliani-Miller Theorem to the composition of the public debt. We show that in a deterministic model the structure of a government's assets and liabilities is undetermined. Hence, a floating exchange rate regime can implement any attainable competitive equilibrium. Concerning stochastic economies, if the government issues nominal bonds of several maturities, then the same result may hold. Thus, a conceivable link between the choice of an exchange rate regime and economic outcomes may be due to factors often not considered in standard macroeconomic models.
    Keywords: Modigliani-Miller Theorem, exchange rate regime, indeterminacy
    JEL: E42 E58 F31 F41 G32
    Date: 2006–10–24
  69. By: Andre Jungmittag (University of Wuppertal); Paul J.J. Welfens (University of Wuppertal and IZA Bonn)
    Abstract: In EU countries, opening up of telecommunications markets and regulations have helped to reduce the price of digital services which is an important quasi-input factor in all firms. Integrating the use of telecommunications in a macroeconomic production function is the analytical starting point for our interdependent analysis of output, use of telecommunications and employment. Based on unit root and co-integration analysis as well as an error correction three-equation model which are estimated simultaneously, we present results both on long run links and short run links between telecommunications, output and employment. Considering various scenarios suggests that a fall in the relative price of telecommunications can generate a cumulated employment increase of 760,000 within seven years in Germany. The institutional setup for regulating telecommunications could be improved in Germany and other EU countries.
    Keywords: telecommunications, employment, growth, knowledge society, regulation
    JEL: E0 L96 O0
    Date: 2006–10
  70. By: Pierre-Guillaume Méon (DULBEA-CERT, Université libre de Bruxelles, Brussels); Laurent Weill (Université Robert Schuman, France)
    Abstract: This paper investigates whether financial intermediary development influences macroeconomic technical efficiency on a sample of 47 countries, both developed and developing, over 1980-1995. We do so by applying Battese and Coelli (1995)’s method at the aggregate level. It is found that financial intermediary development, except financial depth, is on average associated with more efficiency. However we find strong evidence that this relationship is conditional on the level of economic development. The lower economic development the weaker is the impact of financial development on efficiency. That impact can even become negative in the poorest countries.
    Keywords: financial development, income, aggregate productivity, efficiency
    JEL: C33 O11 O16 O47
    Date: 2006–10
  71. By: Lloyd-Braga, Teresa; Modesto, Leonor; Seegmuller, Thomas
    Abstract: We consider a constant returns to scale, one sector economy with segmented asset markets, encompassing both the Woodford (1986) and overlapping generations models. We analyze the role of public spending, financed by (labour or capital) income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.
    Keywords: indeterminacy; public spending; segmented asset markets; taxation
    JEL: E32 E63 H23
    Date: 2006–08
  72. By: Makoto Watanabe
    Abstract: This paper studies an (S, s) pricing model from the perspective of inflation and price competition in search markets. I present a model in which consumers'search technologies can influence firms' price setting, price dispersion, and the market structure. The result shows that although price competition among firms is more intensified in markets where consumers' search technologies are more efficient, price inflation is counter-intuitively, more likely to increase monopoly power of firms and to stimulate entry in these markets. The model also provides new empirical implications for firms' price setting behaviors.
    Date: 2006–10
  73. By: Cavalcanti, Tiago; Tavares, José
    Abstract: The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy, namely an increase in the share of government spending in GDP and an increase in female labour force participation. This paper suggests that these two changes are causally related. We develop a growth model where the structure of the economy is endogenous so that participation in market activities and government size are causally related. Economic growth and rising incomes are accompanied by a greater incentive for women to engage in labour market activities as the opportunity cost of staying at home increases. We hypothesize that government spending decreases the cost of performing household chores such as, but not limited to, child rearing and child care so that couples decide to engage further in the labour market and chose a higher tax rate to finance more government spending. Using a wide cross-section of data for developed and developing countries, we show that higher participation by women in the labour market are indeed positively associated with larger governments. Furthermore, we investigate the causal link between the two variables using as instrumental variables a unique and novel dataset on the relative price of home appliances across OECD countries and over time. We find strong evidence of a causal link between participation in the labour market and government size: a 10 percent rise in participation in the labour market leads to a 7 to 8 percent rise in government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998). The inclusion of an endogenous choice of government spending allows a considerable extension of the model in Galor and Weil (2000) so fertility can either rise or fall and phenomena like the baby boom and baby bust in Greenwood at el. (2002) can be addressed. In addition, the paper has important implications for the analysis of the secular as well as cross-country determinants of government size.
    Keywords: government size; growth; structural transformation
    JEL: E62 J1 O1
    Date: 2006–05
  74. By: Bell, Clive; Gersbach, Hans
    Abstract: What is the right balance among policy interventions in order to ensure economic growth over the long run when an epidemic causes heavy mortality among young adults? We argue that, in general, policies to combat the disease and promote education must be concentrated, in certain ways, on some subgroups of society, at first to the partial exclusion of others. This concentration involves what we term the macroeconomics of targeting. The central comparison is then between programs under which supported families enjoy the benefits of spending on health and education simultaneously (DT), and those under which the benefits in these two domains are sequenced (ST). When levels of human capital are uniformly low at the outbreak, DT is superior to ST if the subsequent mortality rate exceeds some threshold value. Outside aid makes DT more attractive; but DT restricts support to fewer families initially and so increases inequality.
    Keywords: education support; epidemic diseases; health policies; HIV/AIDS; macroeconomics of targeting; poverty traps; single and double targeting
    JEL: E62 H20 I10 I20 O11
    Date: 2006–06
  75. By: Hale, Galina B; Razin, Assaf; Tong, Hui
    Abstract: We establish an empirical regularity that a weak creditor protection index is associated with high stock price volatility. Using a standard Tobin Q model we demonstrate two distinct mechanisms that are responsible for increased volatility: credit guarantees and weak creditor protection that tightens credit constraints. In a panel of OECD and non OECD countries we attempt to identify the effects of these distinct mechanisms on stock price volatility while taking explicit account of events of financial crises. We find that both mechanisms are responsible for the stock price volatility in the data.
    Keywords: credit constraints; credit growth volatility; credit guarantees; stock price volatility
    JEL: E30 F30 G20
    Date: 2006–04

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