nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒11‒18
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inflation dynamics and regime shifts By Julia Lendvai
  2. Monetary Policy Rules under Heterogeneous Inflation Expectations By Sophocles N. Brissimis; Nicholas S. Magginas
  3. Monetary Policy Effects on Financial Risk Premia By Paul Söderlind
  4. The Value of Interest Rate Stabilization Policies When Agents are Learning By John Duffy; Wei Xiao
  5. Macroeconomic fluctuations and bank lending: evidence for Germany and the euro area By Eickmeier, Sandra; Hofmann, Boris; Worms, Andreas
  6. Inflation Forecasts and the New Keynesian Phillips Curve By Sophocles N. Brissimis; Nicholas S. Magginas
  7. Optimal simple monetary policy rules and non-atomistic wage setters in a New-Keynesian framework By Stefano Gnocchi
  8. International Macroeconomic Dynamics: A Factor Vector Autoregressive Approach By Fabio C. Bagliano; Claudio Morana
  9. The Euro and Inflation Uncertainty in the European Monetary Union By Guglielmo Maria Caporale; Alexandros Kontonikas
  10. Inflation Implications of Rising Government Debt By Chryssi Giannitsarou; Andrew Scott
  11. Monetary policy before and after the euro: Evidence from Greece By Arghyrou, Michael G
  12. The Stability Of The Turkish Phillips Curve And Alternative Regime Shifting Models By Özlem Önder
  13. The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation By George S. Tavlas; P.A.V.B. Swamy
  14. The Political Economy of Monetary Institutions in Brazil: The Limits of the Inflation Targeting Strategy, 1999-2005 By Matias Vernengo
  15. Regional Currency Arrangements: Insights from Europe By Josef Christl
  16. Macroeconomic Forecasting with Mixed Frequency Data : Forecasting US output growth and inflation. By Clements, Michael P; Galvão, Ana Beatriz
  17. The real interest rate, the real oil price, and US unemployment revisited By Spyros Andreopoulos
  18. Global Finance and Macroeconomic Policy By George Argitis
  19. The Value of Central Bank Transparency When Agents are Learning By John Duffy; Michele Berardi
  20. Central Bank Independence, Exchange Rate Policy and Inflation Persistence Empirical Evidence on Selected EMU Countries By Athanasios Papadopoulos; Moïse Sidiropoulos
  21. Fiscal Policy in the 1920s and 1930s. How much different it is from the post war period's policies By Matti Virén
  22. Interbank Markets under Currency Boards By Marius Jurgilas
  23. Open Economy Codependence: U.S. Monetary Policy and Interest Rate Pass-through By Bluedorn, John; Bowdler, Christopher
  24. Business Cycles of Non-mono-cultural Developing Economies: The Case of ASEAN Countries By Kodama, Masahiro
  25. Testing Models of Low-Frequency Variability By Ulrich Mueller; Mark W. Watson
  26. Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA By Matthews, Kent; Minford, Patrick; Naraidoo, Ruthira
  27. Fiscal institutions, fiscal policy and sovereign risk premia By Hallerberg, Mark; Wolff, Guntram B.
  28. Trade and Business Cycle Correlations in Asia-Pacific By Kumakura, Masanaga
  29. Measuring the Correlation of Shocks betweem the EU15 and the New Member Countries By Stephen G. Hall; George Hondroyiannis
  30. Inflation as a Redistribution Shock: Effects on Aggregates and Welfare By Matthias Doepke
  32. The European Union GDP Forecast Rationality under Asymmetric Preferences By George A. Christodoulakis
  33. Catching-up and Credit Booms in Central and Eastern European EU Member States and Acceding Countries: An Interpretation within the New Neoclassical Synthesis Framework By Peter Backé; Cezary Wójcik
  34. Finance, Monetary Policy and Investment By George Argitis
  35. Whither Job Destruction? Unemployment, Job Flows and Hours in a New Keynesian Model By Richard Holt
  36. Labour Contracts, Equal Treatment and Wage-Unemployment Dynamics By Andy Snell; Jonathan Thomas
  37. La Tasa de Interés Natural en Colombia By Juan José Echavarría Soto; Enrique López Enciso; Martha Misas Arango; Juana Téllez Corredor; Juan Carlos Parra Alvarez
  38. Two Flaws In Business Cycle Accounting By Lawrence J. Christiano; Joshua M. Davis
  39. An Evolutionary Theory of Inflation Inertia By Alexis Anagnostopoulos; Italo Bove; Karl Schlag; Omar Licandro
  40. Monetary Unions, External Shocks and Economic Performance: A Latin American Perspective By Sebastian Edwards
  41. Sustainability of Austrian Public Debt: A Political Economy Perspective By Gottfried Haber; Reinhard Neck
  42. Origins and Consequences of Child Labor Restrictions: A Macroeconomic Perspective By Matthias Doepke
  43. Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability By Panayiotis P. Athanasoglou; Sophocles N. Brissimis; Matthaios D. Delis
  44. Term Structure Linkages Among the New EU Countries and the EMU By Minoas Koukouritakis; Leo Michelis
  45. Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis By Roel Beetsma; Massimo Giuliodori; Franc Klaassen
  46. Las fuentes del desempleo en Colombia: un examen a partir de un modelo SVEC By Enrique López Enciso; Martha Misas Arango
  47. Mis-Specification and Frequency Dependence in a New Keynesian Phillips Curve By Richard A. Ashley.; Randall J. Verbrugge.
  48. The Greek Model of the European System of Central Banks Multi-Country Model By Dimitrios Sideris; Nicholas G. Zonzilos
  49. Real Money Balances and TFP Growth: Evidence from Developed and Developing Countries By Giannis Karagiannis; Vangelis Tzouvelekas
  50. Credit growth in Central and Eastern Europe - new (over)shooting stars? By Balázs Égert; Peter Backé; Tina Zumer
  51. Internal consistency of survey respondents.forecasts : Evidence based on the Survey of Professional Forecasters By Clements, Michael P
  52. The effect of financial development on the investment-cash flow relationship - cross-country evidence from Europe By Bo Becker; Jagadeesh Sivadasan
  53. Is Discrete Time a Good Representation of Continuous Time? By Omar Licandro; Luis A. Puch
  54. A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II By Roman Kraeussl
  55. The Comparative Performance of Q-type and Dynamic Models of Firm Investment: Empirical Evidence from the UK By Eleni Angelopoulou
  56. Firm Investment and Financial Frictions By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  57. Are Output Growth-Rate Distributions Fat-Tailed? Some Evidence from OECD Countries By Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
  58. Decomposing the Effects of Financial Liberalization: Crises vs. Growth (March 2006) By Aaron Tornell
  59. The Term Structures of Interest Rates in the New and Prospective EU Countries By Minoas Koukouritakis; Leo Michelis
  60. Real-time forecasting of GDP based on a large factor model with monthly and quarterly data By Schumacher, Christian; Breitung, Jörg
  61. A Structural VAR Analysis of the Determinants of Capital Flows Into Turkey By Ali Askin Culha
  62. The Historical Origins of U.S. Exchange Market Intervention Policy By Michael D. Bordo; Owen Humpage; Anna J. Schwartz
  63. Longevity and Aggregate Savings By Eytan Sheshinski
  64. Stale information, shocks and volatility By Reint Gropp; Arjan Kadareja
  65. ACE vs. CBIT: Which is Better for Investment and Welfare? By Doina Maria Radulescu; Michael Stimmelmayr
  66. The role of new technologies in the economic growth of Andalucia By Diego Martínez López; Jesús Rodríguez López
  67. Do Credit Rating Agencies Add to the Dynamics of Emerging Market Crises By Roman Kraeussl
  68. Directed Search for Equilibrium Wage-Tenure Contracts By Shouyong Shi
  69. Sustainable Social Spending in a Greying Economy with Stagnant Public Services: Baumol’s Cost Disease Revisited By Frederick van der Ploeg

  1. By: Julia Lendvai (University of Namur, Department of Economics; Rempart de la Vierge, 8, B-5000, Namur, Belgium.)
    Abstract: This paper extends the New Keynesian model to allow for stochastic shifts in the monetary policy regime. Agents cannot observe the regime and use a Bayesian learning rule to make optimal inferences. Price setting is adapted to this environment - lagged expectations about monetary policy influence the current inflation rate through an indexation rule. No structural inflation persistence is assumed. We show that this model can capture stylized facts about short-run inflation dynamics both in periods of transition and in stable environments. The role of expectations increases after regime shifts. This creates a link between the degree of inflation persistence and the stability and transparency of monetary policy. Thereby, our model can explain observed changes in inflation persistence. JEL Classification: E30, E31, E32.
    Keywords: Inflation dynamics, regime shifts, Bayesian learning, inflation persistence.
    Date: 2006–10
  2. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Nicholas S. Magginas (National Bank of Greece)
    Abstract: This paper evaluates the role of inflation-forecast heterogeneity in US monetary policy making. The deviation between private and central bank inflation forecasts is identified as a factor increasing inflation persistence and thus calling for a policy reaction. An optimal policy rule is derived by the minimization under discretion of a standard central bank loss function subject to a Phillips curve, modified to include the forecast deviation, and a forward-looking aggregate demand equation. This rule, which itself includes the forecast deviation as an additional argument, is estimated for the period 1974-1998, covering the Chairmanships of Arthur Burns, Paul Volcker and Alan Greenspan, by using real-time forecasts of inflation and the output gap obtained from the FOMC’s Greenbook and the Survey of Professional Forecasters. The estimated rule remains remarkably stable over the whole sample period, challenging the conventional view of a structural break following Volcker’s appointment as Chairman of the Fed. Finally, the substantial decline in the significance of the interest-rate smoothing term in the rule indicates that monetary policy inertia may, to a large extent, be an artifact of serially correlated inflation-forecast errors that feed into policy decisions in real time.
    Keywords: Forward-looking model; Monetary policy reaction function; Expectations formation; Inflation expectations
    JEL: D84 E31 E43 E52 E58
    Date: 2006–03
  3. By: Paul Söderlind
    Abstract: The effect of monetary policy on financial risk premia is analysed in a simple general equilibrium model with sticky wages and an optimising central bank. Analytical results show that equity risk premia and term premia are higher under inflation targeting than under output targeting, and that inflation risk premia are higher for policies that strike a balance between output and inflation stability (and achieve a social optimum) than for policies that target only one of them.
    Keywords: Inflation risk premium, equity risk premium, term premium
    JEL: E52 E44 G12
    Date: 2006–11
  4. By: John Duffy; Wei Xiao
    Abstract: We examine the expectational stability (E--stability) of rational expectations equilibrium in the ``New Keynesian`` model where monetary policy is optimally derived and interest rate stabilization is added to the central bank`s traditional objectives of inflation and output stabilization. We consider both the case where the central bank lacks a commitment technology and the case of full commitment. We show that for both cases, optimal policy rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. These findings stand in contrast to Evans and Honkapohja`s (2003ab, 2006) findings for optimal monetary policy rules in environments where interest rate stabilization is not a central bank objective.
    JEL: D83 E43 E52
    Date: 2006–09
  5. By: Eickmeier, Sandra; Hofmann, Boris; Worms, Andreas
    Abstract: This paper analyzes how bank lending to the private nonbank sector responds dynamically to aggregate supply, demand and monetary policy shocks in Germany and the euro area. The results suggest that the dynamic responses in the two areas are broadly similar, although there are some differences in the relative contribution of the three shocks to the development of output, prices, interest rates and bank loans over time. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we perform counterfactual simulations and analyze the dynamic responses of German loan sub-aggregates in order to test the distributional implications of potential credit market frictions. The results suggest that there is no evidence that loans amplify the transmission of macroeconomic fluctuations or that a “financial accelerator” via bank lending exists.
    Keywords: Business cycle fluctuations, bank lending, SVAR model, sign restrictions
    JEL: E32 E44 G21
    Date: 2006
  6. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Nicholas S. Magginas (National Bank of Greece)
    Abstract: The ability of the New Keynesian Phillips curve to explain US inflation dynamics when official central bank forecasts (Greenbook forecasts) are used as a proxy for inflation expectations is examined. The New Keynesian Phillips curve is estimated on quarterly data spanning the period 1970Q1-1998Q2 against the alternative of the Hybrid Phillips curve, which allows for a backward-looking component in the price-setting behavior in the economy. The results are compared to those obtained using actual data on future inflation as conventionally employed in empirical work under the assumption of rational expectations. The empirical evidence provides, in contrast to most of the relevant literature, considerable support for the standard forward-looking New Keynesian Phillips curve when inflation expectations are measured using official inflation forecasts. In this case, lagged inflation terms become insignificant in the hybrid specification. The usefulness of real unit labor cost as the preferred proxy for real marginal cost in recent empirical work on the Phillips curve is confirmed by our results.
    Keywords: Money demand; Inflation; Phillips curve; Real marginal cost; Real-time data; GMM estimation
    JEL: C13 C52 E31 E37 E50 E52
    Date: 2006–05
  7. By: Stefano Gnocchi (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas, 25, 08005 Barcelona, Spain.)
    Abstract: The purpose of the paper is to design optimal monetary policy rules in a New-Keynesian model featuring the presence of non-atomistic unions. It is shown that concentrated labor markets call for more aggressive inflation stabilization. This is because the central bank is able to induce wage restraint and to push output towards Pareto efficiency by implementing tougher stabilization policies. Moreover, the welfare cost of deviation from the optimal policy is increasing in wage setting centralization. The analysis is performed in the context of a linearquadratic approach where the welfare measure is derived resorting to a second order approximation to households’ lifetime utility. JEL Classification: E24, E52.
    Keywords: Monetary Policy, Unions, Inflation.
    Date: 2006–10
  8. By: Fabio C. Bagliano; Claudio Morana
    Abstract: In this paper international comovements among a set of key real and nominal macroeconomic variables for the G-7 countries have been investigated for the 1980- 2005 period, using a Factor Vector Autoregressive approach. We present evidence that comovements in macroeconomic variables do not concern only real activity, but are an important feature also of stock market returns, in‡ation rates, interest rates and, to a smaller extent, monetary aggregates. Both common sources of shocks and similar transmission mechanisms explain international comovements, with the only exception of Japan, where the idiosyncratic features seem to dominate. Finally, concerning the origin of global shocks, evidence of both global supply-side and demand-side disturbances is found.
    Keywords: G7, international business cycle, factor vector autoregressive models, common factors.
    JEL: C22 E31 E32
    Date: 2006
  9. By: Guglielmo Maria Caporale; Alexandros Kontonikas
    Abstract: This paper investigates the relationship between inflation and inflation uncertainty in twelve EMU countries. A time-varying GARCH model is estimated to distinguish between short-run and steady-state inflation uncertainty. The effects of the introduction of the Euro in 1999 are then examined introducing a dummy variable. Overall, it appears that post-1999 steady-state inflation has generally remained stable, steady-state inflation uncertainty and inflation persistence have both increased, and the relationship between inflation and inflation uncertainty has broken down in many countries. When the break dates are determined endogenously, the adjustment is found to have taken place before the introduction of the Euro.
    Keywords: inflation, inflation uncertainty, inflation persistence, time-varying parameters, GARCH models, ECB, EMU
    JEL: C22 E31 E52
    Date: 2006
  10. By: Chryssi Giannitsarou; Andrew Scott
    Abstract: The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure of fiscal balance and can be used as an accounting identity to examine the channels through which governments achieve fiscal sustainability. We evaluate the ability of this framework to account for the fiscal behaviour of six industrialised nations since 1960. We show how fiscal imbalances are mainly removed through adjustments in the primary deficit (80-100%), with less substantial roles being played by inflation (0-10%) and GDP growth (0-20%). Focusing on the relation between fiscal imbalances and inflation suggests extremely modest interactions. This post WWII evidence suggests that the widely anticipated future increases in fiscal deficits, need not necessarily have a substantial impact on inflation.
    JEL: E31 E62
    Date: 2006–10
  11. By: Arghyrou, Michael G (Cardiff Business School)
    Abstract: We model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the current ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by foreign (German/ECB) interest rates though still influenced, to some degree, by domestic fundamentals; (ii) involving non- linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reduction in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies.
    Keywords: monetary policy; reaction function; non- linear; compatibility; Greece; EMU
    JEL: C51 C52 E43 E58 F37
    Date: 2006–11
  12. By: Özlem Önder (Department of Economics, Ege University)
    Abstract: This paper presents empirical evidence supporting instability of the Phillips curve in Turkey. We employ the multiple structural break models and the Markov switching models and then evaluate the performance of the two models. The data pertains to the monthly inflation rate in Turkey for the period of 1987-2004. The results show that the Turkish Phillips curve is not linear. There exists no evidence on the asymmetry in the inflation response to output gap. The persistence of inflation is found to be much lower than in linear models. After 2001 slight decline in persistence of inflation is observed.
    Keywords: Phillips curve, multiple structural change models, Markov switching models
    JEL: C52 E31
    Date: 2006–03
  13. By: George S. Tavlas (Bank of Greece, Economic Research Department); P.A.V.B. Swamy (US Bureau of Labour Statistics)
    Abstract: A theoretical analysis of the new Keynesian Phillips curve (NKPC) is provided, formulating the conditions under which the NKPC coincides with a real-world relation that is not spurious or misspecified. A time-varying-coefficient (TVC) model, involving only observed variables, is shown to exactly represent the underlying “true” NKPC under certain conditions. In contrast, “hybrid” NKPC models, which add lagged-inflation and supply-shock variables, are shown to be spurious and misspecified. We also show how to empirically implement the NKPC under the assumption that expectations are formed rationally.
    Keywords: Time-varying-coefficient model; Inflation-unemployment trade-off; “Objective” probability; Spurious correlation; Rational expectation; Coefficient driver
    JEL: C51 E31 E42 E50
    Date: 2006–03
  14. By: Matias Vernengo
    Abstract: The paper provides a critical analysis of the literature on monetary policy institutions. It presents a critique of the dominant notion of central bank independence, based on the literature on time-inconsistency of monetary policy. An alternative view that emphasizes the role of distributive conflict in establishing monetary policy regimes is developed and used to analyze the Brazilian inflation targeting regime implemented in 1999. The analysis suggests that financial or rentier’s interests benefit from the current monetary regime, while manufacturing and worker’s interests bear the costs.
    Keywords: Inflation Targeting, Central Bank Behavior, Distributive Conflict
    JEL: E52 E58 F59
    Date: 2006–05
  15. By: Josef Christl (Oesterreichische Nationalbank)
    Abstract: This paper focuses on the requirements and features of a successful monetary union on the basis of the optimum currency area theory, the “logical roadmap” for integration as proposed by Balassa as well as the economic and institutional framework of the European Economic and Monetary Union (EMU). The analysis suggests that monetary union is contingent upon high economic integration and strong political commitment. However, political union is not an ex-ante requirement. Outside factors such as systemic shocks and globalization seem to speed up the pooling of sovereignty in the economic domain. A firm commitment to stability-oriented monetary and fiscal policies is a precondition for gaining credibility and trust within and outside a monetary union. Last, but not least, convergence criteria, fiscal rules and strong institutions are necessary to help ensure and monitor the participants’ compliance. However, the European experience is not a blueprint for regional integration that can be directly and entirely applied to other regions.
    Keywords: Economic and Monetary Integration; International Monetary Arrangements and Institutions; Monetary Policy and Central Banking; Macroeconomic Policy Formation
    JEL: E50 E61 F02 F33
    Date: 2006–06
  16. By: Clements, Michael P (Department of Economics, University of Warwick); Galvão, Ana Beatriz (Bank of Portugal)
    Abstract: Although many macroeconomic series such as US real output growth are sampled quarterly, many potentially useful predictors are observed at a higher frequency. We look at whether a recently developed mixed data-frequency sampling (MIDAS) approach can improve forecasts of output growth and inflation. We carry out a number of related real-time forecast comparisons using various indicators as explanatory variables. We find that MIDAS model forecasts of output growth are more accurate at horizons less than one quarter using coincident indicators ; that MIDAS models are an effective way of combining information from multiple indicators ; and that the forecast accuracy of the unemployment-rate Phillips curve for inflation is enhanced using the MIDAS approach.
    Keywords: Data frequency ; multiple predictors ; combination ; real-time forecasting
    JEL: C51 C53
    Date: 2006
  17. By: Spyros Andreopoulos
    Abstract: The time series evidence on the relationship between unemployment and the real prices of capital and energy is re-examined for US data. In contrast to previous studies, results indicate that the real interest rate matters little, if at all, for equilibrium unemployment. Using a Markov Switching vector autoregressive method proposed by Psaradakis, Ravn, Sola (2005) [JApplEconometrics 20(5), pp. 665-683] to investigate time-varying Granger causality, the paper shows that the real rate helps forecast unemployment during NBER expansions only. Granger causality from the oil price to unemployment occurs in recessions. The results support the view that the price of crude induces at least some recessions, while not being a regular feature of the US business cycle.
    Keywords: Unemployment, Real Interest Rate, Oil Price, Granger Causality, US Recessions, Markov Chain, Regime Switching, Structural Instability
    JEL: C32 E24 E32
    Date: 2006–11
  18. By: George Argitis (Department of Economics, University of Crete, Greece)
    Abstract: A shift away from the Keynesian, welfare-state interventionist era towards a neoliberal, market-based disciplinary order in economic policy has been taken place the last decades. This shift could be attributed to key social, political and institutional changes, which have eroded the foundations of the post-war international economic order, shaped by the Bretton Woods monetary system, and caused the formation of a new, global, financial structure of power. The revival of global finance reinforces the deflationary bias of fiscal and monetary policy and reduces the viability of relatively expansionary policies. The aim of this paper is to consider the contribution of the revival of global finance to the resurrection of neo-classical ‘orthodoxy’ in current economy policy making. Based on a growing body of literature in the field of International Political Economy, it attempts to develop a political economy framework to consider the way the ‘orthodox’ deflationary discipline that this global, financial structure of power imposes on macroeconomic policy and especially of monetary policy works under certain conditions.
    Keywords: Global finance, fiscal and monetary policy, globalisation
    JEL: B15 B22 E12 G28
  19. By: John Duffy; Michele Berardi
    Abstract: We examine the role of central bank transparency when the private sector is modeled as adaptive learners. In our model, transparent policies enable the private sector to adopt correctly specified models of inflation and output while intransparent policies do not. In the former case, the private sector learns the rational expectations equilibrium while in the latter case it learns a restricted perceptions equilibrium. These possibilities arise regardless of whether the central bank operates under commitment or discretion. We provide conditions under which the policy loss from transparency is lower (higher) than under intransparency, allowing us to assess the value of transparency when agents are learning.
    JEL: D83 E52 E58
    Date: 2006–09
  20. By: Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Moïse Sidiropoulos (Université Louis Pasteur, FRANCE)
    Abstract: The purpose of this paper is to provide theoretical arguments and explore for empirical evidence for the rationale that low inflation persistence may be achieved either by setting up an independent Central Bank or by an exchange-rate based policy. Our theoretical analysis states that the degree of Central Bank independence and exchange rate policy changes affect the inflation persistence. In addition, our empirical analysis, which concerns with selected EMU countries (France, Germany, Greece, Italy and Spain for the period 1980-1998) validates the argument. In this exercise the most likely date for the change in regime is detected by a procedure based upon the recent work of Perron (1997), where the null hypothesis of a unit root is set against the alternative of stationarity about a single broken trend line.
    Keywords: Exchange rate policy, Central Bank independence, inflation persistence, EMU
    JEL: E31 E42 E58 C22
  21. By: Matti Virén
    Abstract: This paper deals with the fiscal behaviour of governments in the 1920s and 1930s. The intention is to see whether there were the same features in government behaviour as in the post-World War II era. In particular, attention is paid to asymmetric fiscal policies, ie the question of whether government deficits react differently to income growth and inflation during depressions and booms. The analysis is carried out using data primarily from the League of Nations. The data come from 32 countries and covers the period 1925?1938. Estimation results suggest the in pre-war period deficits were much less sensitive to output and did not show as many asymmetric features as in post-war period. Otherwise, the same regularities apply to the empirical results. In particular, this is true with the disciplinary role of government debt in terms of budget deficits.
    Keywords: Fiscal policy, deficit, asymmetric behaviour
    JEL: E62 H62
    Date: 2006–11–08
  22. By: Marius Jurgilas (University of Connecticut)
    Abstract: This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates.
    Keywords: Interbank market, Currency board
    JEL: E52 E58
    Date: 2006–10
  23. By: Bluedorn, John; Bowdler, Christopher
    Abstract: We analyze the international transmission of interest rates under pegged and non-pegged exchange rate regimes, demonstrating that transmission depends upon the informational properties of a base countryÂ’s interest rate change. We differentiate between interest rate movements which are predictable/unpredictable and dependent/independent (i.e., a function of non-monetary factors such as cost-push inflation). Under capital mobility, we show that predictable or dependent interest rate changes should elicit interest rate pass-through for an imperfectly credible peg that is less than unity, whilst interest rate changes that are unpredictable and independent should elicit pass-through greater than unity. Using a real-time identification of unpredictable and independent U.S. federal funds rate changes, we provide evidence consistent with these propositions. When the federal funds rate change is unpredictable and independent, the joint hypothesis of unit within-month pass-through to pegs and zero within-month pass-through to non-pegs cannot be rejected. The same hypothesis is strongly rejected following actual, aggregate federal funds rate changes which include predictable and dependent components. In a dynamic context, we find that maximum interest rate pass-through to pegs is delayed. Moreover, even though there is a full transmission of unpredictable and independent federal funds rate changes, they explain only a small portion of pegged regime interest rate changes. Keywords; interest rate pass-through, monetary policy identification, open economy trilemma, exchange rate regime. JEL Classification: F33, F41, F42
  24. By: Kodama, Masahiro
    Abstract: Based on analyses of actual data, we reveal that many Asian developing economies own economic structural features of “non-mono-cultural economy†and the “large primary good sectorâ€, which have not been discussed in developing economies RBC literature. We also examine the input-output tables to develop a model reflecting actual developing economies' structures. Referring to the analyses, we construct RBC models of ASEAN countries. Based on the model, we find that approximately half of GDP volatility is attributable to domestic productivity shocks, and the remaining half is attributable to price shocks.
    Keywords: Business Cycles, Developing Economies, Economic development, Input-output tables, Asia, Southeast Asia, Thailand, Malaysia, Indonesia, Philippines
    JEL: D58 E32 F41 O53
    Date: 2006–03
  25. By: Ulrich Mueller; Mark W. Watson
    Abstract: We develop a framework to assess how successfully standard times eries models explain low-frequency variability of a data series. The low-frequency information is extracted by computing a finite number of weighted averages of the original data, where the weights are low-frequency trigonometric series. The properties of these weighted averages are then compared to the asymptotic implications of a number of common time series models. We apply the framework to twenty U.S. macroeconomic and financial time series using frequencies lower than the business cycle.
    JEL: C22 E32
    Date: 2006–11
  26. By: Matthews, Kent (Cardiff Business School); Minford, Patrick (Cardiff Business School); Naraidoo, Ruthira
    Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.
    Keywords: Equilibrium unemployment; political economy; 'vicious' and 'virtuous' circles; bootstrapping
    JEL: E24 E27 P16
    Date: 2006–01
  27. By: Hallerberg, Mark; Wolff, Guntram B.
    Abstract: We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies.
    Keywords: Budget institutions, fiscal rules, sovereign risk premia, EMU, fiscal policy, government bond yields
    JEL: E43 E62 G12 G15 H61 H62
    Date: 2006
  28. By: Kumakura, Masanaga
    Abstract: Recent empirical studies challenge the traditional theory of optimum currency areas by arguing that a monetary union enhances trade and business cycle co-movements among its member countries sufficiently as to obviate the need for national monetary policy. This paper examines the empirical relationship between trade and business cycle correlations among thirteen Asia-Pacific countries, paying particular attention to the structural characteristics of their economies and other issues not explored fully in the literature. According to our result, although trade is relevant to the business cycles of individual countries, the main determinant of their international correlations is not the geographical structure of their trade but what they produce and export --more specifically the extent to which their output and exports are concentrated on electronic products.
    Keywords: Business cycles, Optimum currency area, Trade, Electronics, Trade problem, Monetary policy, Asia, Oceania
    JEL: F15 F33 F40
    Date: 2006–10
  29. By: Stephen G. Hall (Leicester University and NIESR); George Hondroyiannis (Bank of Greece, Economic Research Department)
    Abstract: This paper considers the question of the symmetry of inflation, exchange rate changes and GDP shocks between the EU15 and the new member countries. It applies a relatively new technique, the orthogonal GARCH model, which allows us to calculate a complete time varying correlation matrix for these countries. We can then examine the way the conditional correlation of shocks between the EU15 and the new member countries has been evolving over time. Our results suggest that the shocks which hit the EU are not symmetrical with those affecting the majority of new member countries. In addition, most of the new member countries seem to exhibit relatively low correlation with EU15.
    Keywords: Business cycle, GARCH
    JEL: E32 C22
    Date: 2006–01
  30. By: Matthias Doepke
  31. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks’ decisions and their consequences.
    Date: 2006–04
  32. By: George A. Christodoulakis (Bank of Greece and Manchester Business School)
    Abstract: This paper examines the behaviour of the demand for money in Greece during 1976:1-2000:4, a period that included many of the influences that cause money-demand instability. Two empirical methodologies, vector error correction (VEC) modelling and second-generation random coefficient (RC) modelling, are used to estimate the demand for money. The coefficients of both the VEC and RC procedures support the hypothesis that the demand for money becomes more responsive to both the own rate of return on money balances and the opportunity cost of holding money because of financial deregulation. In general, both procedures also support the hypothesis that the income elasticity of money demand declines over time as a result of technological improvements in the payments system and the development of money substitutes, which lead to economies of scale in holding money.
    Keywords: Asymmetric Loss Preferences, Forecast Rationality, GDP Growth Forecasts, GMM Estimation, Lin-Lin.
    JEL: C1 C44 C53 E17 E27
    Date: 2005–12
  33. By: Peter Backé; Cezary Wójcik
    Abstract: Credit to the private sector has risen rapidly in many Central and Eastern European EU Member States (MS) and acceding countries (AC) in recent years. The lending boom has recently been particularly strong in the segment of loans to households, primarily mortgage-based housing loans, and in those countries that operate currency boards or other forms of hard pegs. The main aim of this paper is to propose a conceptual framework to analyze the observed developments with a view to exploring some policy implications at a stage in which these countries are preparing for their prospective integration with the euro area. To achieve this, we first use a stylized New Neoclassical Synthesis (NNS) framework, which has recently been advanced by Goodfriend (2002) and Goodfriend and King (2000). We then discuss the implications of the NNS model for credit dynamics and ensuing monetary policy challenges. Specifically, we emphasize consumption smoothing as an important channel of the observed credit expansion and we show how it is related to and how it affects the monetary policy making in MS and AC. In doing so, we place our discussion in the context of the monetary integration process in general and the nominal convergence process in particular.
    Keywords: credit booms, new neoclassical synthesis, currency boards, euro area, convergence process
    JEL: E50 F30
    Date: 2006
  34. By: George Argitis (Department of Economics, University of Crete, Greece)
    Abstract: In this paper we attempt to develop some basic lines of a political economy perspective of the impact of finance and monetary policy on investment. We argue that the structure of capital, particularly the type of the relation between the industrial and the financial sector determines, to an extent, the way that finance affects investment. The domain in which this effect takes place is the distribution of income. Hence, this perspective integrates financial and real variables and argues that their interaction, which is institutionally and historically defined, acts as a main source of influence on investment and industrial accumulation in capitalism. Yet, we econometrically estimate some of our fundamental hypotheses, using data from the USA.
    Keywords: Finance, Monetary Policy, Credit, Income Distribution, Investment
    JEL: B22 E11 E12
  35. By: Richard Holt
    Abstract: Labour markets play a key role in business cycle analysis. Although a focal point of research on unemployment over the past decade, endogenous job destruction has recently fallen into disfavour, since its introduction leads to a positively sloped Beveridge curve. We show that introducing variation in hours per worker - a second margin for labour input adjustment in combination with endogenous job destruction generates a negatively sloped Beveridge curve, a data consistent correlation structure for job flows and captures many aspects of the cyclical behaviour of hours per worker. This improved peformance is robust to wage rigidity (which raises the variability of unemployment and labour market tightness) and a wide range of empirically plausible labour supply elasticities - but not completely inelastic labour supply implicit in much of the literature on labour market search.
  36. By: Andy Snell; Jonathan Thomas
    Abstract: This paper analyses a model in which firms cannot pay discriminate based on year of entry to a firm, and develops an equilibrium model of wage dynamics and unemployment. The model is developed under the assumption of worker mobility, so that workers can costlessly quit jobs at any time. Firms on the other hand are committed to contracts. Thus the model is related to Beaudry and DiNardo (1991). We solve for the dynamics of wages and unemployment, and show that real wages do not necessarily clear the labour 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: labour contracts, business cycle, unemployment, equal treatment, cohort effects
    JEL: E32 J41
    Date: 2006
  37. By: Juan José Echavarría Soto; Enrique López Enciso; Martha Misas Arango; Juana Téllez Corredor; Juan Carlos Parra Alvarez
    Abstract: En este artículo se estima para Colombia la tasa de interés natural (TIN) para el período 1982-2005, con base en las metodologías propuestas por Laubach y Williams (2001) y Mésonnier y Renne (2004). Un modelo neokeynesiano es la base de la estimación de la TIN de “mediano plazo” como una variable no observada que cambia en el tiempo. Tal estimación se realiza mediante un filtro de Kalman que estima simultáneamente la TIN y la brecha del producto para la economía colombiana. Se sugiere que la política monetaria fue contraccionista en 1998 y 1999, y relativamente expansiva en los años recientes, aún cuando los resultados no son tan claros cuando se trabaja con los promedios móviles de la TIN. La brecha del producto ha sido positiva en 2003 y 2004, confirmando los resultados de otros trabajos en el área.
    Keywords: Tasa natural de interés, variables no observadas, producto potencial, filtro de Kalman. Classification JEL: E43; E52; C32.
  38. By: Lawrence J. Christiano; Joshua M. Davis
    Abstract: Using 'business cycle accounting' (BCA), Chari, Kehoe and McGrattan (2006) (CKM) conclude that models of financial frictions which create a wedge in the intertemporal Euler equation are not promising avenues for modeling business cycle dynamics. There are two reasons that this conclusion is not warranted. First, small changes in the implementation of BCA overturn CKM's conclusions. Second, one way that shocks to the intertemporal wedge impact on the economy is by their spillover effects onto other wedges. This potentially important mechanism for the transmission of intertemporal wedge shocks is not identified under BCA. CKM potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.
    JEL: C32 C52
    Date: 2006–10
  39. By: Alexis Anagnostopoulos; Italo Bove; Karl Schlag; Omar Licandro
    Abstract: We provide a simple theory of in.ation inertia in a staggered price setting framework a la Calvo (1983). Contrary to Calvo.s formulation, the frequency of price changes is allowed to vary according to an evolutionary criterion. Inertia is the direct result of gradual adjustment in this frequency following a permanent change in the rate of money growth.
  40. By: Sebastian Edwards (University of California, Los Angeles and National Bureau of Economic Research)
    Abstract: During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.
    Keywords: Regional and International Currency Arrangements
    JEL: F41 F15 F33
    Date: 2006–06
  41. By: Gottfried Haber; Reinhard Neck
    Abstract: Sustainablity of Austrian public debt is investigated in the context of political objectives such as stabilizing the business cycle, increasing chances for being re-elected and implementing the ideologies of political parties. Several tests indicate that Austrian fiscal policies were sustainable in the period 1960–1974, while from 1975 on, public debt grew much more rapidly. The development of public debt in Austria seems to be driven not primarily by ideology, but by structural causes and a shift in the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated by one party run higher deficits than coalition governments. There are no indications of a political business cycle.
    Keywords: fiscal policy, sustainability, time series, political economy
    JEL: E60 H60
    Date: 2006
  42. By: Matthias Doepke
  43. By: Panayiotis P. Athanasoglou (Bank of Greece); Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Matthaios D. Delis (Athens University of Economics and Business)
    Abstract: The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.
    Keywords: Bank profitability; business cycles and profitability; dynamic panel data model
    JEL: G21 C23 L2
    Date: 2005–06
  44. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates in the 10 new EU countries, and the 2 core EMU countries, France and Germany. By decomposing each term structure into its transitory and permanent components, we also analyze the possible short run and long run linkages among the term structures of these countries. The empirical results support the expectations theory of the term structure for all countries except Malta. Further, they point to both weak short run linkages and several strong long run linkages among the monetary policies of the 10 new EU and the core of the EMU. The group of the Central European countries and Latvia are prominent in the latter case.
    Keywords: Term Structure, EU Enlargement, Cointegration, Common Trends, Granger
    JEL: E43 F15 F42
    Date: 2005
  45. By: Roel Beetsma; Massimo Giuliodori; Franc Klaassen
    Abstract: We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings).
    Keywords: trade policy
    Date: 2005–10–26
  46. By: Enrique López Enciso; Martha Misas Arango
    Abstract: En este artículo se analizan las fuentes del desempleo en Colombia en el marco de un modelo estructural de corrección de errores (SVEC). Con este propósito se estima un modelo de corrección de errores. El análisis de cointegración muestra la existencia de una relación de largo plazo entre la productividad, el empleo, el desempleo, la tasa real de cambio y el salario real. Con base en la forma reducida del modelo de corrección de errores se identifican los shocks estructurales y se determina su importancia para el desempleo a partir del análisis de impulso respuesta y la descomposición de la varianza del error de pronóstico.
    Keywords: Desempleo, Cointegración, VEC estructural Classification JEL: C32; E24.
  47. By: Richard A. Ashley.; Randall J. Verbrugge.
    Keywords: Phillips Curve, spectral regression, time series analysis
    Date: 2006
  48. By: Dimitrios Sideris (Bank of Greece, Economic Research Department and University Ioannina, Department of Economics); Nicholas G. Zonzilos (Bank of Greece, Economic Research Department)
    Abstract: The present paper presents a quarterly econometric model for the Greek economy, the GR-MCM model. The model has been developed as part of a larger project within the European System of Central Banks (ESCB), the Multi-Country Model (MCM). The model combines short-run Keynesian dynamics determined by demand with a neoclassical steady state driven by supply factors. A well-specified long-run supply side is fully and simultaneously estimated. As far as the econometric methodology is concerned, the equilibrium relationships are estimated using cointegration analysis, whereas the dynamic equations are specified as error correction models. Standard simulations result in plausible short to long-run responses to exogenous shocks, thus indicating that the model can be useful for policy analysis experiments.
    Keywords: Econometric Modelling; Cointegration Techniques; Simulation Results
    JEL: C50 E17
    Date: 2005–02
  49. By: Giannis Karagiannis (Department of Economics, University of Macedonia, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
  50. By: Balázs Égert (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria); Peter Backé (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria); Tina Zumer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper analyzes the equilibrium level of private credit to GDP in 11 Central and Eastern European countries in order to see whether the high credit growth recently observed in some of these countries led to above equilibrium private credit-to-GDP levels. We use estimation results obtained for a panel of small open OECD economies (out-of-sample panel) to derive the equilibrium credit level for a panel of transition economies (in-sample panel). We opt for this (out-of-sample) approach because the coe¢ cient estimates for transition economies are fairly unstable. We show that there is a large amount of uncertainty to determine the equilibrium level of private credit. Yet our results indicate that a number of countries are very close or even above the estimated equilibrium levels, whereas others are still well below the equilibrium level. JEL Classification: C31, C33, E44, G21.
    Keywords: Credit to the private sector, credit growth, equilibrium level of credit, initial undershooting, transition economies.
    Date: 2006–10
  51. By: Clements, Michael P (Department of Economics, University of Warwick)
    Abstract: We ask whether the different types of forecasts made by individual survey respondents are mutually consistent, using the SPF survey data. We compare the point forecasts and central tendencies of probability distributions matched by individual respondent, and compare the forecast probabilities of declines in output with the probabilities implied by the probability distributions. When the expected associations between these different types of forecasts do not hold for some idividuals, we consider whether the discrepancies we observe are consistent with rational behaviour by agents with asymmetric loss functions.
    Keywords: Rationality ; probability forecasts ; probability distributions
    JEL: C53 E32 E37
    Date: 2006
  52. By: Bo Becker (University of Illinois at Urbana-Champaign, Urbana, IL 61801, USA.); Jagadeesh Sivadasan (Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109, USA.)
    Abstract: We investigate financing constraints in a large cross-country data set covering most of the European economy. Firm level investment sensitivity to cash flow is used to identify financing constraints. We find that the sensitivities are significantly positive on average, controlling for country and industry fixed effects, as well as firm level controls. Most importantly, the cash flow sensitivity of investment is lower in countries with better-developed financial markets. This suggests that financial development may mitigate financial constraints. This effect is weaker in conglomerate subsidiaries, which are likely to have access to internal capital markets and depend less on the outside financial environment, and possibly for firms in industries with highly liquid assets as well. This result sheds light on the link between financial and economic development. JEL Classification: E22, E44, G31, L10.
    Keywords: Financial Constraints, Investment, Europe, Financial Development.
    Date: 2006–10
  53. By: Omar Licandro; Luis A. Puch
    Abstract: Economists model time as continuous or discrete. The recent literature on continuous time models with delays should help to bridge the gap between these two families of models. In this note, we propose a simple time–to–build model in continuous time, and show that a discrete time version is a true representation of the continuous time problem under some sufficient conditions.
    Keywords: Discrete Time, Continuous Time, Time–to–Build, Delay, DDEs
    JEL: O40 E32 C61
    Date: 2006
  54. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: This paper deals with the proposed use of sovereign credit ratings in the “Basel Accord on Capital Adequacy” (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.
    Keywords: Sovereign Risk, Credit Ratings, Basel II
    JEL: E44 E47 G15
  55. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business)
    Abstract: In this paper two models of investment stemming from the neoclassical theory are derived in a unifying framework. The Q type models view the stock market valuation of a firm as an all-encompassing variable determining its investment decisions, while the Euler equation for investment highlights the dynamic nature of firms’ decisionmaking. A sample of 779 UK manufacturing companies listed in the London Stock Exchange in the period 1971-1990 is used to compare the empirical fit of the two different models of investment. Despite a number of difficulties, the Q model appears to be empirically superior delivering the desirable consistency between theory and data.
    Keywords: Empirical investment models, Euler equation for investment, Q model
    JEL: E22 C23 D92
    Date: 2005–09
  56. By: Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
    Abstract: In this paper we investigate the analytical and empirical linkages between firms' capital investment behavior and financial frictions arising from asymmetric information, proxied by firms' liquidity and degree of uncertainty. Measures of intrinsic and extrinsic uncertainty are derived from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. We employ a panel of U.S. manufacturing firm data obtained from COMPUSTAT over the 1984-2003 period. Financial frictions captured by interactions between firms' cash flow and both intrinsic and CAPM-based measures of uncertainty have a significant negative impact on firms' investment spending, while extrinsic uncertainty has a positive impact.
    Keywords: capital investment, asymmetric information, financial frictions, uncertainty, CAPM
    JEL: E22 D81 C23
    Date: 2006
  57. By: Giorgio Fagiolo (Corresponding author, Dipartimento di Scienze economiche (Università di Verona)); Mauro Napoletano; Andrea Roventini
    Abstract: This work explores some distributional properties of aggregate output growth-rate time series. We show that, in the majority of OECD countries, output growth-rate distributions are well-approximated by symmetric exponential-power densities with tails much fatter than those of a Gaussian. Fat tails robustly emerge in output growth rates independently of: (i) the way we measure aggregate output; (ii) the family of densities employed in the estimation; (iii) the length of time lags used to compute growth rates. We also show that fat tails still characterize output growth-rate distributions even after one washes away outliers, autocorrelation and heteroscedasticity.
    Keywords: Output Growth-Rate Distributions, Normality, Fat Tails, Time Series, Exponential-Power Distributions, Laplace Distributions, Output Dynamics.
    JEL: C1 E3
    Date: 2006–10
  58. By: Aaron Tornell
  59. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: This paper uses cointegration and common trends techniques to investigate empirically the expectations hypothesis of the term structure of interest rates for the 10 new EU countries, along with Bulgaria and Romania. The empirical results support the expectations theory of the term structure for all countries except Malta. By decomposing each term structure into its transitory and permanent components, we also analyze short run and long run interdependence among the term structures of interest rates in these countries. Our results indicate weak linkages among the term structures of the 10 new EU countries, and strong linkages between Bulgaria and Romania that hope to join the EU in 2007.
    Keywords: Term Structure, EU Enlargement, Cointegration, Common Trends, Granger Causality
    JEL: E43 F15 F42
    Date: 2005
  60. By: Schumacher, Christian; Breitung, Jörg
    Abstract: This paper discusses a factor model for estimating monthly GDP using a large number of monthly and quarterly time series in real-time. To take into account the different periodicities of the data and missing observations at the end of the sample, the factors are estimated by applying an EM algorithm combined with a principal components estimator. We discuss the in-sample properties of the estimator in real-time environments and methods for out-of-sample forecasting. As an empirical application, we estimate monthly German GDP in real-time, discuss the nowcast and forecast accuracy of the model and the role of revisions. Furthermore, we assess the contribution of timely monthly data to the forecast performance.
    Keywords: monthly GDP, EM algorithm, principal components, factor models
    JEL: C53 E37
    Date: 2006
  61. By: Ali Askin Culha
    Date: 2006
  62. By: Michael D. Bordo; Owen Humpage; Anna J. Schwartz
    Abstract: The present set of arrangements for U.S. exchange market intervention policy was largely developed after 1961 during the Bretton Woods era. However, that set had important historical precedents. In this paper we examine precedents to current arrangements, focusing on three historical eras: pre-1934 operations; the Exchange Stabilization Fund operations beginning in 1934; and the Bretton Woods era. We describe operations by the Second Bank of the United States in the pre-Civil War period and then operations by the U.S. Treasury in the post-Civil War period. After establishment of the Federal Reserve in 1914, the New York Fed engaged in isolated exchange market policies in the 1920s and 1930s, first under the direction of the Governor Benjamin Strong until his death in 1928, thereafter, under the direction of his successor, George Harrison. We then examine operations of the Exchange Stabilization Fund that the Gold Reserve Act of 1934 created as a Treasury Department agency. We exploit unique unpublished sources to analyze its dealings with the Banque de France and the Bank of England before and after the Tripartite Agreement. Finally, based on a unique data set of all U.S. Treasury and Federal Reserve foreign-exchange transactions, we discuss U.S. efforts from 1961 through 1972 to defend the dollar's parity under the Bretton Woods system.
    JEL: E42 N10
    Date: 2006–11
  63. By: Eytan Sheshinski
    Abstract: For the last fifty years, countries in Asia and elsewhere witnessed a surge in aggregate savings per capita. Some empirical studies attribute this trend to the increases in life longevity of the populations of these countries. It has been argued that the rise in savings is short-run, eventually to be dissipated by the dissaving of the elderly, whose proportion in the population rises along with longevity. This paper examines whether these conclusions are supported by economic theory. A model of life cycle decisions with uncertain survival is used to derive individuals’ consumption and chosen retirement age response to changes in longevity from which changes in individual savings are derived. Conditions on the age-profile of improvements in survival probabilities are shown to be necessary in order to predict the direction of this response. Population theory (e.g. Coale, 1952) is used to derive the state-state population age density function, enabling the aggregation of individual response functions and a comparative steady-state analysis. Under certain conditions, increased longevity is shown to increase aggregate savings per capita. These conclusions pertain to an economy with a competitive annuity market. The absence of such market compels individuals to leave unintended bequests, whose size depends on the (random) age of death. While an increase in longevity raises individual savings for given endowments, it is shown that the effect on expected steady-state aggregate savings, taking into account the endogenous ergodic distribution of endowments, cannot be determined a-priori.
    Keywords: longevity, annuities, life cycle savings, retirement age, steady-state, aggregate savings
    JEL: D10 D60 E20 H00
    Date: 2006
  64. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Arjan Kadareja
    Abstract: We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord. JEL Classification: G21, G14.
    Keywords: Realised volatility, public information, transparency.
    Date: 2006–10
  65. By: Doina Maria Radulescu; Michael Stimmelmayr
    Abstract: This paper analyses the switch to an ACE or to a CBIT type of tax system starting from the present German tax system. We show that in case an ACE type of reform is financed by an increase in the VAT and not in the profit tax, it might be preferred to a CBIT even in the context of an open economy. Moreover, the required exogenous increase in the profit tax rate cannot ensure revenue neutrality on its own due to the negative general equilibrium effects it triggers on the whole economy. For a CBIT, the exogenous reduction in the tax rates on corporate and non-corporate profits leads to better results than when we allow for an endogenous change in the VAT. The best results arise when the CBIT is accompanied by a provision for immediate write-off and a lower profit tax or when the ACE with no additional capital gains taxation on the household side is financed by an increase in the VAT.
    Keywords: income taxation, computable general equilibrium modeling, welfare analysis
    JEL: C68 D58 D92 E62 H25
    Date: 2006
  66. By: Diego Martínez López (Centro de Estudios Andaluces); Jesús Rodríguez López (Universidad Pablo de Olavide)
    Abstract: This paper explores the contribution of Information and Communication Technologies (ICT) on economic growth and labor productivity growth of Andalucía during 1995-2004. We find that the contribution of ICT assets to total market GVA growth is quantitatively modest. Anyway the contribution to GVA growth and employment growth within the intensive ICT sectors has experienced a considerable increase in Andalucía. Although our analysis detects that intensive ICT sectors exhibit a high productivity level with respect to that of the non intensive ones, our main conclusion is that the advantages that might emerge from the use of ICT are nor yet observable in the economic dynamics of Andalucía, at least in a similar manner to that of the most developed.
    Keywords: Information and Communication Technologies, productivity growth, regional growth
    JEL: E13 O30 O40 O47
    Date: 2006
  67. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: The experience in the period during and after the Asian crisis of 1997-98 has provoked an extensive debate about the credit rating agencies’ evaluation of sovereign risk in emerging markets lending. This study analyzes the role of credit rating agencies in international financial markets, particularly whether sovereign credit ratings have an impact on the financial stability in emerging market economies. The event study and panel regression results indicate that credit rating agencies have substantial influence on the size and volatility of emerging markets lending. The empirical results are signifi¬cantly stronger in the case of government’s downgrades and negative imminent sover¬eign credit rating actions such as credit watches and rating outlooks than positive ad¬justments by the credit rating agencies while by the market participants’ anticipated sovereign credit rating changes have a smaller impact on financial markets in emerg¬ing economies.
    Keywords: Sovereign Risk, Credit Ratings, Financial Crises
    JEL: E44 E47 G15
  68. By: Shouyong Shi
    Abstract: I analyze the equilibrium in a labor market where firms offer wage-tenure contracts to direct the search of employed and unemployed workers. Each applicant observes all offers and there is no coordination among individuals. Workers' applications (as well as firms' recruiting decisions) are optimal. This optimality requires the equilibrium to be formulated differently from the that in the literature of undirected search. I provide such a formulation and show that the equilibrium exists. In the equilibrium, individuals explicitly tradeoff between an offer and the matching rate at that offer. This tradeoff yields a unique offer which is optimal for each worker to apply, and applicants are separated endogenously according to their current values. Despite such uniqueness and separation, there is a non-degenerate and continuous wage distribution of employed workers in the stationary equilibrium. The density of this distribution is increasing at low wages and decreasing at high wages. In all equilibrium contracts, wages increase with tenure, which results in quit rates to decrease with tenure. Moreover, the model makes novel predictions about individuals' job-to-job transition and comparative statics.
    Keywords: Directed search; on the job; wage tenure contracts
    JEL: D83 E24 J60
    Date: 2006–11–03
  69. By: Frederick van der Ploeg
    Abstract: Baumol’s cost disease states that relatively high productivity growth in manufacturing induces a steady increase in the relative price of human services. If demand for these services is inelastic or manufactured goods are necessities, the budget share of these services inexorably rises over time and labour gradually shifts from manufacturing to services. If the care for children and elderly releases time for households, labour supply and the budget share of human services expand over time. This paper addresses the sustainability of human services such as care and education in a greying economy if they are financed by labour taxes. A productivity growth differential in favour of the market sector pushes up the tax rate and public sector employment if private goods and public services are poor substitutes, labour supply is relatively inelastic and there are not too many pensioners and children. Private affluence and public squalor result if labour supply is very elastic, the dependency ratio is large and the market provides good substitutes for public services. Greying of the population boosts demand for public employment if the market provides poor substitutes for public services, but the provision of public services per dependent may fall due to the erosion of the tax base. Subsequently, we discuss the situation where market and public employment are imperfect substitutes for households, the utility of money is not constant and public sector productivity depends on public sector pay.
    Keywords: Baumol’s cost disease, Wagner’s law, time price, congestion of public services, public squalor, private affluence, tax burden, cost of public funds, differential productivity growth, greying of population, public sector pay
    JEL: E62 H00 J22 J31 J40 O40
    Date: 2006

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