nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒11‒25
106 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Great Ratios, Balanced Growth and Stochastic Trends: Evidence for the Euro Area By M.S.Rafiq
  2. "The "New Consensus" View of Monetary Policy: A New Wicksellian Connection?" By Giuseppe Fontana
  3. Asset Market Participation, Monetary Policy Rules, and the Great Inflation By Roland Straub; Florin Bilbiie
  4. Transmission Mechanisms of Monetary Policy in Armenia: Evidence from VAR Analysis By Holger Floerkemeier; Era Dabla-Norris
  5. Monetary policy in a low inflation economy with learning By John C. Williams
  6. Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic By Horvath, Roman
  7. Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve By Peter Funk; Bettina Kromen
  8. Fiscal Determinants of Inflation: A Primer for the Middle East and North Africa By Ludvig Söderling; Domenico Fanizza
  9. An Optimized Monetary Policy Rule for ToTEM By Jean-Philippe Cayen; Amy Corbett; Patrick Perrier
  10. The Role of Seasonality and Monetary Policy in Inflation Forecasting By Francis Y. Kumah
  11. Monetary Transmission Mechanisms in Belarus By Rodolfo Maino; Balázs Horváth
  12. Revealing the secrets of the temple: the value of publishing central bank interest rate projections By Glenn D. Rudebusch; John C. Williams
  13. Testing the Opportunistic Approach to Monetary Policy By Martin, Chris; Milas, Costas
  14. Monetary Policy Analysis in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  15. Measuring the Stance of Monetary Policy in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  16. Measures of Underlying Inflation in the Euro Area: Assessment and Role for Informing Monetary Policy By Emil Stavrev
  17. Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter? By Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
  18. Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation By Rudiger Ahrend; Pietro Catte; Robert Price
  19. The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv By Michel Normandin
  20. Money Demand and Disinflation in Selected CEECs during the Accession to the EU By Fidrmuc, Jarko
  21. The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain By António Afonso; Peter Claeys
  22. Monetary Policy Analysis in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  23. Okun’s Law, Creation of Money and the Decomposition of the Rate of Unemployment By Stéphane Mussard; Bernard Philippe
  24. The Response of Monetary Policy to Uncertainty: Theory and Empirical Evidence for the US By Christopher Martin; Costas Milas
  25. Measuring the Stance of Monetary Policy in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  26. Indexed Bonds and Revisions of Inflation Expectations By Reschreiter, Andreas
  27. Monetary Policy and Inflation Dynamics By Roberts, John M
  28. Was the New Deal contractionary? By Gauti B. Eggertsson
  29. Has Globalization Changed Inflation? By Laurence M. Ball
  30. Monetary Policy and its Informative Value By Camille Cornand; Romain Baeriswyl
  31. Global versus Country-Specific Shocks and International Business Cycles By Michel Normandin; Bruno Powo Fosso
  32. The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market By Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo
  33. Source of Output dynamics in USA vs. Great Britain: supply, demand or nominal shocks By Rzigui, Lotfi
  34. Employment and growth in Europe and the US - The role of fiscal policy composition By T. DHONT; F. HEYLEN
  35. Banks’ Regulatory Buffers, Liquidity Networks and Monetary Policy Transmission By Christian Merkl; Stéphanie Stolz
  36. A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous? By Milani, Fabio
  37. Does Consumer Confidence Forecast Household Spending? The Euro Area Case By DION, David Pascal
  38. The Monetary Policy Regime and Banking Spreads in Barbados By Wendell Samuel; Laura Valderrama
  39. Two flaws in business cycle dating By Lawrence J. Christiano; Joshua M. Davis
  40. Adaptive learning, endogenous inattention, and changes in monetary policy By William A. Branch; John B. Carlson; George W. Evans; Bruce McGough
  41. Deflationary Shocks and Monetary Rules: an Open-Economy Scenario Analysis By Douglas Laxton; Papa N'Diaye; Paolo Pesenti
  42. "On Lower-bound Traps: A Framework for the Analysis of Monetary Policy in the ÒAgeÓ of Central Banks" By Alfonso Palacio-Vera
  43. The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area By Adalid, Ramon; Coenen, Gunter; McAdam, Peter; Siviero, Stefano
  44. Where Are We Now? Real-Time Estimates of the Macroeconomy By Evans, Martin D
  45. Controlling for geographic dispersion when estimating the Japanese Phillips curve By Hiroshi Fujiki; Howard J. Wall
  46. The Complex Response of Monetary Policy to the Exchange Rate By Ram Sharan Kharel; Christopher Martin; Costas Milas
  47. Equilibrium of incomplete markets with money and intermediate banking system. By Monique Florenzano; Stella Kanellopoulou; Yannis Vailakis
  48. Two flaws in business cycle accounting By Lawrence J. Christiano; Joshua M. Davis
  49. Short-term Pain for Long-Term Gain: The Impact of Structural Reform on Fiscal of Outcomes in EMU By Paul van den Noord; Boris Cournède
  50. A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed By Andrew K. Rose
  51. Fiscal Consolidation in Israel: A Global Fiscal Model Perspective By Selim Elekdag; Marialuz Moreno-Badia; Natan P. Epstein
  52. Intrinsic and Inherited Inflation Persistence By Fuhrer, Jeffrey
  53. Learning about Monetary Policy Rules when Long-Horizon Expectations Matter By Preston, Bruce
  54. External shocks and economic fluctuations: evidence from Tunisia By Rzigui, Lotfi
  55. Anticipation of Monetary Policy and Open Market Operations By Carpenter, Seth; Demiralp, Selva
  56. Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements By Gurkaynak, Refet S; Sack, Brian; Swanson, Eric T
  57. Moderate inflation and the deflation-depression link By Jess Benhabib; Mark M. Spiegel
  58. Duration Dependent Markov-Switching Vector Autoregression: Properties, Bayesian Inference, Software and Application By Matteo Pelagatti
  59. Fiscal Policies, External Deficits, and Budget Deficits By Michel Normandin
  60. The (Ir)relevance of the NRU for Policy Making: The Case of Denmark By Marika Karanassou; Hector Sala; Pablo F. Salvador
  61. Term Structure of Interest Rates. European Financial Integration By Elisabet Ruiz Dotras; Hortensia Fontanals Albiol; Catalina Bolance Losilla
  62. The political economy of unemployment and threshold effects. A nonlinear time series approach. By Ruthira Naraidoo; Patrick Minford; Ioannis A. Venetis
  63. Downward nominal wage rigidity in Poland By Brzoza-Brzezina, Michal; Socha, Jacek
  64. Forecasting with the yield curve; level, slope, and output 1875-1997 By Michael D. Bordo; Joseph G. Haubrich
  65. Business cycles and monetary regimes in emerging economies: a role for a monopolistic banking sector By Federico S. Mandelman
  66. Monetary Integration and the Cost of Borrowing By Marta Gomez-Puig
  67. U.S. Wage and Price Dynamics: A Limited-Information Approach By Sbordone, Argia M
  68. Mind the Gap: A Comment on Aggregate Productivity and Technology By M. Ali Choudhary; Vasco J. Gabriel
  69. Natural-Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon By Daniel Leigh; Jan-Peter Olters
  70. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Fernando Sanchez-Losada; Daniel Cardona
  71. Sustaining Latin America's Resurgence: Some Historical Perspectives By Martin D. Cerisola; Anoop Singh
  72. An evaluation of inflation forecasts from surveys using real-time data By Dean Croushore
  73. Averaging forecasts from VARs with uncertain instabilities By Todd E. Clark; Michael W. McCracken
  74. New Evidence on Fiscal Adjustment and Growth in Transition Economies By Alejandro Simone; Alex Segura-Ubiergo; Sanjeev Gupta
  75. The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach By Gadea, Maria; Mayoral, Laura
  76. "On the Minskyan Business Cycle" By Korkut A. Erturk
  77. Macroeconomic Uncertainty and Bank Lending : The Case of Ukraine By Oleksandr Talavera; Andriy Tsapin; Oleksandr Zholud
  78. Gender and Its Relevance to Macroeconomic Policy: A Survey By Janet Gale Stotsky
  79. Why are plant deaths countercyclical: reallocation timing or fragility? By Andrew Figura
  80. Assessing structural VARs By Lawrence J. Christiano; Martin Eichenbaum; Robert Vigfusson
  81. Future Productivity Growth in Canada and Implications for the Canada Pension Plan By Andrew Sharpe
  82. The "Great Moderation" and the US External Imbalance By Fabrizio Perri; Alessandra Fogli
  83. Political Instability and Inflation Volatility By Ari Aisen; Francisco José Veiga
  84. Closing International Real Business Cycle Models with Restricted Financial Markets By Michel Normandin; Martin Boileau
  85. Asymmetric and Non-Linear Adjustments in Local Fiscal Policy By Gabriella Legrenzi; Costas Milas
  86. Nominal growth of a small open economy By Péter Benczúr; István Kónya
  87. Patterns of Non-exponential Growth of Macroeconomic Models: Two-parameter Poisson-Dirichlet Models By Masanao Aoki
  88. Post-Crisis Recovery: When Does Increased Fiscal Discipline Work? By Pritha Mitra
  89. Capital Account Liberalization: Theory, Evidence, and Speculation By Peter Blair Henry
  90. What Explains Private Saving in Mexico? By Andrew Swiston; Ales Bulir
  91. Effects of longevity and dependency rates on saving and growth: Evidence from a panel of cross countries By Hongbin Li; Junsen Zhang; Jie Zhang
  92. Dual labor markets and business cycles By David Cook; Hiromi Nosaka
  93. Forming priors for DSGE models (and how it affects the assessment of nominal rigidities) By Marco Del Negro; Frank Schorfheide
  94. The Degree of Precautionary Saving: A Reexamination By Yasuyuki Sawada; Jeong-Joon Lee
  95. Changements de régime pour la persistance et la dynamique du taux d'intérêt réel américain. By Nicolas Million
  96. Global current account adjustment: a decomposition By Michael B. Devereux; Amartya Lahiri; Ke Pang
  97. Micro-aspects of Monetary Policy: Lender of Last Resort and Selection of Banks in Pre-war Japan By Tetsuji Okazaki
  98. Measuring Idiosyncratic Risk: Implications for Capital Flows By Eva Rytter Sunesen
  99. De la relation épargne/investissement à l'évolution du taux de chômage By Mussard, Stéphane; Philippe, Bernard
  100. De la relation épargne/investissement à l’évolution du taux de chômage By Stéphane Mussard; Bernard Philippe
  101. Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis By Hamid Faruqee; Douglas Laxton; Dirk Muir; Paolo Pesenti
  102. The Macroeconomics of Targeting: The Case of an Enduring Epidemic By Clive Bell; Hans Gersbach
  103. Understanding Post-War Changes in U.S. Household Production: A Full-Income Demand-System Perspective By Huffman, Wallace
  104. "Population Forecasts, Fiscal Policy, and Risk" By Shripad Tuljapurkar
  105. Regional Spillovers and Spatial Heterogeneity in Matching Workers and Employers in Germany By Reinhold Kosfeld
  106. SIGMA: A New Open Economy Model for Policy Analysis By Erceg, Christopher; Guerriei, Luca; Gust, Christopher

  1. By: M.S.Rafiq (Dept of Economics, Loughborough University, United Kingdom)
    Abstract: Following Kydland and Prescott's (1982) seminal paper, a key question that has been debated widely remains, `Are business cycles mainly the result of permanent shocks to productivity?' This paper attempts to answer this question in the context of the Euro area economy as a whole, given current efforts to understand the design of Euro-wide policies. To help shed light on the preceding question for the Euro area a common trends model is utilised, allowing for the study of growth and business cycles phenomena in a joint framework. This paper imposes a long-run restriction implied by a large class of Real Business Cycle (RBC) models - identifying permanent productivity shocks as innovations to a common stochastic trend in output, consumption and investment - to provide evidence on the role of balanced growth shocks for the Euro area business cycle. This approach is given further credibility by the finding of stationary great ratios, justifying the use of exogenous growth models in examining the significance of productivity shocks on real output fluctuations for the Euro area. The results are broadly supportive of standard RBC theory, with the finding that up to 60% of transitory fluctuations are caused by exogenous permanent productivity shocks. The model further finds that productivity shocks have useful explanatory power in illuminating certain macroeconomic historical episodes, in contrast to monetary and inflation shocks, which appear to have played a relatively minor role in driving output fluctuations.
    Keywords: Stochastic Trends, Balanced Growth, Cointegration, Open Economy.
    JEL: C32 E32
    Date: 2006–11
  2. By: Giuseppe Fontana
    Abstract: One of the greatest achievements of the modern ÒNew ConsensusÓ view in macroeconomics is the assertion of a nonquantity theoretic approach to monetary policy. Leading theorists and practitioners of this view have indeed rejected the quantity theory of money, and defended a return to the old Wicksellian idea of eliminating high levels of inflation by adjusting nominal interest rates to changes in the price level. This paper evaluates these recent developments in the theory and practice of monetary policy in terms of two basic questions: 1) What is the monetary policy instrument controlled by the central bank? and 2) Which macroeconomic variables are affected in the short and long run by monetary policy?
    Date: 2006–10
  3. By: Roland Straub; Florin Bilbiie
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price dynamic stochastic general equilibrium model, which implies that at low asset-market participation rates, the interest rate elasticity of output (the slope of the IS curve) becomes positive - that is, "non-Keynesian." Remarkably, in that case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Consequently, we argue that the policy of the Federal Reserve System in the pre-Volcker era, often associated with a passive monetary policy rule, was closer to optimal than conventional wisdom suggests and may thus have remained unchanged at a fundamental level thereafter. We provide institutional and empirical evidence for our hypothesis, in the latter case using Bayesian estimation techniques, and show that our model is able to explain most features of the "Great Inflation."
    Keywords: Great inflation , limited asset market participation , passive monetary policy ,
    Date: 2006–09–13
  4. By: Holger Floerkemeier; Era Dabla-Norris
    Abstract: This paper examines monetary policy transmission in Armenia in light of the authorities' intention to shift to an inflation-targeting regime over the medium term. We find that the capability of monetary policy to influence economic activity and inflation is still limited, as important channels of monetary transmission are not fully functional. In particular, the interest rate channel remains weak, even though there is some evidence of transmission to prices of changes in the repo rate, the central bank's new operating target for inflation. As in other emerging and transition economies with a high degree of dollarization, the exchange rate channel has a strong impact on the inflation rate. Moreover, we find that inflation does respond to broad money shocks, once foreign currency deposits are included.
    Keywords: Armenia , monetary policy , transmission mechanism ,
    Date: 2006–11–03
  5. By: John C. Williams
    Abstract: In theory, monetary policies that target the price level, as opposed to the inflation rate, should be highly effective at stabilizing the economy and avoiding deflation in the presence of the zero lower bound on nominal interest rates. With such a policy, if the short-term interest rate is constrained at zero and the inflation rate declines below its trend, the public expects that policy will eventually engineer a period of above-trend inflation that restores the price level to its target level. Expectations of future monetary accommodation stimulate output and inflation today, mitigating the effects of the zero bound. The effectiveness of such a policy strategy depends crucially on the alignment of the public's and the central bank's expectations of future policy actions. In this paper, we consider an environment where private agents have imperfect knowledge of the economy and therefore continuously reestimate the forecasting model that they use to form expectations. We find that imperfect knowledge on the part of the public, especially regarding monetary policy, can undermine the effectiveness of price-level-targeting strategies that would work well if the public had complete knowledge. For low inflation targets, the zero lower bound can cause a dramatic deterioration in macroeconomic performance with severe recessions occurring with alarming frequency. However, effective communication of the policy strategy that reduces the public's confusion about the future course of monetary policy significantly reduces the stabilization costs associated with the zero bound. Finally, the combination of learning and the zero bound implies the need for a stronger policy response to movements in the price level than would otherwise be optimal and such a rule is effective at stabilizing both inflation and output in the presence of learning and the zero bound even with a low inflation target.
    Keywords: Monetary policy ; Inflation (Finance)
    Date: 2006
  6. By: Horvath, Roman
    Abstract: This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1-2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.
    Keywords: equilibrium interest rates; Taylor rule; augmented Kalman filter
    JEL: E58 E43 E52
    Date: 2006–10–30
  7. By: Peter Funk; Bettina Kromen
    Abstract: This model analyses the interaction between inflation and the long-run levels of employment and output growth in a Schumpeterian growth model with quality improving innovations under nominal price rigidity. At the unique REE steady state equilibrium, both employment and growth are hump-shaped functions of money growth peaking at positive inflation rates. This is due to four effects of money growth under rigidity: Erosion of its relative price through inflation and the optimal initial mark-up set in anticipation of this influence a firm’s profits. Dispersion in relative prices causes inefficient production while the change in the average mark-up influences aggregate demand.
    Keywords: Inflation, price rigidity, endogenous growth, employment, long-run Phillips curve
    JEL: E24 E31 O31 O42
    Date: 2006–11–14
  8. By: Ludvig Söderling; Domenico Fanizza
    Abstract: Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.
    Keywords: Fiscal theory of the price level , Algeria , Egypt , Lebanon , Morocco , Tunisia ,
    Date: 2006–10–06
  9. By: Jean-Philippe Cayen; Amy Corbett; Patrick Perrier
    Abstract: The authors propose a monetary policy rule for the Terms-of-Trade Economic Model (ToTEM), the Bank of Canada's new projection and policy-analysis model for the Canadian economy. They consider simple instrument rules such as Taylor-type and inflation-forecast-based rules. The proposed rule minimizes a loss function that reflects the assumed preferences of the monetary authority over inflation and output, as well as over the variability of its instrument. The authors also investigate how robust the proposed rule is with respect to a particular realization of shocks that differs from the historical distribution used to find the optimized rule.
    Keywords: Economic models; Monetary policy framework; Transmission of monetary policy
    JEL: E5 E52
    Date: 2006
  10. By: Francis Y. Kumah
    Abstract: Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model-with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated errorcorrection models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting.
    Keywords: Inflation forecasting , seasonal unit roots , monetary policy stance , erroro-correction models and VAR , Monetary policy , Inflation , Forecasting models ,
    Date: 2006–07–28
  11. By: Rodolfo Maino; Balázs Horváth
    Abstract: We explore monetary policy transmission by estimating VAR impulse response functions to illustrate the Belarusian economy's response to unexpected changes in policy and exogenous variables. We find a significant exchange rate pass-through to prices, and interest rate policy following, rather than leading, financial market developments. Our estimated monetary policy reaction function shows the central bank striking a balance between real exchange rate stability and containing inflation. We discuss dollarization, administrative interventions, and other features complicating monetary policy transmission, review specific constraints and vulnerabilities, and conclude with observations on possible measures that could raise the effectiveness of monetary policy in Belarus.
    Keywords: Monetary policy , inflation , transmission mechanisms , dollarization ,
    Date: 2006–11–02
  12. By: Glenn D. Rudebusch; John C. Williams
    Abstract: The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.
    Keywords: Monetary policy
    Date: 2006
  13. By: Martin, Chris; Milas, Costas
    Abstract: The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1% of the intermediate target but a strong response when inflation is further from the intermediate target.
    JEL: E52
    Date: 2006–10–24
  14. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure.
    Keywords: Monetary policy analysis; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 C13 E37 C32
    Date: 2006–03–11
  15. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.
    Keywords: Stance of monetary policy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 C13 E37 C32
    Date: 2006–06–11
  16. By: Emil Stavrev
    Abstract: The paper evaluates the 24-month ahead inflation forecasting performance of various indicators of underlying inflation and structural models. The inflation forecast errors resulting from model misspecification are larger than the errors resulting from forecasting of exogenous variables. Also, measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.
    Keywords: Underlying inflation , forecast evaluation , composite indicators , forecast risk assessment , Inflation , Euro area , Monetary policy , Economic models ,
    Date: 2006–09–11
  17. By: Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
    Abstract: This paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies. First, it explores the interest rate-inflation relationship in economies with different levels of external and domestic public debt using panel- and crosssection data. The results show that interest rate-inflation elasticity weakens with debt/GDP and external debt/GDP. Second, it utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news. The results suggest that when vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates, and the impact of monetary policy is weakened.
    Keywords: Public debt , fiscal policy , monetary policy , Emerging markets , Public debt , Fiscal policy , Monetary policy ,
    Date: 2006–08–14
  18. By: Rudiger Ahrend; Pietro Catte; Robert Price
    Abstract: This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation “episodes”, it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators -- inflation, the exchange rate and unemployment -- suggest a “crisis” situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued. <P>Interactions entre la politique monétaire et budgétaire : L’effet des conditions monétaires sur les consolidations budgétaires <BR>Cet article, utilisant des données relatives à 24 pays de l’OCDE sur les 25 dernières années, examine comment et dans quelles circonstances des ajustements budgétaires sont affectés par les conditions monétaires. Les ajustements budgétaires interviennent le plus souvent lorsque d’importants déficits menacent la soutenabilité des finances publiques, ou lorsque d'autres indicateurs macroéconomiques -- inflation, taux de change ou niveau de chômage -- sont très dégradés. En contrôlant ces variables, l’article apporte des preuves économétriques robustes suivant lesquelles les efforts de consolidation budgétaire ont davantage de chance d’être mis en oeuvre et couronnés de succès si la politique monétaire est accommodante dans la période initiale de l’ajustement, contribuant ainsi à amortir l’effet défavorable pour la croissance du resserrement budgétaire. Le lien n’est cependant pas mécanique, comme l’atteste l’existence d’épisodes de desserrement monétaire suivis d’un abandon des efforts d’ajustement fiscal. Par ailleurs, si l’indépendance des banques centrales fait explicitement obstacle à une réponse directe de la politique monétaire aux opérations budgétaires, l’article montre que la qualité de l’ajustement fiscal peut indirectement influer sur les banques centrales et les marches financiers. Par exemple, les taux d'intérêt à court et long terme semblent se replier davantage si l’ajustement budgétaire prend la forme d’une maîtrise stricte des dépenses courantes. Au total, l’influence entre l’ajustement budgétaire et la conduite de la politique monétaire est réciproque mais l’article montre que, même en contrôlant la qualité d'ajustement budgétaire, la politique monétaire continue à influencer la probabilité d’une consolidation des finances publiques d’être menée à bien.
    Keywords: financial markets, marchés financiers, fiscal policy, politique budgétaire, monetary policy, politique monétaire, fiscal adjustment, fiscal consolidation, interest rate, taux d'intérêt, fiscal stance, monetary conditions, conditions monétaires, central bank, banque centrale, quality of fiscal adjustment, modalités de l'ajustement budgétaire, policy co-ordination, coordination des politiques économiques, ajustement budgétaire, consolidation budgétaire
    JEL: E58 E63 G12 H62
    Date: 2006–11–03
  19. By: Michel Normandin (IEA, HEC Montréal)
    Abstract: This paper assesses the plausibility of popular models of the monetary transmission mechanism for the G7 countries. For this purpose, flexible structural vector autoregressions are used to relaxe the restrictions behind the traditional identifying schemes of monetary-policy shocks and their effects on macroececonomic variables, and in particular, on real wages. The estimates reveal that expansionary monetary-policy shocks produce declines of real wages for Canada, France, and the United Kingdom. This is consistent with sticky-wage models and suggests that labor-market frictions constitute prime features of these economies. In constrast, positive monetary-policy shocks yield increases of real wages for Germany, Italy, Japan, and the United States. This is consistent with sticky-price models and limited-participation models, so that goods-market frictions and/or financialmarket frictions seem important characteristics of these economies. Finally, the standard identifying restrictions are often statistically rejected and produce severe distortions of real-wage responses.
    Keywords: Conditional heteroscedasticity; monetary-policy indicators; orthogonality conditions.
    JEL: C32 E52
    Date: 2006–04
  20. By: Fidrmuc, Jarko
    Abstract: A panel data set for six countries (Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) is used to estimate money demand with panel cointegration methods over the recent disinflation period. The basic money demand model is able to convincingly explain the long-run dynamics of M2 in the selected countries. However, money demand is found to have been significantly determined by the euro area interest rates and the exchange rate against the euro, which indicates possible instability of money demand functions in the CEECs. Therefore, direct inflation targeting is an appropriate monetary regime before the eventual adoption of the euro.
    Keywords: Money demand; panel unit root tests; panel cointegration; direct inflation targeting; CEECs
    JEL: E41 E58 C23
    Date: 2006–10
  21. By: António Afonso; Peter Claeys
    Abstract: The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability.
    Keywords: fiscal indicator; structural balance; output gap; SGP; EMU; SVAR; short and longterm restrictions.
    JEL: E62 E65 E66 H61 H62
  22. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure.
    Keywords: Monetary policy analysis; Inflation targeting; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 F41 C13 F47 C32
    Date: 2006–03–11
  23. By: Stéphane Mussard (GREDI, Université de Sherbrooke and GEREM, Université de Perpignan); Bernard Philippe (GEREM, Université de Perpignan)
    Abstract: In this paper, we show that the rate of unemployment in period t depends on GDP and inflation rate in period t-1. We then show that GDP is related to money creation, and subsequently that the rate of unemployment is a decreasing function of this creation.
    Keywords: Creation of Money, Decomposition, GDP, Rate of Unemployment
    JEL: E20 E24
    Date: 2006
  24. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years.
    Keywords: Monetary Policy, Uncertainty
    JEL: C51 C52 E52 E58
    Date: 2005–07
  25. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.
    Keywords: Stance of monetary policy; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 F41 C13 F47 C32
    Date: 2006–06–11
  26. By: Reschreiter, Andreas (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper investigates the impact of revisions in inflation expectations on the prices of UK inflation-indexed and conventional government bonds with a vector autoregressive (VAR) model. Downwards revisions of inflation expectations are associated with unexpected increases in the prices of conventional bonds, but the prices of indexed bonds are not significantly affected. This suggests that indexed bonds protect investors against inflation while nominal bonds are exposed to changing monetary conditions. This is consistent with the view that indexed bonds avoid the inflation risk premium of conventional bonds and reduce the government's long-run borrowing costs.
    Keywords: Conventional and indexed bonds, Inflation, Macroeconomy, VAR
    JEL: E43 G12
    Date: 2006–11
  27. By: Roberts, John M
    Abstract: Since the early 1980s, the U.S. economy has changed in some important ways: inflation now rises considerably less when unemployment is low, and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these changes in the economy. The results suggest that changes in monetary policy can account for most or all of the change in the inflationunemployment relationship. In addition, changes in policy can explain a large proportion of the reduction in the volatility of the output gap.
    JEL: G00 G0
    Date: 2006–07–06
  28. By: Gauti B. Eggertsson
    Abstract: Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply. I argue that these emergency conditions-zero interest rates and deflation-were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by Cole and Ohanian, who argue that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.
    Keywords: Financial crises ; Depressions ; Inflation (Finance) ; Economic forecasting
    Date: 2006
  29. By: Laurence M. Ball
    Abstract: Many observers suggest that the "globalization" of the U.S. economy has changed the behavior of inflation. This essay examines this idea, focusing on several questions: (1) Has globalization reduced the long-run level of inflation? (2) Has it affected the structure of inflation dynamics, as captured by the Phillips curve? (3) Has it contributed substantial negative shocks to the inflation process? The answers to these questions are no, no, and no.
    JEL: E31
    Date: 2006–11
  30. By: Camille Cornand; Romain Baeriswyl
    Abstract: This paper analyzes the welfare effects of economic transparency in the conduct of monetary policy. We propose a model of monopolistic competition with imperfect common knowledge on the shocks affecting the economy where the central bank has no inflationary bias. In this context, monetary policy entails a dual role. The instrument of the central bank is both an action that stabilizes the economy and a public signal that partially reveals to firms the central bank's assessment about the state of the economy. Yet, firms are unable toperfectly disentangle the central bank's signals responsible for the instrument and the central bank optimally balances the action and information purposes of its instrument. We derive the optimal monetary policy and the optimal central bank's disclosure. We define transparency as an announcement by the central bank that allows firms to identify the rationale behind the instrument. It turnsout that transparency is welfare increasing (i) when the degree of strategic complementarities is low, (ii) when the economy is not too affected by mark-up shocks, (iii) when the central bank is more inclined towards price stabilization, (iv) when firms have relatively precise private information, and (v) when the central bank's information is relatively precise on demand shocks and relatively imprecise on mark-up shocks. These results rationalize the increase in trans-parency in the current context of relative low sensitivity of the economy to mark-up shocks and of strong central bank's preference for price stability.JEL classification: E52, E58, D82.Keywords: differential information, monetary policy, transparency.
    Date: 2006–07
  31. By: Michel Normandin (IEA, HEC Montréal); Bruno Powo Fosso
    Abstract: This paper documents the relative importance of global and country-specific shocks for international business cycles. For this purpose, we rely on a symmetric twocountry, dynamic, general-equilibrium model with costly, incomplete, international financial markets. We also relate exogenous technologies and government expenditures to unobservable common and idiosynchratic components, and apply a Kalman filter to extract the associated global and country-specific shocks. We show that the baseline parametrization of the model, including all shocks, closely matches the cyclical fluctuations of key macroeconomic variables for the United States and a non-US aggregate over the post-1975 period. We then experiment alternative parametrizations, isolating the effects of each shock, and find that country-specific technology shocks constitute a prime determinant of international business cycles. Also, global technology shocks have marginal contributions, whereas global and country-specific government-expenditure shocks have negligible effects on cyclicalfluctuations.
    Keywords: General Equilibrium, Kalman Filter, Symmetric Economies.
    JEL: F32 F41 C32
    Date: 2005–12
  32. By: Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo
    Abstract: Using the interest rates on negotiable certificates of deposit issued by individual banks, we first show that under the Bank of Japan's zero interest rate policy and quantitative monetary easing policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums.
    Keywords: Monetary policy; Zero Interest Rate Policy; Quantitative Monetary Easing Policy; Negotiable Certificate of Deposit; Credit Risk Premium
    JEL: G00 G0
    Date: 2005–10–17
  33. By: Rzigui, Lotfi
    Abstract: The purpose of the present paper is to extend Clarida and Gali (1994) from structural specification to common trend specification and to study the relative importance of nominal, supply and demand shocks in relative output dynamics. Using their long run restrictions for given cointegration vectors, we can identify number of permanent shocks assumed to affect long run dynamics of real activity and estimate the common trend model. From the estimated model we analyze source of output dynamics in USA vs. Great Britain during 1950-2004. The common trend analysis indicates that supply shock is more important than others shocks to explain real activity dynamics and confirms stylized fact of real business cycle theory.
    Keywords: Supply Shock; Demand Shocks; Nominal Shocks; Output Dynamics; Common Trend Model
    JEL: C32 E32 F41
    Date: 2005–12–05
  34. By: T. DHONT; F. HEYLEN
    Abstract: We analyze the impact of the composition of fiscal policy on employment and long-run growth. Our theoretical model builds on Barro (JPE, 1990) which we extend by endogenizing the decision to work and by allowing three kinds of government expenditures and three kinds of taxes. The model explains what we basically observe in the data for European countries: relatively high employment and growth in the Nordic countries, but poor employment and low growth in the core countries of the euro area. Our model can also explain employment and growth in the US.
    Keywords: fiscal policy, taxes, transfers, government spending, employment, endogenous growth
    JEL: E24 E62 J22 O41
    Date: 2006–11
  35. By: Christian Merkl; Stéphanie Stolz
    Abstract: Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers.
    Keywords: monetary policy transmission, bank lending channel, bank capital channel, liquidity networks
    JEL: E52 G21 G28 C23
    Date: 2006–11
  36. By: Milani, Fabio
    Abstract: This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears to be a crucial determinant of inflation inertia.
    JEL: G00 G0
    Date: 2006–06–28
  37. By: DION, David Pascal
    Abstract: The following analysis, based on error correction models, suggests that consumer confidence, together with traditional macroeconomic variables, contains a forecasting and explicative power on consumption. By including consumer confidence in a consumption function, consumer confidence releases a significant coefficient. Such a confidence-augmented consumption model provides good forecasting results.
    Keywords: Consumer confidence; consumption function; forecasting; consumer attitudes and behaviour; households
    JEL: D12 C52 D11 E27 E21 C53
    Date: 2006–11–22
  38. By: Wendell Samuel; Laura Valderrama
    Abstract: The paper analyzes the determinants of banking spreads in Barbados, with a view to identifying the role of the monetary policy regime in explaining high spreads. The paper finds that interest rate spreads for Barbados are higher than would be suggested by its macroeconomic performance. Banking concentration and bank-specific variables, including bank size and provisions for nonperforming loans, do not have an important role in explaining variations in bank spreads. Rather, it appears that monetary policy variables, such as reserve requirements and capital controls, are the most important determinants of spreads.
    Keywords: Interest rate spreads , monetary policy regime ,
    Date: 2006–10–02
  39. By: Lawrence J. Christiano; Joshua M. Davis
    Abstract: Using “business cycle accounting,” Chari, Kehoe, and McGrattan (2006) 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 business cycle accounting overturn Chari, Kehoe, and McGrattan’s conclusions. Second, one way that shocks to the intertemporal wedge affect 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 business cycle accounting. Chari, Kehoe, and McGrattan potentially understate the importance of these shocks by adopting the extreme position that spillover effects are zero.
    Keywords: Business cycles
    Date: 2006
  40. By: William A. Branch; John B. Carlson; George W. Evans; Bruce McGough
    Abstract: This paper develops an adaptive learning formulation of an extension to the Ball, Mankiw, and Reis (2005) sticky information model that incorporates endogenous inattention. We show that, following an exogenous increase in the policymaker’s preferences for price vs. output stability, the learning process can converge to a new equilibrium in which both output and price volatility are lower.
    Keywords: Monetary policy ; Information theory
    Date: 2006
  41. By: Douglas Laxton; Papa N'Diaye; Paolo Pesenti
    Abstract: The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-a-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.
    JEL: E17 E52 F41
    Date: 2006–11
  42. By: Alfonso Palacio-Vera
    Abstract: We present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. Contrary to the predictions of the New Consensus View in macroeconomics, the model suggests that ÒstructuralÓ factors such as a high saving rate and, especially, a low ÒnaturalÓ rate of growth increase the chances that an economy experiences an aggregate demand deficiency. Contrary to conventional wisdom, the model predicts that a fall in the NAIRU may lead to a rise in the natural interest rate, and vice versa.
    Date: 2006–11
  43. By: Adalid, Ramon; Coenen, Gunter; McAdam, Peter; Siviero, Stefano
    Abstract: In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.
    Keywords: macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area
    JEL: G00 G0
    Date: 2005–02–10
  44. By: Evans, Martin D
    Abstract: This paper describes a method for calculating daily realtime estimates of the current state of the U.S. economy. The estimates are computed from data on scheduled U.S. macroeconomic announcements using an econometric model that allows for variable reporting lags, temporal aggregation, and other complications in the data. The model can be applied to find real-time estimates of GDP, inflation, unemployment, or any other macroeconomic variable of interest. In this paper, I focus on the problem of estimating the current level of and growth rate in GDP. I construct daily real-time estimates of GDP that incorporate public information known on the day in question. The real-time estimates produced by the model are uniquely suited to studying how perceived developments in the macroeconomy are linked to asset prices over a wide range of frequencies. The estimates also provide, for the first time, daily time series that can be used in practical policy decisions.
    JEL: G00 G0
    Date: 2005–03–14
  45. By: Hiroshi Fujiki; Howard J. Wall
    Abstract: This paper argues that estimation of the Phillips curve for Japan should take account of the geographic dispersion of labor-market conditions. We find evidence that the relationship between wage inflation and the unemployment rate is convex. With such convexity, wage inflation can occur when unemployment rates across regions become more disperse, even if the aggregate unemployment rate is unchanged. We show that controlling for the geographic dispersion of unemployment rates yields a flatter Phillips curve and a higher natural rate of unemployment.
    Keywords: Phillips curve ; Japan ; Labor market
    Date: 2006
  46. By: Ram Sharan Kharel (Brunel University); Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4\% and over-valuations of more than 5\%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
    Keywords: Monetary policy, asset prices, nonlinearity
    JEL: C51 C52 E52 E58
    Date: 2006–09
  47. By: Monique Florenzano (Centre d'Economie de la Sorbonne); Stella Kanellopoulou (Centre d'Economie de la Sorbonne); Yannis Vailakis (Centre d'Economie de la Sorbonne)
    Abstract: This paper studies a simple stochastic two-period general equilibrium model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money, both implemented at the first period. The equilibrium existence is established under a "Gains to trade" hypothesis and the assumption that banks have a nonzero endowment of money at each date-event of the model.
    Keywords: Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt.
    JEL: C61 C62 D20 D46 D51
    Date: 2006–11
  48. 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.
    Keywords: Accounting ; Business cycles
    Date: 2006
  49. By: Paul van den Noord; Boris Cournède
    Abstract: The 2005 reform of the EU Stability and Growth Pact has provided leeway for governments to let their fiscal deficit temporarily breach the 3% rule to finance the immediate budgetary cost of structural reform, such as compensation schemes to offset redistributive effects. Against this backdrop, it is useful to dispose of empirical estimates of the effect of structural reform on fiscal outcomes, not only the short term cost but also the long-run fiscal gain stemming from changes in spending parameters and better economic performance. Based on econometric estimates for a pool of 21 OECD countries, this study finds a significant net fiscal gain of structural reform. <P>Quelques coûts à court terme pour des gains durables : Les conséquences budgétaires des réformes de structure dans l’UEM <BR>La réforme du Pacte de stabilité et de croissance (PSC) de l’Union européenne opérée en 2005 a ouvert la possibilité d’autoriser les États membres à dépasser temporairement le seuil de 3% afin de financer les coûts budgétaires de court terme que les réformes de structure peuvent engendrer, comme par exemple la compensation des effets distributifs non souhaités. Dans ce contexte, il est utile de disposer d’estimations empiriques des effets budgétaires des réformes de structure, non seulement s’agissant des coûts de court terme mais aussi des gains à long terme qui résultent des modifications des programmes de dépense publique et d’une meilleure performance économique. Au moyen d’estimations économétriques réalisées sur un panel de 21 pays membres de l’OCDE, cette étude conclut que les réformes structurelles se traduisent au plan budgétaire par un gain net d’une ampleur significative.
    Keywords: fiscal policy, politique budgétaire, Economic and Monetary Union, Union économique et monétaire, stability and growth pact, pacte de stabilité et de croissance
    JEL: E61 E62 H3 H5 H6
    Date: 2006–11–03
  50. By: Andrew K. Rose
    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 been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.
    JEL: F02 F33
    Date: 2006–11
  51. By: Selim Elekdag; Marialuz Moreno-Badia; Natan P. Epstein
    Abstract: Fiscal consolidation has become an important policy prescription for many emerging market countries (EMCs), particularly for the highly indebted ones. Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper represents, to the best of our knowledge, one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. In particular, using the IMF's Global Fiscal Model (GFM), we find that early consolidation through expenditure cuts would result in a substantial increase in Israel's long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, we find that delaying tax cuts would result in cumulative real GDP that is much larger than otherwise.
    Keywords: Fiscal consolidation , distortionary taxes , government debt ,
    Date: 2006–11–10
  52. By: Fuhrer, Jeffrey
    Abstract: In the conventional view of inflation, the New Keynesian Phillips curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the "driving process" for inflation is quite persistent, and the NKPC implies that inflation must "inherit" this persistence. Second, backward-looking or indexing behavior imparts some "intrinsic" persistence to inflation. This paper shows that, in practice, inflation in the NKPC inherits very little of the persistence of the driving process, and it is intrinsic persistence that constitutes the dominant source of persistence. The reasons are that, first, the coefficient on the driving process is small, and, second, the shock that disturbs the NKPC is large.
    JEL: G00 G0
    Date: 2006–06–19
  53. By: Preston, Bruce
    Abstract: This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations.
    JEL: G00 G0
    Date: 2005–11–28
  54. By: Rzigui, Lotfi
    Abstract: In this paper, we investigate the role of openness and external shock transmission affecting Tunisian economy. The paper proposes a new econometric methodology of fluctuations analysis in the objective to evaluate the effect of external shock based on trade on the dynamics of the GDP. The estimated common trend model reveals the role of external shock as well as technological shock in variation of economic activity. Our results are added to criticisms addressed to RBC model of first generation and show the role of external shock, ignored a long time in the business cycle literature.
    Keywords: External shocks; technological shocks; common trend representation; variances decomposition
    JEL: F41 C32 E32
    Date: 2005–06
  55. By: Carpenter, Seth; Demiralp, Selva
    Abstract: Central banking transparency is now a topic of great interest, but its impact on the implementation of monetary policy has not been studied. This paper documents that anticipated changes in the target federal funds rate complicate open market operations. We provide theoretical and empirical evidence on the behavior of banks and the Open Market Trading Desk. We find a significant shift in demand for funds ahead of expected target rate changes and that the Desk only incompletely accommodates this shift in demand. This anticipation effect, however, does not materially affect other markets.
    JEL: G0
    Date: 2006–03–28
  56. By: Gurkaynak, Refet S; Sack, Brian; Swanson, Eric T
    Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
    Keywords: Monetary Policy; Asset Prices; Factor Analysis; Multi-dimensional Policy
    JEL: G00 G0
    Date: 2005–02–08
  57. By: Jess Benhabib; Mark M. Spiegel
    Abstract: In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative-to-moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is non-linear over the entire sample range.
    Keywords: Inflation (Finance)
    Date: 2006
  58. By: Matteo Pelagatti
    Abstract: Duration dependent Markov-switching VAR (DDMS-VAR) models are time series models with data generating process consisting in a mixture of two VAR processes. The switching between the two VAR processes is governed by a two state Markov chain with transition probabilities that depend on how long the chain has been in a state. In the present paper we analyze the second order properties of such models and propose a Markov chain Monte Carlo algorithm to carry out Bayesian inference on the model’s unknowns. Furthermore, a freeware software written by the author for the analysis of time series by means of DDMS-VAR models is illustrated. The methodology and the software are applied to the analysis of the U.S. business cycle.
    Keywords: Markov-switching, business cycle, Gibbs sampler, duration dependence, vector autoregression
    JEL: C11 C15 C32 C41 E32
    Date: 2003–08
  59. By: Michel Normandin (IEA, HEC Montréal)
    Abstract: This paper studies the effects of fiscal policies on external and budget deficits. From a tractable small open-economy, overlapping-generation model, the effects are measured by the responses of the external deficit to an increase in the budget deficit due to a tax-cut. The responses are positively affected by the birth rate and the degree of persistence of the budget deficit. Empirical results for the G7 countries over the post-1975 period reveal that the values of birth rate are small for all, but one, countries; but the responses of external and budget deficits are substantial and persistent for most countries. In particular, the fiscal policy has the most important effects on the external deficits for Canada, Japan, and the United States; somewhat smaller impacts for France, Germany, and the United Kingdom; and negligible effects for Italy.
    Keywords: Agents’ superior information; birth rate; impact and dynamic responses; G7 Countries; orthogonality restrictions.
    JEL: E62 F32 F41
    Date: 2006–05
  60. By: Marika Karanassou (Queen Mary, University of London and IZA Bonn); Hector Sala (Universitat Autònoma de Barcelona and IZA Bonn); Pablo F. Salvador (Universitat Autònoma de Barcelona and Universitat de Girona)
    Abstract: We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.
    Keywords: unemployment, natural rate of unemployment, labour market dynamics, frictional growth, chain reaction theory
    JEL: E22 E24 J21
    Date: 2006–10
  61. By: Elisabet Ruiz Dotras; Hortensia Fontanals Albiol; Catalina Bolance Losilla (Universitat de Barcelona)
    Abstract: In this paper we estimate, analyze and compare the term structures of interest rates in six different countries over the period 1992-2004. We apply the Nelson-Siegel model to obtain the term structures of interest rates at weekly intervals. A total of 4,038 curves are estimated and analyzed. Four European Monetary Union countriesSpain, France, Germany and Italyare included. The UK is also included as a European non-member of the Monetary Union. Finally the US completes the analysis. The goal is to determine the differences in the shapes of the term structure of interest rates among these countries. Likewise, we can determine the most usual term structure shapes that appear for each country.
    Keywords: european interest rate., level parameter, parsimonious models, slope parameter, term structure of interest rate
    JEL: C14 C51 C82 G15
    Date: 2006
  62. By: Ruthira Naraidoo (Keele University, Centre for Economic Research and School of Economic and Management Studies); Patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University); Ioannis A. Venetis (University of Patras, Department of Economics)
    Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment using a nonlinear threshold model for a number of OECD countries. 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 empirical results obtained confirm the existence of multiple and ``moving'' equilibria (``vicious'' and ``virtuous'' circles). The nonlinear model is compared with a linear version with the nonlinear framework always exhibiting superior in-sample fit and generally better out-of-sample predictive accuracy. The conclusion is that macroeconomics and supply side policies feed on each other via the political economy.
    Keywords: Equilibrium unemployment, political economy, threshold model, forecasting
    JEL: E24 E27 P16
    Date: 2006–10
  63. By: Brzoza-Brzezina, Michal; Socha, Jacek
    Abstract: We use data on enterprise level from a survey of medium sized and big companies to test for downward nominal wage rigidity in Poland. We find relatively weak support for downward nominal wage rigidity when average total compensation in the enterprise is taken into account. However, since this result may be affected by job rotation, we propose a method for eliminating its impact and find that downward wage rigidity becomes higher. Moreover, disaggregating the data reveals strong differences between sectors, with no rigidity in highly competitive branches and significant rigidities in monopolized or state-owned sectors. Still, the amount of downward nominal wage rigidity seems lower than in other countries, although, due to differences in data sets, robust comparisons are not possible.
    Keywords: Downward nominal wage rigidity; Poland; inflation
    JEL: E31 J30 E24
    Date: 2006–05
  64. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: Using the yield curve helps forecast real growth over the period 1875 to 1997. Using both the level and slope of the curve improves forecasts more than using either variable alone. Forecast performance changes over time and depends somewhat on whether recursive or rolling out of sample regressions are used.
    Keywords: Interest rates ; Gross national product
    Date: 2006
  65. By: Federico S. Mandelman
    Abstract: Starting from a variant of the New Keynesian model for a small open economy, I extend the standard credit channel framework to show that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle. This novel modeling of the banking system captures various well-documented facts in developing economies. I show that strategic limit pricing, aimed at protecting retail niches from potential competitors, generates countercyclical bank markups. Markup increments, as a consequence of sudden capital outflows, end up increasing borrowing costs for firms as well as damaging the financial position of firms’ balance sheets. The recognition of monopoly power in banking allows the model to account for the relatively high investment volatility registered in emerging countries, even in the presence of debt that is fully denominated in local currency and flexible exchange rates.
    Date: 2006
  66. By: Marta Gomez-Puig (Universitat de Barcelona)
    Abstract: With the beginning of the European Monetary Union (EMU), euro-area sovereign securities adjusted spreads over Germany (corrected from the foreign exchange risk) experienced an increase that caused a lower than expected decline in borrowing costs. The objective of this paper is to study what explains that rising. In particular, if it took place a change in the price assigned by markets to domestic (credit risk and/or market liquidity) or to international risk factors. The empirical evidence supports the idea that a change in the market value of liquidity occurred with the EMU. International and default risk play a smaller role.
    Keywords: international and domestic credit risk, market liquidity, monetary integration, sovereign securities markets
    JEL: E44 F36 G15
    Date: 2005
  67. By: Sbordone, Argia M
    Abstract: This paper analyzes the dynamics of prices and wages using a limited-information approach to estimation. I estimate a two-equation model for the determination of prices and wages derived from an optimization-based dynamic model, where both goods and labor markets are monopolistically competitive, prices and wages can be reoptimized only at random intervals, and, when not reoptimized, can be partially adjusted to previous-period aggregate inflation. The estimation procedure is a two-step minimum-distance estimation, which exploits the restrictions that the model imposes on a time-series representation of the data. In the first step I estimate an unrestricted autoregressive representation of the variables of interest. In the second step, I express the model solution in the form of a constrained autoregressive representation of the data and define the distance between unconstrained and constrained representations as a function of the structural parameters that characterize the joint dynamics of inflation and labor share. This function summarizes the cross-equation restrictions between the model and the time-series representations of the data: I then estimate the parameters of interest by minimizing a quadratic function of that distance. I find that the estimated dynamics of prices and wages track actual dynamics quite well, and that the estimated parameters are consistent with the observed length of nominal contracts.
    JEL: G00 G0
    Date: 2006–07–12
  68. By: M. Ali Choudhary (University of Surrey); Vasco J. Gabriel (University of Surrey)
    Abstract: This paper reconsiders the empirical results of Basu and Fernald (European Economics Review, 2002) which suggests a significant and persistent gap between the aggregate productivity and technology levels for the US private business sector. We we control for capacity utilisation, time-varying markup and use a superior system estimator, the profile of the gap is shown to change considerably.
    Keywords: productivity, technology, welfare, hours, dynamic-markups
    JEL: O47 O51 E32 E23
    Date: 2006–08
  69. By: Daniel Leigh; Jan-Peter Olters
    Abstract: While models based on Friedman's (1957) permanent-income hypothesis can provide oilproducing countries with long-run fiscal targets, they usually abstract from short-run costs associated with consolidation. This paper proposes a model that takes such adjustment costs (or "habits") into account. Further operational realism is added by permitting differential interest rates on sovereign debt and financial assets. The approach is applied to Gabon, where oil reserves are expected to be exhausted in 30 years. The results suggest that Gabon's current fiscal-policy stance cannot be maintained, while the presence of habits justifies smoothing the bulk of the adjustment toward the sustainable level over three to five years.
    Keywords: Sustainable fiscal policy , habit formation , permanent-income hypothesis , Gabon , Fiscal policy , Gabon , Income , Investment , Economic models ,
    Date: 2006–09–05
  70. By: Fernando Sanchez-Losada; Daniel Cardona (Universitat de Barcelona)
    Abstract: In this paper we analyze how the composition of labor taxation affects unemployment in a unionized economy with capital accumulation and an unemployment benefit system. We show that if the unemployment benefit system is gross Bismarckian then the unemployment rate is reduced if wage taxes are decreased (and thus payroll taxes are increased). However, if the unemployment benefit system is net Bismarckian then the unemployment rate does not depend on how the system is financed. Besides, in a Beveridgean system the labor tax composition does not affect the unemployment rate if and only if the unemployed do not pay taxes and the employed pay a constant marginal tax rate. We also analyze when an unemployment benefit budget-balanced rule makes the economy to have a hysteresis process.
    Keywords: payroll tax, unemployment benefit system, wage tax
    JEL: E24 E62 H53 J50 J65
    Date: 2005
  71. By: Martin D. Cerisola; Anoop Singh
    Abstract: This paper looks at the historical lessons that might serve to entrech Latin America's newly resurgent growth phase. It briefly reviews the post-World War II experiences in Latin America and Asia, focusing on the conditions that favored capital accumulation and productivity growth in the faster growing economies. Among these, the paper highlights the importance of stable macroeconomic policies, especially fiscal policy.
    Keywords: Macroeconomic Policy; Policy Design and Consistency; Economic Growth and Open Economies ,
    Date: 2006–11–13
  72. By: Dean Croushore
    Abstract: This paper carries out the task of evaluating inflation forecasts from the Livingston Survey and the Survey of Professional Forecasters, using the real-time data set for macroeconomists as a source of real-time data. The author examines the magnitude and patterns of revisions to the inflation rate based on the output price index and describe what data to use as “actuals” in evaluating forecasts. The author then runs tests on the forecasts from the surveys to see how good they are, using a variety of actuals. The author finds that much of the empirical work from 20 years ago was a misleading guide to the quality of forecasts because of unique events during the earlier sample period. Repeating that empirical work over a longer sample period shows no bias or other problems in the forecasts. The use of real-time data also matters for some key tests on some variables. If a forecaster had used the empirical results from the late 1970s and early 1980s to adjust survey forecasts of inflation, forecast errors would have increased substantially.
    Keywords: Inflation (Finance)
    Date: 2006
  73. By: Todd E. Clark; Michael W. McCracken
    Abstract: A body of recent work suggests commonly–used VAR models of output, inflation, and interest rates may be prone to instabilities. In the face of such instabilities, a variety of estimation or forecasting methods might be used to improve the accuracy of forecasts from a VAR. These methods include using different approaches to lag selection, different observation windows for estimation, (over-) differencing, intercept correction, stochastically time–varying parameters, break dating, discounted least squares, Bayesian shrinkage, and detrending of inflation and interest rates. Although each individual method could be useful, the uncertainty inherent in any single representation of instability could mean that combining forecasts from the entire range of VAR estimates will further improve forecast accuracy. Focusing on models of U.S. output, prices, and interest rates, this paper examines the effectiveness of combination in improving VAR forecasts made with real–time data. The combinations include simple averages, medians, trimmed means, and a number of weighted combinations, based on: Bates-Granger regressions, factor model estimates, regressions involving just forecast quartiles, Bayesian model averaging, and predictive least squares–based weighting. Our goal is to identify those approaches that, in real time, yield the most accurate forecasts of these variables. We use forecasts from simple univariate time series models and the Survey of Professional Forecasters as benchmarks.
    Keywords: Economic forecasting ; Vector autoregression
    Date: 2006
  74. By: Alejandro Simone; Alex Segura-Ubiergo; Sanjeev Gupta
    Abstract: This paper analyzes the relationship between fiscal adjustment and real GDP growth in a panel of 26 transition economies during 1992-2001. Unlike most previous studies using cross-country regressions, the paper finds a positive and statistically significant relationship between fiscal adjustment and growth that is robust to different model specifications and estimation methods. The paper also presents country experiences to delve deeper into the mechanisms that may underlie this statistical relationship.
    Keywords: Fiscal adjustment , growth , transition economies , fiscal policy ,
    Date: 2006–10–31
  75. By: Gadea, Maria; Mayoral, Laura
    Abstract: The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate, and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of twenty-one OECD countries which are modeled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although nonpermanent) in most postindustrial countries and that it has remained basically unchanged over the last four decades.
    JEL: G00 G0
    Date: 2005–12–21
  76. By: Korkut A. Erturk
    Abstract: The essential insight Minsky drew from Keynes was that optimistic expectations about the future create a margin, reflected in higher asset prices, which makes it possible for borrowers to access finance in the present. In other words, the capitalized expected future earnings work as the collateral against which firms can borrow in financial markets or from banks. But, then, the value of long-lived assets cannot be assessed on any firm basis, as they are highly sensitive to the degree of confidence that markets have about certain events and circumstances that will unfold in the future. This means that any sustained shortfall in economic performance in relation to the level of expectations that are already capitalized in asset prices may promote the view that asset prices are excessive. Once the view that asset prices are excessive takes hold in financial markets, higher asset prices cease to be a stimulant. Initially debt-led, the economy becomes debt-burdened. In this article, it is argued that KeynesÕs views on the alternation of the ÒbullÓ and ÒbearÓ sentiment and asset price speculation over the business cycle can explain two of MinskyÕs central propositions relative to business cycle turning points that have often been found less than fully persuasive: (1) that financial fragility increases gradually over the expansion, and, (2) that the interest rate sooner or later, increases setting off a downward spiral bringing the expansion to an end.
    Date: 2006–08
  77. By: Oleksandr Talavera; Andriy Tsapin; Oleksandr Zholud
    Abstract: Our study investigates the link between bank lending behavior and macroeconomic uncertainty. We develop a dynamic model of a bank's value maximization that results in a negative relationship between loan to capital ratio and macroeconomic uncertainty. This proposition is tested using a panel of Ukrainian banks collected from NBU and covering the period 2003q1-2005q3. The results indicate that banks increase their lending ratios when macroeconomic uncertainty decreases. We demonstrate that our results are robust with respect to the measurement of macroeconomic uncertainty. The reaction of banks to changes in uncertainty is not uniform and depends on bank-specific characteristics.
    Keywords: Banks, macroeconomic uncertainty, Ukraine, banks' balance sheets
    JEL: G21 G28 P27 P34
    Date: 2006
  78. By: Janet Gale Stotsky
    Abstract: This survey examines the implications of gender differences in economic behavior for macroeconomic policy. It finds that reducing gender inequality and improving the status of women may contribute to higher rates of economic growth and greater macroeconomic stability. Women's relative lack of opportunities in developing countries inhibits economic growth, while, at the same time, economic growth leads to a reduction in their disadvantaged condition. Equality of opportunity in labor and financial markets is critical to enabling women to take full advantage of improved macroeconomic conditions. Macroeconomic policies should take into account the benefits of reducing gender inequalities, especially in the lowest-income countries where these differences are most pronounced, and should consider the potentially harsher short-term effects of economic austerity measures on women to avoid exacerbating gender inequalities.
    Keywords: Gender , macroeconomic policy ,
    Date: 2006–10–24
  79. By: Andrew Figura
    Abstract: Because plant deaths destroy specific capital with large local economic impacts and potentially important macroeconomic effects, understanding the causes of deaths and, in particular, why they are concentrated in cyclical downturns, is important. The reallocation-timing hypothesis posits that plants suffering adverse permanent demand/productivity shocks delay shutdowns until cyclical downturns when plant capacity is less valuable, while the fragility hypothesis posits that shutdowns occur in downturns because the option value of maintaining the plant through weak demand periods is too low. I show that the effect that a plant's specific capital has on the timing of plant deaths differs across these two hypotheses and then use this insight to test the hypotheses' relative importance. I find that fragility is the dominant cause of the countercyclical behavior of plant deaths. This suggests that the endogenous destruction of capital is likely an important amplification and propagation mechanism for cyclical shocks and that stabilization policies have the benefit of reduced capital destruction.
    Keywords: Business cycles ; Plant shutdowns
    Date: 2006
  80. By: Lawrence J. Christiano; Martin Eichenbaum; Robert Vigfusson
    Abstract: This paper analyzes the quality of VAR-based procedures for estimating the response of the economy to a shock. We focus on two key issues. First, do VAR-based confidence intervals accurately reflect the actual degree of sampling uncertainty associated with impulse response functions? Second, what is the size of bias relative to confidence intervals, and how do coverage rates of confidence intervals compare with their nominal size? We address these questions using data generated from a series of estimated dynamic, stochastic general equilibrium models. We organize most of our analysis around a particular question that has attracted a great deal of attention in the literature: How do hours worked respond to an identified shock? In all of our examples, as long as the variance in hours worked due to a given shock is above the remarkably low number of 1 percent, structural VARs perform well. This finding is true regardless of whether identification is based on short-run or long-run restrictions. Confidence intervals are wider in the case of long-run restrictions. Even so, long-run identified VARs can be useful for discriminating among competing economic models.
    Keywords: Vector analysis ; Econometric models
    Date: 2006
  81. By: Andrew Sharpe
    Abstract: This is organized into three main parts. The first section provides a perspective on future productivity growth in Canada. It discusses key productivity concepts, looks at current productivity trends, examines the forces affecting future productivity growth, and reviews productivity projections in Canada and the United States. The second section discusses the relationship between productivity growth and the real earnings of workers, and examines the implications of different productivity assumptions for CPP financial projections. The third part examines the relationship between productivity growth and other key variables affecting CPP financial projections, namely the real rate of return on investments, price increases, participation rates, retirement rates, migration rate, mortality rate, fertility rate, and disability rates.
    Keywords: Productivity growth, Real earnings, Canada Pension Plan (CPP), Investment return, Price, Retirement, Migration.
    JEL: J13 J14 J18 J33 J38 J88 O15 O11 E21 E24
    Date: 2006–04
  82. By: Fabrizio Perri; Alessandra Fogli
    Abstract: The early 1980s marked the onset of two striking features of the current world macro-economy: the fall in US business cycle volatility (the "great moderation") and the large and persistent US external imbalance. In this paper we argue that an external imbalance is a natural consequence of the great moderation. If a country experiences a fall in volatility greater than that of its partners, its relative incentives to accumulate precautionary savings fall and this results in an equilibrium permanent deterioration of its external balance. To assess how much of the current US imbalance can be explained by this channel, we consider a standard two country business cycle model in which households are subject to country specific shocks they cannot perfectly insure against. The model suggests that a fall in business cycle volatility like the one observed for the US relatively to other major economies can account for about 20% of the current total US external imbalance.
    JEL: F32 F34 F41
    Date: 2006–11
  83. By: Ari Aisen; Francisco José Veiga
    Abstract: The purpose of this paper is to empirically determine the causes of worldwide diversity of inflation volatility. We show that higher degrees of political instability, ideological polarization, and political fragmentation are associated with higher inflation volatility.
    Keywords: Inflation , volatility , political instability , institutions ,
    Date: 2006–10–04
  84. By: Michel Normandin (IEA, HEC Montréal); Martin Boileau
    Abstract: Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables.
    Keywords: Incomplete markets, stationarity, cross-country correlations, wealth effects.
    JEL: F32 G15
    Date: 2005–03
  85. By: Gabriella Legrenzi (Keele University, Centre for Economic Research and School of Economic and Management Studies); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We introduce possible asymmetries and non-linearities in the analysis of the taxing and spending decisions of local governments. Our empirical results evidence a down-ward inflexibility of both local government spending and taxation, pointing to a budget-maximizing local government. These asymmetries will need to be explicitly tackled in fiscal federalism reforms, in order for decentralization to positively contribute to the achievement of the European Monetary Union objectives.
    Keywords: Fiscal federalism, non-linear time series, asymmetric adjustment, fly-paper effect
    JEL: H10 H71 C22
    Date: 2006–08
  86. By: Péter Benczúr (MNB, Hungary); István Kónya (MNB, Hungary)
    Abstract: Abstract will be soon available
    Keywords: two-sector growth model, household portfolios, q-theory, real effects of nominal shocks, equilibrium real exchange rates
    JEL: F32 F41 F43
    Date: 2006–08–30
  87. By: Masanao Aoki (Department of Economics, UCLA)
    Abstract: This paper discusses non-exponential growth patterns of macroeconomic models. More specifically, the paper discusses asymptotic growth patterns of the numbers of clusters and of components of partition vectors, that is, the number of clusters of specific sizes, of one-andtwo-parameter Poisson-Dirichlet models as the model sizes grow towards infinity. As the model sizes become large, the coefficients of variaation of the cluster sizes and components of the partition vector tend to zero in one-parameter Poisson-Dirichlet model, but they remain positive in the two-parameter version. Furthermore, the two-parameter version of the model exhibits power-law behavior, while the one-parameter versiondoes not. The growth behavior of the two-parameter models is shown to be expressed in terms of generalized Mittag-Leffler distributions. The paper ends with preliminary discussion of the effects of demand pattern management policies on growth patterns of models that endogenize the parameters of the two-parameter Poisson-Dirichlet model.
    Date: 2006–11
  88. By: Pritha Mitra
    Abstract: Emerging market financial crises during the late 1990s were marked by sudden withdrawals of funds by foreign creditors, resulting in production declines. The IMF favored positive signals to potential foreign creditors and initially recommended disciplined fiscal policy during the height of crisis, countering standard Keynesian recommendations of expansionary fiscal stimulus. This paper formulates an open-economy general equilibrium model for resolving this policy conundrum and analyzing the impact of disciplined fiscal policy on post-crisis recovery. The model demonstrates via simulations that disciplined fiscal policy will improve (worsen) post-crisis recovery in the presence (absence) of appropriately defined production flexibility.
    Keywords: financial crisis , emerging markets , fiscal policy ,
    Date: 2006–10–13
  89. By: Peter Blair Henry
    Abstract: Writings on the macroeconomic impact of capital account liberalization find few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion's share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.
    JEL: E6 F3 F4 G15 O16 G12 G14 G18 G3 G31 G38 O11 O16 O19 O24 O4
    Date: 2006–11
  90. By: Andrew Swiston; Ales Bulir
    Abstract: This paper examines the factors influencing Mexico's private saving rate. Cross-country analysis finds that Mexico's private saving is somewhat higher than could be explained by its fundamentals, but lower than in the average country in the sample. This analysis suggests that Mexico's greater reliance on external saving, its relatively high population dependency ratio, and its less developed financial system have been the main factors holding back private saving. Time-series analysis finds that movements in private saving have not been associated with similar shifts in investment, as changes in public saving and external saving have tended to offset movements in private saving. This is consistent with the direction of causality being from investment to saving and suggests that policy measures should focus on creating conditions favorable to increased investment.
    Keywords: Mexico , private saving , Ricardian equivalence , Private savings , Mexico , Investment , Inflation , Taxes ,
    Date: 2006–08–25
  91. By: Hongbin Li; Junsen Zhang; Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: While earlier empirical studies found a negative saving effect of old-age dependency rates without considering longevity, recent studies have found that longevity has a positive effect on growth without considering old-age dependency rates. In this paper, we first justify the related yet independent roles of longevity and old-age dependency rates in determining saving and growth by using a growth model that encompasses both neoclassical and endogenous growth models as special cases. Using panel data from a recent World Bank data set, we then find that the longevity effect is positive and the dependency effect is negative in savings and investment regressions. The estimates indicate that the differences in the demographic variables across countries or over time can well explain the differences in aggregate savings rates. We also find that both population age structure and life expectancy are important contributing factors to growth.
  92. By: David Cook; Hiromi Nosaka
    Abstract: In this paper, we model a dynamic general equilibrium model of a small open developing economy. We model labor markets as including both formal and informal urban employment as well as rural employment. We find that modelling dual labor markets helps explain why output in developing economies may fall even as labor inputs remain constant during financial crises. An external financial shock may lead to a reallocation of labor from productive formal sectors of the economy to less productive informal sectors.
    Keywords: Labor market
    Date: 2005
  93. By: Marco Del Negro; Frank Schorfheide
    Abstract: In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) models, prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or presample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for a subset of DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions.
    Date: 2006
  94. By: Yasuyuki Sawada (Faculty of Economics, University of Tokyo); Jeong-Joon Lee (Department of Economics, Towson University)
    Abstract: Extending Dynan's methodology (1993), we show that a significant frac tion of the prudence parameter puzzle can be explained by a downward omitted variable bias. Further, the estimated prudence is substantially higher for liquidity-constrained households.
    Date: 2006–11
  95. By: Nicolas Million (Centre d'Economie de la Sorbonne)
    Abstract: In this article, we analyze the real interest rate series of the three-month Treasury Bill rates in the framework of a SETAR model (Self Exciting Threshold Auto-Regressive). With the aim of disentangling the non-linearity from the non-stationarity cases, we use very recent threshold integration tests against a stationary but non-linear alternative hypothesis. One innovation consists in the introduction of structural breaks in the deterministic part of the process. This long-run representation therefore allows for a time-varying threshold parameter in the model. Empirical results strongly call for non-linear mean reversion effects concerning the real interest rate series during the last fifty years. However, the conclusion of the unit root tests are not so straightforward concerning the hypothesis of stationarity : the real interest rate seems to be stationary only for the lower regime, determined by the estimated threshold.
    Keywords: SETAR Model, structural break, real interest rate, switching regime.
    JEL: E4 C12 C22
    Date: 2006–10
  96. By: Michael B. Devereux; Amartya Lahiri; Ke Pang
    Abstract: The rising current account deficit in the USA has attracted considerable attention in recent years. We use the "business cycle accounting" methodology to identify the principal distortions that have affected the external accounts of the US. In particular, we measure distortions in the optimality conditions of a simple two-country general equilibrium model using data from the US and the other G7 countries. We then feed these measured distortions into the model individually and use the simulated counterfactual paths of the current account to determine the contribution of each of these "wedges" to the overall external imbalance of the USA. We find that no single wedge in isolation can account closely for the observed current account. However, a combination of productivity differences and deviations from risk-sharing between the US and the rest of the G7 does the best job in accounting for most of the measured movement of the US current account.
    Date: 2006
  97. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred.
    Date: 2006–11
  98. By: Eva Rytter Sunesen (Department of Economics, University of Copenhagen)
    Abstract: This paper offers two refinements of the traditional risk measure based on the volatility of growth. First, we condition GDP growth on structural characteristics of the host country that move only slowly and therefore can be partly predicted by an investor. Second, we adjust conditional risk for the systematic components due to the global and regional interdependence between alternative investment locations. The decomposition of conditional risk into its systematic and idiosyncratic components reveals that not only are African countries on average characterised by a larger conditional risk than Asian and Latin American countries, but the idiosyncratic risk factor also represents a larger share than in other developing countries. As a final contribution, we search the empirical literature on foreign direct investment and risk in order to determine which of the suggested risk measures provide the best description of idiosyncratic risk. Using a general-to-specific methodology, we find that both economic and political risk factors are important elements in the investment decision. We also find that commercial risk factors applied in the literature so far are poor determinants of idiosyncratic risk.
    Keywords: foreign direct investment; global and regional business cycles; risk decomposition
    JEL: E32 F21 O16 C23
    Date: 2006–10
  99. By: Mussard, Stéphane (CEPS/INSTEAD, GEREM (Université de Perpignan), GREDI (Université de Sherbrooke)); Philippe, Bernard (GEREM (Université de Perpignan))
    Abstract: Nous soutenons que pour étudier le fonctionnement réel des économies capitalistes, il ne suffit pas de considérer l'innovation comme un processus de destruction créatrice. Il est aussi nécessaire de supposer que les agents de ces économies adoptent une institution ou règle nommée système de paiement. Cette hypothèse permet de proposer deux conclusions. Selon la première, le montant des investissements réalisés dans ces économie au cours d'une période diffère de celui de l'épargne. D'après la seconde, l'écart entre ces deux montants peut avoir pour origine une création monétaire elle-même fonction de trois types d'arguments : le degré de validation par la marché des paris engagés par les directions d'entreprise, l'innovation, et les conflits concernant la répartition de la valeur ajoutée. Ces conclusions permettent-elles de décrire des fonctionnements réels et non virtuels ? Un test nous incite à privilégier la première partie de l'alternative.
    Keywords: Création Monétaire; Croissance ; Partage, Valeur ajoutée ; Taux de chômage ; Validation
    JEL: E20 E24
    Date: 2006–09
  100. By: Stéphane Mussard (GREDI, Université de Sherbrooke and GEREM, Université de Perpignan); Bernard Philippe (GEREM, Université de Perpignan)
    Abstract: Nous soutenons que pour étudier le fonctionnement réel des économies capitalistes, il ne suffit pas de considérer l’innovation comme un processus de destruction créatrice. Il est aussi nécessaire de supposer que les agents de ces économies adoptent une institution ou règle nommée système de paiement. Cette hypothèse permet de proposer deux conclusions. Selon la première, le montant des investissements réalisés dans ces économie au cours d’une période diffère de celui de l’épargne. D’après la seconde, l’écart entre ces deux montants peut avoir pour origine une création monétaire elle-même fonction de trois types d’arguments : le degré de validation par la marché des paris engagés par les directions d’entreprise, l’innovation, et les conflits concernant la répartition de la valeur ajoutée. Ces conclusions permettent-elles de décrire des fonctionnements réels et non virtuels ? Un test nous incite à privilégier la première partie de l’alternative.
    Keywords: Création Monétaire, Croissance, Partage de la valeur ajoutée, Taux de chômage, Validation.
    JEL: E20 E24
    Date: 2006
  101. By: Hamid Faruqee; Douglas Laxton; Dirk Muir; Paolo Pesenti
    Abstract: In the evolving debate and analysis of global imbalances, a commonly overlooked issue pertains to rising protectionism. This paper attempts to fill that gap, examining the macroeconomic implications of trade policy changes through the lens of a dynamic general equilibrium model of the world economy encompassing four regional blocs. Simulation exercises are carried out to consider the imposition of uniform and discriminatory tariffs on trading partners as well as the case of tariff retaliation. We also discuss a scenario in which a 'globalization backlash' lowers the degree of competition in import-competing sectors, and compare the implications of higher markups in the product and labor markets.
    JEL: E66 F32 F47
    Date: 2006–11
  102. By: Clive Bell (University of Heidelberg); Hans Gersbach (ETH Zurich and IZA Bonn)
    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: epidemic diseases, HIV/AIDS, poverty traps, macroeconomics of targeting, education support, health policies, single and double targeting
    JEL: E62 H20 I10 I20 O11
    Date: 2006–10
  103. By: Huffman, Wallace
    Abstract: This paper examines the changing structure of U.S. household production over the post-World War II period. We apply production theory in order to define a new set of inputs for U.S. households and use newly constructed data so as to examine with the aid of a relatively simple complete household aggregate demand system. The goal is to extent our understanding of the changing structure of the U.S. household sector over the post-World War II period, including the demand for inputs of women’s and men’s housework or unpaid household labor and seven other aggregate input categories. The econometric estimate of the demand system yields plausible price and income elasticities for nine input groups. The own-price elasticity of demand for women’s and men’s housework is shown to be sizeable and similar in size. Women’s and men’s housework are also shown to be complements, rather than substitutes, but the other seven input categories are substitutes for women’s and men’s unpaid housework. Purchased housework substitutes and household appliance services are shown to be much better substitutes for men’s housework than for women’s housework. Also, men’s unpaid housework, household transportation input, recreation input, and “other inputs,” which are largely men’s and women’s leisure time, are luxury goods; and women’s unpaid housework, food at home, housing input, and household appliance input are normal goods. Purchased housework substitute services have an income elasticity that is not significantly different from zero. These results are obtained while controlling for the impacts of trend dominated factors. The methodology applied here has implications for cost of living comparisons over the post-War II period.
    Keywords: complete-demand system, household production, housework, price elasticities, income elasticities, post-World War II
    JEL: C3 J2 D1 E3
    Date: 2006–11–16
  104. By: Shripad Tuljapurkar
    Abstract: This paper describes how stochastic population forecasts are used to inform and analyze policies related to government spending on the elderly, mainly in the context of the industrialized nations. The paper first presents methods for making probabilistic forecasts of demographic rates, mortality, fertility, and immigration, and shows how these are combined to make stochastic forecasts of population number and composition, using forecasts of the U.S. population by way of illustration. Next, the paper discusses how demographic models and economic models can be combined into an integrated projection model of transfer systems such as social security. Finally, the paper shows how these integrated models describe various dimensions of policy-relevant risk, and discusses the nature and implications of risk in evaluating policy alternatives.
    Date: 2006–08
  105. By: Reinhold Kosfeld (Department of Economics, University of Kassel)
    Abstract: When job search takes place across labour markets, the standard flow approach to labour market analysis fails to uncover the effectiveness at which workers are matched to available jobs. A spatially augmented matching function is backed by a spatial search model with endogenous search intensity. Recent studies deal with the issue of spatial externalities by assuming the process of job matching to be homogenous across space. This study shows that this supposition is not valid for the unified Germany. Particularly differences in labour mobility give reason for the existence of West-East regimes of the matching process. Spatial heterogeneity is additionally found on the level of German macroregions. Though matching efficiency is affected by labour market characteristics, its cyclical pattern is closely related to business cycle fluctuations. Variation of regional mismatch over the business cycle can only explain a relatively small fraction of matching inefficiency.
    Keywords: Matching function, regional mismatch, spatial spillovers, spatial heterogeneity
    JEL: C21 C23 E24 J23
    Date: 2006–10
  106. By: Erceg, Christopher; Guerriei, Luca; Gust, Christopher
    Abstract: In this paper, we describe a new multicountry open economy SDGE model named "SIGMA" that we have developed as a quantitative tool for policy analysis. We compare SIGMA's implications to those of an estimated large-scale econometric policy model (the FRB/Global model) for an array of shocks that are often examined in policy simulations. We show that SIGMA's implications for the near-term responses of key variables are generally similar to those of FRB/Global. Nevertheless, some quantitative disparities between the two models remain due to certain restrictive aspects of SIGMA's optimization-based framework. We conclude by using long-term simulations to illustrate some areas of comparative advantage of our SDGE modeling framework.
    JEL: G00 G0
    Date: 2006–01–13

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