|
on Macroeconomics |
|
Issue of 2006‒12‒16
fifty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | José Antonio Ocampo |
| Abstract: | This paper recommends a broad concept of macroeconomic stability, whereby “sound macroeconomic frameworks” include not only price stability and sound fiscal policies, but also a well-functioning real economy, sustainable debt ratios and healthy public and private sector balance sheets. These multiple dimensions imply using multiple policy instruments. The paper elaborates a framework for developing countries that involves active use of counter-cyclical macroeconomic policies (exchange rate, monetary and fiscal), together with capital management techniques (capital account regulations and prudential rules incorporating macroeconomic dimensions). It also explores the role of international financial institutions in facilitating developing countries’ use of counter-cyclical macroeconomic policies. |
| Keywords: | macroeconomic stability, capital account volatility, counter-cyclical macroeconomic policies, capital management techniques, capital account regulations. |
| JEL: | E44 E61 E63 F41 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:une:wpaper:1&r=mac |
| By: | Ravenna , Federico (Department of Economics, University of California); Seppälä , Juha (Department of Economics, University of Illinois) |
| Abstract: | We study the rejection of the expectations hypothesis within a New Keynesian business cycle model. Earlier research has shown that the Lucas general equilibrium asset pricing model can account for neither sign nor magnitude of average risk premia in forward prices, and is unable to explain rejection of the expectations hypothesis. We show that a New Keynesian model with habit-formation preferences and a monetary policy feedback rule produces an upward-sloping average term structure of interest rates, procyclical interest rates, and countercyclical term spreads. In the model, as in U.S. data, inverted term structure predicts recessions. Most importantly, a New Keynesian model is able to account for rejections of the expectations hypothesis. Contrary to earlier work, we identify systematic monetary policy as a key factor behind this result. Rejection of the expectation hypothesis can be entirely explained by the volatility of just two real shocks which affect technology and preferences. |
| Keywords: | term structure of interest rates; monetary policy; sticky prices; habit formation; expectations hypothesis |
| JEL: | E43 E44 E52 G12 |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_025&r=mac |
| By: | Jesus Vazquez (Universidad del Pais Vasco) |
| Abstract: | This paper estimates a standard version of the New Keynesian Monetary (NKM) model augmented with financial variables in order to analyze the relative importance of stock market returns and term spread in the estimated U.S. monetary policy rule. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The empirical results show that the Fed seems to respond to the macroeconomic outlook and to the stock market return but does not seem to respond to the term spread. Moreover, policy inertia and persistent policy shocks are also significant features of the estimated policy rule. |
| Keywords: | NKM model, stock market returns, policy rule |
| JEL: | C32 E44 E52 |
| Date: | 2006–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200606&r=mac |
| By: | Gisle James Natvik (University of Oslo and Norges Bank (Central Bank of Norway)) |
| Abstract: | This paper explores how government size affects the scope for equilibrium indeterminacy in a New Keynesian economy where part of the population live hand-to-mouth. I find that in this framework, a larger public sector may widen the scope for self-fulfilling prophecies to occur. This takes place even though taxes serve to reduce swings in current income. In general, government provision of goods that are Edgeworth substitutes for private consumption tend to narrow the scope for indeterminacy, while government goods that are Edgeworth complements for private consumption increase the problem of indeterminacy. Hence monetary policy should be conducted with an eye to the amount and composition of government consumption. |
| Keywords: | Public expenditures, Taylor principle, Fiscal policy rules, Rule- of-thumb consumers. |
| JEL: | E32 E52 E63 |
| Date: | 2006–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_11&r=mac |
| By: | Gilbert KOENIG; Irem ZEYNELOGLU |
| Abstract: | In this paper, we use a two country stochastic “new open economy macroeconomics” model with sticky wages and imperfect competition where public spending and private consumption appear in a non-separable way in individual preferences. We use this setup to define optimal fiscal policy in the face of a productivity shock and to analyze the efficiency of this optimal fiscal policy as a stabilization tool. We also consider strategic games between fiscal authorities in the two countries in order to see if there are additional gains from fiscal cooperation. We find that optimal fiscal policy consists of a deviation in the same direction as the deviation of the shock and that this type of reaction reduces the negative effects of the shock. We find also that fiscal cooperation generates a higher level of welfare than under Nash. However, the gain from cooperation is very likely to be negligible. |
| Keywords: | Fiscal policy, policy coordination, stabilization, new open economy macroeconomics. |
| JEL: | E62 F41 F42 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2006-09&r=mac |
| By: | Anthony E. Landry |
| Abstract: | We introduce elements of state-dependent pricing and strategic complementarity into an otherwise standard New Open Economy Macroeconomics (NOEM) model. Relative to previousNOEM works, there are new implications for the dynamics of real and nominal economic activity: complementarity in the timing of price adjustment alters an open economy's response to monetary disturbances. Using a two-country Producer-Currency-Princing environment, our framework replicates key international features following a domestic monetary expansion: (i) a delayed surge in inflation across countries, (ii) a delayed overshooting of exchange rates, (iii)a J-curve dynamic in the domestic trade balance, and (iv) a high international output correlation relative to consumption correlation. Overall, the model is consistent with many emperical aspects of international economic fluctuations, while stressing pricing behavior and exchange rate effects highlighted in traditional Keynesian works.> |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0604&r=mac |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Yakov Ben-Haim (Technion - Israel Institute of Technology); Øyvind Eitrheim (Norges Bank (Central Bank of Norway)) |
| Abstract: | We employ information-gap decision theory to derive a robust monetary policy response to Knightian parameter uncertainty. This approach provides a quantitative answer to the question: For a specified policy, how much can our models and data err or vary, without rendering the outcome of that policy unacceptable to a policymaker? For a given acceptable level of performance, the policymaker selects the policy that delivers acceptable performance under the greatest range of uncertainty. We show that such information-gap robustness is a proxy for probability of policy success. Hence, policies that are likely to succeed can be identified without knowing the probability distribution. We adopt this approach to investigate empirically the robust monetary policy response to a supply shock with an uncertain degree of persistence. |
| Keywords: | Knightian uncertainty, Monetary policy, Info-gap decision theory. |
| JEL: | E31 E52 E58 E61 |
| Date: | 2006–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_10&r=mac |
| By: | J. Benson Durham |
| Abstract: | This paper decomposes nominal Treasury yields into expected real rates, expected inflation rates, real risk premiums, and inflation risk premiums by separately calibrating a three-factor affine term structure model to the nominal Treasury and TIPS yield curves. Although this particular application seems to produce expected real short rates and inflation rates that are somewhat static, there are theoretical advantages to calibrating the model to nominal and real yields separately. Moreover, the estimates correlate positively with back-of-the-envelope measures of the inflation risk premium. With respect to the current environment, monetary policy uncertainty does not seem to have contributed to the apparent increase in the inflation risk premium since the beginning of 2006. Also, in purely nominal terms, the increase in term premiums thus far this year might be just as much a global as a domestic phenomenon, given that nominal term premiums have also increased in Germany and the United Kingdom. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-42&r=mac |
| By: | Jeffrey A. Frankel |
| Abstract: | Commodity prices are back. This paper looks at connections between monetary policy, and agricultural and mineral commodities. We begin with the monetary influences on commodity prices, first for a large country such as the United States, then smaller countries. The claim is that low real interest rates lead to high real commodity prices. The theory is an analogy with Dornbusch overshooting. The relationship between real interest rates and real commodity prices is also supported empirically. One channel through which this effect is accomplished is a negative effect of interest rates on the desire to carry commodity inventories. The paper concludes with a consideration of implications for monetary policy. |
| JEL: | E4 E5 F3 Q0 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12713&r=mac |
| By: | Ágeir Daníelsson; Lúdvík Elíasson; Magnús F. Gudmundsson; Björn A. Hauksson; Ragnhildur Jónsdóttir; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson |
| Abstract: | This paper documents and describes the new Quarterly Macroeconomi Model of the Central Bank of Iceland (qmm). qmm and the underlying quar terly database have been under construction since 2001 at the Research and Forecasting Division of the Economics Department at the Bank. qmm is used by the Bank for forecasting and various policy simulations and therefore play a key role as an organisational framework for viewing the medium-term futur when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of qmm. Analysis of the steady state properties of the model are currently under way and will be reported in a separate paper in the near future. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp32&r=mac |
| By: | Richard Dennis, Kai Leitemo and Ulf Soderstrom |
| Abstract: | We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:316&r=mac |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | In an interesting paper Barsky, House, and Kimball (2005) demonstrate that in a standard sticky price model a monetary contraction will lead to a decline in nondurable goods production but an increase in durable goods production, so that aggregate output is little changed. This lack of co-movement between nondurables and durables is wildly at odds with the data and occurs because, by assumption, durable goods prices are relatively more flexible than nondurable goods prices. We investigate possible solutions to this puzzle: nominal wage stickiness and credit constraints. We demonstrate that by adding adjustment costs as in Topel-Rosen, the sticky wage model solves the co-movement puzzle and delivers reasonable volatilities. |
| Keywords: | Durable goods, Consumer |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0614&r=mac |
| By: | Gary Richardson |
| Abstract: | During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay introduces quarterly series derived from that hitherto dormant data and presents aggregate series constructed from it. The new data series will supplement, and in some cases, supplant the data currently used to study banking panics of the Great Depression, which was published by the Federal Reserve Board of Governors in 1937. |
| JEL: | E0 E4 E44 N1 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12715&r=mac |
| By: | Charles Yuji Horioka; Junmin Wan |
| Abstract: | In this paper, we conduct a dynamic panel analysis of the determinants of the household saving rate in China using a life cycle model and panel data on Chinese provinces for the 1995-2004 period from China's household survey. We find that China's household saving rate has been high and rising and that the main determinants of variations over time and over space therein are the lagged saving rate, the income growth rate, and (in some cases) the real interest rate and the inflation rate. However, we find that the variables relating to the age structure of the population usually do not have a significant impact on the household saving rate. These results provide mixed support for the life cycle hypothesis, are consistent with the existence of inertia or persistence, and imply that China's household saving rate will remain high for some time to come. |
| JEL: | D12 D91 E21 J10 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12723&r=mac |
| By: | Chirinko, Robert S. (Department of Economics, Emory University); Schaller, Huntley (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, Carleton University) |
| Abstract: | Is real investment fully determined by fundamentals or is it sometimes affected by stockmarket misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether "overinvestment" affects subsequent returns; and analyze the time path of the marginal product of capital in reaction to fundamental and misvaluation shocks. Besides these qualitative tests, we introduce a measure of misvaluation into standard investment equations to estimate the quantitative effect of misvaluation on investment. Overall, the evidence suggests that both fundamental and misvaluation shocks affect investment. |
| Keywords: | Investment, Stock market, Fundamentals, Misvaluation, Bubbles, Real effects of financial markets |
| JEL: | E44 E22 E32 G3 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:200&r=mac |
| By: | Darmoul Mokhtar (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility. |
| Keywords: | Exchange rates, official interventions, monetary policy, GARCH models. |
| Date: | 2006–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00118789_v1&r=mac |
| By: | Jean-Bernard Chatelain (PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Andrea Generale (Banca d´Italia - [Banca d´Italia]); Ignacio Hernando (Bank of Spain - [Bank of Spain]); Philip Vermeulen (ECB - European Central Bank - [European Central Bank]); Ulf Von Kalckreuth (Bundesbank - [Bundesbank]) |
| Abstract: | In this paper we present comparable results on the determinants of firms' investment and their link to monetary policy. The results have been obtained by the Eurosystem Monetary Transmission Network. This network has produced a series of papers in which the use of micro data permits estimating and quantifying the relevance of two channels of monetary policy transmission: the nterest rate and the broad credit channel. The research findings provide evidence of an operative interest rate channel in all countries examined. Moreover, the results indicate that variables which proxy firms' financial conditions play a role. Firms characterised by weaker balance sheets<br />show higher liquidity sensitivity. |
| Keywords: | investment, monetary transmission, user cost of capital |
| Date: | 2006–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00119490_v1&r=mac |
| By: | Tapas K. Mishra |
| Abstract: | Demography-based income forecasting has recently gained enormous popu- larity. Malmberg and Lindh (ML, 2005) in an important contribution forecast global income by incorporating demographic age information where the vari- ables were assumed to be stationary. Drawing on the insights from recent theoretical and empirical advances, in this paper we re-examine the stationary assumption and argue in favour of a more flexible framework where ’stationar- ity’ is a limiting condition of the stochastic demographic behavior. Based on Mishra and Urbain (2005) where we showed that the age-specific population display varied long-term and short-term dynamics, we invest this idea in the present paper for long-term projections of per capita income (till 2050) of a set of developed and developing countries and the World income. We find that GDP forecast that corroborates demographic information have higher forecasts than without demographic information - a result consistent with ML, but we find that embedding ’memory’ features of demographic variables lead to higher forecast that ML. The relevance of stochastic shocks in GDP forecasting is drawn in this paper and implications of these forecast in the presence of fluc- tuating age-shares in those countries are discussed. |
| Keywords: | Global income forecasting, Long memory, Demographic components, Economic growth. |
| JEL: | C13 E32 E43 E63 J11 C33 O47 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2006-17&r=mac |
| By: | Jean-Bernard Chatelain (PSE - Paris-Jourdan Sciences Economiques - [CNRS : UMR8545] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Normale Supérieure de Paris], EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Andrea Generale (Banca d´Italia - [Banca d´Italia]); Philip Vermeulen (ECB - European Central Bank - [European Central Bank]); Michael Ehrmann (ECB - European Central Bank - [European Central Bank]); Jorge Martínez-Pagés (Bank of Spain - [Bank of Spain]); Andreas Worms (Bundesbank - [Bundesbank]) |
| Abstract: | This paper presents an overview of the results of a research project on monetary transmission pursued by the Eurosystem, which has analysed micro data on firms and banks in several countries of the euro area in great detail. There is strong empirical support for an interest rate channel working through firm investment. Furthermore, a credit channel can be identified with firm micro data. On the bank side, there is evidence that lending reacts differently to monetary policy according to bank balance sheet characteristics. In particular, banks that have a less liquid asset composition show a stronger loan supply response. This finding may be due to banks drawing on their liquid assets to cushion the effects of monetary policy on their loan portfolio, which is in line with the existence of close relationships between banks and their loan customers. |
| Keywords: | monetary policy transmission, interest rate channel, credit channel, euro area |
| Date: | 2006–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00119489_v2&r=mac |
| By: | Federico S. Mandelman |
| Abstract: | This paper studies the cyclical pattern of ex post markups in the banking system using balance-sheet data for a large set of countries. Markups are strongly countercyclical even after controlling for financial development, banking concentration, operational costs, inflation, and simultaneity or reverse causation. The countercyclical pattern is explained by the procyclical entry of foreign banks, which occurs mostly at the wholesale level and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies, which are aimed at deterring entry into retail niches and which, in turn, dampen bank markups. In the second part of the paper, I develop a general equilibrium model that accounts for these features of the data. I find that this monopolistic behavior in the intermediary financial sector increases the volatility of real variables and amplifies the business cycle. I interpret this bank-supply channel as an extension of the credit channel pioneered by Bernanke and Blinder (1988). |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-21&r=mac |
| By: | David E. Lebow; Jeremy B. Rudd |
| Abstract: | Inflation measurement is the process through which changes in the prices of individual goods and services are combined to yield a measure of general price change. This paper discusses the conceptual framework for thinking about inflation measurement and considers practical issues associated with determining an inflation measure's scope; with measuring individual prices; and with combining these individual prices into a measure of aggregate inflation. We also discuss the concept of "core inflation," and summarize the implications of inflation measurement for economic theory and policy. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-43&r=mac |
| By: | Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]) |
| Abstract: | Silvio Gesell (1862-1930) proposed a system of stamped money in order to accelerate monetary circulation and to free money from interest. This was part of a global socialist system intended to free economy from rent and interest. In the 1930s, Irving Fisher, who proposed the system to President Roosevelt, and John Maynard Keynes rendered homage to Gesell's monetary proposals in the context of the economic depression. Among the experiments that took place, several were based on his ideas, notably in the Austrian town of Wörgl and in the United States. These experiments were always local and never lasted more than a few months. This article shows that trust is the main issue of this kind of monetary organization; and therefore, that such experiments can only take place successfully on a small scale. |
| Keywords: | Gesell. History of economic ideas, monetary utopia, local currencies. |
| Date: | 2006–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00119192_v1&r=mac |
| By: | Gary Richardson |
| Abstract: | During the contraction from 1929 through 1933, the Federal Reserve System tracked changes in the status of all banks operating in the United States and determined the cause of each bank suspension. This essay analyzes chronological patterns in aggregate series constructed from that data. The analysis demonstrates both illiquidity and insolvency were substantial sources of bank distress. Periods of heightened distress were correlated with periods of increased illiquidity. Contagion via correspondent networks and bank runs propagated the initial banking panics. As the depression deepened and asset values declined, insolvency loomed as the principal threat to depository institutions. |
| JEL: | E0 E42 E44 E65 N01 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12717&r=mac |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee; Emi Mise; Kalvinder Shields |
| Abstract: | Methods are described for the appropriate use of data obtained and analysed in real time to represent the output gap. The methods employ cointegrating VAR techniques to model real time measures and realisations of output series jointly. The model is used to mitigate the impact of data revisions; to generate appropriate forecasts that can deliver economically-meaningful output trends and that can take into account the end-of-sample problems associated with the use of the Hodrick-Prescott filter in measuring these trends; and to calculate probability forecasts that convey in a clear way the uncertainties associated with the gap measures. The methods are applied to data for the US 1965q4-2004q4 and the improvements over standard methods are illustrated. |
| Keywords: | Output gap measurement, real time data, data revision, HP end-points, probability forecasts. |
| JEL: | E52 E58 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0619&r=mac |
| By: | Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics) |
| Abstract: | The aim of this paper is to give an account of the unfolding of macroeconomic from Keynes to the present day. To this end I shall use a grid of analyses resulting from the combination of two distinctions. The first is the Marshall-Walras divide, the second is the distinction between Keynesianism viewed as a conceptual apparatus and Keynesianism viewed as a policy cause. On the basis of these distinctions, I construct two box diagrams. Box diagram No.1 has complex general equilibrium and simple general equilibrium (I.e. macroeconomics) models as its columns, and the Marshallian and Walrasian approaches as its rows. Box diagram No.2 has the Keynesian policy cause (justifying demand activation) and the anti-Keynesian policy cause (a defence of laissez-faire) as its columns, and the Marshallian and Walrasian conceptual apparatuses as it rows. This framework allows me to recount the history of macroeconomics as if it were a matter of filling in, step by step, the different slots in my two box diagrams. One of the claims made in the paper is that the rise of new classical macroeconomics can be encapsulated as the replacement of Marshallian by Walrasian macroeconomics, on the one hand, and, on the other hand, as the emergence of models that are anti-Keynesian on the score of both their analytical apparatus and their policy cause. |
| Date: | 2006–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006051&r=mac |
| By: | Patrice Robitaille; Jennifer E. Roush |
| Abstract: | This paper provides a robust structural identification of the effects of U.S. interest rates on an emerging economy’s asset values. Using newly available intraday data, we investigate how surprises associated with U.S. macro data and FOMC announcements affectmove on intra-daily movements in the yield spread on a benchmark Brazilian government dollar-denominated bond and (the C-bond) as well as onthe Brazilian broad stock price index. Our study covers the period February 1999 to April 2005. We find that FOMC announcements that lead to an increase in U.S. interest rates are associated with a systematic increase in Brazil’s C-bond spread and a systematic decline in the Bovespa stock price index. Several U.S. macro data surprises, including for nonfarm payrolls and the CPI, prompt an increase in the Brazilian C-bond yield spread and a fall in Brazilian share prices. These combined findings suggest that, for Brazil during this period, the financial risks of higher U.S. interest rates rates in response to positive news about the U.S. economy dominated any benefits through trade or other channels in the determination of Brazilian asset valuations. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:868&r=mac |
| By: | Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha |
| Abstract: | This paper is about the properties of Markov-switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium, and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria, which exist even when the MSRE model satisfies a generalized Taylor principle. Our result suggests that it may be more difficult to rule out nonfundamental equilibria in MRSE models than in the single-regime case where the Taylor principle is known to guarantee local uniqueness. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-19&r=mac |
| By: | Francisco Covas; Wouter J. den Haan |
| Abstract: | The authors show that debt and equity issuance are procyclical for most listed U.S. firms. The procyclicality of equity issuance decreases monotonically with firm size. At the aggregate level, however, the authors' results are not conclusive: issuance is countercyclical for very large firms that, although few in number, have a large effect on the aggregate because of their enormous size. If firms use the standard one-period contract, then the shadow price of external funds is procyclical and the cyclicality decreases with firm size. This property generates equity to be procyclical and--as in the data--the procyclicality decreases with firm size. Other factors that cause equity to be procyclical in the model are a countercyclical price of risk and a countercyclical cost of equity issuance. The model (i) generates a countercyclical default rate, (ii) magnifies shocks, and (iii) generates a stronger cyclical response for small firms, whereas the model without equity does the exact opposite. |
| Keywords: | Financial stability; Business fluctuations and cycles |
| JEL: | E3 G1 G3 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-45&r=mac |
| By: | Westerlund Joakim (METEOR) |
| Abstract: | Most empirical evidence suggest that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account. |
| Keywords: | econometrics; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2006054&r=mac |
| By: | Martin Menner |
| Abstract: | Shouyong Shi(1998) presents a general equilibrium model which shows a persistent monetary propagation mechanism. There the high persistence is obtained by a combination of search frictions in the goods and labor markets and the presence of final goods inventories. The present paper addresses the question of robustness of these results, especially, how sensitive are Shi's results to parameter changes and to different model specifications. Calibration of the parameters to intervals is used to perform a global sensitivity analysis. The calibration exercise reveals that the model is quite robust to changes in parameters. Comparing different model versions - including a CIA model which appears as a special case when buyers and sellers match always - we can disentangle and quantify the contributions of the various frictions in accounting for the persistent propagation. Search-frictions in the goods market and inventory holdings are necessary for persistent propagation of monetary shocks. Labor market frictions are not crucial but prolong the output responses and reduce their magnitude. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we066426&r=mac |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Gary Koop; Shaun P. Vahey |
| Abstract: | A recent revision to the preliminary measurement of GDP(E) growth for 2003Q2 caused considerable press attention, provoked a public enquiry and prompted a number of reforms to UK statistical reporting procedures. In this paper, we compute the probability of “substantial revisions” that are greater (in absolute value) than the controversial 2003 revision. The predictive densities are derived from Bayesian model averaging over a wide set of forecasting models including linear, structural break and regime-switching models with and without heteroskedasticity. Ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures recent improvements in the quality of preliminary UK macroeconomic measurements. |
| Keywords: | Revisions, Structural Breaks, Regime Switching, Model Uncertainty, Bayesian Model Averaging, Predictive Densities. |
| JEL: | E01 C11 C32 C53 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0617&r=mac |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee; Emi Mise; Kalvinder Shields |
| Abstract: | This paper describes an approach that accommodates in a coherent way three types of uncertainty when measuring the output gap. These are trend uncertainty (associated with the choice of model and de-trending technique), estimation uncertainty (with a given model) and data uncertainty (associated with the reliability of data). The approach employs VAR models to explain real time measures and realisations of output series jointly along with Bayesian-style ‘model averaging’ procedures. Probability forecasts provide a comprehensive representation of the output gap and the associated uncertainties in real time. The approach is illustrated using a real time dataset for the UK over 1961q2 — 2005q4. |
| Keywords: | Output gap, real time data, revisions, Hodrick-Prescott trend, exponential smoothing trend, moving average trend, model uncertainty, probability forecasts. |
| JEL: | E52 E58 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0618&r=mac |
| By: | Ansgar Belke; Thorsten Polleit; Kai Geisslreither |
| Abstract: | Am 9. Oktober dieses Jahres gab die Königlich Schwedische Akademie der Wissenschaften (KVA) bekannt, dass der Ökonom Edmund S. Phelps mit dem Wirtschaftsnobelpreis ausgezeichnet wird. Der vorliegende Beitrag stellt die wissenschaftlichen Leistungen von Phelps vor und ordnet sie in den makroökonomischen Gesamtkontext ein. Phelps’ Arbeiten haben signifikant zur Verbesserung der Theorie des makroökonomischen Politik-Designs beigetragen. Von ihm ging die Idee einer um Erwartungen modifizierten Phillips-Kurve aus; diese trug dazu bei, den Konflikt zwischen Inflation und Beschäftigung als „Scheinkonflikt“ zu entlarven. Phelps lieferte somit einen bedeutenden Beitrag für die Mikrofundierung der Makroökonomik. Phelps’ zweite bedeutende makroökonomische Innovation war die Entdeckung der goldenen Regel der Kapitalakkumulation. Auch sie birgt wichtige Politikimplikationen. Die Auszeichnung von Edmund S. Phelps ist ein folgerichtiger Schritt zur Würdigung eines Ökonomen, der die moderne Makroökonomik in umfassender Weise geprägt hat. |
| JEL: | A11 B22 B31 E22 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:278&r=mac |
| By: | Aurelijus Dabušinskas; Martti Randveer |
| Abstract: | In this paper, we review the price setting survey of Estonian firms and compare our findings with the results of similar research in the euro area summarized by Fabiani et al. (2005). Generally, the price setting patterns that emerge from our survey are quite similar to those in the euro zone. There is some evidence, however, that price setting may be somewhat more flexible in Estonia. The findings that suggest more price flexibility in Estonia are as follows: the incidence of time-dependent pricing is lower, the share of firms that are price takers is larger, price changes are more frequent, and, finally, the speed of price adjustments to shocks is higher |
| Keywords: | price setting, nominal rigity, inflation persistence, price survey |
| JEL: | E30 D40 |
| Date: | 2006–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2006-08&r=mac |
| By: | Satyajit Chatterjee; Dean Corbae |
| Abstract: | What caused the worldwide collapse in output from 1929 to 1933? Why was the recovery from the trough of 1933 so protracted for the U.S.? How costly was the decline in terms of welfare? Was the decline preventable? These are some of the questions that have motivated economists to study the Great Depression. In this paper, the authors review some of the economic literature that attempts to answer these questions. |
| Keywords: | Depressions |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-12&r=mac |
| By: | David C. Mills, Jr. |
| Abstract: | I present an environment for which both outside and inside money are essential as means of payment. The key model feature is that there is imperfect monitoring of issuers of inside money. I use a random matching model of money where some agents have private trading histories and others have trading histories that can be publicly observed only after a lag. I show via an example that for lags that are neither too long nor too short, there exist allocations that use both types of money that cannot be duplicated when only one type is used. Inside money provides liquidity that increases the frequency of trades, but incentive constraints restrict the amount of output that can be traded. Outside money is immune to such constraints and can trade for higher levels of output. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-38&r=mac |
| By: | François R. Velde |
| Abstract: | Suppose the nominal money supply could be cut literally overnight by, say, 20%. What would happen to prices, wages, output? The answer can be found in 1720s France, where just such an experiment was carried out, repeatedly. Prices adjusted instantaneously and fully on one market only, that for foreign exchange. Prices on other markets (such as commodities) as well as prices of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. Coincidentally or not, the industrial sector (as represented by manufacturing of woolen cloths) experienced a contraction of 30%. When the government changed course and increased the nominal money supply overnight by 20%, prices responded much more, and the woolen industry rebounded. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-12&r=mac |
| By: | Gary Richardson |
| Abstract: | Between the founding of the Federal Reserve System in 1913 and the depression of the 1930s, three check-clearing systems operated in the United States. The Federal Reserve cleared checks for members of the system. Clearing houses cleared checks for members of their organizations. Correspondents cleared checks for all other institutions. The correspondent-clearing system was vulnerable to counter-party cascades, particularly because accounting conventions overstated reserves available to individual institutions and the system as a whole. In November 1930, a correspondent system in the center of the United States collapsed, causing the closure of more than one hundred institutions. Bank runs radiated from the locus of events, and additional correspondent networks succumbed to the situation. For the remainder of the contraction, banks that relied upon correspondents to clear checks failed at higher rates than other banks. In sum, weaknesses within a check-clearing system played a hitherto unrecognized role in the banking crises of the Great Depression. |
| JEL: | E42 E44 E65 N1 N12 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12716&r=mac |
| By: | Jan Willem van den End; Marco Hoeberichts en Mostafa Tabbae |
| Abstract: | Macro stress-testing has become an important tool to assess financial stability. This paper describes a tool kit for scenario analysis and macro stress-testing. It is based on a model which maps multivariate scenarios to banks' credit and interest rate risks by deterministic and stochastic simulations. Our approach is an extension of existing macro stress-testing models as it distinguishes between probability of default on the one hand and loss given default on the other and allows for separate models for domestic and foreign portfolios. Another contribution of the paper is that the stochastic simulations generate loss distributions which provide insight in the extreme losses and allow for changing correlations between risk factors in stress situations. The methodology is applied to the Dutch banking sector. |
| Keywords: | banking; financial stability; stress-tests; credit risk; interest rate risk |
| JEL: | C33 E44 G21 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:119&r=mac |
| By: | Gary Richardson |
| Abstract: | Hooks and Robinson argue that moral hazard induced by deposit insurance induced banks to invest in riskier assets in Texas during the 1920s. Their regressions suggest this manifestation of moral hazard may explain a portion of the events that occurred during the 1920s, but some other phenomena, hitherto overlooked, must also be at work. Economic logic and evidence form the archives of the Board of Governors suggest that phenomenon is mismanagement and defalcation by corporate officers, which increases when insurance reduces depositors' incentives to monitor and react to the safety and soundness of banks. |
| JEL: | E42 E44 E65 N1 N13 N2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12719&r=mac |
| By: | Esteban Rossi-Hansberg; Mark L. J. Wright |
| Abstract: | Why do growth and net exit rates of establishments decline with size? What determines the size distribution of establishments? This paper presents a theory of establishment dynamics that simultaneously rationalizes the basic facts on economy-wide establishment growth, net exit, and size distributions. The theory emphasizes the accumulation of industry-specific human capital in response to industry-specific productivity shocks. It predicts that establishment growth and net exit rates should decline faster with size and that the establishment size distribution should have thinner tails in sectors that use human capital less intensively or physical capital more intensively. In line with the theory, the data show substantial sectoral heterogeneity in U.S. establishment size dynamics and distributions, which is well explained by variation in physical capital intensity. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:382&r=mac |
| By: | Fatih Guvenen |
| Abstract: | The current literature offers two views on the nature of the labor income process. According to the first view, which we call the “restricted income profiles” (RIP) model, individuals are subject to large and very persistent shocks while facing similar life-cycle income profiles (MaCurdy, 1982). According to the alternative view, which we call the “heterogeneous income profiles” (HIP) model, individuals are subject to income shocks with modest persistence while facing individual-specific income profiles (Lillard and Weiss, 1979). In this paper we study the restrictions imposed by the RIP and HIP models on consumption data—in the context of a life-cycle model—to distinguish between these two hypotheses. In the life-cycle model with a HIP process, which has not been studied in the previous literature, we assume that individuals enter the labor market with a prior belief about their individual-specific profile and learn over time in a Bayesian fashion. We find that learning is slow, and thus initial uncertainty affects decisions throughout the life cycle. The resulting HIP model is consistent with several features of consumption data including (i) the substantial rise in within-cohort consumption inequality, (ii) the non-concave shape of the age-inequality profile, and (iii) the fact that consumption profiles are steeper for higher educated individuals. The RIP model we consider is also consistent with (i), but not with (ii) and (iii). These results bring new evidence from consumption data on the nature of labor income risk. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmem:145&r=mac |
| By: | Anthony Garratt (School of Economics, Mathematics & Statistics, Birkbeck); Kevin Lee |
| Abstract: | We evaluate the forecast performance of a range of theory-based and atheoretical models explaining exchange rates and interest rates in US, UK and Japan. The decision-making environment is fully described for an investor who optimally allocates portfolio shares to domestic and foreign assets. Methods necessary to compute and use forecasts in this context are proposed, including the means of combining density forecasts to deal with model uncertainty. An out-of-sample evaluation exercise covering the 1990’s is described, comparing statistical criteria with decision-based criteria. The theory-based models are found to perform relatively well when their forecasts are judged by their economic value. |
| Keywords: | Model Averaging, Buy and Hold, Exchange rate and interest rate forecasts. |
| JEL: | C32 C53 E17 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0616&r=mac |
| By: | Martin Bodenstein |
| Abstract: | Several methods have been proposed to obtain stationarity in open economy models. I find substantial qualitative and quantitative differences between these methods in a two-country framework, in contrast to the results of Schmitt-Grohé and Uribe (2003). In models with a debt elastic interest rate premium or a convex portfolio cost, both the steady state and the equilibrium dynamics are unique if the elasticity of substitution between the domestic and the foreign traded good is high. However, there are three steady states if the elasticity of substitution is sufficiently low. With endogenous discounting, there is always a unique and stable steady state irrespective of the magnitude of the elasticity of substitution. Similar to the model with convex portfolio costs or a debt elastic interest rate premium, though, there can be multiple convergence paths for low values of the elasticity. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:867&r=mac |
| By: | Morten Ravn; Stephanie Schmitt-Grohe; Martin Uribe |
| Abstract: | This paper proposes a novel international transmission mechanism based on the assumption of deep habits. The term deep habits stands for a preference specification according to which consumers form habits on a good-by-good basis. Under deep habits, firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand, creating an incentive to price discriminate. We refer to this type of price discrimination as pricing to habits. In the presence of pricing to habits, innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad, leading to a departure from the law of one price. In this way, the proposed pricing-to-habit mechanism can explain the observation that prices of the same good across countries, expressed in the same currency, vary over the business cycle. Furthermore, it can account for the empirical fact that in response to a positive domestic demand shock, such as an increase in government spending, the real exchange rate depreciates, domestic consumption expands, and the trade balance deteriorates. |
| JEL: | E3 F4 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12731&r=mac |
| By: | Kalina Koleva (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Jean-Marie Monnier (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | Après avoir spécifié la nature juridique du droit fiscal comme application d'un pouvoir de contrainte et expression d'une autorité étatique par les pouvoirs publics, l'objectif du présent article est d'examiner comment les théories économiques contemporaines de l'impôt prennent en compte cette dimension essentielle des prélèvements obligatoires. La contrainte induit en effet une modification des comportements de sorte que les règles juridiques produisent des conséquences dans l'ordre économique. Pour ce faire, on rappelle, dans un premier temps, la position originale de l'ancienne économie financière publique française, et on souligne les défaillances de l'économie publique et particulièrement de la théorie de la taxation optimale. Elles concernent non seulement les spécifications économiques des modèles, mais surtout leurs spécifications institutionnelles et fiscales. On présente, dans un deuxième temps, le cadre d'analyse de la nouvelle économie du droit fiscal qui prétend précisément prendre en compte la complexité du droit fiscal et des institutions dévolues à la collecte de l'impôt. La troisième partie permettra d'en tirer un premier bilan critique et de proposer un programme de recherche qui seront argumentés selon trois axes principaux. Outre qu'elle privilège essentiellement l'analyse en termes de coûts d'efficience, la nouvelle économie du droit fiscal sous-estime les conséquences de la fraude en termes d'équité. La nouvelle économie du droit fiscal ne traite pas non plus la question de résolution des conflits. Cette question conduit plus généralement à s'interroger sur une question essentielle pour toute institution, celle de son évolution. Dès lors, un véritable renouvellement méthodologique s'impose. |
| Keywords: | Droit fiscal, coûts d'efficience, économie du droit. |
| Date: | 2006–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00118878_v1&r=mac |
| By: | Ledyaeva , Svetlana (BOFIT); Linden, Mikael (BOFIT) |
| Abstract: | Barro and Sala-I-Martin empirical framework of neoclassical Solow-Swan model is specified to determine the FDI impact on per capita growth in 74 Russian regions during period of 1996-2003. The Arellano-Bond GMM-DIFF methodology, developed for dynamic panel data models, is used in estimations. Results imply that in general FDI (or related investment components) do not contribute significantly to economic growth in Russia in the analyzed period. Regional growth in 1996-2003 is explained by the initial level of region’s economic development, the 1998 financial crisis, domestic investments, and exports. However some evidence of positive aggregate FDI effects in higher-income regions is relevant. Another interesting result is that natural resource availability seems to be growth-inducing in rich regions, while in poor regions it is not significant. We also found convergence between poor and rich regions in Russia. However FDI seems not to play any significant role in the recent growth convergence process among Russian regions. |
| Keywords: | foreign direct investment (FDI); Russian regional economy; and economic growth |
| JEL: | E22 F21 P27 |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2006_017&r=mac |
| By: | David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Axel, GOSSERIES (Chaire d’Ethique, ESPO, UCL) |
| Keywords: | Tradable permits, Population control, Pronatalist policy, Income inequality, Differential fertility, Grandfathering |
| JEL: | J13 E61 O40 |
| Date: | 2006–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006040&r=mac |
| By: | Giovanni Andrea Cornia |
| Abstract: | The paper analyses the relationship between within-country income inequality and policies of domestic liberalization and external globalization. The models used to provide the rationale for such reforms—such as the Hecksher-Ohlin model—usually predict a decline in inequality. However, the evidence shows that inequality often rose with the introduction of such reforms. The paper tries to explain this discrepancy by identifying the conditions under which the models’ conclusions do not hold. Indeed, such models are based on a simplified view of reality and restrictive assumptions, and their predictions do not necessarily hold in conditions of institutional weakness, structural rigidities, inefficient markets, asymmetric information and persistent protectionism. |
| Keywords: | trends in income inequality, factor income distribution, policy reform, structural adjustment, globalization |
| JEL: | D31 D33 E69 F02 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:une:wpaper:3&r=mac |
| By: | Marius Boldea (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]) |
| Abstract: | In this paper I study a discrete-time version of the Lucas model with the endogenous leisure but without physical capital. Under standard conditions I prove that the optimal human capital sequence is increasing. If the instantaneous utility function and the production function are Cobb-Douglas, I prove that the human capital sequence grow at a constant rate. I finish by studying the existence and the unicity of the equilibrium in the sense of Lucas or Romer. |
| Keywords: | Lucas Model, human capital, externalities, optimal growth, equilibrium. |
| Date: | 2006–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00118829_v1&r=mac |