|
on Macroeconomics |
|
Issue of 2006‒12‒22
twenty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Carlos Thomas |
| Abstract: | I analyze optimal monetary policy in an economy with search and matching frictions in thelabor market and staggered nominal wage and price contracts. In this framework, as opposedto the standard New Keynesian model, preset nominal wages need not have any effect onexisting employment relationships. However, staggered bargaining of nominal wages distortsaggregate job creation and creates inefficient dispersion in hiring rates across firms.Targeting zero inflation (the optimal policy in the standard New Keynesian model) onlymagnifies these distortions. The optimal policy allows for non-zero inflation in response toreal shocks, so as to reduce the rigidity of real wages. Quantitatively, the case against pricestability as the sole goal of monetary policy turns out to be important. |
| Keywords: | search and matching, New Keynesian, staggered nominal wage bargaining |
| JEL: | E52 E32 J40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0743&r=mac |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | Surveys provide direct information on expectations, but only short histories are available at quarterly frequencies or for long-horizon expectations. Longer histories typically contain only semi-annual observations of short-horizon forecasts. The authors fill in the gaps by constructing a 50-year monthly history of expected inflation at all horizons from one month to 10 years that is consistent with inflation data and infrequent survey data. In the process, some models that fit inflation well are found to generate forecasts that bear little resemblance to survey data. Also, survey data on near-term expectations are found to contain considerable information about long-horizon views. The estimated long-horizon forecast series, a measure of the private sector’s perception of the inflation target of monetary policy, has shifted considerably over time and is the source of some of the persistence of inflation. When compared with estimates of the effective inflation goal of policy, these perceptions suggest that monetary policy has been less than fully credible historically. |
| Keywords: | Inflation and prices; Inflation targets; Uncertainty and monetary policy |
| JEL: | E3 E5 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-46&r=mac |
| By: | Luiz de Mello; Diego Moccero |
| Abstract: | Brazil has made considerable progress in recent years towards consolidating macroeconomic stability, which is a key framework condition for sustained growth. Monetary policy continues to respond swiftly to changes in the inflation outlook, anchoring expectations. Fiscal policy has been guided by debt sustainability considerations, delivering primary budget surpluses that have often exceeded the end-year targets. Nevertheless, while the public debt-to-GDP has been reduced, it remains high, especially in comparison with other emerging-market economies. Brazil?s overarching macroeconomic challenge is therefore to continue to reduce the public debt overhang while improving the quality of fiscal adjustment, which has so far been underpinned by revenue hikes, rather than a retrenchment of expenditure commitments. To do so, measures will need to be taken to arrest the increase in current spending, especially on pensions, paving the way for subsequently removing distortions and reducing the tax burden over the medium to longer term, once the debt-to-GDP ratio has been reduced in a sustainable manner. The favourable domestic macroeconomic environment, with falling inflation and improving growth prospects, appears propitious for reform towards the gradual phasing-out of directed credit and a reduction in compulsory reserve requirements. <P>Consolider l'ajustement macroéconomique en Brésil <BR>Le Brésil a remarquablement progressé ces dernières années vers la consolidation de la stabilité macroéconomique, condition indispensable d'une croissance durable. La politique monétaire continue de réagir promptement à l'évolution des perspectives d'inflation, ancrant ainsi les anticipations. La politique budgétaire a été guidée par des considérations relatives à la viabilité de la dette, dégageant des excédents primaires souvent supérieurs aux objectifs de fin d'année. Néanmoins, si le ratio dette publique-PIB a diminué, il demeure élevé, surtout en comparaison de ceux des autres économies de marché émergentes. La principale tâche macroéconomique à laquelle le Brésil doit s'atteler est par conséquent de réduire encore le niveau excessif de la dette publique tout en améliorant la qualité de l'ajustement budgétaire qui, jusqu'à présent, a résulté d'augmentations de recettes et non de compressions des engagements de dépenses. Pour ce faire, des mesures devront être prises afin de mettre un terme à l'alourdissement des dépenses courantes, surtout au titre des pensions, de façon à pouvoir ensuite alléger la charge fiscale sur le moyen terme, une fois que le ratio dette-PIB aura été réduit de manière durable. Le contexte macroéconomique favorable, caractérisé par un recul de l'inflation et une amélioration des perspectives de croissance, paraît propice à une réforme visant à supprimer progressivement le crédit administré et à abaisser les niveaux de réserves obligatoires. |
| Keywords: | public debt, dette publique, fiscal adjustment, inflation target, cible d'inflation, ajustement budgétaire, credit, crédit |
| JEL: | E30 E50 E60 |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:531-en&r=mac |
| By: | Domenico Giannone; Troy Matheson (Reserve Bank of New Zealand) |
| Abstract: | This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate price data. Using disaggregate price data we can directly compare the predictive performance of our core indicator with a wide range of other ‘core inflation’ measures estimated from disaggregate prices, such as the weighted median and the trimmed mean. Predictive performance is assessed relative to a centred 2 year moving average of past and future annual inflation outcomes. The 2 year centred moving average is used as an analytical approximation of the inflation target from the PTA, which requires the Reserve Bank to keep annual inflation between 1 and 3 per cent on average over the medium term. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models. |
| JEL: | C32 E31 E32 E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/12&r=mac |
| By: | Thierry Warin |
| Abstract: | This paper surveys the roots of the modern literature on monetary policy, and illustrates the convergence that occurs between open-economy approaches and the micro foundations of monetary policy. From the Banking School versus Currency School debate to the “credibility versus flexibility” refinement, monetary policy has a long history of scholarly works. Although it may be hard to imagine that there is still room for innovations, the current developments of the literature on open-economy monetary policy seem to spawn a new and essential branch. |
| Keywords: | : monetary policy, rules versus discretion, credibility versus flexibility, Banking School, Currency School |
| JEL: | E4 E5 E6 F0 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0617&r=mac |
| By: | Ricardo J. Caballero |
| Abstract: | The world has a shortage of financial assets. Asset supply is having a hard time keeping up with the global demand for store of value and collateral by households, corporations, governments, insurance companies, and financial intermediaries more broadly. The equilibrium response of asset prices and valuations to these shortages has played a central role in global economic developments over the last twenty years. The so-called "global imbalances," the recurrent emergence of speculative bubbles (which recently have transited from emerging markets, to the dot-coms, to real estate, to gold...), the historically low real interest rates and associated "interest-rate conundrum," and even the widespread low inflation environment and deflationary episodes in parts of the world, all fall into place once one adopts this asset shortage perspective. |
| JEL: | E3 E4 E5 F3 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12753&r=mac |
| By: | Robert J. Barro |
| Abstract: | Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year. |
| JEL: | E21 E44 G12 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12763&r=mac |
| By: | Gary D. Hansen |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:416&r=mac |
| By: | Christopher D. Carroll; Misuzu Otsuka; Jirka Slacalek |
| Abstract: | This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector. |
| JEL: | C22 E21 E32 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12746&r=mac |
| By: | Christopher A. Pissarides |
| Abstract: | I examine the dynamic evolutions of unemployment, hours of work and the service sharesince the war in the United States and Europe. The theoretical model brings together allthree and emphasizes technological growth. Computations show that the very lowunemployment in Europe in the 1960s was due to the high productivity growth associatedwith technological catch-up. Productivity also played a role in the dynamics of hours buta full explanation for the fast rise of service employment and the big fall in aggregatehours needs further research. Taxation has played a role but results are mixed. |
| Keywords: | Unemployment, hours of work, service employment, structural change, laborproductivity taxation |
| JEL: | E24 J21 J22 J64 O14 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0757&r=mac |
| By: | Gary D. Hansen |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:417&r=mac |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | Economies are susceptible to speculative attacks regardless of whether they use fixed or floating exchange rates. Turkish experience in the last two decades constitutes one of the most prominent examples proving this verdict. It is widely accepted that narrow money (M1) is the most conventional measure of liquidity, excessive growth of which may fuel speculative attacks on the currency. The literature on currency crises clearly lacks a country-specific study that addresses the long-run relationship between this indicator and the speculative pressure in the exchange market. This article aims at filling this gap in the literature using monthly Turkish time series data spanning the period 1984:04- 2006:11. Results of the ADF unit root tests suggest that the series are stationary. Hence, no-cointegration analysis was carried out before the Granger-causality tests. Granger causality tests reveal strong evidence supporting univariate causality running from narrow money (M1) to exchange market pressure. This outcome lends empirical support to the Turkish policy makers’ current efforts to maintain a tight control of the money supply. |
| Keywords: | Speculative attacks; currency crises; domestic credit. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_24&r=mac |
| By: | Christian Dustmann (Centre for Research and Analysis of Migration, Department of Economics, University College London); Albrecht Glitz (Centre for Research and Analysis of Migration, Department of Economics, University College London); Thorsten Vogel (Humboldt Universität zu Berlin and Centre for Research and Analysis of Migration.) |
| Abstract: | Differences in the cyclical pattern of employment and wages of immigrants relative to natives have largely gone unnoticed in the migration literature. In this paper we show that immigrants and natives react differently to the economic cycle. Based on over two decades of micro data, our investigation is for two of the largest immigrant receiving countries in Europe which at the same time are characterised by different immigrant populations as well as different economic cycles, Germany and the UK. Understanding the magnitude, nature and possible causes of differences in responses is relevant for assessing the economic performance of immigrant communities over time. We show that there are substantial differences in cyclical responses between immigrants and natives. Our analysis illustrates the magnitude of these differences, while distinguishing between different groups of immigrants. Differences in responses may be due to differences in the skill distribution between immigrant groups and natives, or differences in demand for immigrants and natives of the same skills due to differential allocation of immigrants and natives across industries and regions. We demonstrate that substantial differences in cyclical patterns remain, even within narrowly defined groups. Finally, we estimate a more structural factor type model that, using regional variation in economic conditions, separates responses to economic shocks from a secular trend and allows us to obtain a summary measure for these differences within education groups. |
| Keywords: | Immigration, Wage Structure, Business Cycle |
| JEL: | E32 F22 J31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:0906&r=mac |
| By: | Troy Matheson (Reserve Bank of New Zealand) |
| Abstract: | We describe a simple extension of the Monacelli (2005) small open economy model that incorporates a non-tradable good, habit persistence and price indexation. The empirical fit of eight different specifications of this model is then tested in a Bayesian framework using data for three small open economies: Australia, Canada, and New Zealand. The results show that the model with a non-tradable good fits the data better than the one-good model across all specifications considered. In contrast to Rabanal and Rubio-Ramarez (2005), we find that adding price indexation to either the one- or two-good model deteriorates overall empirical fit. |
| JEL: | C51 E52 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/11&r=mac |
| By: | Nick Bloom; Stephen Bond; John Van Reenen |
| Abstract: | This paper shows that, with (partial) irreversibility, higher uncertainty reduces the impacteffect of demand shocks on investment. Uncertainty increases real option values makingfirms more cautious when investing or disinvesting. This is confirmed both numerically for amodel with a rich mix of adjustment costs, time-varying uncertainty, and aggregation overinvestment decisions and time, and also empirically for a panel of manufacturing firms.These cautionary effects of uncertainty are large - going from the lower quartile to the upperquartile of the uncertainty distribution typically halves the first year investment response todemand shocks. This implies the responsiveness of firms to any given policy stimulus may bemuch lower in periods of high uncertainty, such as after major shocks like OPEC I and 9/11. |
| Keywords: | Investment, uncertainty, real options, panel data |
| JEL: | D92 E22 D8 C23 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0739&r=mac |
| By: | Chong-En Bai; Chang-Tai Hsieh; Yingyi Qian |
| Abstract: | China's investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from China's national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978. |
| JEL: | E01 E22 E23 O11 O16 O53 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12755&r=mac |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | Economies are susceptible to speculative attacks regardless of whether they use fixed or floating exchange rates. Turkish experience in the last two decades constitutes one of the most prominent examples proving this verdict. It is widely accepted that there is a link between domestic credit and speculative attacks on the currency. Nevertheless, the literature on currency crises clearly lacks a country-specific study that addresses the long-run relationship between this indicator and the speculative pressure in the exchange market. This article aims at filling this gap in the literature using monthly Turkish time series data spanning the period 1984:04- 2006:11. Results of the ADF unit root tests suggest that the series are stationary. Hence, no cointegration analysis was carried out before the Granger-causality tests. Granger causality tests fail to establish a causal relationship between domestic credit and exchange market pressure. |
| Keywords: | Speculative attacks; currency crises; domestic credit. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_23&r=mac |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | This article aims at investigating the long-run relationship between stock prices and speculative pressure in the Turkish exchange market through Granger-causality analysis for the period 1986:01-2006:11. For this purpose an Exchange Market Pressure Index is built using the weighted average of exchange rate changes, interest rate changes and foreign exchange reserve changes. This index is then used in pairwise causality analyses with Istanbul Stock Exchange (ISE) National-100 Index. Results of the ADF unit root tests suggest that the series are stationary. Hence, no-cointegration analysis was carried out before the Granger-causality tests. Results of Granger-causality indicates that there exists no long-run relationship between stock prices and the speculative pressure in the exchange market in Turkey. |
| Keywords: | currency crises; stock prices; co-integration; exchange market pressure. |
| JEL: | F3 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_22&r=mac |
| By: | Mirko Draca; Raffaella Sadun; John Van Reenen |
| Abstract: | We survey the micro and macro literature on the impact of Information and CommunicationTechnologies (ICTs) on productivity. The "Solow Paradox" of the absence of an impact ofICT on productivity no longer holds, if it ever did. Both growth accounting and econometricevidence suggest an important role for ICTs in accounting for productivity. In fact, theempirical estimates suggest a much larger impact of ICT on productivity than would beexpected from the standard neoclassical model that we focus on. We discuss the variousexplanations for these results, including the popular notion of complementary organizationalcapital. Finally, we offer suggestions for where the literature needs to go. |
| Keywords: | ICT, productivity, organisation |
| JEL: | E22 E23 F1 O11 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0749&r=mac |
| By: | Francesco Caselli; Nicola Gennaioli |
| Abstract: | The most striking difference in corporate-governance arrangements between rich and poorcountries is that the latter rely much more heavily on the dynastic family firm, whereownership and control are passed on from one generation to the other. We argue that if theheir to the family firm has no talent for managerial decision making, dynastic management isa failure of meritocracy that reduces a firm's Total Factor Productivity. We present a simplemodel that studies the macreconomic causes and consequences of dynastic management. Inour model, the incidence of dynastic management depends, among other factors, on theimperfections of contractual enforcement. A plausible calibration suggests that, via dynasticmanagement, poor contract enforcement may be a substantial contributor to observed crosscountrydifferences in aggregate Total Factor Productivity. |
| Keywords: | Meritocracy, Family firms, Financial Development, TFP |
| JEL: | E1 E2 G1 G3 O1 O4 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0741&r=mac |