nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒01‒02
47 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility By Sylvain Leduc; Keith Sill
  2. The Beveridge Curve By Eran Yashiv
  3. Monetary and budgetary-fiscal policy interactions in a Keynesian heterogeneous monetary union By Angel Asensio
  4. Real-time determinants of fiscal policies in the euro area: Fiscal rules, cyclical conditions and elections By Roberto Golinelli; Sandro Momigliano
  5. The transmission of monetary policy shocks from the US to the euro area By Andrea Nobili; Stefano Neri
  6. Deflationary Shocks and Monetary Rules: An Open-Economy Scenario Analysis By Laxton, Doug; N'Diaye, Papa; Pesenti, Paolo
  7. DSGE Models in a Data-Rich Environment By Jean Boivin; Marc Giannoni
  8. What does a technology shock do? A VAR analysis with model-based sign restrictions By Luca Dedola; Stefano Neri
  9. A bivariate model of Fed and ECB main policy rates By Chiara Scotti
  10. A Simple Benchmark for Forecasts of Growth and Inflation By Marcellino, Massimiliano
  11. National Labour Markets, International Factor Mobility and Macroeconomic Instability By Aloi, Marta; Lloyd-Braga, Teresa
  12. Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market By Kilian, Lutz
  13. The Macroeconomics of the Labor Market: Three Fundamental Views By Marika Karanassou; Hector Sala; Dennis J. Snower
  14. Monetary Policy and Staggered Wage Bargaining when Prices are Sticky By Carlsson, Mikael; Westermark, Andreas
  15. The monetary origins of asymmetric information in international equity markets By Gregory H. Bauer; Clara Vega
  16. Model selection for monetary policy analysis – Importance of empirical validity By Q. Farooq Akram; Ragnar Nymoen
  17. Fear and Market Failure: Global Imbalances and 'Self-insurance' By Miller, Marcus; Zhang, Lei
  18. Macroeconomic Conditions and the Distribution of Income in Spain By Lídia Farré-Olalla; Francis Vella
  19. Structural Reforms and Growth: Product and Labor Market Deregulations By Eijffinger, Sylvester C W; Rossi, Alberto
  20. Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort By Guillermo A. Calvo
  21. Comparing alternative representations and alternative methodologies in business cycle accounting By V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  22. How professional forecasters view shocks to GDP By Spencer D. Krane
  23. Testing Theories of Job Creation: Does Supply Create Its Own Demand? By Mikael Carlsson; Stefan Eriksson; Nils Gottfries
  24. An Analysis of Business Cycles and Mortality on Swedish Regional Data By Svensson, Mikael
  25. Global integration of India's Money Market : Interest rate parity in India By Vipul Bhatt; Arvind Virmani
  26. A tale of two rigidities: sticky prices in a sticky-information environment By Edward S. Knotek II
  27. Adjustment to Target Capital, Finance and Growth By Ciccone, Antonio; Papaioannou, Elias
  28. Sticky information and sticky prices By Peter J. Klenow; Jonathan L. Willis
  29. Macroeconomic Effects of Short-Term Training Measures on the Matching Process in Western Germany By Reinhard Hujer; Christopher Zeiss
  30. Welfare Effects of the Euro Cash Changeover By Christoph Wunder; Johannes Schwarze; Gerhard Krug; Bodo Herzog
  31. A quantitative comparison of sticky-price and sticky-information models of price setting By Michael T. Kiley
  32. What “Hides” Behind Sovereign Debt Ratings? By António Afonso; Pedro Gomes; Philipp Rother
  33. Socially Optimal Coordination: Characterization and Policy Implications By George-Marios Angeletos; Alessandro Pavan
  34. Ordered Response Models for Sovereign Debt Ratings By António Afonso; Pedro Gomes; Philipp Rother
  35. How to be Well Shod to Absorb Shocks? Shock Synchronization and Joining the Euro Zone By Natacha Gilson
  36. Would Protectionism Defuse Global Imbalances and Spur Economic Activity? A Scenario Analysis By Faruqee, Hamid; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
  37. Domestic Market Integration By Arvind Virmani; Surabhi Mittal
  38. Fixed-Term Employment Contracts in an Equilibrium Search Model By Fernando Alvarez; Marcelo Veracierto
  39. The SPS and TBT Agreements: Implications for Indian Policy By Bibek Debroy
  40. Has the Rise in Debt Made Households More Vulnerable? By Nathalie Girouard; Mike Kennedy; Christophe André
  41. Are Financial Distortions an Impediment to Economic Growth? Evidence from China By Alessandra Guariglia; Sandra Poncet
  42. Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective By David Jamieson Bolder
  43. Heterogeneous Expectations and Bond Markets By Wei Xiong; Hongjun Yan
  44. Longevity and Lifetime Labour Input: Data and Implications By Hazan, Moshe
  45. Political Effects on the Allocation of Public Expenditures : Empirical Evidence from OECD Countries By Niklas Potrafke
  46. The Evolution of the East Asian Currency Baskets – Still Undisclosed and Changing By Gunther Schnabl
  47. Effects of the 2004 Personal Income Tax System Reform on the Shadow Sector in Ukraine By Koziarivska Larysa; Oliinyk Andrii

  1. By: Sylvain Leduc; Keith Sill
    Abstract: An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in U.S. inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally.
    Date: 2006
  2. By: Eran Yashiv (Tel Aviv University, CEPR and IZA Bonn)
    Abstract: The Beveridge curve depicts a negative relationship between unemployed workers and job vacancies, a robust finding across countries. The position of the economy on the curve gives an idea as to the state of the labour market. The modern underlying theory is the search and matching model, with workers and firms engaging in costly search leading to random matching. The Beveridge curve depicts the steady state of the model, whereby inflows into unemployment are equal to the outflows from it, generated by matching.
    Keywords: business cycle, job search, matching function, Phillips curve, unemployment, vacancies, wage inflation
    JEL: E24 E32 J63 J64
    Date: 2006–12
  3. By: Angel Asensio
    Abstract: The paper studies the effects of heterogeneity upon the monetary and fiscal-budgetary policy interactions in a Keynesian monetary union. As a result of interactions, some of our results contrast sharply with the ones in studies that consider separately monetary, fiscal and budgetary policies. Other non-conventional mechanisms are identified in connection with the supply-side effects of fiscal taxes variations. As concerns policy responses to inherited unemployment, the central bank profile proves notably to be crucial in determining the magnitude of the instrument moves that are required to achieve the objectives. Simulations suggest that heterogeneity is likely to introduce more sources of non conventional effects and to enforce adverse interactions, especially in contexts of high unemployment. However, provided authorities are able to control the distributive conflict and its inflationary consequences, it is beneficial for the union that monetary policy specializes in countering the common effects of shocks, because that pushes governments to concentrate in countering the idiosyncratic effects. Employment targets require then lower instruments responses, as a result of efficiency gains.
    Keywords: Monetary policy;Fiscal policy;Monetary union;Macroeconomic governance;Post-Keynesian
    Date: 2006–12–14
  4. By: Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Economic Research Department)
    Abstract: We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.
    Keywords: fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle
    JEL: E61 D72 E62 H60
    Date: 2006–12
  5. By: Andrea Nobili (Bank of Italy); Stefano Neri (Bank of Italy)
    Abstract: This paper studies the transmission of monetary policy shocks from the US to the euro-area using a two-country structural VAR with no exogeneity assumption. The analysis reveals the following results. First, in response to an unexpected increase in the Federal funds rate, the euro immediately depreciates with respect to the dollar and then appreciates in line with the prediction of the uncovered interest parity condition. Second, there is evidence of a temporary positive spillover to euro-area output in the short run, while a negative effect emerges in the medium run. Third, the contribution of the trade balance channel to the transmission of monetary shocks is negligible. Finally, the degree of pass-through of the exchange rate changes onto euro-area consumer prices is incomplete and small in the short run, while it is close to zero in the medium run.
    Keywords: VAR, Monetary Policy, International transmission
    JEL: C32 E52 F42
    Date: 2006–12
  6. By: Laxton, Doug; N'Diaye, Papa; Pesenti, Paolo
    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-à-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.
    Keywords: deflation; monetary policy rules; zero interest rate floor
    JEL: E17 E52 F41
    Date: 2006–12
  7. By: Jean Boivin; Marc Giannoni
    Abstract: Standard practice for the estimation of dynamic stochastic general equilibrium (DSGE) models maintains the assumption that economic variables are properly measured by a single indicator, and that all relevant information for the estimation is summarized by a small number of data series. However, recent empirical research on factor models has shown that information contained in large data sets is relevant for the evolution of important macroeconomic series. This suggests that conventional model estimates and inference based on estimated DSGE models might be distorted. In this paper, we propose an empirical framework for the estimation of DSGE models that exploits the relevant information from a data-rich environment. This framework provides an interpretation of all information contained in a large data set, and in particular of the latent factors, through the lenses of a DSGE model. The estimation involves Markov-Chain Monte-Carlo (MCMC) methods. We apply this estimation approach to a state-of-the-art DSGE monetary model. We find evidence of imperfect measurement of the model's theoretical concepts, in particular for inflation. We show that exploiting more information is important for accurate estimation of the model's concepts and shocks, and that it implies different conclusions about key structural parameters and the sources of economic fluctuations.
    JEL: C10 C32 C53 E01 E32 E37
    Date: 2006–12
  8. By: Luca Dedola (European Central Bank, Research Department); Stefano Neri (Bank of Italy, Research Department)
    Abstract: This paper estimates the effects of technology shocks in VAR models of the U.S., identified by imposing restrictions on the sign of impulse responses. These restrictions are consistent with the implications of a popular class of DSGE models, with both real and nominal frictions, and with sufficiently wide ranges for their parameters. This identification strategy thus substitutes theoretically-motivated restrictions for the atheoretical assumptions on the time-series properties of the data that are key to long-run restrictions. Stochastic technology improvements persistently increase real wages, consumption, investment and output in the data; hours worked are very likely to increase, displaying a hump-shaped pattern. Contrary to most of the related VAR evidence, results are not sensitive to a number of specification assumptions, including those on the stationarity properties of variables.
    Keywords: technology shocks, DSGE models, bayesian VAR methods, identification
    JEL: C3 E3
    Date: 2006–12
  9. By: Chiara Scotti
    Abstract: This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between mag- nitude shocks, but they do not support follower behavior. Institutional factors and inflation represent relevant variables for timing decisions of both banks. Inflation rates are important factors for magnitude decisions, while output plays a major role in US magnitude decisions.
    Date: 2006
  10. By: Marcellino, Massimiliano
    Abstract: A theoretical model for growth or inflation should be able to reproduce the empirical features of these variables better than competing alternatives. Therefore, it is common practice in the literature, whenever a new model is suggested, to compare its performance with that of a benchmark model. However, while the theoretical models become more and more sophisticated, the benchmark typically remains a simple linear time series model. Recent examples are provided, e.g., by articles in the real business cycle literature or by new-keynesian studies on inflation persistence. While a time series model can provide a reasonable benchmark to evaluate the value added of economic theory relative to the pure explanatory power of the past behavior of the variable, recent developments in time series analysis suggest that more sophisticated time series models could provide more serious benchmarks for economic models. In this paper we evaluate whether these complicated time series models can really outperform standard linear models for GDP growth and inflation, and should therefore substitute them as benchmarks for economic theory based models. Since a complicated model specification can over-fit in sample, i.e. the model can spuriously perform very well compared to simpler alternatives, we conduct the model comparison based on the out of sample forecasting performance. We consider a large variety of models and evaluation criteria, using real time data and a sophisticated bootstrap algorithm to evaluate the statistical significance of our results. Our main conclusion is that in general linear time series models can be hardly beaten if they are carefully specified, and therefore still provide a good benchmark for theoretical models of growth and inflation. However, we also identify some important cases where the adoption of a more complicated benchmark can alter the conclusions of economic analyses about the driving forces of GDP growth and inflation. Therefore, comparing theoretical models also with more sophisticated time series benchmarks can guarantee more robust conclusions.
    Keywords: growth; inflation; non-linear models; time-varying models
    JEL: C2 C53 E30
    Date: 2006–12
  11. By: Aloi, Marta; Lloyd-Braga, Teresa
    Abstract: We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.
    Keywords: fluctuations driven by self fulfilling expectations; indeterminacy; international capital movements; international labour movements; unemployment
    JEL: E24 E32 F15 F20
    Date: 2006–12
  12. By: Kilian, Lutz
    Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil in four components is proposed: oil supply shocks driven by political events in OPEC countries; other oil supply shocks; aggregate shocks to the demand for industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about the availability of future oil supplies. The paper quantifies the magnitude and timing of these shocks, their dynamic effects on the real price of oil and their relative importance in determining the real price of oil during 1975-2005. The analysis also sheds light on the origins of the major oil price shocks since 1979. Distinguishing between the sources of higher oil prices is shown to be crucial for assessing the effect of higher oil prices on U.S. real GDP and CPI inflation. It is shown that policies aimed at dealing with higher oil prices must take careful account of the origins of higher oil prices. The paper also quantifies the extent to which the macroeconomic performance of the U.S. since the mid-1970s has been determined by the external economic shocks driving the real price of oil as opposed to domestic economic factors and policies.
    Keywords: oil supply; causality; oil demand; oil price shocks
    JEL: E31 E32 Q43
    Date: 2006–12
  13. By: Marika Karanassou (Queen Mary, University of London and IZA Bonn); Hector Sala (Universitat Autònoma de Barcelona and IZA Bonn); Dennis J. Snower (Institute for World Economics, University of Kiel, CEPR and IZA Bonn)
    Abstract: We distinguish and assess three fundamental views of the labor market regarding the movements in unemployment: (i) the frictionless equilibrium view; (ii) the chain reaction theory, or prolonged adjustment view; and (iii) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short and long run, the hysteresis view implies that all the short-run fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long runs are interrelated, merging with one another along an intertemporal continuum.
    Keywords: unemployment, interactive labor market dynamics, interplay of lags and shocks, frictional growth, growth drivers
    JEL: E22 E24 J21 J30
    Date: 2006–12
  14. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Department of Economics, Uppsala University)
    Abstract: In this paper, we outline a baseline DSGE model which enables a straightforward analysis of wage bargaining between firms and households/unions in a model with both staggered prices and wages. Relying on empirical evidence, we assume that prices can be changed whenever wages are changed. This feature of the model greatly reduces the complexity of the price and wage setting decisions; specifically it removes complicated interdependencies between current and future price and wage decisions. In an application of the model we study the interaction between labor-market institutions and monetary policy choices, and the consequences for welfare outcomes. Specifically, we focus on the relative bargaining power of unions. We find that, for a standard specification of the monetary policy rule, welfare is substantially affected by the degree of relative bargaining power, but that this effect can be neutralized by optimal discretionary policy.
    Keywords: Monetary Policy; Labor Market; Bargaining
    JEL: E52 E58 J41
    Date: 2006–12–01
  15. By: Gregory H. Bauer; Clara Vega
    Abstract: Existing studies using low-frequency data have found that macroeconomic shocks contribute little to international stock market covariation. However, these papers have not accounted for the presence of asymmetric information where sophisticated investors generate private information about the fundamentals that drive returns in many countries. In this paper, we use a new microstructure data set to better identify the effects of private and public information shocks about U.S. interest rates and equity returns. High-frequency private and public information shocks help forecast domestic money and equity returns over daily and weekly intervals. In addition, these shocks are components of factors that are priced in a model of the cross section of international returns. Linking private information to U.S. macroeconomic factors is useful for many domestic and international asset pricing tests.
    Date: 2006
  16. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Ragnar Nymoen (Department of Economics, University of Oslo)
    Abstract: We investigate the importance of employing a valid model for monetary policy analysis. Specifically, we investigate the economic significance of differences in specification and empirical validity of models. We consider three alternative econometric models of wage and price inflation in Norway. We find that differences in model specification as well as in parameter estimates across models can lead to widely different policy recommendations. We also find that the potential loss from basing monetary policy on a model that may be invalid, or on a suite of models, even when it contains the valid model, can be substantial, also when gradualism is exercised as a concession to model uncertainty. Furthermore, possible losses from such a practice appear to be greater than possible losses from failing to choose the optimal policy horizon to a shock within the framework of a valid model. Our results substantiate the view that a model for policy analysis should necessarily be empirically valid and caution against compromising this property for other desirable model properties, including robustness.
    Keywords: Model uncertainty; Econometric modelling; Economic significance; Robust monetary policy.
    JEL: C52 E31 E52
    Date: 2006–12–20
  17. By: Miller, Marcus; Zhang, Lei
    Abstract: Two key issues are examined in an integrated framework: the emergence of global imbalances and the precautionary motive for accumulating reserves. Standard models of general equilibrium would predict modest current account surpluses in the emerging markets if they face higher risk than the US itself. But, with pronounced Loss Aversion in Emerging Markets, their precautionary savings can generate substantial ‘global imbalances’, especially if there is an inefficient supply of global ‘insurance’. A combination of fear and market failure generates imbalances as a general equilibrium outcome. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level: but disequilibrium may result if the required real interest rate is negative. A precautionary savings glut appears to us to be a temporary phenomenon, however, destined for correction as and when adequate reserve levels are achieved. If the process of correction is triggered by ‘Sudden Stop’ on capital flows to the US, might this not lead to 'hard landing' that is forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment.
    Keywords: liquidity trap; loss aversion; stochastic dynamic general equilibrium
    JEL: D51 D52 E12 E13 E21 E44 F32
    Date: 2006–12
  18. By: Lídia Farré-Olalla (University of Alicante); Francis Vella (Georgetown University and IZA Bonn)
    Abstract: This paper analyzes the impact of changes in macroeconomic conditions on the income distribution in Spain. Using household data from the Encuesta Continuada de Presupuestos Familiares (ECPF) from 1985 to 1996, we disentangle the effect of aggregate variables on the income distribution by estimating counterfactual densities conditional on different macroeconomic scenarios. Our empirical approach allows for a flexible relationship between the income level and two constructed indices. The first index captures the influence of individual characteristics while the second captures the role of macroeconomic variables. The contribution of each of these variables to their respective indices is estimated by a semiparametric least squares procedure. We find that although inequality displays a decreasing trend over the earlier part of the period examined, the poor performance of the Spanish economy during the early 1990's appears to have reversed this trend. We also conclude that while inflation appears to have no impact on the distribution of income for the period examined, there were important redistributive roles for unemployment, government expenditure and the level of GDP.
    Keywords: income distribution, aggregate fluctuations, semiparametric estimation
    JEL: D31 E32 C14
    Date: 2006–12
  19. By: Eijffinger, Sylvester C W; Rossi, Alberto
    Abstract: The paper focuses on labor and product market deregulations, as fundamental elements in the passage from an investment to an innovation-based economy. The approach undertaken is prominently empirical. After a very brief description of the regulatory levels on the two sides of the Atlantic, we take two cornerstone theoretical models: one developed by Robert Gordon (1997), the other developed by Blanchard and Giavazzi (2003) and we observe how well their theoretical predictions are supported by hard data. We conclude with an independent study on the accuracy of the IMD competitiveness index in predicting the overall economic performance of countries close to the technological frontier.
    Keywords: employment; growth; IMD competitiveness index; productivity; regulation; unemployment; wages
    JEL: D24 E24 J50 L16
    Date: 2006–12
  20. By: Guillermo A. Calvo
    Abstract: The paper argues that Emerging Market economies (EMs) face financial vulnerabilities that weaken the effectiveness of a domestic Lender of Last Resort (LOLR). As a result, monetary policy is inextricably linked to the state of the credit market. In particular, the central bank should be ready to operate as LOLR during Sudden Stop (of capital inflows) by releasing international reserves in an effective manner. These conditions also impact on optimal monetary policy in normal but high-volatility periods. The paper further argues that during those periods interest rate rules may engender excessive volatility of exchange rates and, thus, that it may be advisable to temporarily supplement those rules by foreign exchange market intervention or outright exchange rate pegging. At a fundamental level, the analysis suggests that the state-of-the-art literature summarized by Woodford (2003) or even more heterodox approaches exemplified by Stiglitz and Greenwald (2003) are likely fall short of providing a satisfactory guide for monetary policy in EMs.
    JEL: E52 E58 F32
    Date: 2006–12
  21. By: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: We make two comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge as a tax on capital income as long as the probability distributions over this wedge in the two representations are the same. In practice, convenience dictates differing probability distributions over this wedge in the two representations. Even so, the quantitative results under the two representations are essentially identical. We also compare our methodology, the CKM methodology, to an alternative one used in Christiano and Davis (2006) as well as by us in early incarnations of the business cycle accounting approach. We argue that the CKM methodology rests on more secure theoretical foundations.
    Date: 2006
  22. By: Spencer D. Krane
    Abstract: Economic activity depends on agents' real-time beliefs regarding the persistence in the shocks they currently perceive to be hitting the economy. This paper uses an unobserved components model of forecast revisions to examine how the professional forecasters comprising the Blue Chip Economic Consensus have viewed such shocks to GDP over the past twenty years. The model estimates that these forecasters attribute more of the variance in the shock to GDP to permanent factors than to transitory developments. Both shocks are significantly correlated with incoming high-frequency indicators of economic activity; but for the permanent component, the correlation is driven by recessions or other periods when activity was weak. The forecasters' shocks also differ noticeably from those generated by some simple econometric models. Taken together, the results suggest that agents? expectations likely are based on broader information sets than those used to specify most empirical models and that the mechanisms generating expectations may differ with the perceived state of the business cycle.
    Date: 2006
  23. By: Mikael Carlsson; Stefan Eriksson; Nils Gottfries
    Abstract: Although search-matching theory has come to dominate labor economics in recent years, few attempts have been made to compare the empirical relevance of search-matching theory to efficiency wage and bargaining theories, where employment is determined by labor demand. In this paper we formulate an empirical equation for net job creation, which encompasses search-matching theory and a standard labor demand model. Estimation on firm-level data yields support for the labor demand model, wages and product demand affect job creation, but we find no evidence that unemployed workers contribute to job creation, as predicted by search-matching theory.
    Keywords: job creation, involuntary unemployment, search-matching, labor demand, competitiveness
    JEL: E24 J23 J64
    Date: 2006
  24. By: Svensson, Mikael (Department of Business, Economics, Statistics and Informatics)
    Abstract: Several recent papers in the literature have documented a pro-cyclical effect between business cycles and mortality: increased mortality in short-term economic upturns. In this paper I explore the relationship between business cycles and mortality in Sweden. The sample consists of 21 Swedish regions during the period 1976 to 2003. Results from the fixed effects panel data estimations indicate that the business cycle effect is insignificant on overall rates of mortality. However, robust results indicate that ischemic heart disease mortality decreases during short-term economic upturns. A one percentage point increase in the employment rate is predicted to decrease ischemic heart disease mortality with approximately 0.8 percent. And the medium-term effects indicates that a one percentage point increase in the average employment rate during the last five years is predicted to decrease ischemic heart disease mortality with approximately 2 percent, which implies an economic value of the decreased mortality from this of about $1,690 million.
    Keywords: Determinants of Health; Mortality; Business cycles
    JEL: E32 I12
    Date: 2006–12–14
  25. By: Vipul Bhatt (Indian Council for Research on International Economic Relations); Arvind Virmani (Indian Council for Research on International Economic Relations)
    Date: 2005–07
  26. By: Edward S. Knotek II
    Abstract: Macroeconomic models with microeconomic foundations face a difficult task: they must be consistent with facts both large and small. This paper proposes a model that combines two strands of the literature on stickiness in order to match both sets of facts. (1) Firms acquire information infrequently, as in Mankiw and Reis (2002), resulting in sticky information. (2) Firms face heterogeneous, fixed menu costs which they must pay to change prices, leading to state-dependent sticky prices at the micro level. I estimate key structural parameters and show that a model of sticky prices in a sticky-information environment is consistent with both micro and macro evidence
    Keywords: Prices
    Date: 2006
  27. By: Ciccone, Antonio; Papaioannou, Elias
    Abstract: Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis.
    Keywords: financial development; growth; investment opportunities; measurement error; sector analysis
    JEL: E23 E44 F30 G10 O40
    Date: 2006–12
  28. By: Peter J. Klenow; Jonathan L. Willis
    Abstract: In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information.
    Keywords: Prices
    Date: 2006
  29. By: Reinhard Hujer (Goethe University of Frankfurt, ZEW Mannheim and IZA Bonn); Christopher Zeiss (Goethe University of Frankfurt)
    Abstract: This paper investigates the macroeconomic effects of short term training measures on the matching processes in West Germany. The empirical analysis is based on regional data for local employment office districts for the period from January 2003 to December 2004. The empirical model relies on a dynamic version of a matching function augmented by short term training measures. In order to obtain consistent estimates in the presence of a dynamic panel data model and endogenous regressors, GMM estimation methods are applied.
    Keywords: training measures, active labor market policy, panel data
    JEL: J64 J24 I28 C41 C14
    Date: 2006–12
  30. By: Christoph Wunder (University of Bamberg); Johannes Schwarze (University of Bamberg, DIW Berlin and IZA Bonn); Gerhard Krug (Institute for Employment Research (IAB)); Bodo Herzog (German Council of Economic Experts)
    Abstract: Using merged data from the British Household Panel Survey (BHPS) and the German Socio- Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.
    Keywords: subjective well-being, euro cash changeover, perceived inflation, difference-in-differences
    JEL: E31 I31
    Date: 2006–12
  31. By: Michael T. Kiley
    Abstract: I estimate sticky-price and sticky-information models of price setting for the United States via maximum-likelihood techniques, reaching several conclusions. First, the sticky-price model fits best, and captures inflation dynamics as well as reduced-form equations once hybrid-behavior is allowed. Second, the importance of hybrid behavior in sticky-price models is potentially consistent with a role for some information imperfections, such as sticky information, as a complement to nominal price rigidities. Finally, the favorable results herein for the hybrid sticky-price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models, as this literature has largely ignored fit in evaluating such models. Many previous studies have focused on ancillary issues, such as the standard errors associated with certain parameters or Granger-causality tests that may not provide much information about sticky-price models.
    Date: 2006
  32. By: António Afonso; Pedro Gomes; Philipp Rother
    Abstract: In this paper we study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. We employ panel estimation and random effects ordered probit approaches to assess the explanatory power of several macroeconomic and public governance variables. Our results point to a good performance of the estimated models, across agencies and across the time dimension, as well as a good overall prediction power. Relevant explanatory variables for a country's credit rating are: GDP per capita, GDP growth, government debt, government effectiveness indicators, external debt, external reserves, and default history.
    Keywords: credit ratings; sovereign debt; rating agencies; panel data; random effects ordered probit.
    JEL: C23 C25 E44 F30 F34 G15 H63
  33. By: George-Marios Angeletos; Alessandro Pavan
    Abstract: In recent years there has been a growing interest in macro models with heterogeneity in information and complementarity in actions. These models deliver promising positive properties, such as heightened inertia and volatility. But they also raise important normative questions, such as whether the heightened inertia and volatility are socially undesirable, whether there is room for policies that correct the way agents use information in equilibrium, and what are the welfare effects of the information disseminated by the media or policy makers. We argue that a key to answering all these questions is the relation between the equilibrium and the socially optimal degrees of coordination. The former summarizes the private value from aligning individual decisions, whereas the latter summarizes the value that society assigns to such an alignment once all externalities are internalized.
    JEL: C72 D62 D82 E3 E5
    Date: 2006–12
  34. By: António Afonso; Pedro Gomes; Philipp Rother
    Abstract: Using ordered logit and probit plus random effects ordered probit approaches, we study the determinants of sovereign debt ratings. We found that the last procedure is the best for panel data as it takes into account the additional cross-section error.
    Keywords: ordered probit; ordered logit; random effects ordered probit; sovereign rating.
    JEL: C25 E44 F30 G15
  35. By: Natacha Gilson
    Abstract: This paper examines the demand and supply shocks observed in the present Eurozone member states and those observed in some neighboring countries. The analysis is based on recent data and each Eurozone member country is compared with an aggregate series corresponding to an area made up of the entire Eurozone minus the country being compared. The results of the study confirm that, even when the series are corrected by removing the country being compared, the disturbances observed in large Eurozone countries are well correlated with the disturbances observed in other Eurozone member countries.
    Keywords: shocks, Eurozone, optimal currency area
    JEL: E42 F31 F33
    Date: 2006
  36. By: Faruqee, Hamid; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
    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.
    Keywords: current account deficit; multi-country DGE models; net asset positions; trade policy
    JEL: E66 F32 F47
    Date: 2006–12
  37. By: Arvind Virmani (Indian Council for Research on International Economic Relations); Surabhi Mittal (Indian Council for Research on International Economic Relations)
    Abstract: The paper looks into the level of integration of commodity markets in India, across centres and states using consumer price data. It measures the extent to which domestic markets for goods in India are integrated, and recommends policy options to facilitate integration. The paper addresses questions: Are domestic markets for goods integrated across states? Has market integration increased over time? What are the policy options to facilitate integration? The paper tests the methodology proposed by Bradford and Lawrence (2004) on the consumer prices of goods in major states across India. This is then repeated using consumer price data at two points in time (1994 and 2004), allowing an assessment of whether Indian markets have integrated over time. Market integration is also tested for individual commodities across markets. The annual consumer prices for commodities were compiled from the Labour Bureau series of average monthly consumer prices of commodities for Industrial workers across 70 constituent centres in 18 states and monthly data was compiled from the Indian Labour Journal, a monthly publication from Labour Bureau, Ministry of Labour Government of India. Authors are thankful to Labour Bureau, Shimla for providing data on consumer prices at the disaggregated level. This study was commissioned by The World Bank as the background paper on market integration in The World Bank Development Policy Review: Inclusive Growth and Service Delivery: Building on India's Success. July 2006
    Keywords: Market Integration, Consumer Prices, Primary Food, Manufactured Goods, India
    JEL: E3 L22
    Date: 2006–07
  38. By: Fernando Alvarez; Marcelo Veracierto
    Abstract: Fixed-term employment contracts have been introduced in number of European countries as a way to provide flexibility to economies with high employment protection levels. We introduce these contracts into the equilibrium search model in Alvarez and Veracierto (1999), a version of the Lucas and Prescott island model, adapted to have undirected search and variable labor force participation. We model a contract of length J as a tax on separations of workers with tenure higher than J. We show a version of the welfare theorems, and characterize the efficient allocations. This requires solving a control problem, whose solution is characterized by two dimensional inaction sets. For J=1 these contracts are equivalent to the case of firing taxes, and for large J they are equivalent to the laissez-faire case. In a calibrated verion of the model, we find that temporary contracts with J equivalent to three years length close about half of the gap between those two extremes.
    JEL: E24 J3 J31 J63 J64 J65
    Date: 2006–12
  39. By: Bibek Debroy (Indian Council for Research on International Economic Relations)
    Date: 2005–06
  40. By: Nathalie Girouard; Mike Kennedy; Christophe André
    Abstract: This paper reviews, for a number of OECD economies, macroeconomic developments in household balance sheets over the past two decades. The main findings show that the rise in household debt to historical levels has been driven by a combination of favourable financial conditions and buoyant housing markets. There have also been a number of supply-side innovations in credit markets that have eased the access to credit for lower income borrowers and reduced financial constraints for first-time homebuyers. Total household net wealth has risen and provided households with a financial cushion against a negative shock. That said, households in a number of countries have leveraged balance sheets and the sensitivity to house price and interest rate developments has likely increased. The paper then examines micro level information which suggests that most of the debt is held by households better able to manage it. In particular, the major part of debt is held by higher-income households, who also spend a smaller proportion of their disposable income servicing debts. Lower-income households, with less ability to service debt, do not hold that much and, as such, the spill over effects from this group to the rest of the economy are perhaps not large. Whether the situation remains benign or not is discussed in the final section of the paper. Estimates presented point to significant effects of changes in net wealth on household saving rates in a large number of the countries studied. <P>Les ménages sont-ils plus vulnérables du fait de leur endettement croissant? <BR>Cette étude examine pour un certain nombre de pays de l’OCDE, l’évolution macroéconomique des bilans des ménages depuis deux décennies. Le fait que l’endettement des ménages, en particulier sous la forme d’emprunts hypothécaires atteigne des niveaux records dans plusieurs pays tient à des conditions financières favorables et au dynamisme du marché du logement. En outre, un certain nombre d’innovations sont apparues du côté de l’offre sur le marché du crédit et ont facilité l’emprunt pour les titulaires de bas revenus tout en allégeant les contraintes financières pour les primo-acquéreurs. De plus, le patrimoine net des ménages a aussi cru et permet de protéger financièrement les ménages en cas de choc négatif. Cela étant, l’effet de levier des ménages semblent important dans plusieurs pays et la sensibilité à l’évolution des prix des logements et des taux d’intérêt s’est probablement accentuée. L'étude analyse ensuite des informations microéconomiques et montrent que la majeure partie de l’endettement est le fait des ménages les mieux à même de le gérer. En particulier, la dette a été surtout contractée par les ménages à revenu élevé, qui affectent une plus faible proportion de leur revenu disponible au service de leur dette. Les ménages à bas revenu, dont la capacité de service de la dette est moindre, ne représentent pas une aussi forte proportion de l’endettement, de sorte que l’impact de la situation de cette catégorie sur le reste de l’économie n’est sans doute pas très marqué. Les conséquences de ce phénomène sont discutées dans la dernière partie de cette étude. Les estimations suggèrent des effets de richesse important sur le taux d'épargne des ménages dans plusieurs pays.
    Keywords: housing market, household debt, household assets, endettement des ménages, actifs des ménages, marché des logements
    JEL: D1 E21
    Date: 2006–12–13
  41. By: Alessandra Guariglia; Sandra Poncet
    Abstract: Using data for 30 Chinese provinces over the period 1989-2003, this study examines the relationship between the level of financial intermediary development, and real GDP growth, physical capital accumulation, and total factor productivity (TFP) growth. We find that traditionally used indicators of financial development and China-specific indicators measuring the level of state interventionism in finance are generally negatively associated with growth and its sources, while indicators measuring the degree of market driven financing in the economy are positively associated with GDP and TFP growth, and capital accumulation. These effects have gradually declined over time and are weaker for high FDI recipients.
    Keywords: Financial intermediation; economic growth; capital accumulation; productivity growth; China
    JEL: E44 G21 N15 O16 O40
    Date: 2006–12
  42. By: David Jamieson Bolder
    Abstract: Modelling term-structure dynamics is an important component in measuring and managing the exposure of portfolios to adverse movements in interest rates. Model selection from the enormous term-structure literature is far from obvious and, to make matters worse, a number of recent papers have called into question the ability of some of the more popular models to adequately describe interest rate dynamics. The author, in attempting to find a relatively simple term-structure model that does a reasonable job of describing interest rate dynamics for risk-management purposes, examines two sets of models. The first set involves variations of the Gaussian affine term-structure model by modestly building on the recent work of Dai and Singleton (2000) and Duffee (2002). The second set includes and extends Diebold and Li (2003). After working through the mathematical derivation and estimation of these models, the author compares and contrasts their performance on a number of in- and out-of-sample forecasting metrics, their ability to capture deviations from the expectations hypothesis, and their predictions in a simple portfolio-optimization setting. He finds that the extended Nelson-Siegel model and an associated generalization, what he terms the "exponential-spline model," provide the most appealing modelling alternatives when considering the various model criteria.
    Keywords: Interest rates; Econometric and statistical methods; Financial markets
    JEL: C0 C6 E4 G1
    Date: 2006
  43. By: Wei Xiong; Hongjun Yan
    Abstract: This paper presents a dynamic equilibrium model of bond markets, in which two groups of agents hold heterogeneous expectations about future economic conditions. Our model shows that heterogeneous expectations can not only lead to speculative trading, but can also help resolve several challenges to standard representative-agent models of the yield curve. First, the relative wealth fluctuation between the two groups of agents caused by their speculative positions amplifies bond yield volatility, thus providing an explanation for the "excessive volatility puzzle" of bond yields. In addition, the fluctuation in the two groups' expectations and relative wealth also generates time-varying risk premia, which in turn can help explain the failure of the expectation hypothesis. These implications, essentially induced by trading between agents, highlight the importance of incorporating heterogeneous expectations into economic analysis of bond markets.
    JEL: E43 G12
    Date: 2006–12
  44. By: Hazan, Moshe
    Abstract: The Ben-Porath (1967) mechanism suggests that prolonging the period during which individuals may receive returns on their investment spurs investment in human capital and causes growth. An important, albeit implicit implication of this mechanism is that the total labour input over a lifetime must increase as longevity does. Otherwise, the incentive to invest in education would not increase. We propose an empirical evaluation of the relevance of this mechanism to the transition from 'stagnation' to 'growth' in today’s developed economies. Specifically, we estimate the expected total lifetime working hours of consecutive cohorts of American men born between 1840 and 1970. Our results show that despite a gain of more than 15 years in life expectancy at the age 5, the expected total lifetime working hours have declined by more than 20 percent between the oldest and youngest cohorts. Furthermore, the similarity in the trends and the magnitudes of the determinants of total lifetime labour input between the US and many European countries suggest that our result is not confined to the US experience; rather, it is a robust feature of the process of development. We conclude that the Ben-Porath mechanism has had no effect on the accumulation of human capital during the growth process of the nineteenth and twentieth centuries.
    Keywords: hours worked; human capital; longevity
    JEL: E20 J22 J24 J26 O11
    Date: 2006–12
  45. By: Niklas Potrafke
    Abstract: This paper examines the effects of political determinants on the allocation of public expenditures. Analyzing an OECD panel from 1990 to 2004, a SURE model controls for the contemporaneous correlation between the different expenditure categories (COFOG). I find that left governments set other priorities than right governments: In particular, they increase spending for "Environment protection", "Recreation; Culture and Religion" and "Education". The number of coalition partners as well as minority governments affects the allocation of public expenditures, too. In contrast, there are no election and pre-election year effects.
    Keywords: Allocation of public expenditures, partisan politics
    JEL: D72 E62 H50
    Date: 2006
  46. By: Gunther Schnabl
    Abstract: Both before and after the Asian crisis, the dollar has been the dominant anchor and reserve currency in East Asia. Due to underdeveloped capital markets and the limited international role of their domestic currencies, the East Asian countries (except Japan) are likely to continue to stabilize exchange rates and to accumulate international reserves. Yet expectations of further dollar depreciation may trigger a re-orientation of exchange rate policies based on basket strategies. Rolling econometric estimations of the basket structures in East Asia suggest growing weights for the Japanese yen in most East Asian currency baskets. The role of the euro as a reserve currency in East Asia remains uncertain.
    Keywords: East Asia, currency basket, exchange rate policies, international role of the euro
    JEL: E58 F31 G15
    Date: 2006
  47. By: Koziarivska Larysa; Oliinyk Andrii
    Abstract: The paper researches into the consequences of the pit reform of 2004 introduced on tax revenues, shadow activities, and income streams. The research approach adopted involves constructing theoretical general equilibrium model adapted to Ukrainian practices and further empirical testing of the hypotheses on the firm-level data. The study leads to inferring that the reform did not stimulate any tangible structural changes in the economy; with no effect on the shadow sector size. As a result of the reform, the government's income in the form of PIT revenues was redistributed to firms. The research shows that under the present conditions no other rate is expected to perform better the existing rate. Within the framework of existing structural ties in the economy it would be beneficial to increase compliance by introducing a more severe punishment for evasion.
    Keywords: Ukraine, tax reform, tax policy, tax evasion, shadow economy, behavioural response
    JEL: D21 E64 H21 H25 H26 H32
    Date: 2006–12–18

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