nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒01‒06
thirteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment By Vincent Bodart; Gregory De Walque; Olivier Pierrard; Henri R. Sneessens; Raf Wouters
  2. Stabilizing Inflation in Iceland By Keiko Honjo; Ben Hunt
  3. Calvo Wages in a Search Unemployment Model By Vincent Bodart; Olivier Pierrard; Henri R. Sneessens
  4. Credit Flows, Fiscal Policy, and the External Deficit of Bosnia and Herzegovina By Daniel Kanda
  5. The Myth of Post-Reform Income Stagnation in Brazil By Marcos Chamon; Irineu de Carvalho Filho
  6. Can Good Events Lead to Bad Outcomes? Endogenous Banking Crises and Fiscal Policy Responses By Celine Rochon; Andrew Feltenstein
  7. Making Fiscal Space Happen: Managing Fiscal Policy in a World of Scaled-Up Aid By Xavier Debrun; Theo Thomas; Taline Koranchelian; Isabell Adenauer; Peter S. Heller; Menachem Katz
  8. Do I Have What It Takes? Equilibrium Search with Type Uncertainty and Non-Participation By Armin Falk; David Huffman; Uwe Sunde
  9. What's Driving Investment in China? By Ray Brooks; Steven Barnett
  10. Goal-Independent Central Banks: Why Politicians Decide to Delegate By Christopher W. Crowe
  11. Political Price Cycles in Regulated Industries: Theory and Evidence By Rodrigo Moita; Claudio Paiva
  12. Do local authorities set local fiscal variables to influence population flows? By Fredrik Carlsen
  13. Elements of Optimal Monetary Policy Design By Jerome Vandenbussche

  1. By: Vincent Bodart (Université catholique de Louvain); Gregory De Walque (National Bank of Belgium); Olivier Pierrard (Central Bank of Luxembourg and Université catholique de Louvain); Henri R. Sneessens (Université catholique de Louvain, Université catholique de Lille and IZA Bonn); Raf Wouters (National Bank of Belgium)
    Abstract: In this paper, we propose a search and matching model with nominal stickiness à la Calvo in the wage bargaining. We analyze the properties of the model, first, in the context of a typical real business cycle model driven by stochastic productivity shocks and second, in a fully specified monetary DSGE model with various real and nominal rigidities and multiple shocks. The model generates realistic statistics for the important labor market variables.
    Keywords: DSGE, search and matching, nominal wage rigidity, monetary policy
    JEL: E31 E32 E52 J64
    Date: 2006–12
  2. By: Keiko Honjo; Ben Hunt
    Abstract: This paper provides some empirical estimates on how tightly is it feasible to control inflation in a very small open economy such as Iceland. Estimated macroeconomic models of Canada, Iceland, New Zealand, the United Kingdom, and the United States are used to derive efficient monetary policy frontiers that trace out the locus of the lowest combinations of inflation and output variability that are achievable under a range of alternative monetary policy rules. These frontiers illustrate that inflation stabilization is more challenging in Iceland than in other industrial countries primarily because of the relative magnitudes of the economic shocks.
    Keywords: Efficient policy frontier , monetary policy rules , inflation-output variability tradeoff , policy coordination , Inflation , Iceland , Monetary policy , Economic stabilization , Economic models ,
    Date: 2006–11–28
  3. By: Vincent Bodart (Université catholique de Louvain); Olivier Pierrard (Central Bank of Luxembourg and Université catholique de Louvain); Henri R. Sneessens (Université catholique de Louvain, Université catholique de Lille and IZA Bonn)
    Abstract: RBC models with search unemployment and wage renegotiation generate too much wage volatility and too stable unemployment rate. Shimer (2004) shows that it is possible to reproduce a volatility of unemployment similar to that observed in actual economies by imposing full real wage rigidity. We use a similar model but with Calvo wage contracts and we obtain a microfounded equation of real wage rigidities. The models with full wage flexibility or full wage rigidity are obtained as particular cases. We show that a contract length of about six quarters fits best the observed cyclical properties of wages and unemployment.
    Keywords: search unemployment, Calvo wage, cyclical properties
    JEL: E24 E32 J30 J41
    Date: 2006–12
  4. By: Daniel Kanda
    Abstract: This paper develops and estimates a model of the trade balance of Bosnia and Herzegovina. Credit flows and the fiscal stance are found to play a significant role in determining the trade balance. On this basis the paper discusses the trade-offs between monetary and fiscal policy settings needed to achieve a clear downward path for the large current account deficit of Bosnia and Herzegovina.
    Keywords: Fiscal , monetary , credit , trade balance ,
    Date: 2006–12–18
  5. By: Marcos Chamon; Irineu de Carvalho Filho
    Abstract: This paper uses Engel curves to estimate real income growth in Brazil. The estimated per capita household real income growth in metropolitan areas during 1987-2002 is about 4½ percent per year, well above the "headline" growth of 1½ percent obtained by deflating nominal incomes by the CPI. This suggests a substantial CPI bias during that period, likely owing to one-off effects of trade liberalization and inflation stabilization. The estimated unmeasured gains are higher for poorer households, implying a marked reduction in "real" inequality. This finding challenges the conventional wisdom that post-reform real income growth in Brazil was low.
    Keywords: CPI bias , trade liberalization , inflation stabilization , economic reform , Income , Brazil , Trade liberalization , Inflation , Economic stabilization , Economic reforms , Consumer price indexes ,
    Date: 2006–12–13
  6. By: Celine Rochon; Andrew Feltenstein
    Abstract: In this paper, we study the impact of labor market restructuring and foreign direct investment on the banking sector, using a dynamic general equilibrium model with a financial sector. Numerical simulations are performed using stylized Chinese data, and banks failures are generated through increases in the growth rate of the labor force, a revaluation of the exchange rate or an increase in debt issue to finance the government deficit, as compared to a benchmark scenario in which banks remain solvent. Thus bank failures can result from what might seem to be either beneficial economic trends, or correct monetary and fiscal policies. We introduce fiscal policies that modify relative factor prices by lowering the capital tax rate and increasing the tax rate on labor. Such policies can prevent banking failures by raising the return to capital. It is shown that such fiscal policies are, in the short run, welfare reducing.
    Keywords: Banking failures , fiscal policies , Banking , China , Fiscal policy , Tax rates , Labor markets , Foreign investment , Economic models ,
    Date: 2006–11–29
  7. By: Xavier Debrun; Theo Thomas; Taline Koranchelian; Isabell Adenauer; Peter S. Heller; Menachem Katz
    Abstract: Debt relief and the scaling up of aid to low-income countries should allow for greater fiscal space for expenditure programs to create long-term growth and lower poverty rates. But designing a suitable medium-term fiscal framework that fosters a sustainable delivery of better public services and infrastructure while maintaining a credible commitment to fiscal prudence confronts many challenges. This paper discusses what low-income countries can do to shape fiscal policy frameworks that are ambitious in trying to absorb additional aid while still ensuring longer-term sustainability for government expenditure programs and finances. It suggests what approaches can be used to manage the greater fiscal policy risks associated with a scaled-up aid environment, including coordination with monetary policy. The paper also discusses what institutional changes are needed if donors and countries are to facilitate the implementation of a higher level of aid-financed spending programs.
    Keywords: Aid , fiscal policy , low-income countries , macroeconomic policy , public financial management , Economic assistance , Fiscal policy , Low income developing countries , Economic policy , Public finance ,
    Date: 2006–12–08
  8. By: Armin Falk (IZA, University of Bonn and CEPR); David Huffman (IZA); Uwe Sunde (IZA, University of Bonn and CEPR)
    Abstract: This paper presents a model of the labor market in which unemployed workers are uncertain about their relative ability to find a job. Unsuccessful search induces individuals to revise their beliefs downwards. Once self-confidence is sufficiently low, workers become discouraged and give up on search. This non-stationarity gives rise to structural flows from unemployment to non-participation in equilibrium. In contrast, existing models typically maintain stationarity and appeal to exogenous stochastic shocks to generate transitions from unemployment to non-participation. Our model is based on relaxing a single assumption in a standard matching framework - workers are uncertain about their job finding probability - and yet the model generates a variety of important implications. Our alternative assumption is supported by experimental evidence. The first implication of the model is a declining hazard from unemployment to employment, arising due to erosion of self-confidence in search. Second, because search outcomes are only a noisy signal about ability, some individuals can become overly discouraged and stop search too early due to wrong beliefs. Finally, workers with greater unemployment duration are less confident, and thus have a worse threat point in wage bargaining. Consequentially, they earn lower starting wages even if they are identical in terms of objective productivity. We discuss how the model provides a new, unifying explanation for a variety of important facts from field evidence.
    Keywords: learning, discouraged workers, subjective job finding probabilities
    JEL: E24 J60 J64
    Date: 2006–12
  9. By: Ray Brooks; Steven Barnett
    Abstract: Investment has grown rapidly in China in recent years, reaching more than 40 percent of GDP. Despite good progress on bank and enterprise reforms, weaknesses remain that could contribute to inefficient investment decisions. Manufacturing, infrastructure, and real estate have been the drivers of fixed asset investment. Econometric analysis presented in the paper suggests that manufacturing investment is strongly correlated with firms' liquidity, largely retained earnings. Analysis of residential real estate investment shows that it is weakly correlated with real household income growth and real mortgage interest rates. A policy implication of these findings is that reducing liquidity in firms, for example by requiring state-owned enterprises to pay dividends to the government, and using monetary policy to reduce liquidity increase real interest rates, would slow investment in manufacturing and real estate.
    Keywords: China , investment , capacity , Investment , China , Absorptive capacity , Resource allocation ,
    Date: 2006–11–30
  10. By: Christopher W. Crowe
    Abstract: A motivation for central bank independence (CBI) is that policy delegation helps politicians manage diverse coalitions. This paper develops a model of coalition formation that predicts when delegation will occur. An analysis of policy preferences survey data and CBI indicators supports the predictions. Case studies, drawn from several countries' recent past and the nineteenth-century United States, provide further support. Finally, the model explains why the expected negative relationship between CBI and inflation is not empirically robust: endogenous selection biases the estimated effect towards zero. The data confirm this.
    Keywords: Central bank independence , inflation , coalition formation , treatment effects , Central banks , Inflation , Political economy ,
    Date: 2006–11–17
  11. By: Rodrigo Moita; Claudio Paiva
    Abstract: This paper develops a model of political regulation in which politicians set the regulated price in order to maximize electoral support by signaling to voters a pro-consumer behavior. Political incentives and welfare constraints interact in the model, yielding an equilibrium in which the real price in a regulated industry may fall in periods immediately preceding an election. The paper also provides empirical support for the theoretical model. Using quarterly data from 32 industrial and developing countries over 1978-2004, we find strong statistical and econometric evidence pointing toward the existence of electoral price cycles in gasoline markets.
    Keywords: Political cycle , regulated prices , gasoline prices , Political economy , Price controls , Gasoline prices ,
    Date: 2006–11–27
  12. By: Fredrik Carlsen (Department of Economics, Norwegian University of Science and Technology)
    Abstract: The paper presents an empirical test of local fiscal competition in Norway based on the observation that interregional migration during the business cycle creates very different incentives for rural and urban municipalities to influence population movements. Panel-data evidence is presented suggesting that municipalities indeed attempt to control population flows. The sensitivity of municipal spending and revenue decisions to population movements varies between municipalities in a way that is consistent with the municipalities' incentives to influence location decisions of households.
    Keywords: Fiscal competition; Local government
    JEL: H73 R51
    Date: 2006–09–01
  13. By: Jerome Vandenbussche
    Abstract: The move from individual decision making to committee decision making is widely seen as a major evolution in contemporary central banking. This paper reviews the relevant economics and social psychology literatures with a view to providing some insights into the question of optimal monetary policy committee design. While the preference aggregation literature points to the effect of committee structure on the extent of the time inconsistency problem and its associated costs, the belief aggregation literature analyzes how different committee structures affect the efficiency of information pooling, the process of social influence, and collective accuracy. In conclusion, we highlight the main tradeoffs that the analysis has brought to light and point to directions for future research.
    Keywords: Monetary policy , collective decision making , committees ,
    Date: 2006–12–18

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