nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒01‒14
sixty-four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Productivity shocks and Optimal Monetary Policy in a Unionized Labor Market Economy By Mattesini, Fabrizio; Rossi, Lorenza
  2. How Important is Money in the Conduct of Monetary Policy? By Michael Woodford
  3. The Eventual Failure and Price Indeterminacy of Inflation Targeting By Eagle, David
  4. Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic By Zsolt Darvas; Andrew K. Rose; György Szapáry
  5. The macroeconomic effects of monetary policy and financial crisis By Douch, Mohamed
  6. Les sources des fluctuations marcoéconomiques au Cameroun By ODIA NDONGO, Yves Francis
  7. Positive effects of fiscal expansions on growth and debt By Canale, Rosaria Rita
  8. Monetary Policy under Rule-of-Thumb Consumers and External Habits: An International Empirical Comparison By Dibartolomeo, Giovanni; Rossi, Lorenza; Tancioni, Massimiliano
  9. The Major Functions of the Central Bank By Govori, Fadil
  10. The European and the Greek Business Cycles: Are they synchronized? By Leon, Costas
  11. Estimating demand for money in Jamaica By Canova, Luciano
  12. Micro Vs Macro Explanations of Post-War US Unemployment Movements By Chris Heaton; Paul Oslington
  13. What does a technology shock do? A VAR analysis with model-based sign restrictions By Luca Dedola; Stefano Neri
  14. On the optimality of a GCC Monetary Union: Structural VAR, Common Trends and Common Cycles Evidence By abu-qarn, aamer; abu-bader, suleiman
  15. Are money and consumption additively separable in the euro area? A non-parametric approach By Barry E. Jones; Livio Stracca
  16. An econometric specification of monetary policy dark art By Ielpo, Florian; Guégan, Dominique
  17. A New Method for Combining Detrending Techniques with Application to Business Cycle Synchronization of the New EU Members By Zsolt Darvas; Gábor Vadas
  18. Yapisal Kirilma Altinda Para Talebinin Istikrari: Türkiye Örnegi By Nazif Catik
  19. Sectoral and Industrial Business Cycles By Everts, Martin
  20. Domestic and Global Determinants of the U.S. Inflation Expectations By Efrem Castelnuovo
  21. An Interpretation of An Affine Term Structure Model for Chile By Juan Marcelo, Ochoa
  22. Can Fluctuations of Money (M2) Help Predict Future Fluctuations of Income (GDP)? An Empirical Investigation on Malaysian Data By Feridun, Mete
  23. Comovements in volatility in the euro money market By Nuno Cassola; Claudio Morana
  24. Mathematical Dynamics of Economic Growth as Effect of Internal Savings By Krouglov, Alexei
  25. Coping with People’s Inflation Perceptions During a Currency Changeover By Thomas A. Eife; W. Timothy Coombs
  26. The Basic Dynamics of the Stock of Money and Capital By Sánchez, Julián
  27. Why Are Plant Deaths Countercyclical: Reallocation Timing or Fragility? By Andrew Figura
  28. TIPS Options in the Jarrow-Yildirim model By Henrard, Marc
  29. Exchange rate uncertainty and monetary transmission in the Philippines By Bayangos, V.B.
  30. Daraltici Devalüasyon Hipotezi: Türkiye Üzerine Bir Uygulama By Nazif Catik
  31. The behaviour of producer prices - some evidence from the French PPI micro data By Erwan Gautier
  32. Is There an Exchange Rate Channel in the Forward-Looking Phillips Curve? A Theoretical and Empirical Investigation By Alfred V. Guender; Yu Xie
  33. Contagion Bond Market “Conundrum”: New Factors Explaining Long-term Interest Rates? By Marie Brière; Ombretta Signori; Kokou Topeglo
  34. Credit Growth in Central and Eastern Europe: Convergence or Boom? By Gergely Kiss; Márton Nagy; Balázs Vonnák
  35. Duration of Business Cycles By Everts, Martin
  36. The effect of the MNB’s communication on financial markets By Péter Gábriel; Klára Pintér
  37. Interview with Kenneth Arrow By Dubra, Juan
  38. Asymmetric Price Adjustment in the Small By Levy, Daniel; Chen, Haipeng (Allan); Ray, Sourav; Bergen, Mark
  39. Macroeconomic Evolution after a Production Shock: the Role for Financial Intermediation By Dmitri V. Vinogradov
  40. Inflation and Supply Shocks in Spain: A Regional Approach By Maria A. Caraballo; Carlos Usabiaga
  41. A Comparative Analysis of the Stabilizing Properties of Nominal Income Growth Targeting By Alfred V. Guender
  42. Intrinsic Business Cycles with Pro-Cyclical R&D By Patrick Francois; Huw Lloyd-Ellis
  43. Accounting for the Current Account Behavior in ASEAN-5 By Lau, Evan; Baharumshah, Ahmad Zubaidi; Habibullah, Muzafar Shah
  44. Forecasting Inflation in Developing Nations: The Case of Pakistan By Feridun, Mete
  45. Durable Goods and Household Saving Ratios in the Euro Area By Jukka Jalava; Ilja Kristian Kavonius
  46. Explaining Cyclical Movements in Employment: Creative-Destruction or Changes in Utilization? By Andrew Figura
  47. Gains from Financial Integration in the European Union: Evidence for New and Old Members By Yuliya Demyanyk; Vadym Volosovych
  48. Stability, Global Dynamics and Markov Equilibrium in Models of Economic Growth By García-Belenguer, Fernando
  49. Bank Insolvencies, Regulatory Forbearance and Ambiguity By Dmitri V. Vinogradov
  50. Information Shocks and Precautionary Saving By James Feigenbaum
  51. The Roles of Temptation and Social Security in Explaining Individual Behavior By Alessandro Bucciol
  52. Macroeconomic Impact of Ageing Population in Scotland. A Computable General Equilibrium Analysis. By Katerina Lisenkova; Peter Mcgregor; Nikos Pappas; Kim Swales; Karen Turner; Robert Wright
  53. Some evidence of exchange market pressure in the EU4 countries By Stavarek, Daniel
  54. A Relative Unit Labor Cost: Case of Accession Countries By Josip Tica; Ljubo Jurčić
  55. Equilibrium Exchange Rates in EU New Members: Applicable for Setting the ERM II Central Parity? By Horvath, Roman; Komarek, Lubos
  56. Memory and Asset Pricing Models with Heterogeneous Beliefs By Verbic, Miroslav
  57. “Evaluación económica sectorial de la inversión en la red viaria de gran capacidad: la evidencia de los efectos desbordamiento” By Alvarez, Inmaculada; Delgado, Maria Jesus
  58. How strong is the impact of exports and other demand components on German import demand? Evidence from euro-area and non-euro-area imports By Stirböck, Claudia
  59. Environmental HDV Road Charging for Berlin - Theoretical Considerations and Empirical Estimations By Martin Winter; Christian von Hirschhausen
  60. Creating Composite Indicators with DEA and Robustness Analysis: the case of the Technology Achievement Index By Laurens Cherchye; Wim Moesen; Nicky Rogge; Tom Van Puyenbroeck; Michaela Saisana; A. Saltelli; R. Liska; S. Tarantola
  61. The effectiveness of official intervention in foreign exchange market in Malawi By Simwaka, Kisu
  62. Externalities from International Labor Migration: Efficacy of a Brain Drain Tax in the Euro-Mediterranean Region By Mehmet Tosun
  63. Local Decentralization and Economic Growth: Evidence from U.S. Metropolitan and Non-Metropolitan Regions By George Hammond; Mehmet S. Tosun
  64. Kerangka Kerja Ekonofisika dalam Basel II By Situngkir, Hokky; Surya, Yohanes

  1. By: Mattesini, Fabrizio; Rossi, Lorenza
    Abstract: In this paper we analyze a general equilibrium DSNK model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the natural rate of interest. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.
    Keywords: Optimal Monetary Policy; Unionized Labor Market; Indivisible Labor; Taylor Rule
    JEL: E24 J51 E52 E32 J23 E50
    Date: 2006–06
  2. By: Michael Woodford (Columbia University)
    Abstract: This paper was presented as the 2006 W.A. Mackintosh Lecture at Queen's University. I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long­run relationship between money growth and inflation. (Here I give particular attention to the implications of "two-­pillar Phillips curves" of the kind proposed by Gerlach (2003).) And fourth, I consider reasons why a monetary policy strategy based solely on short-­run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provide a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.
    Keywords: inflation, Phillips curve, monetary policy
    JEL: E50 E52 E58
    Date: 2006–10
  3. By: Eagle, David
    Abstract: In stark contrast to the previous literature, we find that IT leads to price indeterminacy even when the central bank uses a Taylor-like feedback rule to peg the nominal interest rate. We also find that there is no mechanism with IT to determine the current inflation rate or price level. We conclude that the previous literature has either committed mathematical errors involving infinity or misused the non-explosive criterion for ruling out speculative bubbles. To avoid making errors involving infinity, we analyze inflation targeting (IT) in a typical rational-expectations, pure-exchange, general-equilibrium model where the time horizon is arbitrarily large, but finite.
    Keywords: inflation targeting; price determinacy; monetary policy; pegging interest rates; errors of infinity
    JEL: E42 E52 E58
    Date: 2006–11–22
  4. By: Zsolt Darvas (Corvinus University of Budapest); Andrew K. Rose (University of California, Berkeley); György Szapáry (Magyar Nemzeti Bank)
    Abstract: Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht “convergence criteria,” used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.
    Keywords: European, monetary, union, policy, Maastricht, criteria, optimum, Mundell
    JEL: F42
    Date: 2005–08
  5. By: Douch, Mohamed
    Abstract: In this paper we focus on postwar US data and incorporate new nancial measures and monetary policy shocks in a vector autoregression (VAR) system in order to test whether one or the other has any real effect on the economy. We nd econometric evidence that these shocks and events are exogenous, and therefore the exogenous nature of shocks to monetary policy and stock market crashes investigated in this study may help policymakers, especially regarding debates related to eventual relationships between optimal monetary policy and nancial stability.
    Keywords: Financial crisis; monetary policy
    JEL: E5 G1
    Date: 2005–05–01
  6. By: ODIA NDONGO, Yves Francis
    Abstract: This work aims at analysing the dynamics of macroeconomic fluctuations in Cameroon, using a semi-structural VAR to determine the sources of its macroeconomic fluctuations. The results obtained point out that the macroeconomic fluctuations in Cameroon, even though influenced by external shocks, are deeply tributary of internal shocks, notably on public expenses.
    Keywords: macroeconomic fluctuations; economic cycles
    JEL: E61 E32 C51 F10 C5 E37
    Date: 2007–01–03
  7. By: Canale, Rosaria Rita
    Abstract: The aim of this paper is to point out the shortcomings of propositions that deny economic policy any active role and propose a simple model by which public expenditure is still recognised as performing an active and positive function. The core of our thesis is that public deficit, because it actually has positive effects on the rate of growth, does not automatically increase public debt but rather reduces it. These positive effects are greater if the Central Bank’s monetary policy rule does not change. The policy authority has no reason to change its behaviour since there is no strict relation between fiscal expansions and inflation. The smaller the economic weight of the country considered in terms of the whole Monetary Union, the weaker is the link. These conclusions suggest we should rethink the limits imposed by the Stability and Growth Pact to the action of governments and subordinate the possibility of spending to the inflationary effects of deficit on the whole Union.
    Keywords: fiscal policy; monetary union
    JEL: E52 E62
    Date: 2006–04
  8. By: Dibartolomeo, Giovanni; Rossi, Lorenza; Tancioni, Massimiliano
    Abstract: This paper develops a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with rule-of-thumb consumers and external habits. Our theoretical model has a closed-form solution which allows the analytical derivation of its dynamical and stability properties. These properties are analyzed and discussed in the light of their implications for the efficacy and the calibration of the conduct of the monetary policy. The model is then evaluated empirically, employing numerical simulations based on Monte Carlo Bayesian estimates of the structural parameters and impulse response analyses based on weakly identified SVECMs. The estimates are repeated for each of the G7 national economies. Providing single country estimates and simulations, we derive some indications on the relative efficacy of monetary policy and of its potential asymmetric effects resulting from the heterogeneity of the estimated models.
    Keywords: Rule-of-thumb; habits; monetary policy transmission; price puzzle; DSGE New Keynesian model; monetary policy; SVECM and Monte Carlo Bayesian estimators. Rule-of-thumb; habits; monetary policy transmission; price puzzle; DSGE New Keynesian model; monetary policy; SVECM and Monte Carlo Bayesian estimators. Rule-of-thumb; habits; monetary policy transmission; price puzzle; DSGE New Keynesian model; monetary policy; SVECM and Monte Carlo Bayesian estimators.
    JEL: E50 E52 C15 E58
    Date: 2004–12
  9. By: Govori, Fadil
    Abstract: The major functions of the Central Bank are to set and administer monetary policy, by controlling the money supply and interest rates; to act as a lender of last resort to banks through the discount window; to assist in the payments and collections systems, through the check clearing process and the electronic wire transfer of funds; and to regulate commercial banks.
    Keywords: Banking; Central Banking
    JEL: E58 E51 E52
    Date: 2006–11–30
  10. By: Leon, Costas
    Abstract: Recent developments in the business cycle empirical literature for the developed economies show that there is an increasing synchronization of the cycles in the sense that cycles are of approximately equal wave length, and exhibit similar lead-lag patterns and decreasing volatility over time, although this is not a universally accepted view. In this study I employ spectral analysis and a VAR model to evaluate the length, the volatility and the transmission mechanism of stochastic shocks between Greece and the Eurozone for the period 1980-2005 with quarterly data. The results verify that both areas exhibit lower volatility over time. However, synchronization of the cycles in terms of correlation and their transmission mechanism seems to become weaker over time.
    Keywords: Business Cycle Synchronization; Transmission Mechanisms; Eurozone; Greece.
    JEL: E32
    Date: 2006–08–03
  11. By: Canova, Luciano
    Abstract: This paper estimates the money demand function for Jamaica using cointegration method. This approach provides estimates of the long run structural relations and focuses also on the complex short run feedbacks of monetary policy on strategic macro variables.
    Keywords: jamaica; demand for money; cointegration
    JEL: E50
    Date: 2006
  12. By: Chris Heaton (Department of Economics, Macquarie University); Paul Oslington (University of New South Wales)
    Abstract: We consider the contribution of sectoral shocks to post-war US unemployment movements in a dynamic factor framework. Whereas previously published estimates of the contribution of sectoral shocks to unemployment relate to a particular theory of unemployment, our approach is sufficiently general to encompass almost any theory. We estimate our model in the frequency domain and use data on unemployment rather than employment or output. Sectoral shocks are found to account for around half the movements in US unemployment. These shocks tend to be of higher frequency than the common shocks and concentrated in the service and manufacturing sectors. Shock frequencies, sectoral patterns and flows provide some clues to the identity of some of the shocks driving unemployment. In some periods, such as the rise in unemployment in the 1970s, common shocks were dominant, but sectoral shocks have been more important in recent years.
    Keywords: Structural Unemployment, Sectoral vs. Aggregate Shocks, Dynamic Factor Analysis
    JEL: J21 E24 C22
    Date: 2006–09
  13. By: Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefano Neri (Bank of Italy, Via Nazionale, 91 , 00184 Roma, Italy.)
    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 parameterers. 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. JEL Classification: C3, E3.
    Keywords: Technology shocks, DSGE models, Bayesian VAR methods, Identification.
    Date: 2006–12
  14. By: abu-qarn, aamer; abu-bader, suleiman
    Abstract: This paper examines the suitability of the proposed monetary union among the members of the Gulf Cooperation Council (GCC). To do so, we identify the underlying structural shocks that these economies are subject to and assess the extent to which the shocks are symmetric. Additionally, we test for common trends and common business cycles among the GCC economies. We find that while the transitory demand shocks are typically symmetric, the permanent supply shocks are asymmetric. Furthermore, we do not find synchronous long-run and short-run movements in output. Despite the progress that has been made in terms of integration, our findings indicate that the conditions for forming a GCC monetary union have not as yet been met.
    Keywords: Gulf Cooperation Council; GCC; optimal monetary union; cointegration; common cycles; structural VAR
    JEL: F33 F36
    Date: 2006
  15. By: Barry E. Jones (Assistant Professor, Department of Economics, State University of New York at Binghamton, PO Box 6000, Binghamton, NY 13902-6000, USA.); Livio Stracca (Counsellor to the Executive Board, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We propose a numerical test of the non-parametric conditions for additive separability between consumption and real money balances, building on Varian (1983). If additive separability is rejected, then real balances enter into the theoretical IS curve. We test whether or not monetary assets and consumption are additively separable for the euro area using quarterly data from 1991 to 2005. Previous results using a parametric approach suggest that real balances can be excluded from the IS curve. We find that additive separability is violated over this sample period. After 1992, however, violations involve only a few observations and are in some instances related to measurement problems in the data. Overall, our results tend to support the claim that perfect non-separability between consumption and real balances is implausible, but that non-separabilities may not be very important empirically. At the same time, we reject additive separability throughout if we extend the sample period back to the 1980s, a period characterised by higher volatility in inflation and money growth. JEL Classification: C14, C63, E41.
    Keywords: Non-parametric testing, Revealed Preference, Additive Separability, Money, IS Curve.
    Date: 2006–12
  16. By: Ielpo, Florian; Guégan, Dominique
    Abstract: The classical Taylor rules usually do not yield the same estimation error when working in a monthly or a quarterly framework. This brings us to the conclusion that there must be something that monthly Taylor rules can capture and that the quarterly one cannot: we postulate that it simply boils down to the fact that the target rate’s changes are irregularly spaced in time. So as to tackle this issue, we propose to split the target rate chronicle between changes in the target and the associated durations, that is the time spending between two changes in the target rate. In this framework, we propose to consider that changes in rate can be regarded as a real monetary policy decision, whereas the duration period between two changes can be related to a ”wait and see” position or some fine tuning problematic. To show that both these features of monetary policy do not react to the same fundamentals, we propose an econometric understanding of the Fed’s reaction function using a new model derived from financial econometrics that has been proposed by Engle and Russell (2005). We propose to model the changes in target rates with a classical ordered probit and the durations with an autoregressive conditional duration model. We extracted the Fed anticipations regarding inflation and activity using some factor based method, and used these factors as explanatory variables for the changes in rates and the related durations. We show that the target rate level, the scale of the change in target rate and the associated duration do not necessarily react to the same factors and if they do, the impact can be different. This empirical result supports the idea that durations and scale of the change in target rate deserve equal attention when modeling a Central Bank reaction function.
    Keywords: Taylor rule; duration models; probit models; Central Bank expectations; factor based methods.
    JEL: E52 E58
    Date: 2006–03–04
  17. By: Zsolt Darvas (Corvinus University of Budapest); Gábor Vadas (Magyar Nemzeti Bank)
    Abstract: Decomposing output into trend and cyclical components is an uncertain exercise and depends on the method applied. It is an especially dubious task for countries undergoing large structural changes, such as transition countries. Despite their deficiencies, however, univariate detrending methods are frequently adopted for both policy oriented and academic research. This paper proposes a new procedure for combining univariate detrending techniques which is based on revisions of the estimated output gaps adjusted by the variance of and the correlation among output gaps. The procedure is applied to the study of the similarity of business cycles between the euro area and new EU Member States.
    Keywords: combination, detrending, new EU members, OCA, output gap, revision
    JEL: C22 E32
    Date: 2005–08–15
  18. By: Nazif Catik (Department of Economics, Ege University)
    Abstract: (This paper is in Turkish) This study investigates the stability of the relationship between demand for real money, real income, and interest rates in Turkey using quarterly data for the period from 1988:I to 2005: IV. According to conventional stability tests the demand for money is subject to serious parameter instabilities, especially during the periods of economic crises. Zivot and Andrews (1992) unit root tests show the existence of structural breaks in the variables, but the existence of breaks do not change the results obtained from the conventional ADF tests. Although the standard multivariate cointegration analysis reveals a longrun relationship between variables, the evidence of cointegration is not present when a structural break is found in the relationship using Gregory and Hansen (1996) methodology. These findings show that Central Bank of Turkey must be cautious in using monetary aggregates as a potential indicator of monetary policy.
    Keywords: Money Demand, Structural Break, Zivot-Andrews Unit Root Test, Gregory-Hansen Cointegration Test, Para Talebi, Yapisal Kirilma, Zivot-Andrews Birim Kök Testi, Gregory-Hansen Esbütünlesme Testi
    JEL: C32 C41 C52 E41
    Date: 2006–12
  19. By: Everts, Martin
    Abstract: This article calculates the sectoral and industrial business cycles by means of the band-pass filters by Baxter and King (1999) and Christiano and Fitzgerald (2003), to subsequently analyze the correlations between the sectors and industries and the overall economy. It can be shown that the correlations between the business cycles of the sectors and industries and the overall economy differ strongly. The agriculture sector and the industries mining and quarrying, electricity and education for example exhibit almost no correlation with the overall economy; The wholesale and retail as well as the transport industry on the other hand have a high correlation. By means of an analysis of the leading and lagging correlations it can be shown that the wholesale and retail industry leads the overall economy by two quarters. Thus, the wholesale and retail industry can be used as an indicator for the development of the overall economy.
    Keywords: Business Cycle; Correlation; Band-Pass Filter; Sectoral Cycles; Industrial Cycles; Cross-Country Correlation; Monetary Policy; Forecasting
    JEL: E37 E32
    Date: 2006–06
  20. By: Efrem Castelnuovo (University of Padua)
    Abstract: This paper estimates a reduced-form model for the short-term U.S. inflation expectations and assesses the empirical relevance of the role played by some proxies of the business cycle in shaping forecasters’ projections. In particular, we consider both standard indicators of the "domestic" economic slack (such as the U.S. output and unemployment gap) and "global" measures of the business cycle (their G7 counterparts). Two main findings stand out. First, all the measures of economic slack we take into account turn out to be statistically significant when considered one at a time. Second, horserace regressions contrasting domestic and global measures of economic slack favors the latter, i.e. when global indicators are considered, domestic indicators take the wrong sign and lose their significance. These results are robust to the introduction of several additional indicators of inflationary pressures in the empirical model. Rolling regressions confirm our findings also at a subsample level. Overall, our results suggest that further research is needed for better understanding the role played by measures of the international economic slack in predicting the U.S. inflation expectations.
    Keywords: inflation expectations, output gap, unemployment gap, domestic factors, global factors
    JEL: F02 E31 E52 E58 F41
    Date: 2006–12
  21. By: Juan Marcelo, Ochoa
    Abstract: This paper attempts to provide an economic interpretation of the factors that drive the movements of interest rates of bonds of different maturities in a continuous-time no arbitrage term structure model for Chile. The dynamics of yields in the model are explained by two latent factors, namely the instantaneous short rate and its time-varying central tendency. The model estimates suggest that the short end of the yield curve is mainly driven by changes in first latent factor, while long-term interest rates are mainly explained by the second latent factor. Consequently, when examining movements in the term structure, one should think of at least two forces that hit the economy: temporary shocks that change short-term and medium-term interest rates by much larger amounts than long-term interest rates, causing changes in the slope of the yield curve; and long-lived innovations which have persistent effects on the level of the yield curve.
    Keywords: Affine term structure model; yield curve; Kalman filter
    JEL: E20 E44 C33 E43 G12
    Date: 2006–11
  22. By: Feridun, Mete
    Abstract: The paper aims at establishing whether the fluctuations of money help predict future fluctuations of income, that are not already predictable on the basis of fluctuations of income itself or other readily observable variables. For this purpose vector autoregression (VAR) modelling is used to test whether changes in money supply (M2) has any deterministic or predictive content for movements in Income (GDP). The analysis is performed using quarterly macroeconomic data from Malaysia spanning the period between 1980 and 2001. The results suggest that money (M2) and interest rates have information content for future movements in real GDP beyond that contained in past values of GDP itself. This relationship only establishes itself with a fairly long lag. The finding suggests the possibility of making use of the money-income relationship for forecasting purposes.
    Keywords: Vector autoregression (VAR); cointegration; causality
    JEL: A20
    Date: 2006
  23. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Claudio Morana (International Centre for Economic Research (ICER, Torino) and University of Piemonte Orientale, Faculy of Economics and Quantitative Methods, Via Perrone 18, 28100, Novara, Italy.)
    Abstract: This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. Two common long memory factors are found to drive the temporal evolution of the volatility processes. The first factor shows how persistent volatility shocks are trasmitted along the term structure, while the second factor points to excess persistent volatility at the longer end of the yield curve, relative to the shortest end. Finally, impulse response analysis and forecast error variance decomposition point to forward transmission of shocks only, involving the closest maturities. JEL Classification: C14, C63, E41.
    Keywords: Money market interest rates; liquidity effect, realized volatility, fractional integration and cointegration, fractional vector error correction model.
    Date: 2006–12
  24. By: Krouglov, Alexei
    Abstract: Paper introduces mathematical models describing long-time effects of real savings on economic growth. Models are built for single-product and multiple-product economy with market forces presented through the system of ordinary differential equations. Modeling results show a limited long-run economic growth for occasional and constant-rate systematic internal savings, a steady long-run economic growth if acceleration rate of internal savings lies within the proper limit for every industry, and a steady long-run economic decline if acceleration rate of internal savings exceeds the suitable limit for certain industry. Modeling outcome also suggests that a long-run economic growth requires direct investment of internal savings into appropriate investment vehicles with exclusion from savings-investment chain the interest-rate-bearing bank accounts with clear danger of suffering a long-run economic decline in case of violation of the requirement.
    Keywords: Business Fluctuations; Economic Growth; Savings; Investment
    JEL: E32 O41
    Date: 2006–10–15
  25. By: Thomas A. Eife (University of Heidelberg, Department of Economics); W. Timothy Coombs (University of Illinois)
    Abstract: The gap between actual and perceived inflation is one of the more unexpected consequences of the euro changeover in January 2002. In this note we argue that this gap was caused by a lack of preparation and experience of the authorities to appropriately communicate with the public during the changeover. Using principles of crisis communication we identify the mistakes made and give policy recommendations for future changeovers.
    Keywords: crisis communication, transformative explanation, perceived inflation, euro changeover
    JEL: E50 E60 Y80
    Date: 2006–12
  26. By: Sánchez, Julián (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid)
    Abstract: We present in this paper a model that explains the role of the external financing of capital in the evolution of a primitive economy constituted by families and firms. Our aim is to clarify which are the essential financial elements that in more complex and advanced economies could explain the evolution of their financial structures towards fragility. Now we begin studying the stability of the financial structure of a rudimentary economy with endogenous money.
    JEL: E12 G10 E32 E51
  27. By: Andrew Figura
    Abstract: Because plant deaths destroy specific capital with large local economic impacts and potentially important macroeconmic effects, understanding the causes of deaths and, in particular, why they are concentrated in cyclical downturns, is important. The reallocationtiming hypothesis posits that plants suffering adverse permanent demand/productivity shocks delay shutdowns until cyclical downturns when plant capacity is less valuable, while the fragility hypothesis posits that shutdowns occur in downturns because the option value of maintaining the plant through low profitability periods is too small. I show that the effect that a plant’s specific capital has on the timing of plant deaths differs across these two hypotheses and then use this insight to test the hypotheses’ relative importance. I find that fragility is the dominant cause of the countercyclical behavior of plant deaths. This suggests that the endogenous destruction of capital is likely an important amplification and propagation mechanism for cyclical shocks and that stabilization policies have the benefit of reduced capital destruction.
    Keywords: Plant deaths, business cycle
    JEL: E20 E22 E32
    Date: 2006–11
  28. By: Henrard, Marc
    Abstract: An explicit pricing formula for inflation bond options is proposed in the Jarrow-Yildirim model. The formula resembles that for coupon bond options in the HJM model.
    Keywords: Inflation bond option; Jarrow-Yildirim model
    JEL: G13 E31 E43
    Date: 2006–01–10
  29. By: Bayangos, V.B.
    Keywords: exchange rate; monetary transfers; Philippines;
    Date: 2006
  30. By: Nazif Catik (Department of Economics, Ege University)
    Abstract: (This paper is in Turkish) In this paper we have empirically investigated the validity of the contractionary devaluation hypothesis in Turkey by using the Structural VAR methodology developed by Bernanke (1986). The model used in this study shows that, contrary to conventional wisdom, real depreciations have contractionary effects on output. Persistent devaluations have led to high inflation and economic contraction in Turkey. For that reason we have reached the conclusion that foreign trade policy based on the persistent devaluation of real exchange rate will not be efficient to increase export potential of Turkey. Evidences obtained from variance decompositions and impulse response functions imply that there is a very strong pass-through from real exchange rate to inflation. This finding also point out the substantial risks to keep the exchange rate at a competitive level. As a result permanent real devaluation may not be successful unless it is accompanied by appropriate monetary and fiscal policies.
    Keywords: Contractionary Devaluation, Growth, Stuctural VAR, Daraltici Devalüasyon, Büyüme, Yapisal VAR
    JEL: F41 F31
    Date: 2006–11
  31. By: Erwan Gautier (Banque de France, DGEI-DIR-RECFIN 41-1391, 31 rue Croix-des-petits-champs, 75049 Paris Cedex 01, France.)
    Abstract: This paper provides some new empirical features on price setting behaviour for French producers using micro data underlying the producer and business-services price indices over the period 1994-2005. Some crucial methodological issues on the collection of producer prices are raised. Then, the main features of producers'price setting are presented - producer prices are modified quite frequently and by small amounts. A high heterogeneity across sectors is also observed: business-services prices change less often than industrial producer prices. The data lend some support to predictions of both time- and state-dependence models: Taylor contracts are not unusual but prices also respond to the changes in the firm's economic conditions. Nevertheless, time-dependent models are shown to be the most relevant theories to explain the producer price rigidity. JEL Classification: E31, D43, L11, L16.
    Keywords: Price stickiness, price duration, producer price index, frequency of price change.
    Date: 2006–12
  32. By: Alfred V. Guender (University of Canterbury); Yu Xie
    Abstract: This paper shows how the exchange rate affects the price-setting behavior of monopolistically competitive firms in the sticky price framework that gives rise to a forward-looking Phillips Curve at the aggregate level. The open economy Phillips Curve differs from its closed economy counterpart in that the real exchange rate exerts a direct effect on domestic inflation. The exchange rate channel in the Phillips Curve is pivotal in determining the optimal policy setting in an open economy. On balance, we find only scant empirical evidence for the existence of a direct exchange rate channel in the Phillips Curve in a sample of six OECD countries. Indeed, the forward-looking Phillips Curve does not receive much backing from the data. The use of highly aggregated data may account for the poor fit.
    Keywords: Open economy Phillips Curve; Exchange rate channel; Output gap
    JEL: E3 F4
    Date: 2006–12–01
  33. By: Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussel and Credit Agricole Asset Management SGR, Paris.); Ombretta Signori (Credit Agricole Asset Management SGR, Paris.); Kokou Topeglo (Credit Agricole Asset Management SGR, Paris.)
    Abstract: Interest rates behaved highly atypically from 2004 to 2006. While the US central bank raised its policy rate at every meeting, long-term interest rates remained so remarkably stable that Fed Chairman A. Greenspan described their behaviour as a “conundrum.” Comparing long term rates to their theoretical level based on fundamental valuation model, we show that the anomaly was in average 40 bp. Various explanations have been put forward: investors’ changed attitude toward risk, and the rise in US Treasury purchases by different categories of buyers. We show that, if these variables could theoretically be responsible for bond risk premium decline, by incorporating them in a fundamental model of bond rates, they can explain less than half of the anomaly. Their recent changing influence could nevertheless justify their use for prospective analysis of bond rates.
    Keywords: interest rates, central banks, flows of funds, financial markets.
    JEL: E37 E43 E58 G23
    Date: 2006–12
  34. By: Gergely Kiss (Magyar Nemzeti Bank); Márton Nagy (Magyar Nemzeti Bank); Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: Credit to the private sector has been growing very rapidly in a number of Central and Eastern European countries in recent years. The main question is whether this dynamics is an equilibrium convergence process or may rather pose stability risks. Using panel econometric techniques, this paper attempts to identify the equilibrium credit/GDP levels of the new EU countries, disentangling the observed growth into an equilibrium trend and an excess (boom) component. In the paper the pooled mean group estimator was used for its flexibility and efficiency. Using instrumental variable technique we tested whether long run endogeneity affects the consistency. The estimations show that large part of the credit growth in new member states can be explained by the catching-up process, and, in general, credit/GDP ratios are below the levels consistent with macroeconomic fundamentals. However, in Latvia and Estonia credit growth is found to be significantly faster than what would be justified along the equilibrium path.
    Keywords: financial deepening, credit growth, transition economies, panel econometrics, endogeneity bias.
    JEL: E44 O16
    Date: 2006
  35. By: Everts, Martin
    Abstract: In this paper the Bry and Boschan (1971) procedure is modified such that it can be applied to quarterly data in order to recalculate the maximum duration of business cycles. In this way it can be shown that the maximum duration of business cycles constitutes 42 quarters in the United States of America and 49 quarters in the United Kingdom. The large difference to the maximum duration of Burns and Mitchell (1946) makes clear that caution is advisable with the application of the filters by Baxter and King (1999) and Christiano and Fitzgerald (2003). If one chooses the maximum duration too low (high), the amplitude of the medium-term business cycles is underestimated (overestimated) and the variability of the growth rate of the long-term trend is overestimated (underestimated).
    Keywords: Duration; Business Cycles; Dating Turning Points; Non-Parametric Procedure; Minimum Duration; Maximum Duration; Band-Pass Filter
    JEL: E32 E37
    Date: 2006–04
  36. By: Péter Gábriel (Magyar Nemzeti Bank); Klára Pintér (Magyar Nemzeti Bank)
    Abstract: Our paper aims to assess how the Magyar Nemzeti Bank’s communication affects financial asset prices. We find that the central bank plays the most important role in influencing long-term yields. The effect on the exchange rate is less pronounced, while short-term yields are influenced only by the communication related to the exchange rate. Analysing the direction and channels of communication we observe two asymmetries. The central bank is more successful in signalling monetary policy tightening than easing and with the increase of time horizon the written communication gains in importance and dominates the verbal forms.
    Keywords: communication, transmission mechanism.
    JEL: C22 E43 E52
    Date: 2006
  37. By: Dubra, Juan
    Abstract: Arrow argues that the biggest failures of economic theory are: our failure to explain the business cycle; the missing explanations for the size of fluctuations of prices; our failure to explain the causes of growth and of the spread of innovation. He then discusses several of the existing alternatives to the rational expectations paradigm. He tells the story of his dissertation, and how Koopmans wanted to decline his Nobel Prize.Finally, he discusses health care reform, and malaria in Africa.
    Keywords: Health Care; Business Cycles; Fluctuations.
    JEL: D00 D01 G12 E32 I0
    Date: 2005–03
  38. By: Levy, Daniel; Chen, Haipeng (Allan); Ray, Sourav; Bergen, Mark
    Abstract: Analyzing a large weekly retail transaction price dataset, we uncover a surprising regularity—small price increases occur more frequently than small price decreases for price changes of up to about 10 cents, while there is no such asymmetry for larger price changes. The asymmetry holds for the entire sample and for individual categories. We find that while inflation can explain some of the asymmetry, inflation is not the whole story as the asymmetry holds even after excluding inflationary periods from the data, and even for products whose price had not increased over the eight-year period. The findings hold for different measures of inflation and also after allowing for lagged price adjustments. We offer a consumer-based explanation for these findings.
    Keywords: Asymmetric Price Adjustment; Price Rigidity; Rational Inattention; Rational Ignorance;
    JEL: D21 D11 M31 D80 L16 L11 E31
    Date: 2006–11–30
  39. By: Dmitri V. Vinogradov (Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften; Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften)
    Abstract: Financial intermediaries may increase economic efficiency through intertemporal risk smoothing. However without an adequate regulation, intermediation may fail to do this. This paper studies the effects of a production shock in a closed economy and compares abilities of market-based and bank-based financial systems in processing the shock. Unregulated banking system may collapse in absence of a proper regulation. The paper studies several types of regulatory interventions, which may improve the performance of the banking system.
    Keywords: Financial intermediation, overlapping generations, general equilibrium, intertemporal smoothing
    JEL: D50 G21 G28 E44 E53 O16
    Date: 2006–08
  40. By: Maria A. Caraballo; Carlos Usabiaga
    Abstract: This paper analyses the effects of supply shocks on the Spanish inflation rate. Our goal is to determine if there is a homogeneous behaviour across regions with regard to that issue or if, on the contrary, there are regions more inflationary than others. In this sense, this paper tries to throw some light on the causes of the recent increase in the Spanish inflation rate and the relation of this fact with the evolution of oil prices. The methodology applied is based on the seminal paper of Ball and Mankiw (1995). Those authors assume that a good proxy for supply shocks is the third moment of the distribution of changes in relative prices, and show that for no trend inflation regimes the presence of nominal rigidities, like menu costs, implies a positive relationship between inflation and skewness -i.e., the supply shocks-, that is magnified by the variance of the distribution. In order to achieve these goals, we have chosen the 1993-2005 period, given that it fulfils the features required to apply the methodology above mentioned. The data used are the monthly consumer price indexes of each region, disaggregated in 57 categories. As a first stage, we have checked that the skewness of the distribution of changes in relative prices is a good proxy for supply shocks. After that, the relationship between inflation and the higher moments of the distribution is estimated. Moreover, control variables as interest rates and unemployment rates have been introduced. The analysis has been carried out in two ways. On one hand, each region is analysed separately and, on the other hand, we have used panel data techniques in order to test homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to inflation behaviour and that they are vulnerable to supply shocks.
    Date: 2006–08
  41. By: Alfred V. Guender (University of Canterbury)
    Abstract: Given highly persistent cost-push shocks, the relative performance of nominal income growth targeting depends critically on the size of two key parameters. Barring extreme preferences, nominal income growth targeting performs fairly well relative to commitment and pure discretion for small values of the Phillips Curve parameter.
    Keywords: Nominal Income Growth Targeting; Timeless Perspective; Discretion; Standard Commitment
    JEL: E3 E5
    Date: 2006–10–01
  42. By: Patrick Francois (University of British Columbia); Huw Lloyd-Ellis (Queen's University)
    Abstract: Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not redit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time.
    Keywords: Schumpeterian, R&D investment, endogenous cycles, endogenous growth
    JEL: E3 O3 O4
    Date: 2006–01
  43. By: Lau, Evan; Baharumshah, Ahmad Zubaidi; Habibullah, Muzafar Shah
    Abstract: Current account are an endogenous variable that contain information about the behavior of the economics agents and is important for economic policymaking as it gives a broad reflection of the stance of macroeconomics policies. The imbalances in current account are a reflection of the forward-looking, dynamic saving and investment decisions in the intertemporal approach to current account modeling. This study empirically analyzed the anatomy of the dynamic current account behavior for the ASEAN-5 countries using present value model. Despite the simplicity, the statistical computations suggest that the agents behave as the forward-looking rational agents in the face of the shocks in the three out of five economies. This implies that the current account acts as a buffer to smooth the consumption in the presence of shock and optimally smoothing its consumption path for these countries.
    Keywords: Current Account; Present Value Model; Consumption Smoothing; Consumption Tilting.
    JEL: F32 O53 E22
    Date: 2007–01–03
  44. By: Feridun, Mete
    Abstract: This study attempts to outline the practical steps which need to be undertaken to use autoregressive integrated moving average (ARIMA) time series models for forecasting Pakistan’s inflation. A framework for ARIMA forecasting is drawn up. On the basis of insample and out-of-sample forecast it can be concluded that the model has sufficient predictive powers and the findings are well in line with those of other studies. Further, in this study, the main focus is to forecast the monthly inflation on short-term basis, for this purpose, different ARIMA models are used and the candid model is proposed. On the basis of various diagnostic and selection & evaluation criteria the best and accurate model is selected for the short term forecasting of inflation.
    Keywords: Forecasting inflation; ARIMA
    JEL: E10
    Date: 2006
  45. By: Jukka Jalava; Ilja Kristian Kavonius
    Abstract: The purpose of this paper is to estimate the impact of capitalising durable goods on the Euro area (EA) countries? and the EA-aggregate?s household saving ratios and disposable incomes. The reason for this exercise is twofold. Firstly, it is generally accepted that individual households regard consumer durables as assets even though they are not treated as such in the System of National Accounts 1993. Secondly, the issue is related to the definition of household saving ratios; a much discussed topic in previous years. For instance, the U.S. Federal Reserve Board publishes two separate household net saving measures. The difference between these saving ratios is that one is derived by treating expenditure on consumer durables as investments while the other one is compiled by considering them to be household final consumption expenditure as is the present convention. We find that the effect of capitalising consumer durables on EA saving ratios is significant although the impact is lower than it is in the US.
    Keywords: durable good, asset, household consumption, national accounts, saving ratio, disposable income, user cost
    Date: 2006–12–29
  46. By: Andrew Figura
    Abstract: An important step in understanding why employment fluctuates cyclically is determining the relative importance of cyclical movements in permanent and temporary plant-level employment changes. If movements in permanent employment changes are important, then recessions are times when the destruction of job specific capital picks up and/or investment in new job capital slows. If movements in temporary employment changes are important, then employment fluctuations are related to the temporary movement of workers across activities (e.g. from work to home production or search and back again) as the relative costs/benefits of these activities change. I estimate that in the manufacturing sector temporary employment changes account for approximately 60 percent of the change in employment growth over the cycle. However, if permanent employment changes create and destroy more capital than temporary employment changes, then their economic consequences would be relatively greater. The correlation between gross permanent employment changes and capital intensity across industries supports the hypothesis that permanent employment changes do create and destroy more capital than temporary employment changes.
    Keywords: Cyclical Employment Changes, Permanent and Temporary Employment Changes
    JEL: J23 E24
    Date: 2006–11
  47. By: Yuliya Demyanyk (Federal Reserve Bank of St. Louis); Vadym Volosovych (Department of Economics, College of Business, Florida Atlantic University)
    Abstract: We estimate potential welfare gains from financial integration and corresponding better insurance against country-specific shocks to output (risk sharing) for the twenty-five European Union countries. Using theoretical utility-based measures we express the gains from risk sharing as the utility equivalent of a permanent increase in consumption. We report positive potential welfare gains for all the EU countries if they move toward full risk sharing. Ten country-members who joined the Union in 2004 have more volatile or counter-cyclical consumption and output and would obtain much higher potential gains than the longer-standing fifteen members.
    Keywords: EU enlargement, financial integration, welfare gains, risk sharing
    JEL: F15 F36 E32
    Date: 2006–12
  48. By: García-Belenguer, Fernando (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: This paper studies the local and a global dynamics of two-sector models of endogenous growth with economy-wide external effects and taxes on capital and labor. The local analysis classifies the parameter space depending on the number of stationary solutions and local stability of equilibria. Taxes on labor and subsidies to education may determine the existence of poverty traps and indeterminacy. The global analysis shows that if externalities and taxes are not too big then the equilibrium path is monotone and therefore a continuous Markov equilibrium can be defined.
    Keywords: competitive equilibrium; stability; Markov equilibrium; externalities; taxes
    JEL: C62 E62 O41
  49. By: Dmitri V. Vinogradov (Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften; Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften)
    Abstract: Banking regulators often practice forbearance and ambiguity in insolvency resolutions. The paper examines the effects of regulatory forbearance and ambiguity in a context of allocational efficiency. Bailouts, liquidations and their stochastic policy mix lead to suboptimal allocations if banks do not internalize insolvency costs. The policy of forbearance may make banks internalizing such costs and improves the efficiency of intermediation.
    Keywords: Banks, insolvency resolution, forbearance, constructive ambiguity
    JEL: D50 E44 G21 G28
    Date: 2006–09
  50. By: James Feigenbaum
    Abstract: Skinner’s (1988) second-order approximation to the consumption function under CRRA utility is generalized to accomodate any structure of uninsurable income risk. To second order` the expected rate of consumption growth depends on higher moments only through the currently perceived variance of the expected present value of future income. This approximation reveals that precautionary saving is a decreasing function of both the time preceding an income shock and the time remaining in the consumer’s lifespan after information shocks about this income shock. Since these effects oppose each other` the timing of shocks has an ambiguous effect on precautionary saving. In a finite-horizon model` precautionary saving produces a hump-shaped lifecycle profile of mean consumption primarily because the variance of future income decreases with age` but the lifecycle dynamics of total wealth also affect the shape of the profile. For a Markov income process with autocorrelations on the order of 0.9 or less` the second-order approximation performs surprisingly well for common parameter choices from the literature` but it does poorly as the autocorrelation approaches 1.
    JEL: E20
    Date: 2006–12
  51. By: Alessandro Bucciol (University of Padua)
    Abstract: I simulate a life-cycle model with preferences described by a utility function a' la Gul and Pesendorfer (2001). I show that temptation to consume contributes to explain the saving, retirement consumption, and asset allocation puzzles. I perform two analyses, with and without Social Security protection, separately for the US and Italy. The pension replacement rate is endogenous in the model and varies with income realizations. The results also show that the optimal behavior differs remarkably between the two countries when Social Security is considered. In particular, the more generous Italian system depresses savings and investments of more tempted individuals.
    JEL: D91 E21 G11
    Date: 2006–12
  52. By: Katerina Lisenkova; Peter Mcgregor; Nikos Pappas; Kim Swales; Karen Turner; Robert Wright
    Abstract: This paper combines a multi-period economic Computable General Equilibrium (CGE) modelling framework with a demographic model to analyse the macroeconomic impact of the projected demographic trends in Scotland. Demographic trends are defined by the existing fertility-mortality rates and the level of annual net-migration. We employ a combination of a demographic and a CGE simulation to track the impact of changes in demographic structure upon macroeconomic variables under different scenarios for annual migration. We find that positive net migration can cancel the expected negative impact upon the labour market of other demographic changes. (Pressure on wages, falling employment). However, the required size of the annual net-migration is far higher than the current trends. The policy implication suggested by the results is that active policies are needed to attract migrants. We nevertheless report results when varying fertility and mortality assumptions. The impact of varying those assumptions is rather small.
    Date: 2006–08
  53. By: Stavarek, Daniel
    Abstract: This paper estimates the exchange market pressure (EMP) on currencies of EU4 countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2005. Therefore, it is one of a very few studies focused on this region and the very first paper applying the model-dependent approach to the EMP estimation on these countries. Moreover, the model proposed by Spolander (1999) is used in the paper along with quarterly data. Thus, this paper, tests the suitability of this model for the countries analysed. Regarding the results obtained, EMP is of similar magnitude in all countries except Poland. We found that EMP was significantly lower and less volatile during the periods when a floating exchange rate arrangement was applied than in periods with fixed exchange rates. It implies that unavoidable entry into ERM II (a quasi-fixed regime) could lead to the EMP increase during the period of the exchange rate stability criterion fulfilment. Hence, a revision of the current definition and understanding of the criterion fulfilment is suggested. Since the model estimation was burdened by some factors reducing the estimates validity we also propose some modifications and extensions of the methodology applied.
    Keywords: market pressure; Central Europe; model-dependent approach; exchange rate stability criterion
    JEL: E58 F31
    Date: 2006–09
  54. By: Josip Tica (Faculty of Economics and Business, University of Zagreb); Ljubo Jurčić (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper, framework of the relative labor cost has been used in order to analyze relative competitiveness of the economic agents in the Croatia and five accession countries. Therefore, unit labor costs have been calculated for the Croatia, Czech Republic, Hungary, Poland, Slovakia and Slovenia. All of the analyzed countries are transition countries, on the similar level of GDP per capita, and are or will be in the near future EU members. Therefore, it is more than obvious that all of the analyzed countries will be direct competitors in the common European markets. Our findings suggest that relative unit costs (competitiveness) of Croatia vis a vis analyzed countries increased since 1996.
    Keywords: competitiveness, relative unit labor costs, productivity, wages, employment
    JEL: F41 E24
    Date: 2006–11–27
  55. By: Horvath, Roman; Komarek, Lubos
    Abstract: In this paper we discuss the estimation and methodology of the real equilibrium exchange rate partial equilibrium models and analyze to what extent the resulting estimates are applicable for setting the central parity prior to ERM II entry in the new EU member states. Given the uncertainty surrounding the estimates, we argue that they are informative in the sign rather than the size of the misalignment of the exchange rate, but may still serve as useful consistency checks for the decision on the setting of the central parity. We argue that policy makers should consider the estimates in their decision-making only if the real exchange rate is substantially misaligned.
    Keywords: Equilibrium Exchange Rate; ERM II; EU New Member States
    JEL: E58 E61 C52 F31 C53
    Date: 2006–10–20
  56. By: Verbic, Miroslav
    Abstract: The paper discusses the role of memory in asset pricing models with heterogeneous beliefs. In particular, we were interested in how memory in the fitness measure affects stability of evolutionary adaptive systems and survival of technical trading. In order to obtain an insight into this matter two cases were analyzed; a two-type case of fundamentalists versus contrarians and a three-type case of fundamentalists versus opposite biases. It has been established that increasing memory strength has a stabilizing effect on dynamics, though it is not able to eliminate speculative traders’ short-run profit seeking behaviour from the market. Furthermore, opposite biases do not seem to lead to chaotic dynamics, even when there are no costs for fundamentalists. Apparently some (strong) trend extrapolator beliefs are needed in order to trigger chaotic asset price fluctuations.
    Keywords: asset pricing; biased beliefs; contrarians; fitness measure; fundamentalists; heterogeneous beliefs; memory strength; stability
    JEL: G12 E32 C02 C62 C61
    Date: 2006–08–15
  57. By: Alvarez, Inmaculada (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid); Delgado, Maria Jesus (Departamento de Economía Aplicada II y Fundamentos del Análisis Económico. Universidad Rey Juan Carlos I)
    Abstract: La red viaria de gran capacidad constituye un instrumento fundamental de vertebración territorial que genera importantes efectos económicos. Son escasos, sin embargo, los trabajos dedicados a su análisis, principalmente por la falta de series de este tipo de capital con cobertura temporal y geográfica suficiente. En este documento se ha utilizado una estimación de este componente del capital público productivo, realizada por las autoras para las regiones españolas, desde el año 1970 hasta el 1998, para evaluar el impacto económico sectorial de esta infraestructura. Los resultados muestran el positivo y significativo impacto de este equipamiento en el sector privado de la economía, siendo las actividades agrarias y las industriales las que se han beneficiado del desarrollo de esta infraestructura en España.
    Keywords: Red de Gran Capacidad; Capital Público; Método del Inventario Permanente
    JEL: E22 H54 R49
  58. By: Stirböck, Claudia
    Abstract: This paper presents a single error-correction analysis of German total, euro-area (intra) and non-euro-area (extra) import demand for the 1980-2004 period and the more recent 1993-2004 period. German import demand is mainly driven by domestic demand and foreign demand for German goods; by contrast, the price sensitivity of German imports is low. We note a greater propensity to import with respect to an increase in investment compared to a rise in consumption, yet find that export goods have the highest marginal import content. The influence of export demand on the German economy’s import demand is growing, with the marginal propensity to import being higher for extra imports than for intra imports; in addition, the reagibility of the former has intensified perceptibly since the 1990s. The price sensitivity of intra imports is not only higher but, unlike that of extra imports, is also significant and has increased at the current end.
    Keywords: Import demand intra and extra euro-area imports import content, single equation error-correction
    JEL: C22 E20 F41
    Date: 2006
  59. By: Martin Winter (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin); Christian von Hirschhausen (Chair of Energy Economics and Public Sector Management, Technische Universität Dresden)
    Abstract: Our paper estimates the effects of an environmentally-oriented, time-differentiated road charging system for heavy duty vehicles (HDV) in Berlin. We develop a network based simulation model, which explicitly takes into account the interdependence between HDV and passenger car traffic. The model covers the whole metropolitan area. Our estimations of traffic effects are based on our own estimates of trip demand elasticities, as well as on data taken from other recent studies. Three main effects of the HDV toll are estimated: The potential reductions of air pollution, noise and congestion. The welfare effects of diminished air pollution due to lower traffic levels are computed, taking into account Berlin specific fleet emission data. For the valuation of noise effects we apply the Impact- Pathway-Approach: changes of health risks due to changes in traffic levels are calculated and expressed in monetary terms, using an immission model, dose-response-functions, and monetary values from other studies. In addition, we estimate the welfare effects of reduced congestion due to fewer trips, a changed routing behaviour and subsequent higher average speeds. It is concluded that while there is a social surplus of a Berlin city charge for HDV (about 25 million €), it may be smaller than the installation and operation cost of such a system.
    Keywords: North-South, growth model, innovation assimilation
    JEL: E32 R10
  60. By: Laurens Cherchye; Wim Moesen; Nicky Rogge; Tom Van Puyenbroeck; Michaela Saisana; A. Saltelli; R. Liska; S. Tarantola
    Abstract: Composite indicators are regularly used for benchmarking countries’ performance, but equally often stir controversies about the unavoidable subjectivity that is connected with their construction. Data Envelopment Analysis helps to overcome some key limitations, viz., the undesirable dependence of final results from the preliminary normalization of sub-indicators, and, more cogently, from the subjective nature of the weights used for aggregating. Still, subjective decisions remain, and such modelling uncertainty propagates onto countries’ composite indicator values and relative rankings. Uncertainty and sensitivity analysis are therefore needed to assess robustness of final results and to analyze how much each individual source of uncertainty contributes to the output variance. The current paper reports on these issues, using the Technology Achievement Index as an illustration.factor is more important in explaining the observed progress.
    Keywords: composite indicators, aggregation, weighting, Internal Market
    JEL: E13 E60 F02 O47
    Date: 2006
  61. By: Simwaka, Kisu
    Abstract: The Malawi Kwacha was floated in February 1994. Since then, the Reserve Bank of Malawi has periodically intervened in the foreign exchange market. This paper analyses the effectiveness of foreign exchange market interventions carried out by the Reserve Bank of Malawi. We use a GARCH (1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi kwacha. Using monthly exchange rates and official intervention data from January 2002 to February 2006, the empirical results suggest that intervention activities of the Reserve Bank of Malawi affect the kwacha. In line with similar findings elsewhere in the literature, the paper finds that net sales of dollars by the Reserve Bank of Malawi depreciate, rather than appreciate, the kwacha. This effect is very small, however. Moreover, the paper also finds that the Reserve Bank of Malawi intervention reduces the volatility of the kwacha. This shows that the Reserve Bank actually achieves its objective of smoothing out fluctuations of the kwacha. This can be evidenced by the stability of the kwacha during a greater part of 2004. Thus intervention is, to some extent, used as an effective tool for moderating fluctuations of the kwacha. However, its effectiveness is constrained by the amounts of foreign exchange reserves, which are usually low.
    Keywords: Official intervention; foreign exchange market; garch model
    JEL: E58
    Date: 2006–11–20
  62. By: Mehmet Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This paper uses a two-region, two-period overlapping generations model with international labor mobility to examine the efficacy of using tax policy to internalize the externalities created by international labor migration. While a brain drain tax has a substantial limiting effect on labor migration and a small negative effect on per worker growth, it is found to be a viable solution to the negative externality problem. It is also found that the brain-drain tax can raise substantial tax revenue for the SMCs which could be used to enhance human capital in the region.
    Keywords: International labor mobility, brain-drain tax, population aging, overlapping generations, endogenous tax policy, Euro-Mediterranean region
    JEL: E62 F22 H23 H24 H41
    Date: 2006–12
  63. By: George Hammond; Mehmet S. Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This paper extends the recent empirical literature on the relationship between local decentralization and growth using data from both metropolitan and non-metropolitan regions in the U.S. The analysis utilizes both metropolitan and non-metropolitan regions, and thus avoids the possible selection bias present in previous research. The results for non-metropolitan regions indicate a relatively weak or negative relationship between the local decentralization measures and local economic growth compared to a positive relationship suggested by a recent study on metropolitan regions. Results for the non-metro regions also suggest that there are different impacts across population and income than we observe for metropolitan regions.
    Keywords: Decentralization, metropolitan, non-metropolitan, economic growth
    JEL: E62 H7 R11
    Date: 2006–11
  64. By: Situngkir, Hokky; Surya, Yohanes
    Abstract: The paper elaborates some analytical opportunities for econophysics in the implementation of Basel II documents for banking. We see this chances by reviewing some methodologies proposed by the econophysicists in the three important aspects of risk management: the market risk, credit risk, and operational risk.
    Keywords: risk management; econophysics; Basel II.
    JEL: G23 E51 H55 D81 C52 G32
    Date: 2006–06–07

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