nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒01‒23
fifty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Ramsey monetary policy with labour market frictions By Ester Faia
  2. Forecast errors and the macroeconomy — a non-linear relationship? By Ulrich Fritsche; Joerg Doepke
  3. Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data By Jean Boivin; Marc Giannoni; Ilian Mihov
  4. The New Keynesian Model and the Long-run Vertical Phillips Curve: Does it hold for Germany? By Ulrich Fritsche; Jan Gottschalk
  5. Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options By Vit Barta
  6. Why should central banks be independent? By Harashima, Taiji
  7. Estimating Time-Varying Policy Neutral Rate in Real Time By Roman Horváth
  8. Structural breaks in the interest rate pass-through and the euro. A cross-country study in the euro area and the UK By Giuseppe Marotta
  9. Quantifying and sustaining welfare gains from monetary commitment By Paul Levine; Peter McAdam; Joseph Pearlman
  10. The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates By Harashima, Taiji
  11. Coordination des Politiques Budgétaires dans une Union Monétaires Hétérogène: Modélisation et Application à l'UEM Coordination of Budgetary Policies in a Heterogeneous Monetary Union: Modelisation and Application By Schalck, Christophe
  12. Debt and the Effects of Fiscal Policy By Carlo Favero; Francesco Giavazzi
  13. Sticky Information Phillips Curves: European Evidence By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  14. Financijska liberalizacija, monetarna i fiskalna politika Europske unije By Mato Grgić; Vlatka Bilas; Hrvoje Šimović
  15. New Keynesian Model Dynamics under Heterogeneous Expectations and Adaptive Learning By Martin Fukac
  16. Understanding the Relationship between Financial Development and Monetary Policy By Luis Carranza; José Enrique Galdón Sánchez; Javier Gómez Biscarri
  17. Regional housing market spillovers in the US - lessons from regional divergences in a common monetary policy setting By Isabel Vansteenkiste
  18. The Dynamics of European Inflation Expectations By Jonas Dovern; Joerg Doepke; Ulrich Fritsche; Jirka Slacalek
  19. The Role of Policy Rule Misspecification in Monetary Policy Inertia Debate By Jiri Podpiera
  20. Discretion rather than rules? When is discretionary policy-making better than the timeless perspective? By Stephan Sauer
  21. Stagnation after Financial Liberalization: The Case of Guyana By Khemraj, Tarron
  22. Makroökonomische Bedingungen für die Rückkehr zur Vollbeschäftigung: Plädoyer für einen mehrdimensionalen Ansatz By Ulrich Fritsche; Erik Klaer; Erik Klaer; Florian Zinsmeister
  23. Some observations about the endogenous money theory By Bertocco Giancarlo
  24. The dynamics of bank spreads and financial structure By Reint Gropp; Christoffer Kok Sørensen; Jung-Duk Lichtenberger
  25. How Homogenous are Currency Crises? A Panel Study Using Multiple-Response Models By Tassos G. Anastasatos; Ian R. Davidson
  26. A Model of Money with Multilateral Matching, Second Version By Manolis Galenianos; Philipp Kircher
  27. Empirical Studies in Consumption, House Prices and the Accuracy of European Growth and Inflation Forecasts By Barot, Bharat
  28. The Store-of-Value-Function of Money as a Component of Household Risk Management By Ingrid Groessl; Ulrich Fritsche
  29. Periodic Unobserved Cycles in Seasonal Time Series with an Application to US Unemployment By Siem Jan Koopman; Marius Ooms; Irma Hindrayanto
  30. Adjusting to the euro By Gabriel Fagan; Vítor Gaspar
  31. Excess Liquidity and the Foreign Currency Constraint: The Case of Monetary Management in Guyana By Khemraj, Tarron
  32. Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan By Emmanuel De Veirman
  33. POLÍTICA MONETARIA Y CAMBIARIA Y ESTABILIDAD DEL TIPO DE CAMBIO EN ALGUNOS PAÍSES EMERGENTES: Hungría, Chile, China, Perú y Brasil By Gloria Alonso; Pilar Esguerra; Luz Adriana Flórez; Franz Hamann; Munir Jalil; Luisa Silva
  34. Efectos de los cambios en la tasa de intervención del Banco de la República sobre la estructura a plazo By Luis Eduardo Arango; Andrés González; John Jairo León; Luis Fernando Melo
  35. Règles Budgétaires et Gestion du Policy-Mix dans l'UEM Budgetary Rules and Management of the Policy-Mix in the UME By Schalck, Christophe
  36. A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II By Roman Kraeussl
  37. Growth Effects of Consumption Jealousy in a Two-Sector Model By Duernecker, Georg
  38. Emerging Asia’s growth and integration - how autonomous are business cycles? By Rasmus Rüffer; Marcelo Sánchez; Jian-Guang Shen
  39. Fiscal Sustainability ů Definition, Indicators and Assessment of Czech Public Finance Sustainability By Ales Krejdl
  40. Currency Crises in Emerging Markets: An Application of Signals Approach to Turkey By Mete Feridun
  41. Globalization, Economic policy and Employment: Poverty and Gender Implications By James Heintz
  44. Are banks special? A note on Tobin’s theory of financial intermediaries. By Bertocco Giancarlo
  45. EL AHORRO DE LOS HOGARES EN COLOMBIA By Ligia Melo B.; Héctor Zárate S.; Juana Tellez C.
  46. Tunisian Financial System: a Growth Factor By Ben Fredj, Imene; Schalck, Christophe
  47. Colombian economic growth under Markov switching regimes with endogenous transition probabilities By Martha Misas; María Teresa Ramírez
  48. Uncertainty and consumption: new evidence in OECD countries By M. Menegatti
  49. Price Points and Price Rigidity By Levy, Daniel; Lee, Dongwon; Chen, Allan (Haipeng); Kauffman, Robert; Bergen, Mark
  50. Finite project life and uncertainty effects on investment By Gryglewicz,Sebastian; Huisman,Kuno J.M.; Kort,Peter M.
  51. Employment Protection Legislation By Anja Deelen; Egbert Jongen; Sabine Visser
  52. How Wages Change: Micro Evidence from the International Wage Flexibility Project By William Dickens; Lorenz Goette; Erica L. Groshen; Steinar Holden; Julian Messina; Mark Schweitzer; Jarkko Turunen; Melanie Ward
  53. Uloga inozemnih izravnih ulaganja i načini poticanja By Vlatka Bilas; Sanja Franc
  54. The U.S. Westward Expansion By Guillaume Vandenbroucke
  55. Supply-Side Performance and Structure in the Czech Republic (1995ů2005) By Kamil Dybczak; Vladislav Flek; Dana Hajkova; Jaromir Hurnik
  56. The Social Security Earnings Test Removal. Money Saved or Money Spent by the Trust Fund? By Giovanni Mastrobuoni
  57. Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises? By Roman Kraeussl
  58. Stress Testing the Czech Banking System: Where Are We? Where Are We Going? By Martin Cihak; Jaroslav Hermanek
  59. Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth By Annamaria Lusardi; Olivia S. Mitchell

  1. By: Ester Faia (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain.)
    Abstract: This paper studies the design of optimal monetary policy (in terms of unconstrained Ramsey allocation) in a framework with sticky prices and matching frictions. Furthermore I consider the role of real wage rigidities. Optimal policy features significant deviations from price stability in response to various shocks. This is so since search externalities generate an unemployment/ inflation trade-off. In response to productivity shocks optimal policy is pro-cyclical when the worker’s bargaining power is higher than the share of unemployed people in the matching technology and viceversa. This is so since when the workers’ share of surplus is high there are many searching workers and few vacancies hence the monetary authority has an incentive to increase vacancy profitability by reducing the interest rate and increasing inflation. The opposite is true when the workers’ share of surplus is high. This implies that optimal inflation volatility is U-shaped with respect to workers’ bargaining power. JEL Classification: E52, E24.
    Keywords: optimal monetary policy, matching frictions, wage rigidity.
    Date: 2007–01
  2. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Joerg Doepke (Fachhochschule Merseburg)
    Abstract: The paper analyses reasons for departures from strong rationality of growth and inflation forecasts based on annual observations from 1963 to 2004. We rely on forecasts from the joint forecast of the so-called "six leading" forecasting institutions in Germany and argue that violations of the rationality hypothesis are due to relatively few large forecast errors. These large errors are shown - based on evidence from probit models - to correlate with macroeconomic fundamentals, especially on monetary factors. We test for a non-linear relation between forecast errors and macroeconomic fundamentals and find evidence for such a non-linearity for inflation forecasts.
    Keywords: forecast error evaluation, non-linearities, business cycles
    JEL: E32 E37 C52 C53
    Date: 2006–02
  3. By: Jean Boivin; Marc Giannoni; Ilian Mihov
    Abstract: This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a "price puzzle," contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions.
    JEL: C3 D2 E31 E4 E5
    Date: 2007–01
  4. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jan Gottschalk (International Monetary Fund)
    Abstract: New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without.
    Keywords: Cointegration, Vector error Correction Model, Unemployment, Phillips Curve, Hysteresis
    JEL: B22 C32 E24
    Date: 2006–04
  5. By: Vit Barta
    Abstract: The purpose of this paper is twofold: firstly, to identify and quantify the potential costs to the Czech economy should fulfilment of the Maastricht inflation criterion (MIC) require disinflation; and secondly, to discuss and suggest policies geared towards minimising the costs related to meeting the MIC. We assume that the real appreciation of the koruna will be about 1.5% during the reference period. Three disinflation simulations are derived from this assumption. The results show that a decline in inflation by 0.5 p.p., 1 p.p. and 1.5 p.p. leads to a cumulative loss of output reaching about 0.5%, 1% and 1.6% respectively of annual potential GDP over a period of four years. The time restriction imposed on the simulations implies that the shorter the time to reach a given lower level of inflation, the higher the initial increase in the interest rate and the more aggressive the policy rule needed. The simulation results and the likely application of the monetary convergence criteria are relevant to the discussion of policy options. We argue that due to the asymmetry of the Maastricht exchange rate criterion (MERC), allowing for nominal appreciation rather than depreciation, fulfilment of the MIC should be superior. Also, we suggest that the main task for the CNB will be to focus on reaching a level of inflation consistent with the presumed level of the MIC sufficiently early before the reference period. This may require a downward adjustment of the CNB’s inflation point target and an extension of the current policy horizon.
    Keywords: Disinflation, EMU entry, euro adoption, Maastricht inflation criterion, policy options, real exchange rate appreciation, output loss.
    JEL: E31 E32 E47 E52 E58 E63
    Date: 2005–12
  6. By: Harashima, Taiji
    Abstract: Most explanations for the necessity of an independent central bank rely on the time-inconsistency model and therefore assume that governments are weak, foolish, or untruthful and tend to cheat people. The model in this paper indicates, however, that an independent central bank is not necessary because governments are weak or foolish. Central banks must be independent because governments are economic Leviathans. Only by severing the link between the political will of a Leviathan government and economic activities is inflation perfectly guaranteed not to accelerate. A truly independent central bank is necessary because it severs this link.
    Keywords: Central Bank Independence; Inflation; The Fiscal Theory of the Price Level; Leviathan; Monetary Policy
    JEL: E61 E63 E52 E58
    Date: 2007–01–15
  7. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic)
    Abstract: This paper examines policy neutral rate in real time for the Czech Republic in 2001:1-2006:09 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply a structural timevarying parameter model with endogenous regressors to evaluate the fluctuations of policy neutral rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the policy neutral rate gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium, equilibrium exchange rate appreciation as well as successful disinflation in the Czech economy.
    Keywords: policy neutral rate; Taylor rule; time-varying parameter model with endogenous regressors
    JEL: E43 E52 E58
    Date: 2007–01
  8. By: Giuseppe Marotta
    Abstract: We search for multiple unknown structural breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the single currency. One break is detected in five EMU countries, two are found in other four, and in the UK as well. The last break occurs much before the event for France, several quarters later for Austria, Germany, Italy and Portugal, and the UK, hinting at best at a loose link with the inception of EMU. Long run pass-throughs decrease (except for France), becoming even more incomplete (except for the Netherlands and the UK); though the adjustment to equilibrium has become faster, cross-country heterogeneity in the euro area has barely changed. An incomplete lending rate pass-through, even in the long run, for the least sticky bank rate and the persistence of cross-country heterogeneity make tougher for the ECB to realize an effective area-wide monetary policy.
    Keywords: Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks
    JEL: E43 E52 E58 F36
    Date: 2006–12
  9. By: Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, United Kingdom.)
    Abstract: The objectives of this paper are - first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household’s utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment - our central estimate is a 0.4 ? 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule. JEL Classification: E52, E37, E58.
    Keywords: Monetary rules, commitment, discretion, welfare gains.
    Date: 2007–01
  10. By: Harashima, Taiji
    Abstract: The Friedman rule is strongly immune to most model modifications although it has not actually been observed. The Friedman rule implicitly assumes that a government is perfectly under the control of the representative household. This paper shows that, if a government is not perfectly under the control of the representative household, but also pursues political objectives, the optimal quantity of money generally is accompanied by positive nominal interest and inflation rates through the simultaneous optimization of government and the representative household. The fact that nominal interest and inflation rates are usually positive conversely implies that a government usually pursues political objectives.
    Keywords: The Optimal Quantity of Money; The Friedman rule; Inflation; The fiscal theory of the price level; Leviathan
    JEL: E42 E41 E51 E63
    Date: 2007–01–16
  11. By: Schalck, Christophe
    Abstract: This paper studies coordination of Fiscal policies in a monetary union in terms of sta- bilization performance. We use a static model of closed monetary union and numerical simulations in which macroeconomic heterogeneities are introduced. Results show that the coordination is an e¢ cient tool to increase EMU stabilization, even though coordin- ation gains greatly varies according to macroeconomic heterogeneities. We then identify coalitions and free riding behaviours.
    Keywords: coordination; hétérogénéités; UEM
    JEL: F42 E61 E63
    Date: 2006–12
  12. By: Carlo Favero; Francesco Giavazzi
    Abstract: Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio are not tracked. We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt. We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular the absence of an effect of fiscal shocks on long-term interest rates - a frequent finding in research based on VAR's that omit a debt feedback - can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable. Using data for the U.S. economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings.
    JEL: E62 H60
    Date: 2007–01
  13. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We estimate the sticky information Phillips curve model ofMankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months.
    Keywords: Inflation expectations, sticky information, Phillips curve, inflation persistence
    JEL: D84 E31
    Date: 2006–10
  14. By: Mato Grgić (Faculty of Economics and Business, University of Zagreb); Vlatka Bilas (Faculty of Economics and Business, University of Zagreb); Hrvoje Šimović (Faculty of Economics and Business, University of Zagreb)
    Keywords: financial liberalization, monetary policy, fiscal policy, the European Union
    JEL: F2 E52 H72
    Date: 2006–12–31
  15. By: Martin Fukac
    Abstract: We analyze the economic dynamics in a basic New Keynesian model adjusted for imperfect, heterogeneous knowledge and adaptive learning. The policy, represented by a forward-looking Taylor rule, is driven by the central bankŽs own internal forecasts, whereas the core economic dynamics are driven by private agentsŽ expectations. We study the implications of disagreement between those two. We find that if there is expectations heterogeneity, monetary policy should be less active in its actions in order to be short-run stability improving, and to affect positively the speed of convergence towards the first best equilibrium in the long run. This is in contrast to the homogeneous incomplete knowledge literature, which predicts the opposite. We also find that the homogeneous expectations economy is easier to operate in for monetary policy, and that policy can be more effective than in the heterogeneous expectations economy. From the perspective of incomplete, heterogeneous knowledge and adaptive learning methodology, we can thus see the importance of good communication policy and monetary policy credibility.
    Keywords: . Imperfect and heterogeneous knowledge, adaptive learning, monetary policy.
    JEL: E52
    Date: 2006–10
  16. By: Luis Carranza (Universidad de Navarra); José Enrique Galdón Sánchez (Universidad Pública de Navarra); Javier Gómez Biscarri (Universidad de Navarra)
    Abstract: In this paper we summarize the results of a broad exploratory empirical analysis where we attempt to relate the level of financial development with the effectiveness of monetary policy. The analysis is based on a panel of sixty plus countries for whom we calculate measures both of financial development and of monetary policy effectiveness. We correlate the above measures and other macroeconomic variables to look for statistically significant relationships between the indicators of financial development, the effectiveness coefficients and other country characteristics. We present our results in the form of a list of stylized facts that deserve to be given future attention. Given the focus of the analysis on financial development, our results have important implications for emerging markets.
    Keywords: Financial Markets, Investment, Emerging Markets, Asymmetry Response of Credit, Lending Rates
    JEL: E44 E52
  17. By: Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the United States. The econometric approach involves an application of the recently developed global VAR (GVAR) as presented in Dées, DiMauro, Pesaran, and Smith (2005) and Pesaran, Schuermann, and Weiner (2004) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks (such as interest rate shocks) on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables — measured as a weighted average of other states —. These individual state models are then linked in a consistent and cohesive manner. Impact elasticities indicate strong interregional linkages for both real house prices and real income per capita. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the United States. JEL Classification: C32, E44, R10, R31.
    Keywords: housing, monetary policy, global VAR (GVAR).
    Date: 2007–01
  18. By: Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin))
    Abstract: We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
    Keywords: Inflation expectations, sticky information, inflation persistence
    JEL: D84 E31
    Date: 2006–07
  19. By: Jiri Podpiera
    Abstract: Operational monetary policy rules are characterized by a parsimonious specification and are therefore prone to specification error when estimated on real data. I devise a policy rule estimation procedure, which is robust to marginal misspecification, and study the effects of specification error in least squares. I find the robust evidence of upward bias in policy inertia in least squares applied to most commonly used Taylor type rule. In effect, least squares learning of a central bank can lead to increasing monetary policy inertia over time.
    Keywords: Monetary policy inertia, policy rule.
    JEL: E4 E5
    Date: 2006–12
  20. By: Stephan Sauer (Seminar for Macroeconomics, University of Munich, Ludwigstrasse 28 Rgb., 80539 Munich, Germany.)
    Abstract: Discretionary monetary policy produces a dynamic loss in the New Keynesian model in the presence of cost-push shocks. The possibility to commit to a specific policy rule can increase welfare. A number of authors since Woodford (1999) have argued in favour of a timeless perspective rule as an optimal policy. The short-run costs associated with the time-less perspective are neglected in general, however. Rigid prices, relatively impatient households, a high preference of policy makers for output stabilisation and a deviation from the steady state all worsen the performance of the timeless perspective rule and can make it inferior to discretion. JEL Classification: E5.
    Keywords: Optimality, Timeless perspective, Policy rules.
    Date: 2007–01
  21. By: Khemraj, Tarron
    Abstract: Despite deep financial reforms, sustained economic growth in Guyana is not forthcoming. The non-competitive nature of the commercial banking sector is proposed as the primary explanation. Non-regulated oligopoly banks will demand mainly excess liquidity, foreign assets, and a diminishing percentage of growth-augmenting investment loans. A monetary growth model is developed to formalize the analysis. The model predicts that a typical financial liberalization program will not engender positive growth if the rates of growth of excess liquidity and foreign assets in bank portfolios exceed the rate of growth of broad money supply. The model also predicts that indirect monetary policy will find it difficult to stimulate growth when the banking system is non-competitive. Therefore, the effect of money on real output can be neutral because of the investment choices of non-competitive banks.
    Keywords: financial liberalization; economic growth; oligopoly banking; indirect monetary policy
    JEL: O11 E5
    Date: 2006–11
  22. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Erik Klaer (German Institute for Economic Research (DIW Berlin)); Erik Klaer (German Institute for Economic Research (DIW Berlin)); Florian Zinsmeister (German Institute for Economic Research (DIW Berlin))
    Abstract: Das Papier untersucht die makroökonomischen Determinanten der Arbeitslosigkeit. Dabei werden die Argumente neoklassisch-monetaristischer, neukeynesianischer und postkeynesianischer Provinienz auf ihren Gehalt sowohl theoretisch wie empirisch überprüft. Das Hauptgewicht der Analyse wird auf die Interaktion von Institutionen, Schocks und Makropolitik gelegt. Ausgehend von den Politikoptionen in dem einheitlichen Währungsraum der EWU-Mitgliedsländer, wird für einen mehrdimensionalen Ansatz der Wirtschaftspolitik plädiert: Angebotsseitige Maßnahmen (Lohnnebenkostensenkung, Gütermarktreformen) sollten durch eine expansivere Geld- und Fiskalpolitik begleitet werden, wobei eine europäisch koordinierte Lohnpolitik flankierend notwendig wäre.
    Keywords: Unemployment, institutions, supply side economics, demand management, monetary policy, fiscal policy, wage policy
    JEL: B22 E24 E61 E63
    Date: 2006–12
  23. By: Bertocco Giancarlo (Department of Economics, University of Insubria, Italy)
    Abstract: The endogenous money theory constitutes the core element of the post-keynesian monetary theory. The first formulation of this theory can be found in the works of Kaldor published in the 1970s. Taking these studies as a starting point, the post-keynesians elaborated two versions of the endogenous money theory which differ in their assumptions about the behaviour of the monetary authorities and the banking system, and hence offer different conclusions about the slope of the money supply curve. The aim of this paper is to evaluate the importance of the endogenous money theory using a criterion which can be defined on the basis of Keynes’s distinction between a real exchange economy and a monetary economy. As is well known, Keynes (1933a, 1933b) uses the former term to refer to an economy in which money is merely a tool to reduce the cost of exchange and whose presence does not alter the structure of the economic system, which remains substantially a barter economy. A monetary economy instead refers to an economic system in which the presence of fiat money radically changes the nature of exchange and the characteristics of the production process. Keynes (1933a, p. 410) notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded and stressed the need to elaborate a ‘monetary theory of production, to supplement the real–exchange theories which we already possess’ (Keynes, 1933a, p. 411). The specification of the elements determining the non-neutrality of money is thus the key factor differentiating Keynes’s theory from the classical one.1 The criterion used to evaluate the significance of the endogenous money theory is whether it enables us to elaborate on and to broaden the explanation of the justification the nonneutrality of money formulated by Keynes. In The General Theory the reasons for the non-neutrality of money are grounded in the store of wealth function of money; the liquidity preference theory is the element on which the keynesian explanation of income fluctuation is based. The importance of the money endogeneity theory can therefore be assessed in relation to its ability to specify determinant factors for the non-neutrality of money that have not been highlighted by the liquidity preference theory; in other words, the significance of the endogenous money theory depends on its capacity to bring out elements of a monetary economy that have been overlooked in the liquidity preference theory. This paper presents the following results. First of all, it shows that the endogenous money theory makes it possible to extend the analysis of the factors accounting for the non-neutrality of money beyond what Keynes has done in The General Theory; in particular this paper argues that the theory of money endogeneity obtains this result by underlying the means of payment function of money. Second, the work shows that the money endogeneity theory gives credence to certain points developed by Keynes in some works published in 1933 and between 1937 and 1939. Third, the work emphasises that the novel aspects of the money endogeneity theory do not depend on the particular version of this theory, i.e. they do not depend on the slope of the credit supply curve. Finally, in the paper the most significant aspects of the money endogeneity theory are presented by means of a theoretical model that distinguishes clearly between the credit market and the money market. It is shown that an important element of the money endogeneity theory is that it elaborates an alternative credit theory to the neoclassical one. The paper is divided into three parts. In the first one, the most relevant aspects of the money endogeneity theory are presented starting from Kaldor’s work, and we bring out the consistency between that theory and the considerations formulated by Keynes in some writings which preceded and followed the publication of The General Theory. In the second part the two versions of the money endogeneity theory are analysed and it is noted that the debate between the supporters of these two versions risks overshadowing the innovative aspects of the money endogeneity theory that do not depend on the slope of the credit and money supply curves. Then in the third part, the aspects that distinguish a monetary economy from a real-exchange economy and that emerge because of the money endogeneity theory are described.
    Date: 2006–02
  24. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany; Corresponding author.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jung-Duk Lichtenberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the dynamics of the pass-through between market interest rates and bank interest rates in the euro area as a function of cyclical and structural differences in the financial system. We find that overall the speed of adjustment for loans is significantly faster than for deposits, and that the pass-through is especially sluggish for demand deposits and savings deposits. Bank soundness, credit risk and interest rate risk are found to exert a significant influence on the speed of pass through. We also find evidence of faster (slower) pass-through for loans (deposits) if the change in monetary policy was up (down). Overall, we find that competition among banks and competition from financial markets result in a faster bank interest rate pass-through. Finally, we find some evidence that financial innovation speeds up the pass-through for those market segments that are most directly affected by these innovations. JEL Classification: E43, G21.
    Keywords: Monetary transmission, banks, retail rates, financial structure.
    Date: 2007–01
  25. By: Tassos G. Anastasatos (Bank of Greece and Business School, University of Loughborough); Ian R. Davidson (Business School, University of Loughborough)
    Abstract: This paper presents evidence that currency episodes display heterogeneity in terms of their evolution, their impact on the inflicted economy and their links with financial, political and macroeconomic fundamentals. Limited-dependent variable models for ordered and unordered outcomes along with their heteroskedastic and random effects extensions are applied to a large panel of data comprising 40 years of monthly observations on 23 developed countries. Heterogeneity, complemented by indications of self-fulfilling expectations and noise, suggest that time and region specific predictive approaches and policy responses are more useful than trying to base analysis and policy decisions on more general patterns. Results are established with formal specification tests.
    Keywords: Money demand; Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models
    JEL: F31 C23 C25 E44 G15
    Date: 2006–12
  26. By: Manolis Galenianos (Department of Economics, Penn State University); Philipp Kircher (Department of Economics)
    Abstract: We develop a model of monetary exchange that avoids several common criticisms of the recent microfoundations literature. First, rather than random matching, we assume that buyers know the location of all sellers, and hence the process of finding a partner is deterministic, although trade is still stochastic since the number of buyers visiting a given seller is random. Second, given multilateral matching, rather than bargaining, we assume that goods are allocated according to second-price auctions. Third, given this mechanism, we do not have to assume agents can observe each other’s money holdings or preferences, as is necessary for tractability with bargaining. A novel result is that homogeneous buyers hold different amounts of money, leading to equilibrium price dispersion. We find the closed-form solution for the distribution of money holdings. We characterize equilibrium and efficient monetary policy.
    Keywords: Search Theory of Money, Budget Constrained Auctions, Friedman Rule
    JEL: E41 D83
    Date: 2005–12–01
  27. By: Barot, Bharat (National Institute of Economic Research)
    Abstract: BAROT, Bharat, This Ph.D. thesis, Empirical Studies in Consumption, House Prices and the Accuracy of European Growth and Inflation Forecasts contains four self-contained chapters:<p><p> Chapter I gives a brief introduction to the topic of the thesis and summarizes the main results. <p><p> Chapter II an aggregated consumption function based on the life cycle hypothesis using the error correction methodology is estimated for Sweden. Wealth in its disaggregated form (financial and housing wealth) is incorporated in the consumption function, along with basic standard explanatory variables including the unemployment variable. Applying Hendry’s general to specific modelling strategy one final model is deduced. The study finds that each of the primary components of wealth has an equal role for consumer’s expenditure. In addition the study finds significant effects from employment and interest rates.<p><p> Chapter III a stock-flow model serves as the theoretical basis for the fundamental determinants of real estate construction and prices. A housing market model for Sweden has been estimated on semi-annual data for 1970-1998 by separately modelling the demand and the supply sides, specified in error correction form. The supply side is based on Tobin’s q-index. The results indicate that even in a turbulent period, Swedish house prices and housing investment are tracked quite well with this specification. The importance of the simulations and their usefulness to Swedish policy makers is discussed. Both ex post and ex ante forecasts using the model gives reasonable results.<p><p> Chapter IV (with Zan Yang), we estimate quarterly dynamic housing demand and investment supply models for Sweden and the UK for the sample period 1970-1998, using an Error Correction Method (ECM). In order to facilitate comparisons of results between Sweden and the UK we model both countries similarly using comparable exogenous variables. The long run income elasticity for Sweden and the UK are both constrained to be equal to one. The long run semi-elasticity for interest rate is 2.1 for Sweden and 0.9 for the UK. The speed of adjustment on the demand side is 12% and 23% for Sweden and the UK, respectively, while on the supply side it is 6% and 48%. Tobin’s q Granger causes housing investment.<p><p> Chapter V (with Lars-Erik Öller), evaluates the one-year ahead forecasts by the OECD and by national institutes of GDP growth and inflation in 13 European countries. RMSE was large 1.9% for growth and 1.6% for inflation. Six (11) OECD and ten (7) institute growth forecasts records were significantly better than an average growth forecast (the current year forecast). All full record-length inflation forecasts were significantly better than both naive alternatives. There were no significant differences in accuracy between the forecasts of the OECD and the institutes. Two forecasts were found to be biased and one had auto-correlated errors.
    Date: 2007–01–12
  28. By: Ingrid Groessl (Department for Economics and Politics, University of Hamburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin)
    Abstract: We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks. given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account.
    Keywords: Money demand, consumption, CRRA, CARA, exponential utility, households, risk, risk management
    JEL: D11 E21 E41
    Date: 2006–12
  29. By: Siem Jan Koopman (Vrije Universiteit Amsterdam); Marius Ooms (Vrije Universiteit Amsterdam); Irma Hindrayanto (Vrije Universiteit Amsterdam)
    Abstract: This paper discusses identification, specification, estimation and forecasting for a general class of periodic unobserved components time series models with stochastic trend, seasonal and cycle components. Convenient state space formulations are introduced for exact maximum likelihood estimation, component estimation and forecasting. Identification issues are considered and a novel periodic version of the stochastic cycle component is presented. In the empirical illustration, the model is applied to postwar monthly US unemployment series and we discover a significantly periodic cycle. Furthermore, a comparison is made between the performance of the periodic unobserved components time series model and a periodic seasonal autoregressive integrated moving average model. Moreover, we introduce a new method to estimate the latter model.
    Keywords: Unobserved component models; state space methods; seasonal adjustment; time–varying parameters; forecasting
    JEL: C22 C51 E32 E37
    Date: 2006–11–20
  30. By: Gabriel Fagan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vítor Gaspar (Banco de Portugal, Avenida Almirante Reis, 71-8o, 1150, Lisboa, Portugal.)
    Abstract: In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects. JEL Classification: F36, E21, F32.
    Keywords: Euro area, interest rate convergence, overlapping generations model.
    Date: 2007–01
  31. By: Khemraj, Tarron
    Abstract: The paper examines why commercial banks in Guyana demand non-remunerated excess reserves, a phenomenon that became prevalent after financial sector reforms. Banks do not invest all excess reserves in a safe foreign asset because the central bank maintains an unofficial foreign currency constraint by accumulating international reserves. This is done within an indirect monetary policy framework. Banks in Guyana do not demand excess reserves for precautionary purposes – which is the conclusion of several other studies – but rather because of the maintained constraint. The estimated sterilisation coefficient is consistent with the hypothesis of an enforced constraint. Hence, the results provide another way of looking at the monetary transmission mechanism.
    Keywords: Excess bank liquidity; monetary policy; Guyana
    JEL: F30 F31 E5
    Date: 2006–12
  32. By: Emmanuel De Veirman
    Abstract: It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, be it moderately negative inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. The broader relevance of our analysis lies in its attempt to shed light on the determinants of such time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore.
    Date: 2007–01
  33. By: Gloria Alonso; Pilar Esguerra; Luz Adriana Flórez; Franz Hamann; Munir Jalil; Luisa Silva
    Abstract: Este documento resume las principales conclusiones del ejercicio realizado con el objetivo de analizar la forma cómo algunos países emergentes, con diversos esquemas de política monetaria, manejan su política cambiaria. La pregunta que suscitó este análisis fue: ¿Cómo han logrado los países analizados mantener un determinado nivel de la tasa de cambio durante un período de tiempo más o menos prolongado? Cada uno de los países analizados aporta algo a este interrogante: en el caso de Hungría, las autoridades han logrado defender con éxito un determinado nivel de la tasa de cambio aún en la presencia de fuertes ataques especulativos. En el caso de la China, sus peculiaridades de organización política e institucional, además de su tamaño, son parte de la explicación. En el caso de Perú y Brasil, sus notorios avances a una disminución de la vulnerabilidad fiscal y externa parecen haber contribuido a una mayor estabilidad cambiaria.
    Keywords: Macroeconomía, Inflación, Tasa de cambio, Balanza de pagos, Vulnerabilidad Externa, Política Monetaria y Política Cambiaria. Classification JEL:E42; E52; E61; E63.
  34. By: Luis Eduardo Arango; Andrés González; John Jairo León; Luis Fernando Melo
    Abstract: Se analizan los efectos de los movimientos de las tasas de intervención del Banco de la República en la estructura a plazo. La evidencia sugiere que, en frecuencia diaria, las reacciones son imperceptibles. Sin embargo, con datos en frecuencia semanal, la evidencia muestra un efecto empinamiento de la curva de rendimientos cuando aumenta la tasa de subastas. Esto puede ser síntoma de que los agentes perciben un nivel importante de transparencia pero una baja credibilidad de la política monetaria. Esto es, que los agentes están esperando más variaciones de la tasa de intervención en el futuro. En cualquier frecuencia, diaria o semanal, y con las tasas spot se cumple la hipótesis de paridad descubierta de intereses con el mecanismo de expectativas seleccionado.
    Keywords: tasas de intervención, estructura a plazo de tasas de interés, hipótesis de paridad descubierta. Classification JEL:E43; E52; F31.
  35. By: Schalck, Christophe
    Abstract: This papper proposes a comparison of EMU's different fisca rules, i.e. the stability and growth Pact, the structural deficit rule and the golden rule. From comparing the economic stabilizing effects and their consistency with the monetaty policy, it concludes that the Pact is better in the case of a supply shock, and the golden rule is better in the case of a demand shock
    Keywords: Règles budgétaires; Policy-Mix; Stabilisation
    JEL: E61 E63
    Date: 2006
  36. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: This paper deals with the proposed use of sovereign credit ratings in the “Basel Accord on Capital Adequacy” (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of international bank credit flows: the impact on capital costs and the volatility of credit supply across the risk spectrum of borrowers. The empirical findings cast doubt on the usefulness of credit ratings in determining commercial banks’ capital adequacy ratios since the standardized approach to credit risk would lead to more divergence rather than convergence between investment-grade and speculative-grade borrowers. This conclusion is based on the lateness and cyclical determination of credit rating agencies’ sovereign risk assessments and the continuing incentives for short-term rather than long-term interbank lending ingrained in the proposed Basel II framework.
    Keywords: Sovereign Risk, Credit Ratings, Basel II
    JEL: E44 E47 G15
  37. By: Duernecker, Georg (Department of Economics, European University Institute, Florence, Italy)
    Abstract: This paper aims at analyzing the implications of individuals’ consumption jealousy on the dynamic structure of a two-sector model economy. We find that status-seeking substantially influences both, the long-term properties and the adjustment behavior of the model. Depending on the status motive, productivity disturbances might induce countercyclical responses of work effort whereas preference shocks are expected to generate an overshooting relative capital intensity. Generally we find that, for empirically plausible values of the intertemporal elasticity of substitution, a higher degree of consumption jealousy induces agents to devote more time to education which stimulates human capital accumulation and hence promotes economic growth.
    Keywords: Status-seeking, Economic growth, Transitional dynamics, Human capital
    JEL: D91 E21 O41
    Date: 2007–01
  38. By: Rasmus Rüffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jian-Guang Shen (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.)
    Abstract: Against the background of the rapid integration of emerging Asia into the global economy, this paper investigates the role of domestic and external factors in driving individual emerging economies in Asia. We estimate VAR models for ten countries over the period 1979Q1-2003Q4, controlling for external factors, and use sign restrictions to identify structural domestic shocks. Variance decompositions indicate that Asian emerging economies are to a large part driven by external developments, and even more so employing a more recent sample. We analyse to what extent structural domestic shocks exhibit a regional dimension by comparing shocks across countries using correlation and principal component analysis. The extent of regional co-movement between structural shocks is relatively limited. While the principal components analysis indicates a moderate increase in co-movement over time, the correlation analysis finds a decline. This may reflect a broadening of regional integration at the expense of bilateral economic ties. JEL Classification: F15, F02, F41.
    Keywords: Economic integration, international business cycles, structural shocks, sign restrictions.
    Date: 2007–01
  39. By: Ales Krejdl
    Abstract: The aim of this paper is to shed some light on what fiscal sustainability actually means. In doing so, it looks in the literature for a definition of fiscal sustainability that not only is theoretically sound, but can also be used for setting fiscal targets in practice. Sustainability is defined in a rather standard way ů fiscal policy is said to be sustainable if the present value of future primary surpluses equals the current level of debt. This definition enables various sustainability indicators to be constructed. A good indicator of fiscal sustainability should signal, with a sufficient lead, excessive debt accumulation. The paper introduces several sustainability indicators varying in how closely they are related to the sustainability definition (the infinite and finite horizon gaps), whether they take account of the future evolution of spending (the primary gap and the tax gap) and what target value of debt is set at the end of a finite horizon. While the indicators can be used for different time horizons ů from one year to an infinite horizon, the paper is by and large focused on long-term sustainability. When combined with long-term projections the indicators gauge the resilience of public finances to population ageing. The indicators are used to assess the sustainability of Czech fiscal policy. The sustainable revenue ratio, enabling the future surge in age-related spending to be financed, is estimated at 48% of GDP in the Czech Republic. It is some 7 percentage points higher than the current revenue-to-GDP ratio. The sustainable primary balance stands at 0.4% of GDP. By observing this primary surplus, governments would stabilise the debt ratio in the long run. However, compliance with this target would require immediately raising taxes or cutting spending by almost 3.0% of GDP and containing any future spending pressures (projected at 7.3% of GDP) either by systemic reforms preventing age-related spending from rising or by annual discretionary spending cuts and tax increases.
    Keywords: . Fiscal sustainability, population ageing, primary gap, sustainability indicators, tax gap.
    JEL: E61 E62 H30 H62 H63
    Date: 2006–10
  40. By: Mete Feridun (Department of Economics, Loughborough University)
    Abstract: This article aims at identifying the leading indicators of currency crises in Turkey in its post-liberalization history through the signals approach introduced by Kaminsky et al (1998). Based on a broad set of potential indicators, a number of variables are found to be persistently signaling the currency crises during the period 1980:01-2006:06. Particularly, variables such as short-term debt/international reserves, imports, exports, M2/international reserves, and current account balance/GDP are consistent with the results of previous work in the literature. Analysis of the average lead time of the indicators reveals that the first signal is issued 4.4 months before a crisis erupts with public debt/GDP offering the longest lead time with 10.2 months, and government consumption/GDP offering the shortest with 2.2 months. Analysis of the persistence of the indicators reveals that the indicator issuing the most persistent signals is the government consumption/GDP and the one issuing the least persistent signals is FDI/GDP. Results are encouraging from the vantage point of an early warning system since signaling, on average, occurs sufficiently early to allow preemptive policy actions.
    Keywords: Speculative attacks; currency crises; signals approach, Turkey.
    JEL: F30 E44
    Date: 2006–12
  41. By: James Heintz
    Abstract: <p style="MARGIN: 0in 0in 0pt" class="MsoNormal"><span style="FONT-SIZE: 8.5pt; FONT-FAMILY: 'Trebuchet MS'">When we speak of the impact of globalization on national and local economies, those economies are actually composed of a wide variety of individuals, each class of whom will be effected differently by large-scale economic forces. In this paper, produced for the U.N.'s International Labour Office, PERI Associate Director James Heintz demonstrates how global labor markets are segmented by gender and how any analysis of the impact of macroeconomic policies on growth, employment and poverty reduction needs to be undertaken with this segmentation in mind. Specifically, Heintz addresses <span style="mso-spacerun: yes"> </span>how macroeconomic policies differentially effect women's and men's employment, looking at monetary policy, trade policy, exchange rate regimes and public sector restructuring. Heintz brings his findings together in recommendations for an alternative policy framework of employment-centered, poverty-reducing development.</span></p><p></p><p style="MARGIN: 0in 0in 0pt" class="MsoNormal"><span style="FONT-SIZE: 8.5pt; FONT-FAMILY: 'Trebuchet MS'"></span></p><p></p><p style="MARGIN: 0in 0in 0pt" class="MsoNormal"><span style="FONT-SIZE: 8.5pt; FONT-FAMILY: 'Trebuchet MS'"></span></p><p></p><p></p><p> </p><p ></p><p> </p><p></p><p></p>
    Keywords: employment, poverty, gender, global integration, economic policy
    JEL: E24 F02 I3 J3
    Date: 2006
  42. By: Grupo Macroeconomía 2006
    Abstract: En este documento se hace una evaluación tanto de las fortalezas de la economía colombiana que contribuirían a la sostenibilidad actual del crecimiento, como de los factores de riesgo y vulnerabilidades que podrían afectarlo negativamente. Con este propósito se compara el desempeño macroeconómico actual con el observado en la década de los noventa, a fin de determinar si los desequilibrios que desembocaron en la crisis de finales de esa década podrían llegar a repetirse. Para obtener mayor precisión en la identificación de riesgos a la sostenibilidad del crecimiento económico actual, el documento presenta proyecciones macroeconómicas para el período 2006-2011, con referencia a un escenario que supone ausencia de choques externos. Sobre esa base se examinan las consecuencias para el crecimiento y la balanza de pagos que se derivarían de choques desfavorables a los términos de intercambio, caída de la demanda mundial y reversión de los flujos de capital. Igualmente se analizan las consecuencias para la sostenibilidad fiscal y para la vulnerabilidad del sistema financiero de choques de esa naturaleza. Con este análisis se busca ofrecer elementos claves de información para las autoridades económicas y agentes del mercado, que contribuyan al afianzamiento de un crecimiento alto y sostenido, a través de la identificación de riesgos que estimulen la prudencia y faciliten la toma oportuna de decisiones.
    Keywords: Crecimiento económico; balanza de pagos; sostenibilidad fiscal; choques externos; vulnerabilidades macroeconómicas Classification JEL:E00; E27; E52; E60; E61; F0 y F43.
  43. By: Claudio Campanale (Universidad de Alicante)
    Abstract: In this paper I present a calibrated model of life-cycle occupation and investment decisions where households choose between paid work and entrepreneurship and conditional on the latter how much of their savings to invest in their business. The returns to entrepreneurial activity are modeled through Bayesian learning. The model is able to reproduce the main stylized facts of entry in and exit out of self-employment over the life-cycle. It also suggests a partial explanation of the recent finding of Moskowitz and Vissing-Jørgensen (2002) that entrepreneurs seem not to require a premium for the extra risk of their private equity investment.
    Keywords: Occupational choice, portfolio choice, entrepreneurship, firm dynamics, learning, private equity premium
    Date: 2007–01
  44. By: Bertocco Giancarlo (Department of Economics, University of Insubria, Italy)
    Abstract: Since the 1960s Tobin has set himself the objective of developing a macroeconomic model more general than that specified by Keynes in The General Theory. Keynes had assumed that all the assets different from money were perfect substitutes; this hypothesis allowed him to explain only one interest rate. On the contrary, Tobin abandons the perfect substitutability hypothesis and elaborates a theoretical model which envisages more than two assets and explicitly deals with financial intermediaries. Moreover Tobin asks himself whether banks play a special role compared with the other intermediaries and elaborates a ‘new view’ which, in contrast with the ‘old view’, maintains that there are no reasons to attribute a special role to the banks. This paper critically analyses Tobin’s theory and presents two results. First, it shows that Tobin’s theory overlooks an important function of banks; a function highlighted by Keynes in some writings which preceded and followed the publications of The General Theory. Second, this work shows that Tobin’s thesis that the specificity of banks does not exist can be confirmed, albeit on different grounds, also taking into account the function of banks that he overlooks. The paper is divided into four parts: in the first one, the most important aspects of the Tobin’s ‘new view’ are described. The limitations of these theoretical approaches are then showed in the second section; in the last two sections the elements of an alternative theory are outlined.y.
    Date: 2006–07
  45. By: Ligia Melo B.; Héctor Zárate S.; Juana Tellez C.
    Abstract: En este documento se presenta un análisis del comportamiento del ahorro de los hogares y sus determinantes, considerando una perspectiva de largo plazo para el periodo 1950-2004 y una de corto plazo a nivel microeconómico, utilizando la información de las encuestas de calidad de vida de 1997 y 2003. A nivel agregado, con base en un análisis de cointegración se encontró una relación de largo plazo entre la tasa de ahorro de los hogares, el PIB per-cápita, los impuestos directos y una medida de profundización financiera. A nivel microeconómico, se realiza un análisis de las tasas de ahorro agrupadas por diferentes características socioeconómicas de los hogares y para diferentes definiciones de ahorro considerando la inversión en capital humano y la compra de bienes durables. Adicionalmente, se presenta un análisis del comportamiento del ahorro a partir de la hipótesis del ciclo de vida, utilizado los perfiles de ahorro por año de nacimiento del jefe del hogar. Los resultados muestran que tanto el ingreso como el consumo registran un comportamiento de U invertida, sugiriendo que para el caso Colombiano no hay evidencia de que se cumpla la hipótesis del ciclo de vida. Finalmente, al comparar los datos de ahorro de los hogares a nivel agregado, con los datos obtenidos a partir de la información de las encuestas se encuentran diferencias que se pueden explicar por razones metodológicas y por el cambio en la distribución de los ingresos y de los gastos registrado entre 1997 y 2003.
    Keywords: Ahorro de los hogares, hipótesis de ciclo de vida, consumo, Colombia. Classification JEL:D12; D19; E01; E21.
  46. By: Ben Fredj, Imene; Schalck, Christophe
    Abstract: The relationship between financial development and economic growth were the subject of many recent theorical and empirical works [Shepherd, Hasan and Klapper, 2004; Gylfason, 2004; Rioja and Valev, 2003; Driffill, 2004; Haas, 2002; Carlin and Mayer, 2000]. These authors generally focused their analysis of the link finance- growth on the mature financial systems. As the Tunisian economy knew a long period of financial repression before starting the phases of liberalization, it would be more judicious to start by McKinnon and Shaw’s theory of “financial deepening” (1973) to then determinate the impact of Tunisian financial system development on economic growth. Indeed, McKinnon and Shaw were the first authors to analyze positive effects of financial liberalization policy on economic performance of less developed countries. To check the relevance of this assumption in Tunisian’s context, we built a model inspired of the model of King and Levine (1993) who by measuring instruments of economic and financial development appears good indicators of Tunisian economy’s financiarisation. The results of the empirical study on Tunisia stemming from causality tests within B-VAR framework nuance McKinnon and Shaw’s theorical contribution. Reciprocal relationships are only finding between the ratio of investment on the GDP and the loans granted to private and public sectors. The economic role of State is highlighted, over the period of pre-reforms as well as during the recent time.
    Keywords: financial repression; financial deepening; economic development; finance and growth; B-VAR
    JEL: O16 E44 G21
    Date: 2004–07
  47. By: Martha Misas; María Teresa Ramírez
    Abstract: In this paper, we modelled the Colombian long run per capita economic growth (1925-2005) using a Markov switching regime model with both fixed (FTP) and time-varying transition probabilities (TVTP) to explain regime changes in the economic growth. We found evidence of non-linearity in the per capita economic growth, and two different levels in the data associated with depression and sustainable growth regimes were identified. In addition, the hypothesis of fixed probabilities is rejected in favour of the time-varying transitional probabilities, meaning that the correct model is the one with endogenous probabilities, when the probability of remaining in the sustainable growth regime increases with a rise in terms of trade, government expenditures and decreases with capital outflows. On the other hand, increases in government expenditures and terms of trade decrease the probability of being in the depression state while an increase in capital outflows raises such probability. Finally, we found that TVTP model gives more information than FTP model because the probabilities have changed significantly during the period under analysis and the explanatory variables are very informative in dating the evolution of the state of the economy, especially those associated with external shocks.
    Keywords: Markov endogenous switching regime model, Time-varying transition probabilities, economic growth, Colombia. Classification JEL: O40; C22; E32; N16.
  48. By: M. Menegatti
    Date: 2006
  49. By: Levy, Daniel; Lee, Dongwon; Chen, Allan (Haipeng); Kauffman, Robert; Bergen, Mark
    Abstract: We offer new evidence on the link between price points and price rigidity using two datasets. One is a large weekly transaction price dataset, covering 29 product categories over an eight-year period from a large U.S. supermarket chain. The other is from the Internet, and includes daily prices over a two-year period for 474 consumer electronic goods covering ten product categories, from 293 different Internet retailers. Across the two datasets, we find that (i) 9 is the most frequently used price-ending for the penny, dime, dollar and the ten-dollar digits, (ii) the most common price changes are in multiples of dimes, dollars, and ten-dollars, (iii) 9-ending prices are at least 24% (and as much as 73%) less likely to change in comparison to prices ending with other digits, and (iv) the average size of the price change is higher if the price ends with 9 in comparison to non-9-ending prices. This link between price points and price rigidity is robust across a wide range of prices, products, product categories, and retail formats. We offer a behavioral explanation for the findings.
    Keywords: Price Point; 9-Ending Price; Price Rigidity; Rational Inattention; E-Commerce
    JEL: M30 E12 L16 M21 D80 E31
    Date: 2007–01–11
  50. By: Gryglewicz,Sebastian; Huisman,Kuno J.M.; Kort,Peter M. (Tilburg University, Center for Economic Research)
    Abstract: This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment. Typically in this literature projects are assumed to be perpetual. However, in today.s economy .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life. The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty. It is shown that this particularly happens when uncertainty is limited and project life is short.
    Keywords: investment;uncertainty;finite project lenght
    JEL: D92 E22 G31
    Date: 2006
  51. By: Anja Deelen; Egbert Jongen; Sabine Visser
    Abstract: Employment protection is a hotly debated topic. In this document we review the theoretical and empirical studies on the impact of employment protection. Subsequently, we confront the findings of these studies with the Dutch setup, and consider a number of reform options.
    Keywords: Employment protection; literature review; economic policy
    JEL: E60 J32 J65 K31
    Date: 2006–12
  52. By: William Dickens (The Brookings Institution); Lorenz Goette (University of Zurich); Erica L. Groshen (Federal Reserve Bank of New York, and IZA); Steinar Holden (University of Oslo, Center for Economic Studies-Information and Forschung Institute (CESifo)); Julian Messina (CSEF, University of Salerno, and European Central Bank); Mark Schweitzer (Federal Reserve Bank of Cleveland); Jarkko Turunen (European Central Bank); Melanie Ward (European Central Bank, and IZA)
    Abstract: How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals’ earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.
    Keywords: Wage setting, Wage change distributions, Downward nominal wage rigidity, Downward real wage rigidity
    JEL: E3 J3 J5
    Date: 2007–01–01
  53. By: Vlatka Bilas (Faculty of Economics and Business, University of Zagreb); Sanja Franc
    Abstract: Osnovna namjera ovog rada je ukazati na važnost inozemnih izravnih ulaganja i njihov utjecaj u suvremenom gospodarstvu kao i objasniti moguće načine poticanja inozemnih ulaganja. Kontinuirani proces integracije svjetske ekonomije doveo je do promjene stavova zemalja primateljica u odnosu na inozemna izravna ulaganja. Na takva ulaganja zemlje u razvoju više ne gledaju sa sumnjom i susprezanjem, a kontrole i restrikcije za ulazak zamijenjene su selektivnim državnim politikama kojima se želi potaknuti njihov priljev. Međutim, nisu sve države u tome jednako uspješne, niti su učinci inozemnih izravnih ulaganja u svim zemljama jednaki. Uspješnost odabrane strategije prije svega ovisi o stupnju ukupnog društvenog i gospodarskog razvitka zemlje, potrebna je sposobnost vlade i domaćih tvrtki da optimalno iskoriste pogodnosti koje inozemna izravna ulaganja nose.
    Keywords: značaj inozemnih izravnih ulaganja, poticanje inozemnih izravnih ulaganja, Hrvatska
    JEL: F F21 E2
    Date: 2006–12–31
  54. By: Guillaume Vandenbroucke (Department of Economics, University of Southern California)
    Abstract: The U.S. economic development in the nineteenth century was characterized by the westward movement of population and the accumulation of productive land in the West. This paper presents a model of migration and land improvement to identify the quantitatively important forces driving this phenomena. Two forces are key: the decrease in transportation costs induced the westward migration, while population growth was responsible for the investment in productive land.
    Keywords: Westward Expansion, Land-improvement, Migration
    JEL: E1 J1 O1
    Date: 2006–12
  55. By: Kamil Dybczak; Vladislav Flek; Dana Hajkova; Jaromir Hurnik
    Abstract: In this paper, we apply the aggregate production function to approximate the path of potential output. We use a time-varying NAIRU to derive the amount of potential labour and a newly developed measure of capital services to account for the productive impact of capital. In addition, trend total factor productivity is estimated. Production functions for the key sectors (Agriculture, Industry, etc.) are also calculated, exploring the growth accounting approach and decomposition of total factor productivity growth. During 1995ů2005, the growth in potential output was constrained by a gradual increase in the NAIRU, a temporary drop in investment activity and, most importantly, by only a modest rise in total factor productivity. In this period, the Czech economy also suffered from a structural burden, i.e. all growth in total factor productivity was exclusively due to better utilisation of resources, given their initial allocation, with an even negative contribution of resource reallocation. Just from 2001 onwards, we observe substantial improvements in supply-side performance, except for the functioning of the labour market.
    Keywords: . Capital services, factor allocation and utilisation, growth accounting, NAIRU, potential output, production function, structural changes, total factor productivity.
    JEL: E23 O11 O12 O47
    Date: 2006–10
  56. By: Giovanni Mastrobuoni (Collegio Carlo ALberto and Center for Research on Pensions and Welfare Policies, Turin)
    Abstract: Beneficiaries of Social Security face restrictions on how much they can earn without incurring the earnings test (ET). In 2000, President Clinton eliminated the ET between age 65 and 70. In this paper I evaluate how this removal impacts the long-term finances of the Trust Fund. I find that starting in 2006 the Social Security Administration is actually saving money and that the removal appears to be Pareto-efficient. A removal of the remaining part of the ET is likely to be even less costly and to produce larger increases in labor supply and contributions.
    Keywords: Pension, Saving
    Date: 2006–09
  57. By: Roman Kraeussl (Center for Financial Studies, Frankfurt am Main, Germany)
    Abstract: Credit rating changes for long-term foreign cur¬rency debt may act as a wake-up call with upgrades and downgrades in one country af¬fecting other financial markets within and across national borders. Such a potential (contagious) rating effect is likely to be stronger in emerging market economies, where institutional investors’ problems of asymmetric information are more present. This empirical study complements earlier research by explicitly examining cross-security and cross-country contagious rating effects of credit rating agencies’ sovereign risk assessments. In particular, the specific impact of sovereign rating changes during the financial turmoil in emerging markets in the latter half of the 1990s has been examined. The results indicate that sovereign rating changes in a ground-zero country have a (statistically) significant impact on the financial markets of other emerging market economies although the spillover effects tend to be regional.
    Keywords: Sovereign Risk, Credit Ratings, Financial Contagion
    JEL: E44 E47 G15
  58. By: Martin Cihak; Jaroslav Hermanek
    Abstract: This note summarizes the various outputs from the CNB research project Stress Testing for Banking Supervision. Previous research notes in this project presented the key stress testing concepts and discussed the design of stress tests in general terms. Since then, the project has generated outputs that were presented, for example, in the CNB's first Financial Stability Report. The note describes the current status of the project by presenting the latest stress test results and by comparing the methodology of these tests with those presented by other central banks. Finally, the note suggests further steps to improve the stress testing program at the CNB, such as strengthening credit risk modeling, including by engaging commercial banks in the exercise. The note is accompanied by an appendix presenting one of the project's outputs, namely a survey of stress testing practices in commercial banks.
    Keywords: Banking system, stress tests
    JEL: G21 G28 E44
    Date: 2005–02
  59. By: Annamaria Lusardi (Dartmouth College); Olivia S. Mitchell (Wharton School, University of Pennsylvania)
    Abstract: We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.
    Keywords: Wealth holdings, housing wealth, lack of planning, literacy, cohort
    JEL: D91 E21
    Date: 2006–11

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