nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒01‒28
fifty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Anticipated Raw Materials Price Shocks and Monetary Policy Response - A New Keynesian Approach By Wohltmann, Hans-Werner; Winkler, Roland
  2. Optimal Monetary and Fiscal Policy in an Economy with Non-Ricardian Agents By Michal Horvath
  3. Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts By Dixon, Huw; Kara, Engin
  4. Macroeconomic imbalances and exchange rate regime shifts By Post, Erik
  5. The macroeconomic effects of exogenous fiscal policy shocks in Germany: a disaggregated SVAR analysis By Heppke-Falk, Kirsten H.; Tenhofen, Jörn; Wolff, Guntram B.
  6. Does Inflation Targeting Matter for EMEs? By René Cabral
  7. US imbalances: the role of technology and policy By Rudolfs Bems; Luca Dedola; Frank Smets
  8. The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates By Harashima, Taiji
  9. Anticipated Growth and Business Cycles in Matching Models By Den Haan, Wouter; Kaltenbrunner, Georg
  10. Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting By Eagle, David
  11. The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan By Kilian, Lutz; Manganelli, Simone
  12. Is Numerairology the Future of Monetary Economics? Unbundling numeraire and medium of exchange through a virtual currency and a shadow exchange rate By Willem H. Buiter
  13. Macroeconomic fluctuations and the firms' rate of growth distribution: evidence from UK and US quoted companies By Emiliano Santoro
  14. Strategic Wage Bargaining, Labor Market Volatility, and Persistence By Matthias S. Hertweck
  15. Monetary Policy in a Small Open Economy with a Preference for Robustness By Dennis, Richard; Leitemo, Kai; Söderström, Ulf
  16. Explaining Asset Prices with External Habits and Wage Rigidities in a DSGE Model. By Harald Uhlig
  17. An Evolutionary Theory of Inflation Inertia By Alexis Anagnostopoulos; Omar Licandro; Italo Bove; Karl Schlag
  18. Term structure of interest rate. european financial integration. By Hortènsia Fontanals; Elisabet Ruiz; Catalina Bolancé
  19. Excess Liquidity in Guyana: Theoretical and Policy Implications By Khemraj, Tarron
  20. Evaluating An Estimated New Keynesian Small Open Economy Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  21. Inventories, Fluctuations and Business Cycles. Working paper #4 By Louis J. Maccini; Adrian Pagan
  22. Sustainability of EU fiscal policies, a panel test By Peter Claeys
  23. Technological change and the demand for currency: An analysis with household data By Lippi, Francesco; Secchi, Alessandro
  24. Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics By Aubhik Khan; Julia Thomas
  25. Exchange Rate Pass-Through in ASEAN: Implications for the Prospects of Monetary Integration in the Region By Carlos Cortinhas
  26. Fiscal Implications of Emigration By Johansson, Lars
  27. The Economic Impact of Central Bank Transparency: A Survey By Eijffinger, Sylvester C W; van der Cruijsen, Carin A B
  28. Backing, the Quantity Theory, and the Transition to the U.S. Dollar, 1723-1850 By Peter L. Rousseau
  29. Structural Breaks and the Demand for Money in Fiji By Rao, B. Bhaskara; Kumar, Saten
  30. Business Cycle Analysis and VARMA models By Christian Kascha; Karel Mertens
  31. How good are dynamic factor models at forecasting output and inflation? A meta-analytic approach By Eickmeier, Sandra; Ziegler, Christina
  32. Cointegration, structural breaks and the demand for money in Bangladesh By Rao, B. Bhaskara; Kumar, Saten
  33. A Neoclassical Analysis of the Postwar Japanese Economy By Keisuke Otsu
  34. Uncertainty and the Dynamics of R&D By Nick Bloom
  35. Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model By Parantap Basu; Christoph Thoenissen
  36. Reflections on Colombia's plan for economic growth 2019 (in Spanish) By Lopez Gonzalez, Mauricio; Mesa Callejas, Ramon Javier
  37. S-Curve Redux: On the International Transmission of Technology Shocks. By Zeno Enders; Gernot J. Mueller
  38. Consumption Smoothing and Income Redistribution By Bertola, Giuseppe; Koeniger, Winfried
  39. Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model By Kilponen , Juha; Kinnunen , Helvi; Ripatti , Antti
  40. Does trade openness increase firm-level volatility? By Buch, Claudia M.; Döpke, Jörg; Strotmann, Harald
  41. Employment Protection, Firm Selection, and Growth By Markus Poschke
  42. Pricing to Habits and the Law of One Price By Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
  43. Australia’s underground economy – redux? By Breusch, Trevor
  44. Regionalwährungen in Deutschland – Lokale Konkurrenz für den Euro? By Rösl, Gerhard
  45. The Effect of Seasonal Adjustment on the Properties of Business Cycle Regimes By Antonio Matas-Mir; Denise R. Osborn; Marco Lombardi
  46. The Productivity Paradox and the New Economy: The Spanish Case By Jesús Rodríguez López; Diego Martínez López; José Luis Torres Chacón
  47. Transparence et Efficacité de la Politique Monétaire. By Romain Baeriswyl; Camille Cornand
  48. On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables. Working paper #7 By Adrian Pagan; Hashem Pesaran
  49. Trade, Envy and Growth: International Status Seeking in a Two-Country World By Simone Valente
  50. Reforming China’s Exchange Rate Policy By John Ryan
  51. Production Structure and Economic Fluctuations By Tommaso Ciarli; Marco Valente
  52. Oil Dependence and Economic Instability By Luís Francisco Aguiar-Conraria; Yi Wen
  53. Model-free Measurement of Exchange Market Pressure By Franc Klaassen; Henk Jager
  54. Los resultados macroeconómicos y la posición relativa de la economía argentina: 1875-2000 By Isabel Sanz Villarroya
  55. Finance and Efficiency: Do Bank Branching Regulations Matter? By Acharya, Viral V; Imbs, Jean; Sturgess, Jason
  56. Skewed Libor Market Model and Gaussian HJM explicit approaches to rolled deposit options By HENRARD, Marc

  1. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the dynamic effects of anticipated raw materials price increases for small open oil-dependent economies and investigates the con- sequences of several monetary policy rules in response to commodity price shocks. Based on a calibrated New Keynesian open economy model the analysis shows that anticipated increases in the price of oil will involve oil- dependent economies both in temporary inflation and deflation as well as in output expansion and contraction. Compared to an interest rate Taylor rule a money growth rule is more appropriate to reduce the volatility of the CPI in°ation rate whereas just the opposite holds for stabilizing the output gap.
    Keywords: Oil price shocks, Monetary Policy, Open Economy
    JEL: E32 E52 F41 Q43
    Date: 2006
  2. By: Michal Horvath
    Abstract: The optimal policy mix maximizes a quadratic welfare objective which follows from the agents. utility function and depends only on inflation and output gap volatility. We analyze the optimal response of the economy to a rise in government spending. We find that the optimal economy moves along an analogue of a conventional inflation-output variance frontier, as the population share of non-Ricardian agents rises. Output should optimally vary more, as this is to the benefit of the liquidity-constrained agents via net real wages, while optimal inflation volatility falls as there is less of a need to use inflation to maintain fiscal solvency. There is little evidence that increased government spending would crowd in private consumption. The tax rate varies to contain pressures on prices by shifting the natural rate of output towards its preference-driven target level. We identify the size of the target deviation in output and the interest rate elasticity of demand as the key determinants of the optimal interest rate policy.
    Keywords: Optimal Monetary and Fiscal Policy, Macroeconomic Stabilization, Non-Ricardian Agents.
    JEL: E61 E63
    Date: 2007–01
  3. By: Dixon, Huw (Cardiff Business School); Kara, Engin
    Abstract: We develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. Using the Bils-Klenow distribution of contract lengths, we find that the corresponding GTE tracks the US data well. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner.
    Keywords: Persistence; Taylor contract; Calvo
    JEL: E50 E24 E32 E52
    Date: 2007–01
  4. By: Post, Erik (Department of Economics)
    Abstract: This paper uses a dynamic stochastic rational expectations model of a small open economy to shed some light on factors determining exits from a fixed to a flexible exchange rate regime. Exits are in the model determined by a concern for macroeconomic stabilization. If cost-push shocks are important relative to demand shocks exits should occur more likely in times of low consumption and output, high interest rates, negative asset holdings, current account deficits, high inflation and high domestic prices. If the policy maker is more sensitive to negative rather than positive output deviations the probability of exits increases overall and is tilted toward exits with accompanying depreciation.
    Keywords: exchange rates; exchange rate regimes; rational expectations model
    JEL: E42 E44 E47
    Date: 2007–01–16
  5. By: Heppke-Falk, Kirsten H.; Tenhofen, Jörn; Wolff, Guntram B.
    Abstract: We investigate the short-term effects of fiscal policy shocks on the German economy following the SVAR approach by Blanchard and Perotti (2002). We find that direct government expenditure shocks increase output and private consumption on impact with low statistical significance, while they decrease private investment, though insignificantly. For the sub-category government investment – in contrast to government consumption – a positive output effect is found, which is statistically significant until 12 quarters ahead. Allowing for anticipation effects of fiscal policy does not change the sign of the positive consumption response. Anticipated expenditure shocks have significant effects on output when the shock is realized, but not in the period of anticipation. In sum, effects of expenditure shocks are only short-lived. Government net revenue shocks do not affect output with statistical significance. However, when splitting up this aggregate, direct taxes lower output significantly, while small indirect tax revenue shocks have little effects. Compensation of public employees is equally not effective in stimulating the economy.
    Keywords: Fiscal policy, government spending, net revenue, policy anticipation, structural vector autoregression
    JEL: E62 H30
    Date: 2006
  6. By: René Cabral
    Abstract: This paper presents an empirical assessment of the performance of EMEs that have adopted inflation targets to conduct monetary policy. In contrast to the evidence previously found for industrial economies, we observe that IT has really mattered for EMEs' price stability. Cross-section and panel estimations consistently suggest that IT has significantly contributed to EMEs' disinflation.
    Keywords: Inflation, Prices, EME, EMEs
    JEL: E31
    Date: 2006–07
  7. By: Rudolfs Bems (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s. JEL Classification: F3, F4.
    Keywords: global imbalances, open economy, VARs.
    Date: 2007–01
  8. 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
  9. By: Den Haan, Wouter; Kaltenbrunner, Georg
    Abstract: Positive news about future productivity growth causes a contraction in most neoclassical business cycle models, which is counterfactual. We show that a business cycle model that incorporates the standard matching framework can generate an expansion. Although the wealth effect of an increase in expected productivity induces workers to reduce their labour supply, the matching friction has the opposite effect leaving labour supply roughly unaffected. Employment increases because the matching friction also induces firms to post more vacancies. This translates into additional resources, which makes it possible for both consumption and investment to increase in response to positive news about future productivity growth before the actual increase in productivity materializes.
    Keywords: labour force participation; Pigou cycles; productivity growth
    JEL: E24 E32 J41
    Date: 2007–01
  10. By: Eagle, David
    Abstract: The economic profession should demand that that price-determinacy literature adhere to normal academic standards and burdens of proof. By presenting two examples where the non-exploding criterion fails miserably, we demonstrate that that criterion does not universally apply. Therefore, the previous price-determinacy literature has the burden to prove that the non-explosive criterion does apply, but has not met and probably cannot meet that burden. This paper looks at an economy with an arbitrarily large, but finite horizon and concludes that inflation targeting leads to price indeterminacy even with a Taylor-like feedback rule for setting the nominal interest rate.
    Keywords: non-explosive criterion; price determinacy; inflation targeting; stability criterion; saddle-point criterion; infinite-horizon economies; pegging the interest rate
    JEL: E42 E31 E52 E58
    Date: 2007–01–18
  11. By: Kilian, Lutz; Manganelli, Simone
    Abstract: Motivated by policy statements of central bankers, we propose to regard the central banker as a risk manager who aims at containing inflation and the deviation of output from potential within pre-specified bounds. We develop formal tools of risk management that may be used to quantify the risks of failing to attain that objective. Risk measures inherently depend on the loss function of the user. We propose a simple, yet flexible class of loss functions that nests the standard assumption of quadratic symmetric preferences, while being congruent with a risk management model. We show how the parameters of this loss function under weak assumptions may be estimated from realizations for inflation and output gap data even in the absence of a fully specified structural model of the economy. We present estimates of the Federal Reserve’s risk aversion parameters with respect to the inflation and output objectives during the Greenspan period. We formally test for and reject the standard assumptions of quadratic and symmetric preference that underlies the derivation of the Taylor rule. Our results suggest that Fed policy decisions under Greenspan are better understood in terms of the Fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap. We derive a natural generalization of the Taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability. Unlike standard Taylor rules, this generalized policy rule is consistent with the wording of policy decisions by the Federal Reserve.
    Keywords: Greenspan; inflation; monetary policy; output; policy rule; preferences; risk
    JEL: E31 E52 E58
    Date: 2007–01
  12. By: Willem H. Buiter
    Abstract: The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numeraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numeraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numeraire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numeraire used in private transactions. The second is the proposition that price stability in terms of that numeraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numeraire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numerairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.
    JEL: E3 E4 E5 E6
    Date: 2007–01
  13. By: Emiliano Santoro
    Abstract: We fit the asymmetric Subbotin distribution introduced by Bottazzi and Secchi (2003) on UK and US data on quoted companies, in order to detect sources of asymmetries in the transmission of aggregate shocks, and cyclical patterns of higher moments of the firms’ rate of growth distribution over the business cycle. We support the evidence provided by Higson et al. (2002, 2004) of a negative correlation between the rate of growth of GDP and the standard deviation and skewness of the distribu- tion. Kurtosis exhibits a procyclical pattern. Furthermore, we provide an explanation of the emergence of these stylised facts based on the evidence that the left tail of the distribution is more responsive to macroeconomic fluctuations than its right counterpart. The evidence points to financial factors as one of the main drivers of the observed pattern.
    Keywords: Subbotin Distribution, Corporate Growth, Business Cycle, Financial Fragility
    JEL: C16 E32 G30
    Date: 2006
  14. By: Matthias S. Hertweck
    Abstract: This paper modifies the standard Mortensen-Pissarides job matching model in order to explain the cyclical behavior of vacancies and unemployment. The modifications include strategic wage bargaining (Hall and Milgrom, 2006) and convex labor adjustment costs. The results reveal that our model replicates the cyclical behavior of both variables remarkably well. First, we show that strategic wage bargaining increases the volatility of vacancies and unemployment enormously. Second, the introduction of convex labor adjustment costs makes both variables much more persistent. Third, our analysis indicates that both modifications are complementary in generating volatile and persistent labor market variables.
    Keywords: Business Cycles, Matching, Strategic Bargaining
    JEL: E24 E32 J41
    Date: 2006
  15. By: Dennis, Richard; Leitemo, Kai; Söderström, Ulf
    Abstract: We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.
    Keywords: model misspecification; model uncertainty; robust control
    JEL: E52 E61 F41
    Date: 2007–01
  16. By: Harald Uhlig
    Abstract: In this paper, I investigate the scope of a model with exogenous habit formation - or `catching up with the Joneses`, see Abel (1990) - to generate the observed equity premium as well as other key macroeconomic facts. Along the way, I derive restrictions for four out of eight parameters for a rather general preference specification of habit formation by imposing consistency with long-run growth, the leisure share, the aggregate Frisch elasticity of labor supply, the observed risk-free rate, and the observed Sharpe ratio. I show that a DSGE model with (exogenous and lagged) habits in both leisure and consumption, but not necessarily with additional persistence, is well capable of matching the observed asset market facts as well as macro facts, provided one allows for moderate real wage stickiness and provided one allows for sufficient curvature on preferences, as dictated by the asset market observations. Without wage stickiness, delivery on both the asset pricing implications as well as the macroeconomic implications seems to be much harder.
    Keywords: asset pricing, wage rigidity, habit formation, Frisch elasticity, Sharpe ratio, log-linear approximation
    JEL: E24 E30 G12
    Date: 2007–01
  17. By: Alexis Anagnostopoulos; Omar Licandro; Italo Bove; Karl Schlag
    Abstract: We provide a simple theory of inflation inertia in a staggered price setting framework a la Calvo (1983). Contrary to Calvo.s formulation, the frequency of price changes is allowed to vary according to an evolutionary criterion. Inertia is the direct result of gradual adjustment in this frequency following a permanent change in the rate of money growth.
    Date: 2006
  18. By: Hortènsia Fontanals (Faculty of Economics, University of Barcelona.); Elisabet Ruiz (Universitat Oberta de Catalunya.); Catalina Bolancé (Faculty of Economics, University of Barcelona.)
    Abstract: In this paper we estimate, analyze and compare the term structures of interest rate in six different countries, during the period 1992-2004. We apply Nelson and Siegel model to obtain them with a weekly frequency. Four European Monetary Union countries, Spain, France, Germany and Italy are included. UK is also included as a European country, but not integrated in the Monetary Union. Finally US completes the analysis. The goal is to determine the differences in the shape of curves between these countries. Likewise, we can determinate the most usual term structure shapes that appear in every country.
    Keywords: Term structure of interest rate, parsimonious models, level parameter, slope parameter, European interest rate.
    JEL: C14 C51 C82 E43 G15
    Date: 2006–12
  19. By: Khemraj, Tarron
    Abstract: Banks demand non-remunerative excess reserves because of (i) minimum markup interest rates in the loan market and the government security market; and (ii) a foreign currency constraint in the foreign exchange market. The minimum markup interest rates are consistent with an oligopolistic banking sector. The non-competitive nature of the government security market implies (i) there is no exogenous domestic interest rate to pin down the domestic term structure; and (ii) the theory of the banking firm when applied to underdeveloped economies has to be implemented in an open economy context. Indirect monetary policy which aims at managing excess bank reserves has very limited influence on the loan market.
    Keywords: excess liquidity; oligopoly banking; minimum interest rate; foreign currency constraint
    JEL: O16 E52 E5 F30
    Date: 2007–01
  20. By: Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
    Abstract: This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank's instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.
    Keywords: Bayesian inference; DSGE model; DSGE-VAR model; DSGE-VECM model; open economy
    JEL: C11 C53 E17
    Date: 2007–01
  21. By: Louis J. Maccini; Adrian Pagan (National Centre for Econometric Research)
    Abstract: The paper looks at the role of inventories in U.S. business cycles and fluctuations. It concentrates upon the goods producing sector and constructs a model that features both input and output inventories. A range of shocks are present in the model, including sales, technology and inventory cost shocks. It is found that the presence of inventories does not change the average business cycle characteristics in the U.S. very much. The model is also used to examine whether new techniques for inventory control might have been an important contributing factor to the decline in the volatility of US GDP growth. It is found that these would have had little impact upon the level of volatility.
    Date: 2006–09
  22. By: Peter Claeys (Faculty of Economics, University of Barcelona.)
    Abstract: The fiscal policy rule implicit in the Stability and Growth Pact, has been rationalised as a way to ensure that national fiscal policies remain sustainable within the EU, thereby endorsing the independence of the ECB. We empirically examine the sustainability of European fiscal policies over the period 1970-2001. The intertemporal government budget constraint provides a test based on the cointegration relation between government revenues, expenditures and interest payments. Sustainability is analysed at both the national level and for a European panel. Results show that European fiscal policy has been sustainable overall, yet national experiences differ considerably.
    Keywords: Fiscal policy, debt sustainability, panel unit root test, panel cointegration test, EMU.
    JEL: E61 E63 H63
    Date: 2007–01
  23. By: Lippi, Francesco; Secchi, Alessandro
    Abstract: Advances in the transaction technology allow agents to economize on the cost of cash management. We argue that accounting for the impact of new transaction technologies on currency holding behaviour is important to obtain theoretically consistent estimates of the demand for money. We modify a standard inventory model to study the effect of the withdrawal technology on the demand for currency. An empirical specification for the households demand schedule is suggested in which both the level of currency holdings and the interest rate elasticity of the demand depend on the withdrawal technology available to agents (e.g. ATM card ownership or a high/low density of bank branches, ATMs). The theoretical implications are tested using a unique panel of Italian household data (on currency holdings, deposit interest rates, consumption, development of banking services, etc.) for the 1989-2004 period.
    Keywords: inventory models; money demand; technological change
    JEL: E5
    Date: 2007–01
  24. By: Aubhik Khan; Julia Thomas
    Abstract: We study a model of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S,s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low-level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment-level investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time-averaged distribution of plant-level investment rates largely invariant to market-clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model-based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them.
    JEL: E22 E32
    Date: 2007–01
  25. By: Carlos Cortinhas (Universidade do Minho - NIPE)
    Abstract: This paper investigates, for the first time, the degree of exchange rate pass-through to domestic prices in all five founding members of ASEAN. For this purpose, a three variable recursive VAR model was applied which uses the Choleski decomposition method along the distribution chain of pricing, using data for the period 1968 to 2001. The results show that a strong case for entering a currency union can only be made for the cases of Singapore and Malaysia as in these countries there appears to be a case of exchange rate disconnect. A case for a common currency can also be made for Indonesia but for entirely different reasons. For this country, an independent monetary policy is a clear source of shocks to the economy and therefore a currency union would tend to eliminate then. A weaker case for a common currency can be made for the Philippines as evidence of some exchange rate pass-through to inflation was found but not to import prices. Finally, Thailand exhibits a clear case of exchange rate pass-through to import prices (but not to inflation) and thus evidence that a flexible exchange rate might be preferable as it provides the means to improve the country’s price competitiveness.
    Keywords: Exchange Rate Pass-Through; Monetary Integration; Asean
    JEL: F31 F33 E42
    Date: 2007
  26. By: Johansson, Lars (Dept. of Economics, Stockholm University)
    Abstract: This study examines the fiscal effects of emigration. A dynamic macroeconomic framework is used. The net peresent value of the fiscal effects of different types of individuals' emigration decisions is calculated. Individuals are differentiated w.r.t. age, gender, education, being immigrants or born in Sweden and how long they choose to stay abroad in case of emigration. This study expolores how the fiscal effects of emigration are contingent on these different personal characteristics and is applied to the case of emigration from Sweden in 1998. The estmated aggregate fiscal cost is SEK 11.6 billion or 0.62% of GDP. This cost is significantly larger than the cost of immigration.
    Keywords: Migration; Emigration; Fiscal Impact; Fiscal Policy; Taxation
    JEL: E62 F22 H20 H50
    Date: 2007–01–22
  27. By: Eijffinger, Sylvester C W; van der Cruijsen, Carin A B
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its effects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: i) the empirical research resolves all theoretical question marks, ii) how the findings of the literature match the actual practice of central banks, and iii) where there is scope for more research.
    Keywords: central bank transparency; monetary policy; survey
    JEL: E31 E52 E58
    Date: 2007–01
  28. By: Peter L. Rousseau
    Abstract: Among the thirteen original colonies, Pennsylvania was most successful at issuing paper money with only minimal effects on prices -- so much so that the colony's experience is sometimes seen as violating the classical quantity theory of money. Quantity theorists usually attribute this apparent anomaly to mismeasurement of the money stock. In contrast, I use data on money, prices, and real activity in Pennsylvania from 1723 to 1774 and for the United States as a whole from 1790 to 1850 (when the money stock is better measured) to show that the long-run behavior of money and prices is well explained by the quantity theory in both periods, despite the differences in institutional arrangements, once growth in monetized transactions is taken into account.
    JEL: E31 E42 N11
    Date: 2007–01
  29. By: Rao, B. Bhaskara; Kumar, Saten
    Abstract: This paper fills a gap in the empirical work on the demand for money for Fiji. We allowed for structural breaks in the cointegrating equation, within the Gregory and Hansen framework, and found that there is a cointegrating relationship between real narrow money, real income and the nominal rate of interest in all the three types of their models. However, only the model with an intercept shift for the 1987 political coup yields a meaningful cointegrating relationship. We tested for its temporal stability and found that the demand for money in Fiji is stable.
    Keywords: Structural break; Cointegration; Gregory and Hansen; Demand for money; Fiji
    JEL: E4
    Date: 2006–07
  30. By: Christian Kascha; Karel Mertens
    Abstract: An important question in empirical macroeconomics is whether structural vector autoregressions (SVARs) can reliably discriminate between competing DSGE models. Several recent papers have suggested that one reason SVARs may fail to do so is because they are finite-order approximations to infinite-order processes. In this context, we investigate the performance of models that do not suffer from this type of misspecification. We estimate VARMA and state space models using simulated data from a standard economic model and compare true with estimated impulse responses. For our examples, we find that one cannot gain much by using algorithms based on a VARMA representation. However, algorithms that are based on the state space representation do outperform VARs. Unfortunately, these alternative estimates remain heavily biased and very imprecise. The findings of this paper suggest that the reason SVARs perform weakly in these types of simulation studies is not because they are simple finite-order approximations. Given the properties of the generated data, their failure seems almost entirely due to the use of small samples.
    Keywords: Structural VARs, VARMA, State Space Models, Identification, Business Cycles
    JEL: E32 C15 C52
    Date: 2006
  31. By: Eickmeier, Sandra; Ziegler, Christina
    Abstract: This paper surveys existing factor forecast applications for real economic activity and inflation by means of a meta-analysis and contributes to the current debate on the determinants of the forecast performance of large-scale dynamic factor models relative to other models. We find that, on average, factor forecasts are slightly better than other models’ forecasts. In particular, factor models tend to outperform small-scale models, whereas they perform slightly worse than alternative methods which are also able to exploit large datasets. Our results further suggest that factor forecasts are better for US than for UK macroeconomic variables, and that they are better for US than for euro-area output; however, there are no significant differences between the relative factor forecast performance for US and euro-area inflation. There is also some evidence that factor models are better suited to predict output at shorter forecast horizons than at longer horizons. These findings all relate to the forecasting environment (which cannot be influenced by the forecasters). Among the variables capturing the forecasting design (which can, by contrast, be influenced by the forecasters), the size of the dataset from which factors are extracted seems to positively affect the relative factor forecast performance. There is some evidence that quarterly data lend themselves better to factor forecasts than monthly data. Rolling forecasts are preferable to recursive forecasts. The factor estimation technique seems to matter as well. Other potential determinants - namely whether forecasters rely on a balanced or an unbalanced panel, whether restrictions implied by the factor structure are imposed in the forecasting equation or not and whether an iterated or a direct multi-step forecast is made - are found to be rather irrelevant. Moreover, we find no evidence that pre-selecting the variables to be included in the panel from which factors are extracted helped to improve factor forecasts in the past.
    Keywords: Factor models, forecasting, meta-analysis
    JEL: C2 C3 E37
    Date: 2006
  32. By: Rao, B. Bhaskara; Kumar, Saten
    Abstract: This paper allows for endogenous structural breaks in the cointegration equation and investigates if there is a stable demand for money for Bangladesh. We have used the Gregory and Hansen framework and found that there was an intercept shift and a well- determined and stable demand for money in Bangladesh exists.
    Keywords: Endogenous structural breaks; Gregory and Hansen method; Demand for money; Bangladesh.
    JEL: E40 E4
    Date: 2007–01–16
  33. By: Keisuke Otsu (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Two key features of the postwar Japanese economy are the delay of catch up during the 50s followed by rapid economic growth during the 60s and early 70s and the consistent decline in labor supply during the rapid growth period. A standard neoclassical growth model can quantitatively account for the Japanese postwar growth patterns of capital, output, consumption and investment taking the destruction of capital stock during the war and postwar TFP growth as given. The decline in labor can be explained by strong income effects caused by subsistence consumption during the rapidly growing period.
    Keywords: Japanese Postwar Growth, Neoclassical Growth Model, TFP
    JEL: E13 O40
    Date: 2007–01
  34. By: Nick Bloom
    Abstract: Uncertainty varies strongly over time, rising by 50% to 100% in recessions and by up to 200% after major economic and political shocks. This paper shows that higher uncertainty reduces the responsiveness of R&D to changes in business conditions - a "caution-effect" - making it more persistent over time. Thus, uncertainty will play a critical role in shaping the dynamics of R&D through the business cycle, and its response to technology policy. I also show that if firms are increasing their level of R&D then the effect of uncertainty will be negative, while if firms are reducing R&D then the effect of uncertainty will be positive.
    JEL: D8 D92 E32 O3
    Date: 2007–01
  35. By: Parantap Basu; Christoph Thoenissen
    Abstract: Is the relative price of investment goods a good proxy for investment frictions? We analyze investment frictions in an open economy, flexible price, two-sector two-country model and show that when the relative price of investment goods is endogenously determined in such a model, the relative price of investment can actually rise in response to a reduction in investment frictions. Only when the model is driven by TFP shocks do we observe a data congruent negative correlation between investment and the relative price of investment goods.
    Date: 2007–01
  36. By: Lopez Gonzalez, Mauricio; Mesa Callejas, Ramon Javier
    Abstract: [Abstract in English is missing]
    Keywords: crecimiento económico; regimen cambiario; déficit fiscal; remesas; ahorro
    JEL: E23 E40
    Date: 2006–08–01
  37. By: Zeno Enders; Gernot J. Mueller
    Abstract: Using vector autoregressions on U.S. time series, we find that technology shocks induce an ‘S’- shaped cross-correlation function for the trade balance and the terms of trade (S-curve). In calibrating a prototypical international business cycle model to match the S-curve under complete and incomplete financial markets, we find two distinct sets of parameter values. While both model specifications deliver the S-curve, the underlying transmission mechanism of technology shocks is fundamentally different. Most importantly, only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks - as suggested by time series evidence.
    Keywords: S-curve, Technology shocks, Terms of trade, Trade balance, Incomplete markets
    JEL: F41 E32 F32
    Date: 2006
  38. By: Bertola, Giuseppe; Koeniger, Winfried
    Abstract: We show theoretically that income redistribution benefits borrowing-constrained individuals more than is implied by standard relative-income and uninsurable-risk considerations. Empirically, we find in international opinion-survey data that younger and lower-income individuals express stronger support for government redistribution in countries where consumer credit is less easily available. This evidence supports our theoretical perspective if such individuals are more strongly affected by tighter credit supply, in that expectations of higher incomes in the future increase their propensity to borrow.
    Keywords: borrowing constraints; consumer credit
    JEL: D23 E21
    Date: 2007–01
  39. By: Kilponen , Juha (Bank of Finland Research); Kinnunen , Helvi (Bank of Finland); Ripatti , Antti (Bank of Finland)
    Abstract: This paper extends Gertler’s (1999) tractable overlapping generations model with life-cycle features by allowing for distortionary taxation, demographic transition and stochastic variation in demographic structure. The model is then used to study demographic change in the small open economy of Finland. Simulations highlight the key role played by labour market responses to ageing. When the responses of labour supply, wages, and hence private consumption, to higher taxation are consistently accounted for, population ageing has clearly much larger effects on public finance, when compared to mechanical sustainability calculations. Stochastic simulations suggest that lengthening of working time has only a modest alleviating effect on the fiscal burden of ageing. This is due to the fact that stochastic variation in the length of working time has only a relatively small effect on the model’s dependency ratio. Variation in life expectancy is clearly much more important.
    Keywords: ageing; general equilibrium; public finance; demographic uncertainty
    JEL: E13 H55 J11 J26
    Date: 2006–12–23
  40. By: Buch, Claudia M.; Döpke, Jörg; Strotmann, Harald
    Abstract: From a theoretical point of view, greater trade openness affects firm-level volatility by changing the exposure and the reaction of firms to macroeconomic shocks. The net effect is ambiguous, though. This paper provides firm-level evidence on the link between openness and volatility. Using two novel datasets on German firms, we analyze the evolution of firm-level output volatility and the link between volatility and trade openness. We find that firm-level output volatility displays patterns similar to those found in aggregated data for Germany. Also, smaller firms and firms that grow faster are more volatile. Increased trade openness tends to lower volatility.
    Keywords: firm-level volatility, trade openness
    JEL: E32 F41 G15
    Date: 2006
  41. By: Markus Poschke
    Abstract: This paper analyzes the effect of firing costs on aggregate productivity growth. For this purpose, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and the contribution of firm entry and exit to aggregate productivity growth. In this model, growth arises endogenously via market selection among heterogeneous incumbent firms. It is sustained as entrants imitate the best incumbents. In this framework, besides inducing misallocation of labor and reducing entry, firing costs also discourage exit of low-productivity firms. This makes selection less severe and reduces growth. However, exempting exiting firms from firing costs speeds up the exit of inefficient firms and thereby growth, with little change in job turnover. These effects are stronger in sectors where firms face larger idiosyncratic shocks, as in services, fitting evidence that here, EU-US growth rate differences are largest. Introducing firing costs of one year’s wages in a benchmark economy calibrated to the US business (services) sector then leads to 0.1 (0.3) points lower growth. A brief empirical analysis of the impact of firing costs on the size of exiting firms supports the model’s conclusions.
    Keywords: endogenous growth theory, firm dynamics, labor market regulation, firing costs, entry and exit, firm selection
    JEL: E24 J63 J65 L11 L16 O40
    Date: 2006
  42. By: Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper proposes a novel international transmission mechanism based on the assumption of deep habits. The term deep habits stands for a preference specification according to which consumers form habits on a good-by-good basis. Under deep habits, firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand, creating an incentive to price discriminate. We refer to this type of price discrimination as pricing to habits. In the presence of pricing to habits, innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad, leading to a departure from the law of one price. In this way, the proposed pricing-to-habit mechanism can explain the observation that prices of the same good across countries, expressed in the same currency, vary over the business cycle. Furthermore, it can account for the empirical fact that in response to a positive domestic demand shock, such as an increase in government spending, the real exchange rate depreciates, domestic consumption expands, and the trade balance deteriorates.
    Keywords: countercyclical markup; deep habits; government spending; Law of one price; real exchange rate
    JEL: E32 F30 F41
    Date: 2007–01
  43. By: Breusch, Trevor
    Abstract: Bajada (2006) recognises that his earlier books and papers used a faulty method for measuring the underground economy in Australia. He also reports finding a new “more serious problem” in the method. All of these failures can be avoided, it is claimed, by reduced use of currency modelling and more reliance on outside estimates. Despite delivering estimates up to two-thirds less than before, the revised method involves substantial double counting. Ironically, these problems are found only in Bajada’s particular method, not in currency modelling generally. Author’s note: This paper was written at the invitation of an Associate Editor of the Economic Record in response to a comment by Christopher Bajada (2006) called “Australia’s Underground Economy Revisited”. Unfortunately Bajada withdrew his submission at a late stage of the editorial process – after he received this response – despite the Associate Editor’s assessment that “the comment and response do help to further clarify some issues on the topic.”
    Keywords: underground economy; currency; taxes; economic models
    JEL: E41 E62 E26
    Date: 2006–06
  44. By: Rösl, Gerhard
    Abstract: In a surprisingly growing number of regions in Germany private “regional currencies” are issued as a cash substitute for the euro. Currently, these regional currencies are conceived almost exclusively as Schwundgeld (depreciative currency), which loses value on a predetermined timescale. This loss of value is intended to encourage the money owners to spend their money quickly in order to boost local demand. The paper shows that the issuance of unofficial parallel currencies is not a fundamentally new phenomenon neither in Germany nor in other European countries. The theoretical assumptions of the Schwundgeld concept (Silvio Gesell (1862 – 1930)) are highly flawed and suboptimal from a welfare-theoretical perspective. However, the current economic welfare losses resulting from the issuance of Schwundgeld are negligibly small.
    Keywords: Regionalwährungen, Regionalgeld, Parallelgeld, Gesell, Währungssubstitution, Schwundgeld, Freigeld, currency substitution, private money
    JEL: E40 E41 E42 E50
    Date: 2006
  45. By: Antonio Matas-Mir (European central Bank); Denise R. Osborn (University of Manchester, Centre for Growth and Business Cycle Research , Economic Studies, School of Social Sciences); Marco Lombardi (European central Bank)
    Abstract: We study the impact of seasonal adjustment on the properties of business cycle expansion and recession regimes using analytical, simulation and empirical methods. Analytically, we show that the X-11 adjustment filter both reduces the magnitude of change at turning points and reduces the depth of recessions, with specific effects depending on the length of the recession. A simulation analysis using Markov switching models confirms these properties, with particularly undesirable effects in delaying the recognition of the end of a recession. However, seasonal adjustment can have desirable properties in clarifying the true regime when this is well underway. The empirical findings, based on four coincident US business cycle indicators, reinforce the analytical and simulation results by showing that seasonal adjustment leads to the identification of longer and shallower recessions than obtained using unadjusted data.
    Date: 2005–09
  46. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Diego Martínez López (Centro de Estudios Andaluces y Department of Economics, Universidad Pablo de Olavide); José Luis Torres Chacón (Departamento de Teoría e Historia Económica, Universidad de Málaga)
    Abstract: This paper studies the impact of the information and communication technologies (ICT) on economic growth in Spain using a dynamic general equilibrium approach. Contrary to previous works, we use a production function with six different capital inputs, three of them corresponding to ICT assets. Calibration of the model suggests that the contribution of ICT to Spanish productivity growth is very relevant, whereas the contribution of non-ICT capital has been even negative. Additionally, over the sample period 1995-2002, we find a negative TFP and productivity growth. These results together aim at the hypothesis that the Spanish economy could be placed within the productivity paradox.
    Keywords: New economy, information and communication technologies, technological change, productivity paradox.
    JEL: E22 O30 O40
    Date: 2007–01
  47. By: Romain Baeriswyl; Camille Cornand
    Abstract: Cet article analyse les effets de la transparence économique sur l’efficacité de la politique monétaire dans un modèle de concurrence monopolistique en connaissance commune imparfaite sur les chocs de demande affectant une économie sans biais inflationniste. Nous montrons que la transparence est optimale lorsque l’économie est affectée par des chocs de demande que la banque centrale tente de neutraliser, tant que cette dernière n’est pas trop orientée en faveur de la stabilisation du produit.
    Keywords: information, politique monétaire, transparence.
    JEL: E52 E58 D82
    Date: 2007
  48. By: Adrian Pagan; Hashem Pesaran (National Centre for Econometric Research)
    Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.
    Keywords: Permanent shocks, structural identi?cation, error correction models, IS-LM models
    Date: 2007–01
  49. By: Simone Valente (Center of Economic Research, Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper analyzes international status seeking in a two-country model of endogenous growth: utility of agents in developing countries is a¤ected by con- sumption gaps with the average consumer in advanced economies. By distorting terms of trade, status seeking: (i) may compensate for structural gaps in physical productivity, inducing convergence; (ii) may revert the link between trade and growth; and (iii) induces divergence when interacting with technological catching- up. In particular, envy in conjunction with catching-up predicts switchovers of growth leadership: when the advanced economy is both status- and technology- leader in the short run, convergence in interest rates - e.g. due to R&D spillovers - implies that the initially lagging economy becomes growth-leader in the long run, due to permanent price distortions induced by envy.
    Keywords: Consumption externalities, international trade, two-country models.
    JEL: D91 E21 F11
    Date: 2006–06
  50. By: John Ryan (European Business School, Regent’s College)
    Abstract: This paper is aimed at analysing the decision of the Chinese central bank to reform the exchange rate of the national currency and to gauge the effects of this change in regime on the Chinese economy and the world currency markets. Although many nations have been largely disappointed by the relatively small revaluation of 2%, it will be argued that moving away from the dollar-peg is a step in the right direction in moving to a floating exchange rate, and the reform should be expected to occur in two-stages over a longer time frame The paper focuses on those studies attempting to estimate the under-valuation of the Renminbi and the effects of the change in policy. To enable the reader to understand the degree of misalignment of the. Renminbi this paper will examine various factors that determine whether the currency is undervalued. This will then allow the review of the policy options available to the central bank for facilitating an appreciation and the potential effects of a regime change will be reported. The expected outcomes on the currencies, US treasuries and trade deficit will also be analysed and the study will find that, post-revaluation, the dollar depreciates, the Yen moves in line with the Renminbi and the Euro strengthens, as was expected. The implications for the U.S. treasury market, after a move to a currency basket, is that China will reduce their dollar holdings by selling treasuries, however the region will still remain a net-buyer.
    Keywords: Renminbi, China, United States, Dollar, Euro and Yen
    JEL: D53 E41 E42 E44 F31
    Date: 2006
  51. By: Tommaso Ciarli; Marco Valente
    Abstract: We aim at contributing to the debate on the mechanisms and properties of economic fluctuations. We consider a crucial aspect among many thought to influence this ubiquitous and extremely relevant phenomenon: the interaction structure that characterises the organisation of production, that is, the production relation among sectors of a system. We build — and simulate — a very simple model representing an input–output system where sectors/firms adapt production and desired levels of stocks. Their output serves both an exogenous final demand and the intermediate demand solicited by the other sectors of the system. Series of simulation runs allow to derive relevant and non–obvious conclusions concerning the levels and, more importantly, the volatility of economic activity, as an outcome of the same, inherent, economic structure. We claim that the results that we obtain through the highly abstract representation we use, provide useful intuitions on the working of economic cycles, to be later integrated by further studies. As a by–product of our analysis, we also suggest that the methodology we adopt can provide valuable insights by allowing a detailed analysis of the time path generated in the artificial systems, and therefore assessing with precisions the same mechanisms that affect real– world systems. The natural following step, left for further research, is to investigate how those mechanisms are empirically generated.
    Keywords: Production structure, micro- and macro-volatility, simulation models
    Date: 2007–01–22
  52. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Yi Wen (Federal Reserve Bank of St. Louis)
    Abstract: We show that dependence on foreign energy can increase economic instability by raising the likelihood of equilibrium indeterminacy, hence making fluctuations driven by self-fulfilling expectations easier to occur. This is demonstrated in a standard neoclassical growth model. Calibration exercises, based on the estimated share of imported energy in production for several countries, show that the degree of reliance on foreign energy for many countries can easily make an otherwise determinate and stable economy indeterminate and unstable.
    Keywords: Indeterminacy, Energy Imports, Externality, Returns to Scale, Sunspots, Self-Fulfilling Expectations.
    JEL: E13 E20 E30
    Date: 2007
  53. By: Franc Klaassen (Universiteit van Amsterdam); Henk Jager (Universiteit van Amsterdam)
    JEL: E58 F31 F33 G15
    Date: 2007–01–02
  54. By: Isabel Sanz Villarroya
    Abstract: En este artículo se han pretendido analizar las causas del atraso argentino, comparando la experiencia de este país con respecto a las de Australia y Canadá. Mediante la construcción de un índice de libertad económica, compuestos por variables que miden distorsiones macroeconómicas, y a partir de un análisis de cointegración y de causalidad, los resultados obtenidos muestran que, efectivamente, y tal como se sostiene en la historiografía argentina, los resultados de las políticas económicas implementadas han condicionado la evolución relativa y a largo plazo de este país.
    Date: 2007–01
  55. By: Acharya, Viral V; Imbs, Jean; Sturgess, Jason
    Abstract: We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe ratio, and the corresponding weights on investments in different industries. We study how rapidly different states converge to an efficient allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries, greater distance from the efficient frontier before liberalization and larger geographical area. These effects are robust to industries integrating across states and the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for the efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variance-covariance properties of investment returns, rather than on their average only.
    Keywords: Diversification; Financial development; Growth; Sharpe ratio; Volatility
    JEL: E44 F02 F36 G11 G21 G28 O16
    Date: 2007–01
  56. By: HENRARD, Marc
    Abstract: A simple exotic option (floor on rolled deposit) is studied in the shifted log-normal Libor Market (LMM) and Gaussian HJM models. The shifted log-normal LMM exhibits a controllable volatility skew. An explicit approach is used for both models. Using approximations the price in the LMM is obtained without Monte Carlo simulation. The more precise approximation uses a twisted version of the perdictor-corrector adapted to explicit solutions. The results of the approximation are surprisingly good.
    Keywords: Libor Market Model; Heath-Jarrow-Morton; skew; smile; explicit solution; approximation; Bond Market Model; option on composition; existence results.
    JEL: G13 E43 C63
    Date: 2007–01–11

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