nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒02‒10
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Money matters for inflation in the euro area By Ansgar Belke; Thorsten Polleit; Wim Kösters; Martin Leschke
  2. Inflation Persistence and the Phillips Curve Revisited By Marika Karanassou; Dennis J. Snower
  3. Real price and wage rigidities in a model with mataching frictions. By Keith Kuester
  4. Why do markets react badly to good news? Evidence from Fed Funds Futures By Ghent, Andra
  5. Is Forward-Looking Inflation Targeting Destabilizing? The Role of Policy's Response to Current Output under Endogenous Investment By Kevin X.D. Huang; Qinglai Meng
  6. The Demand for Endogenous Money: A Lesson in Institutional Change By Peter Howells
  7. The Relevance of the fiscal Theory of the Price Level revisited By Thams, Andreas
  8. Does Inflation Targeting Make a Difference? By Frederic S. Mishkin; Klaus Schmidt-Hebbel
  9. A Reassessment of the Problems with Interest Targeting: What Have We Learned from Japanese Monetary Policy? By Tom Cargill; Federico Guerrero
  10. Dynamics and monetary policy in a fair wage model of the business cylce By David, DE LA CROIX; Gregory, DE WALQUE; Rafael, WOUTERS
  11. The Taylor rule: can it be supported by the data? By Leon, Costas
  12. Optimal fiscal and monetary policy when money is essential By S. Boragan Aruoba; Sanjay K. Chugh
  13. Inflation and interest rates with endogenous market segmentation By Aubhik Khan; Julia Thomas
  14. Endogenous Money, Non-neutrality and Interest-sensitivity in the Theory of Long Period Unemployment By Peter Docherty
  15. Searching for Fiscal Effects: A VECM Model of Household Consumption Expenditures By Erdogdu, Oya
  16. Interest Rates: The Behavior, the Term Structure, and the Risk Structure By Govori, Fadil
  17. Testing the New Keynesian Phillips curve through Vector Autoregressive models: Results from the Euro area By Fanelli, Luca
  18. Long-Term Inflation Outcomes after Hyperinflation: Theory and Evidence By Federico Guerrero
  19. Open economy DSGE-VAR forecasting and policy analysis - head to head with the RBNZ published forecasts By Kirdan Lees; Troy Matheson; Christie Smith
  20. Evaluating the New Keynesian Phillips Curve under VAR-based learning By Fanelli, Luca
  21. A new core inflation indicator for New Zealand. By Domenico Giannone; Troy Matheson
  22. The daily and policy-relevant liquidity effects By Daniel L. Thornton
  23. Unit labor cost growth differentials in the Euro area, Germany, and the US: lessons from PANIC and cluster analysis By Ulrich Fritsche; Vladimir Kuzin
  24. Industries and the bank lending effects of bank credit demand and monetary policy in Germany By Arnold, Ivo J.M.; Kool, Clemens J.M.; Raabe, Katharina
  25. The Ins and Outs of Cyclical Unemployment By Michael W. Elsby; Ryan Michaels; Gary Solon
  26. The Balance Sheet Channel of Monetary Policy Transmission: Evidence from the UK By Eleni Angelopoulou; Heather D. Gibson
  27. A ‘Second-Best’ Rationale to Deflationary Monetary Policy in Japan By Tom Cargill; Federico Guerrero
  28. Real Origins of the Great Depression: Monopolistic Competition, Union Power, and the American Business Cycle in the 1920s By Monique Ebell; Albrecht Ritschl
  29. Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-run Divergence? Results from a Comparison with the United States of America and Germany By Sebastian Dullien; Ulrich Fritsche
  30. Central bank independence and inflation: a note By Charles T. Carlstrom; Timothy S. Fuerst
  31. The Macroeconomics of the Labor Market: Three Fundamental Views By Marika Karanassou; Hector Sala; Dennis J. Snower
  32. Comparing alternative representations and alternative methodologies in business cycle accounting By V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
  33. The Store-of-Value-Function of Money as a Component of Household Risk Management By Ingrid Größl; Ulrich Fritsche
  34. Predicting recessions with leading indicators: An application on the Icelandic economy By Bruno Eklund
  35. Milton Friedman and U.S. monetary history: 1961-2006 By Edward Nelson
  36. A Yield Curve Perspective on Uncovered Interest Parity By Leo Krippner
  37. Capital Market Frictions and the Business Cycle By Giulio, NICOLETTI; Olivier, PIERRARD
  38. Emerging market crises, Phoenix miracles,and garden-variety-type recoveries By Carlos E. J. M. Zarazaga
  39. Capital and macroeconomic instability in a discrete-time model with forward-looking interest rate rules By Kevin X. D. Huang; Qinglai Meng
  40. The Kinked Demand Curve and Price Rigidity : Evidence from Scanner Data By M. DOSSCHE; F. HEYLEN; D. VAN DEN POEL
  41. Government Size and the Composition of Public Spending in a Neoclassical Growth Model By Oliviero A. Carboni; Giuseppe Medda
  42. The Pros and Cons of Banking Socialism By Martin Gregor
  43. The importance of attractive prices in pricing dynamics By Aalto-Setälä , Ville; Schindler, Robert
  44. The Demand for Treasury Debt By Arvind Krishnamurthy; Annette Vissing-Jorgensen
  45. Computing business cycles in emerging economy models By Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
  46. Taxing Capital? Not a Bad Idea After All! By Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
  47. Rules, Discretion or Reputation? Monetary Policies and the Efficiency of Financial Markets in Germany, 14th to 16th Centuries By Oliver Volckart
  48. How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables By John W. Galbraith; Greg Tkacz
  49. Early Warning or Just Wise After the Event? By Andrew Hughes Hallet; Rasmus Kattai; John Lewis
  50. Consumption risk sharing and adjustment costs By Fanelli, Luca; Cavaliere, Giuseppe; Gardini, Attilio
  51. Political Decisions, Defence and Growth By Erdogdu, Oya Safinaz
  52. Price adjustment in German manufacturing: evidence from two merged survey By Stahl, Harald
  53. Precautionary saving and income uncertainty in Germany - new evidence from microdata By Bartzsch, Nikolaus
  54. National bank notes and silver certificates By Bruce Champ; James B. Thomson
  55. Structural Transformation and the Deterioration of European Labor Market Outcomes By Richard Rogerson
  56. A primer on the macroeconomic implications of population aging By Louise Sheiner; Daniel Sichel; Lawrence Slifman
  57. The Short- and Long-Term Career Effects of Graduating in a Recession: Hysteresis and Heterogeneity in the Market for College Graduates By Philip Oreopoulos; Till von Wachter; Andrew Heisz
  58. Qualitative Expectational Data as Predictors of Income and Consumption Growth: Micro Evidence from the British Household Panel Survey By James Mitchell; Martin Weale
  59. Taxation and Market Work: Is Scandinavia an Outlier? By Richard Rogerson
  60. Overconfidence in financial markets and consumption over the life cycle By Frank Caliendo; Kevin X. D. Huang
  61. Financial Revolution and Economic Modernization in Sweden By Ögren, Anders
  62. Product Market Regulation and Market Work: A Benchmark Analysis By Lei Fang; Richard Rogerson
  63. La distribución provincial de la inversión pública de la Junta de Andalucía: un análisis de sus criterios By Manuela Prieto Rodríguez; Diego Martínez López
  64. On Indeterminacy in Two Sector Models with Factor Market Distortions: The Importance of VIPIRS By Eic W. Bond; Robert A. Driskill
  65. Estimating economic and social welfare impacts of pension reform By van de Coevering, Clement; Foster, Daniel; Haunit, Paula; Kennedy, Cathal; Meagher, Sarah; Van den Berg, Jennie
  66. Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis By Jerzy D. Konieczny
  67. Explaining the Variation in Tax Structures in the MENA Region By Mehmet Tosun
  68. The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions By Diewert, Erwin
  69. Investor Protection, Risk Sharing and Inequality By Alessandra Bonfiglioli
  70. The Farm, the City, and the Emergence of Social Security By Elizabeth M. Caucutt; Thomas F. Cooley; Nezih Guner
  71. Labour Mobility, Capital-Skill Complementarity and the Redistributive Effects of Trade Integration By Carlo Devillanova; Michele Di Maio; Pietro Vertova
  72. Pricing-to-Market in a Ricardian Model of International Trade By Andrew Atkeson; Ariel Burstein
  73. The Long Term Effect of Education Spending Decentralization on Human Capital in Spain By Merrouche, Ouarda
  74. Teaching Convergence: A Contribution By Federico Guerrero
  75. Early-Stage Globalization and Corporate Debt Maturity: The Case of South Korea, 1980-94 By Federico Guerrero

  1. By: Ansgar Belke; Thorsten Polleit; Wim Kösters; Martin Leschke
    JEL: E31 E58 E51 E52 E37
    Date: 2006
  2. By: Marika Karanassou (Queen Mary, University of London and IZA); Dennis J. Snower (Institute for World Economics, CEPR and IZA)
    Abstract: A major criticism against staggered nominal contracts is that they give rise to the so called "persistency puzzle" - although they generate price inertia, they cannot account for the stylised fact of inflation persistence. It is thus commonly asserted that, in the context of the new Phillips curve (NPC), inflation is a jump variable. We argue that this "persistency puzzle" is highly misleading, relying on the exogeneity of the forcing variable (e.g. output gap, marginal costs, unemployment rate) and the assumption of a zero discount rate. We show that when the discount rate is positive in a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it), standard wage-price staggering models can generate both substantial inflation persistence and a nonzero inflation-unemployment tradeoff in the long-run. This is due to frictional growth, a phenomenon that captures the interplay of nominal staggering and permanent monetary changes. We also show that the cumulative amount of inflation undershooting is associated with a downward-sloping NPC in the long-run.
    Keywords: Inflation dynamics, Persistence, Wage-price staggering, New Phillips curve, Monetary policy, Frictional growth
    JEL: E31 E32 E42 E63
    Date: 2007–02
  3. By: Keith Kuester (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper incorporates search and matching frictions in the labor market into a New Keynesian model. In contrast to the literature, the labor market activity takes place in the (Calvo-staggered) price-setting sector. Matching frictions lead price-setting firms to negotiate wage rates with their employees. The negotiation of wages substantially increases strategic complementarity in price-setting among suppliers of differentiated goods. This leads to an increase in real rigidities as in Woodford (2003), which reduces the size of price changes optimally chosen by re-optimizing firms. The same factors which induce smooth inflation also dampen the adjustment of wages in response to shocks. In the search and matching framework this is key for explaining the highly responsive nature of vacancies in the data. Another interesting finding for the Phillips curve is that inflation is not only driven by an output gap but also by an employment gap – a feature usually neglected in empirical research. The modified model matches impulse responses of an SVAR for post Volcker-disinflation US data very well. JEL Classification: E31,E24,E32,J63,J64.
    Keywords: firm-specific labor, real rigidities, Phillips curve, wage rigidity, bargaining.
    Date: 2007–02
  4. By: Ghent, Andra
    Abstract: It is well known that U.S. monetary policy is well-approximated by a Taylor rule. This suggests a reason why good macroeconomic news sometimes depresses equity returns: good news about the real side of the economy implies tighter future monetary policy. I test this hypothesis by assessing the effect of news on equity returns after controlling for changes in expectations of future monetary policy using Fed Funds Futures data. The results do not support the theory. Furthermore, the negative response of stock markets to unanticipated inflation is unchanged by controlling for changes in monetary policy expectations.
    Keywords: Fed Funds Futures. Macroeconomic News Surprises. Taylor Rule.
    JEL: G14 E52 E44
    Date: 2007–02–07
  5. By: Kevin X.D. Huang (Department of Economics, Vanderbilt University); Qinglai Meng (Department of Economics, Chinese University of Hong Kong)
    Abstract: In sticky price models with endogenous investment, virtually all monetary policy rules that set a nominal interest rate in response solely to future inflation induce real indeterminacy of equilibrium. Applying the Samuelson-Farebrother conditions, we obtain a necessary and sufficient condition for local real determinacy, which reveals that increasing price stickiness or letting policy respond also to current output may help ensure a unique equilibrium. We find that the first channel by itself has a quantitatively negligible effect and almost all strict inflation-targeting rules lead to indeterminacy, whether with higher price stickiness or overall stickiness by incorporating firm-specific capital, sticky wages, or both. The effect of the second avenue depends on labor supply elasticity and stickiness. With high labor supply elasticity and price stickiness, indeterminacy is much less likely to occur as policy also responds to output. With estimated labor supply elasticity or empirically reasonable price stickiness, policy's response to output helps little in ensuring determinacy; even incorporating firm-specific capital makes only a marginal improvement. Incorporating sticky wages, on the other hand, greatly enhances the role of policy's response to output in ensuring determinacy. With both sticky wages and firm-specific capital incorporated, even a tiny response of policy to current output can render equilibrium determinate for a wide range of response of policy to future inflation.
    Keywords: Forward-looking inflation targeting, current output, sticky prices, sticky wages, firm-specific capital, endogenous investment, indeterminacy, Samuelson-Farebrother conditions
    JEL: E12 E31 E52
    Date: 2007–02
  6. By: Peter Howells (School of Economics, University of the West of England)
    Keywords: Monetary Policy;
    JEL: E58
    Date: 2007–01
  7. By: Thams, Andreas
    Abstract: This paper analyzes empirically the impact of fiscal policy on the price level for Germany and Spain. We investigate, whether the fiscal theory of the price level (FTPL) is able to deliver a reasonable explanation for the different evolutions of the price levels in these two countries during recent years. We apply a Bayesian VAR model with sign restrictions on the impulse responses to assess the relation between surpluses and public debt. The analysis basically evidences non-Ricardian equilibria in Spain, while the opposite is true for Germany. We interpret this as evidence for the inflation differences in these two countries being partially induced by fiscal policy shocks.
    Keywords: Fiscal theory; policy interaction; monetary policy; public debt; price level; euro area
    JEL: E52 E31 E61
    Date: 2007–02–01
  8. By: Frederic S. Mishkin; Klaus Schmidt-Hebbel
    Abstract: Yes, as inferred from panel evidence for inflation-targeting countries and a control group of high-achieving industrial countries that do not target inflation. Our evidence suggests that inflation targeting helps countries achieve lower inflation in the long run, have smaller inflation response to oil-price and exchange-rate shocks, strengthen monetary policy independence, improve monetary policy efficiency, and obtain inflation outcomes closer to target levels. Some benefits of inflation targeting are larger when inflation targeters have achieved disinflation and are able to make their inflation targets stationary. Despite these favorable results for inflation targeting, our evidence generally does not suggest that countries that adopt inflation targeting have attained better monetary policy performance relative to our control group of highly successful non-inflation targeters. However, inflation targeting does seem to help all country groups to move toward performance of the control group. The performance attained by industrial-country inflation targeters generally dominates performance of emerging-economy inflation targeters and is similar to that of industrial non-inflation targeting countries.
    JEL: E31 E52 E58
    Date: 2007–01
  9. By: Tom Cargill (Department of Economics, University of Nevada, Reno); Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: Interest rate targeting is widely used by central banks to pursue price stability; however, the variation in inflation policy outcomes between central banks such as the Federal Reserve and the Bank of Japan despite a common policy instrument framework suggests interest- targeting has limitations. Despite the variation in policy outcomes, the role of targeting was enhanced with the advent of Taylor rules in the 1990s and interest rate targeting dominates central bank attitudes to the exclusion of any other policy instrument framework. The recent Japanese experience confronts us with the need to reassess the relative merits of interest targeting. This paper frames the discussion of the various problems of the interest-targeting framework within a model that encompasses a number of important previous results and stresses that interest rate targeting may leave the price level indeterminate in various plausible circumstances. In a low, or even zero interest rate environment, such as the one that characterized Japan, Taylor-type rules may offer no solution to the indeterminacy problem. The paper then discusses various aspects of the BoJ’s decision to adhere to interest rate targeting despite its limitations.
    Keywords: Interest-targeting, Monetary Policy, Deflation, Japan
    JEL: E52 E58 E31
    Date: 2006–12
  10. By: David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Gregory, DE WALQUE; Rafael, WOUTERS
    Abstract: We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firmÕs productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affect nominal interest rates and inflation outcomes
    Keywords: Efficiency wage, effort, inflation persistence, monetary policy
    JEL: E4 E5
    Date: 2006–11–13
  11. By: Leon, Costas
    Abstract: The Taylor equation is a simple monetary policy rule that determines the Central Bank’s policy rate as a function of inflation and output. A significant body of literature verifies the consistency of the Taylor rule with the data. However, recently there has been a growing literature regarding the validity of the estimated parameters due to the non-stationarity of the interest rate. In this paper I test the consistency of the Taylor rule with the Greek data for the period 1996-2004. It appears that the data do not support the Taylor rule in the sense that they do not form a cointegration set of variables. Therefore, the estimated parameters should be considered fragile and the forecasting for the interest rate as a function of inflation and output should not be expected to be adequately consistent with the actual data.
    Keywords: Taylor rule; Monetary policy; Central bank; EMU; Greece.
    JEL: F41 E58
    Date: 2006–08–31
  12. By: S. Boragan Aruoba; Sanjay K. Chugh
    Abstract: We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. Our main results are in stark contrast to the prescriptions of earlier flexible-price Ramsey models. Two especially important findings emerge from our work: the Friedman Rule is typically not optimal and inflation is stable over time. Inflation is not a substitute instrument for a missing tax, as is sometimes the case in standard Ramsey models. Rather, the inflation tax is exactly the right tax to use because the use of money has a rent associated with it. Regarding the optimal dynamic policy, realized (ex-post) inflation is quite stable over time, in contrast to the very volatile ex-post inflation rates that arise in standard flexible-price Ramsey models. We also find that because capital is underaccumulated, optimal policy includes a subsidy on capital income. Taken together, these findings turn conventional wisdom from traditional Ramsey monetary models on its head.
    Date: 2006
  13. By: Aubhik Khan; Julia Thomas
    Abstract: The authors examine a monetary economy where households incur fixed transactions costs when exchanging bonds and money and, as a result, carry money balances in excess of current spending to limit the frequency of such trades. As only a fraction of households choose to actively trade bonds and money at any given time, the market is endogenously segmented. Moreover, because households in this model economy have the ability to alter the timing of their trading activities, the extent of market segmentation varies over time in response to real and nominal shocks. The authors find that this added flexibility can substantially reinforce both sluggishness in aggregate price adjustment and the persistence of liquidity effects in real and nominal interest rates relative to that seen in models with exogenously segmented markets.
    Date: 2007
  14. By: Peter Docherty (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper investigates the role played by endogenous money in models with interest-sensitive expenditures. In particular, it examines the impact of endogenous money on a baseline neoclassical model arguing against the frequently asserted claim that traditional neoclassical macroeconomics is compatible with endogenous money. It demonstrates firstly that endogenous money is a sufficient condition to render unstable a neoclassical model characterised by interest-sensitive expenditures, full employment and money neutrality. Secondly, it shows that the introduction of either money illusion on the part of workers or a Taylor rule governing monetary policy are alternative methods of stabilising models with interest-sensitive expenditures and endogenous money, though with different implications for the full employment and neutrality characteristics of the standard model. Thirdly, it raises questions about whether models which incorporate Taylor rules can be properly characterised as containing endogenous money and it provides an alternative interpretation of such models. The paper concludes by arguing that money supply endogeneity of the extreme or accommodationist type is of fundamental significance for the construction of a theory of long period unemployment but it identifies a set of remaining questions which need to be addressed in the advancement of this project.
    Keywords: endogenous money; money neutrality; unemployment; interest-sensitivity
    JEL: E40 E52 E58
    Date: 2006–05–01
  15. By: Erdogdu, Oya
    Abstract: Consumption expenditures is one significant component of aggregate demand. As opposed to lifetime income and permanent income hypothesises based on Ricardian policies, recent theoretical and empirical studies indicate possible fiscal impacts on household consumption decisions. Besides providing insights to determinants of consumption decisions, these studies also guide to policy solutions to high and risky current account deficits and high and persisting inflation rate problems. This empirical study for Turkey is another attempt to distinguish any non Ricardian policy and search for possible fiscal policy effects on household consumption decisions. Allowing for long run and short run effects indicates that the expentionary Keynesian impact of fiscal policy on household consumption is significant only if fiscal policy is sustainable.
    Keywords: Consumption; Fiscal Policy; Vector Error Correction Models
    JEL: E21 C32
    Date: 2006
  16. By: Govori, Fadil
    Abstract: From the financial markets point of view the interest rate can be considered as the price of money. This makes the interest rate a very important instrument for efficient financial markets performance and a vital tool of the government's economic management. The control of interest rates is passed over to the Central Bank. There are many different interest rates. Interest rates will vary according to the amount of time money is tied up for and the riskiness of the investment. The actual interest rate will depend on a number of factors. These include: The length of time for which the money is borrowed (or saved); the security of the loan (or investment); the nature of the financial institution the money is borrowed from (or lent to); the amount of competition between financial institutions Monetary policy and the alteration of interest rates are important tool in the government's economic management. When the Central Bank feels that inflationary pressures are rising in the economy then it increases the rate of interest to dampen down the growth of aggregate demand. Demand falls when interest rates are raised through their effect on the components of aggregate demand. Consumption will fall when interest rates are raised. The rise in interest rates will therefore reduce the level of investment. The amount investment falls by depends on the interest elasticity of demand for investment. Changes in interest rates affects on different aspects of the economy (growth, prices, employment, spending, etc.). That is the interest rate transmission mechanism: One of the peculiarities of the money market is its way of quoting interest rates. Some money market instruments (Treasury bills, commercial paper, and bankers’ acceptances) are quoted on a discount basis. Other rates (fed funds, Federal Reserve discount rate, and repo rates) are quoted on an add-on basis. Each of these rates is different from the yield to maturity, the rate generally used for comparing coupon-bearing bonds. There are at least five different money market rates: The discount rate, the add-on rate, the bond equivalent yield, and the semiannual and annual yields to maturity. Both nominal and real interest rates differ by maturity, or term. A schedule of spot interest rates by maturity is called the term structure of interest rates. The term structure can be rising, flat, declining, or humped. Bonds and other debt instruments have varying degrees of default risk, and the yields on these instruments reflect the market’s assessment of this default risk. The relationship among these interest rates is called the risk structure of interest rates.
    Keywords: Interest Rates; Behavior of Interest Rate; Term Structure; Risk Structure
    JEL: E51 G13 E52 E44 E58 E43 E41 G12
    Date: 2007–01
  17. By: Fanelli, Luca
    Abstract: This paper addresses the issue of testing the 'hybrid' New Keynesian Phillips Curve (NKPC) through Vector Autoregressive (VAR) systems and likelihood methods, giving special emphasis to the case where variables are non stationary. The idea is to use a VAR for both the inflation rate and the explanatory variable(s) to approximate the dynamics of the system and derive testable restrictions. Attention is focused on the 'inexact' formulation of the NKPC. Empirical results over the period 1971-1998 show that the NKPC is far from being a `good first approximation' of inflation dynamics in the Euro area.
    Keywords: Inflation dynamics; Forecast model; New Keynesian Phillips Curve; Forward-looking behavior; VAR expectations.
    JEL: C32 C52 E31
    Date: 2005–01
  18. By: Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: This paper does two things. First, it shows both anecdotal and cross-country evidence that indicates that countries that have experienced hyperinflation display significantly lower long-term rates of inflation than countries that lack the same experience. Secondly, it presents a model to rationalize the main empirical finding. There is more than one mechanism through which the long-term effects of hyperinflation may have an impact on long-term inflation outcomes. The suggested explanation this paper offers is that hyperinflations act by reducing the social costs of increasing the collection of conventional, distorsionary taxes relative to the collection of the inflation tax.
    Keywords: Hyperinflations, monetary institutions, inflation, central banks
    JEL: E31 E42 E58 E65
    Date: 2006–12
  19. By: Kirdan Lees; Troy Matheson; Christie Smith (Reserve Bank of New Zealand)
    Abstract: We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts from a DSGE-VAR and a 'vanilla' DSGE model are competitive with, and in some dimensions superior to, the Reserve Bank of New Zealand's official forecasts. We also use the estimated DSGE-VAR structure to identify optimal policy rules that are consistent with the Reserve Bank's Policy Targets Agreement. Optimal policy rules under parameter uncertainty prove to be relatively similar to the certainty case. The optimal policies react aggressively to inflation and contain a large degree of interest rate smoothing, but place a low weight on responding to output or the change in the nominal exchange rate.
    JEL: C51 E52 F41
    Date: 2007–01
  20. By: Fanelli, Luca
    Abstract: This paper proposes the evaluation of the New Keynesian Phillips Curve (NKPC) under a new learning mechanism where VAR learning dynamics is combined with the idea of testing the validity of the forward-looking model of inflation dynamics. The key assumption is that agents’ perceived law of motion is a VAR whose parameters are updated by recursive least squares. Differently from standard adaptive learning methods, agents test sequentially the cross-equation restrictions that the NKPC imposes on the VAR as the information set increases. When the restrictions are not rejected agents learn under the restricted system and exploit the cross-equation restrictions to forecast inflation. It is thus possible to check how much and in which periods agents’ beliefs are consistent with the restrictions of the theory. The empirical analysis on quarterly data on the euro area shows that the NKPC with negligible backward-looking parameter is not rejected when the model is evaluated over the period 1984-2005 under the proposed learning mechanism. The result, however, is not fully robust to specifications based on non stationary variables and points out that learning may represent a remarkable source of euro area inflation persistence but not its only determinant.
    Keywords: Adaptive learning; Cross-equation restrictions; Forward-looking model of inflation dynamics; Perceived Law of Motion; Recursive Least Squares; VAR.
    JEL: C32 C52 E10 D83
    Date: 2007–01
  21. By: Domenico Giannone; Troy Matheson (Reserve Bank of New Zealand)
    Abstract: This paper introduces a new indicator of core inflation for New Zealand, estimated using a dynamic factor model and disaggregate price data. Using disaggregate price data we can directly compare the predictive performance of our core indicator with a wide range of other ‘core inflation’ measures estimated from disaggregate prices, such as the weighted median and the trimmed mean. Predictive performance is assessed relative to a centred 2 year moving average of past and future annual inflation outcomes. The 2 year centred moving average is used as an analytical approximation of the inflation target from the PTA, which requires the Reserve Bank to keep annual inflation between 1 and 3 per cent on average over the medium term. We find that our indicator produces relatively good estimates of this characterisation of core inflation when compared with estimates derived from a range of other models.
    JEL: C32 E31 E32 E52
    Date: 2006–10
  22. By: Daniel L. Thornton
    Abstract: In an environment of low inflation, the Federal Reserve faces the risk that it has not provided enough monetary stimulus even when it has pushed the short-term nominal interest rate to its lower bound of zero. Assuming the nominal Treasury-bill rate has been lowered to zero, this paper considers whether further open market purchases of Treasury bills could spur aggregate demand through increases in the monetary base that may stimulate aggregate demand by increasing liquidity for financial intermediaries and households; by affecting expectations of the future paths of short-term interest rates, inflation, and asset prices; or by stimulating bank lending through the credit channel. This paper also examines the alternative policy tools that are available to the Federal Reserve in theory, and notes the practical limitations imposed by the Federal Reserve Act, The tools the Federal Reserve has at its disposal include open market purchases of Treasury bonds and private-sector credit instruments (at least those that may be purchased by the Federal Reserve); unsterilized and sterilized intervention in foreign exchange; lending through the discount window; and, perhaps in some circumstances, the use of options.
    Keywords: Liquidity (Economics) ; Monetary policy
    Date: 2007
  23. By: Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Vladimir Kuzin (Goethe-University Frankfurt, Faculty of Economics and Business Administration)
    Abstract: Inflation differentials in the Euro area are mainly due to a sustained divergence of wage developments across the Euro area, and narrower differences in labour productivity growth (Alvarez et al., 2006). We investigate convergence of inflation using unit labour cost (ULC) growth and applying PANIC (Bai and Ng, 2002, 2004) and cluster procedures (Hobijn and Franses, 2000, Busetti et al., 2006) to Euro area countries as well as US States, US Census Regions and German Laender. Euro area differs in that dispersion in general (and its fraction due to idiosyncratic factors in specific) is larger and common factors are much less important in explaining the variance of ULC growth. We report evidence for convergence clusters in all countries.
    Keywords: Unit labor costs, inflation, European Monetary Union, Germany, United States of America, convergence, convergence clubs, panel unit root tests, PANIC
    JEL: E31 O47 C32 C33
    Date: 2007–02
  24. By: Arnold, Ivo J.M.; Kool, Clemens J.M.; Raabe, Katharina
    Abstract: This paper presents evidence on the industry effects of bank lending in Germany and identifies the industry effects of bank lending associated with changes in monetary policy and industryspecific bank credit demand. To this end, we estimate individual bank lending functions for 13 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models shows that industry-specific bank lending growth predominantly responds to changes in industry-specific bank credit demand rather than to changes in monetary policy. In fact, conclusions regarding the bank lending effects of monetary policy are very sensitive to the choice of industry. The empirical results lend strong support to the existence of industry effects of bank lending. Because industries are a prominent source of variation in the bank lending effects of bank credit demand and monetary policy, the paper concludes that the industry composition of bank credit portfolios is an important determinant of bank lending growth and monetary policy effectiveness.
    Keywords: Monetary policy transmission, credit channel, industry structure, dynamic panel data
    JEL: C23 E52 G21 L16
    Date: 2006
  25. By: Michael W. Elsby; Ryan Michaels; Gary Solon
    Abstract: One of the strongest trends in recent macroeconomic modeling of labor market fluctuations is to treat unemployment inflows as acyclical. This trend stems in large part from an influential paper by Shimer on "Reassessing the Ins and Outs of Unemployment," i.e., the extent to which increased unemployment during a recession arises from an increase in the number of unemployment spells versus an increase in their duration. After broadly reviewing the previous literature, we replicate and extend Shimer's main analysis. Like Shimer, we find an important role for increased duration. But contrary to Shimer's conclusions, we find that even his own methods and data, when viewed in an appropriate metric, reveal an important role for increased inflows to unemployment as well. This finding is further strengthened by our refinements of Shimer's methods of correcting for data problems and by our detailed examination of particular components of the inflow to unemployment. We conclude that a complete understanding of cyclical unemployment requires an explanation of countercyclical inflow rates as well as procyclical outflow rates.
    JEL: E24 E32 J63 J64
    Date: 2007–01
  26. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business); Heather D. Gibson (Bank of Greece)
    Abstract: This paper examines the sensitivity of investment to cash flow using a panel of UK firms in manufacturing with a view to shedding some light on the existence of a balance sheet channel or financial accelerator. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy (dividend payouts, share issues and debt accumulation), we also investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness. To this end, we employ a monetary tightness indicator constructed for the UK using the narrative approach pioneered by Romer and Romer. The results provide some support for the view that UK firms show greater investment sensitivity to cash flow during periods of tight monetary policy.
    Keywords: Financial Constraints; Balance Sheet Channel, Investment.
    JEL: E22 E52 E44
    Date: 2007–01
  27. By: Tom Cargill (Department of Economics, University of Nevada, Reno); Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: The Bank of Japan permitted a ten-year period of deflation (1995-2005) which appears to have ended in 2006. The deflation, as well as the preceding disinflation, adversely affected the financial and real sectors of the economy that in turn, made it difficult to recover from the collapse of asset prices in 1990 and 1991. Various ad hoc explanations have been offered to account for the deflation period. This paper offers a second-best explanation based on a two-player policy game between the Bank of Japan and the banking system in which the banking system relies on an accommodative policy of forgiveness and forbearance by the Ministry of Finance to deal with weak balance sheets. The paper does not explicitly model the Ministry of Finance preference function but incorporates the Bank of Japan’s perceived willingness of the Ministry to accommodate the banking system in the Bank’s reaction function. The model suggests that in the context of established deflationary expectations and large amounts of debt, the Bank of Japan explicitly regarded the level of debt as exceeding the socially optimal level, that Ministry of Finance forgiveness and forbearance contributed to this excess, and lacking an instrument to reverse deflationary expectations, the Bank of Japan employed deflation as a disciplining instrument to limit real debt.
    Keywords: Monetary Policy, Deflation, Japan
    JEL: E31 E58 E42 E50
    Date: 2006–12
  28. By: Monique Ebell; Albrecht Ritschl
    Abstract: Most treatments of the Great Depression have focused on its onset and its aftermath. In contrast, we take a unified view of the interwar period. We look at the slide into and the emergence from the 1920-21 recession and the roaring 1920s boom, as well as the slide into the Great Depression after 1929, and attempt to explain these phenomena in a unified framework. The model framework combines monopolistic product market competition with search frictions and bargaining in the labor market, allowing for both individual and collective (unionized) wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. The pro-union provisions of the Clayton Act of 1914 contributed to the slide in asset prices and the depression of 1920-21, while a series of tough anti-union Supreme Court decisions in late 1921 and 1922 coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark court decisions in favor of trade unions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, made the economy increasingly susceptible to collapsing profit expectations. We model the onset of the great depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices.
    Keywords: Trade unions, collective bargaining, Great Depression
    JEL: E24 E27 J51 J64 N12 N22
    Date: 2007–02
  29. By: Sebastian Dullien (Financial Times Deutschland); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin)
    Abstract: Using unit labor cost (ULC) data from Euro area countries as well as US States and German Laender we investigate inflation convergence using different approaches, namely panel unit root tests, cointegration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.
    Keywords: Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs
    JEL: E31 O47 C32
    Date: 2007–02
  30. By: Charles T. Carlstrom; Timothy S. Fuerst
    Abstract: We document increased central bank independence within the set of industrialized nations. This increased independence can account for nearly two thirds of the improved inflation performance of these nations over the last two decades.
    Keywords: Banks and banking, Central ; Inflation (Finance)
    Date: 2006
  31. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Institute for World Economics, University of Kiel, CEPR and IZA)
    Abstract: We distinguish and assess three fundamental views of the labor market regarding the movements in unempoyment: (i) the frictionless equilibrium view; (ii) the chain reaction theory, or prolonged adjustment view; and (iii) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the shortrun fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long runs are interrelated, merging with one another along an intertemporal continuum.
    Keywords: Unemployment, Interactive labor market dynamics, Interplay of lags and shocks, Frictional growth, Growth drivers
    JEL: E22 E24 J21 J30
    Date: 2007–02
  32. By: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
    Abstract: We make two comparisons relevant for the business cycle accounting approach. We show that in theory representing the investment wedge as a tax on investment is equivalent to representing this wedge as a tax on capital income as long as the probability distributions over this wedge in the two representations are the same. In practice, convenience dictates differing probability distributions over this wedge in the two representations. Even so, the quantitative results under the two representations are essentially identical. We also compare our methodology, the CKM methodology, to an alternative one used in Christiano and Davis (2006) as well as by us in early incarnations of the business cycle accounting approach. We argue that the CKM methodology rests on more secure theoretical foundations.
    Date: 2007
  33. By: Ingrid Größl; Ulrich Fritsche
    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: 2007
  34. By: Bruno Eklund
    Abstract: This paper focuses on the Stock and Watson methodology to fore- cast the future state of the business cycle in the Icelandic economy. By selecting variables available on a monthly basis that mimic the cyclical behaviour of the quarterly GDP, coincident and leading vari- ables are identi?ed. A factor model is then speci?ed based on the assumption that a single common unobservable element drives the cyclical evolution of many of the Icelandic macroeconomic variables. The model is cast into a state space form providing a simple frame- work both for estimation and for predicting the future recession and expansion patterns. Based on the bootstrap resampling technique, a simple approach to estimate recession and expansion probabilities is developed. This method is completely nonparametric compared to the semi-parametric approach used by Stock and Watson.
    Date: 2007–01
  35. By: Edward Nelson
    Abstract: This paper brings together, using extensive archival material from several countries, scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). I evaluate these interpretations and predictions in light of subsequent events.
    Keywords: Friedman, Milton ; Economic history
    Date: 2007
  36. By: Leo Krippner (AMP Capital Investors and University of Waikato)
    Abstract: This article uses a dynamic multi-factor model of the yield curve with a rational-expectations, general-equilibrium-economy foundation to investigate the uncovered interest parity hypothesis(UIPH). The yield curve model is used to decompose the interest rate data used in the UIPH regressions into components that reflect rationally-based expectations of the cyclical and fundamental components of the underlying economy. The UIPH is not rejected based on the fundamental components of interest rates, but is soundly rejected based on the cyclical components. These results provide empirical support for suggestions in the existing theoretical literature that rationally-based interest rate and exchange rate dynamics associated with cyclical inter-linkages between the economy and financial markets may contribute materially to the UIPH puzzle.
    Keywords: uncovered interest parity; forward rate unbiasedness hypothesis; yield curve; term structure of interest rates; ANS model; Nelson and Siegel model
    JEL: E43 F31
    Date: 2006–12–21
  37. By: Giulio, NICOLETTI; Olivier, PIERRARD
    Abstract: We augment a RBC model with capital and labor market frictions. We follow the approach of Wasmer and Weil (2004) which model market imperfections as search processes : firms must sequentially find a match with a bank first and then with a worker in order to start production. We show that the interactions between labor and capital market frictions may generate a financial accelerator or decelerator, depending on a parameter condition. We compare our model with US National Accounts data and with the empirical findings of DellÕAriccia and Garibaldi (2005) : we find that the financial accelerator as well as real wage rigidities help in improving the statistical propqerties of the model
    Date: 2006–11–15
  38. By: Carlos E. J. M. Zarazaga
    Keywords: Business cycles ; Gross domestic product ; Financial markets
    Date: 2006
  39. By: Kevin X. D. Huang; Qinglai Meng
    Abstract: The authors establish the necessary and sufficient conditions for local real determinacy in a discrete-time production economy with monopolistic competition and a quadratic price adjustment cost under forward-looking policy rules, for the case where capital is in exogenously fixed supply and the case with endogenous capital accumulation. Using these conditions, they show that (i) indeterminacy is more likely to occur with a greater share of payment to capital in value-added production cost; (ii) indeterminacy can be more or less likely to occur with constant capital than with variable capital; (iii) indeterminacy is more likely to occur when prices are modelled as jump variables than as predetermined variables; (iv) indeterminacy is less likely to occur with a greater degree of steady-state monopolistic distortions; and (v) indeterminacy is less likely to occur with a greater degree of price stickiness or with a higher steady-state inflation rate. In contrast to some existing research, the authors' analysis indicates that capital tends to lead to macroeconomic instability by affecting firms' pricing behavior in product markets rather than households' arbitrage activity in asset markets even under forward-looking policy rules.
    Date: 2007
    Abstract: This paper uses scanner data from a large euro area retailer. We extend Deaton and Muellbauer’s Almost Ideal Demand System to estimate the price elasticity and curvature of demand for a wide range of products. Our results support the introduction of a kinked (concave) demand curve in general equilibrium macro models. We find that the price elasticity of demand is on average higher for price increases than for price decreases. However, the degree of curvature in demand is much lower than is currently imposed. Moreover, for a significant fraction of products we observe a convex demand curve.
    Keywords: price setting, real rigidity, kinked demand curve, behavioral AIDS
    JEL: C33 D12 E3
    Date: 2006–12
  41. By: Oliviero A. Carboni; Giuseppe Medda
    Abstract: This paper develops a non-linear theoretical relationship between public spending and economic growth. The model identifies the “optimal” size of government and the “optimal” composition of government spending. Given the size of the government, different allocations of public resources lead to different growth rates in the transition dynamics, depending on their elasticity. We argue that neglecting the hypothesis of non-linearity and the different impact different kinds of public spending have on economic performance results in models which suffer from mis-specification. Traditional linear regression analysis may thus be biased
    Keywords: neoclassical and augmented growth models, fiscal policy; public spending composition
    JEL: E62 O40 H50 E13 H20
    Date: 2007
  42. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: When nominal wage rigidity is large, and banking sector oligopolistic, the benevolent government may prefer to regulate interest rates to boost labor demand. A government of a transition economy may postpone bank privatization to keep credit provision under control, as long as inefficiencies of state ownership are not prohibitive. We model a transition economy where the government initially owns enterprises as well as banks. The economy features constant wage, and strong market power of banks. Under these conditions, we identify when the government has incentive to privatize enterprises and/or banks. We derive conditions under which the banking socialism (the government owns banks, but privatizes enterprises) dominates other institutional modes: socialism, industrial socialism, and capitalism.
    Keywords: privatization; banking; transition
    JEL: D72 D78 E62 H20
    Date: 2007–01
  43. By: Aalto-Setälä , Ville (Bank of Finland, National Consumer Research Center); Schindler, Robert (Rutgers University, Camden)
    Abstract: Nominal rigidities have an important role in macro models used for the analysis of monetary policy. Re-cently, attractive prices (also known as price points) have often been referred to as one important potential explanation of nominal rigidities. An increased interest on attractive prices as an explanation for price ri-gidities rests on online pricing, in the context of which it has been shown that prices are rigid also on the internet, where physical costs are not important. Our empirical analyses using micro data on consumer prices in Finland indicate that a specific form of attractive prices – 9-ending prices – have a considerable effect on pricing dynamics. The results of the study show that changes to prices with 9 endings are more often decreases than are changes to prices with other endings. Price changes to 9-ending prices are also of smaller size than are changes to other endings.
    Keywords: rigidity; price endings; attractive prices; 9-prices
    JEL: D01 E42
    Date: 2006–11–30
  44. By: Arvind Krishnamurthy; Annette Vissing-Jorgensen
    Abstract: We show that the US Debt/GDP ratio is negatively correlated with the spread between corporate bond yields and Treasury bond yields. The result holds even when controlling for the default risk on corporate bonds. We argue that the corporate bond spread reflects a convenience yield that investors attribute to Treasury debt. Changes in the supply of Treasury debt trace out the demand for convenience by investors. We show that the aggregate demand curve for the convenience provided by Treasury debt is downward sloping and provide estimates of the elasticity of demand. We analyze disaggregated data from the Flow of Funds Accounts of the Federal Reserve and show that individual groups of Treasury holders also have downward sloping demand curves. Even groups with the most elastic demand curves have demand curves that are far from flat. The results have bearing for important questions in finance and macroeconomics. We discuss implications for the behavior of corporate bond spreads, interest rate swap spreads, the riskless interest rate, and the value of aggregate liquidity. We also discuss the implications of our results for the financing of the US deficit, Ricardian equivalence, and the effects of foreign central bank demand on Treasury yields.
    JEL: E43 G12
    Date: 2007–01
  45. By: Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
    Abstract: We show that computing business cycles in emerging economy models using the discrete state space technique may be misleading. We solve the models of sovereign default presented by Aguiar and Gopinath (2006) using interpolation. We find that the simulated behavior of the spread is quite different from the behavior obtained using discrete state space. In fact, some of the results obtained by Aguiar and Gopinath (2006) using discrete state space are reversed when using interpolation. Our analysis thus provides a new set of benchmark results for quantitative models of sovereign default.
    Keywords: Business cycles
    Date: 2006
  46. By: Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that in our model the optimal capital income tax rate is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    JEL: E62 H21 H24
    Date: 2007–01
  47. By: Oliver Volckart
    Abstract: This paper examines the questions of whether and how feudal rulers were able to credibly commit to preserving monetary stability, and of which consequences their decisions had for the efficiency of financial markets. The study reveals that princes were usually only able to commit to issuing a stable coinage in gold, but not in silver. As for silver currencies, the hypothesis is that transferring the right of coinage to an autonomous city was the functional equivalent to establishing an independent central bank. An analysis of market performance indicates that financial markets between cities that were autonomous with regard to their monetary policies were significantly better integrated and more efficient than markets between cities whose currencies were supplied by a feudal ruler.
    Keywords: Financial markets, integration, monetary policy, Middle Ages
    JEL: G15 N13 N23 N43
    Date: 2007–02
  48. By: John W. Galbraith; Greg Tkacz
    Abstract: For stationary transformations of variables, there exists a maximum horizon beyond which forecasts can provide no more information about the variable than is present in the unconditional mean. Meteorological forecasts, typically excepting only experimental or exploratory situations, are not reported beyond this horizon; by contrast, little generally accepted information about such maximum horizons is available for economic variables. The authors estimate such content horizons for a variety of economic variables, and compare these with the maximum horizons that they observe reported in a large sample of empirical economic forecasting studies. The authors find that many published studies provide forecasts exceeding, often by substantial margins, their estimates of the content horizon for the particular variable and frequency. The authors suggest some simple reporting practices for forecasts that could potentially bring greater transparency to the process of making and interpreting economic forecasts.
    Keywords: Econometric and statistical methods, Business fluctuations and cycles
    JEL: C53
    Date: 2007
  49. By: Andrew Hughes Hallet; Rasmus Kattai; John Lewis
    Abstract: The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time dataset containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of OECD economic outlook. We find that data revisions are so great that real time CABs have low power in detecting fiscal slippages as defined by the ex post data. We find that the around half of the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages.
    Date: 2007–01
  50. By: Fanelli, Luca; Cavaliere, Giuseppe; Gardini, Attilio
    Abstract: We show that full risk sharing may not be at odd with the idea that changes in regional consumption display error-correcting dynamics, in line with the idea that information and transaction costs stemming from interregional portfolio diversification and labor movements induced by permanent income shocks may delay the adjustment process. Using Italian data over the period 1960-2001 it is found that regional per capita consumptions match the proposed error-correcting structure.
    Keywords: Consumption risk sharing; Adjustment costs; Forward-looking behavior.
    JEL: E21 C32
    Date: 2004–10
  51. By: Erdogdu, Oya Safinaz
    Abstract: This paper is another attempt to be a link between studies on political stability and growth and studies on military expenditures and growth. However, despite the other two studies in that concept, this paper takes military expenditures as a tool of a democratic government to achieve economic stability and growth. For that purpose, the paper takes political economics and defense literature arguments together and provides and empirical analyzes of the relations between political stability, economic growth and military expenditures. Based on the theoretical model developed by Blomberg (1996), the vector autoregression analyzes for Turkey, a democratic country open to all kinds of terrorism, indicates the positive impact of military expenditures on private sector investment decisions and so on economic growth.
    Keywords: Defense; Political Stability; Growth; VAR
    JEL: C32
    Date: 2006
  52. By: Stahl, Harald
    Abstract: This paper presents new evidence on the formation of producer prices. The database combines a one-time survey that was conducted in June 2004 on a sample of 1,200 firms in manufacturing and time-series information on price adjustment of the same firms from a business-tendency survey. The share of time-dependent price setters amounts to 20 per cent. Neither Taylor nor Calvo type price setting describes their price adjustment well. Only a few firms are forward-looking, the majority relies on contemporaneous and past information.
    Keywords: Price rigidity, sticky information, survey data
    JEL: D40 E30
    Date: 2006
  53. By: Bartzsch, Nikolaus
    Abstract: The saving ratio of households in Germany has increased in the past few years when the income trend was weak. This could be due to precautionary saving. In this paper, the importance of precautionary saving against income uncertainty is analyzed empirically using micro data from the German Socio- Economic Panel Study (GSOEP). Wealth in 2002 is regressed on alternative measures of income uncertainty in a cross-section of households. In addition to the usual controls, risk aversion is also taken into account. When using net financial wealth, precautionary saving is statistically significant and economically quite important. The share of precautionary net financial wealth in total aggregate net financial wealth is on average about 20%. Compared with net financial wealth, housing wealth is not used as a bu®er stock against income uncertainty, confirming the hypothesis that this kind of asset is rather illiquid.
    Keywords: precautionary saving, precautionary wealth, buffer-stock model
    JEL: D91 E21 J24
    Date: 2006
  54. By: Bruce Champ; James B. Thomson
    Abstract: From 1883 to 1892, the circulation of national bank notes in the United States fell nearly 50 percent. Previous studies have attributed this to supply-side factors that led to a decline in the profitability of note issue during this period. This paper provides an alternative explanation. The decline in note issue was, in large part, demand-driven. The presence of a competing currency with superior features caused the public to substitute away from national bank notes.
    Keywords: Paper money ; National bank notes ; Silver
    Date: 2006
  55. By: Richard Rogerson
    Abstract: This paper examines the evolution of hours worked in France, Germany, Italy and the US from 1956-2003 and assesses the role of taxes and technology to account for the differences. The empirical work establishes three results. First, hours worked in Europe decline by almost 45% compared to the US over this period. This change is almost an order of magnitude larger than the effects associated with the increase in unemployment over this time period. Second, the decline occurs at a steady pace from 1956 until the mid 1990s, in contrast to the fact that the relative increase in unemployment occurs in the mid 1970s. Third, the decline in hours worked in Europe is almost entirely accounted for by the fact that Europe develops a much smaller service sector than the US. I build a simple model of time allocation to understand the evolution of total hours worked and their distribution across sectors, and calibrate it to match the US between 1956 and 2000. I find that relative increases in taxes and technological catch-up can account for most of the differences between the European and American time allocations over this period.
    JEL: E2 J2
    Date: 2007–02
  56. By: Louise Sheiner; Daniel Sichel; Lawrence Slifman
    Abstract: The composition of the U.S. population will change significantly in coming decades as the decline in fertility rates following the baby boom, coupled with increasing longevity, leads to an older population. This demographic shift will likely have a dramatic effect on the long-run prospects for living standards. Moreover, as has been widely discussed in the media and by policymakers, population aging also has significant implications for social programs for the elderly, such as Social Security and Medicare. In this paper, we discuss the consequences of population aging from a macroeconomic perspective and consider alternative paths the economy could follow in response to population aging. The choices society makes among those alternatives will be closely linked to decisions about how to reform entitlement programs for the elderly. The fundamental conclusion of our study is that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change. The size of any consumption reduction depends critically on whether the adjustment happens sooner or later and on whether the labor force participation of the elderly changes. Important policy questions, then, are whose consumption path falls, by how much, when, and by what means? Decisions about Social Security and Medicare reform are integrally bound up with these fundamental policy questions.
    Date: 2007
  57. By: Philip Oreopoulos; Till von Wachter; Andrew Heisz
    Abstract: The standard neo-classical model of wage setting predicts short-term effects of temporary labor market shocks on careers and low costs of recessions for both more and less advantaged workers. In contrast, a vast range of alternative career models based on frictions in the labor market suggests that labor market shocks can have persistent effects on the entire earnings profile. This paper analyzes the long-term effects of graduating in a recession on earnings, job mobility, and employer characteristics for a large sample of Canadian college graduates with different predicted earnings using matched university-employer-employee data from 1982 to 1999, and uses its results to assess the importance of alternative career models. We find that young graduates entering the labor market in a recession suffer significant initial earnings losses that eventually fade, but after 8 to 10 years. We also document substantial heterogeneity in the costs of recessions and important effects on job mobility and employer characteristics, but small effects on time worked. These adjustment patterns are neither consistent with a neo-classical spot market nor a complete scarring effect, but could be explained by a combination of time intensive search for better employers and long-term wage contracting. All results are robust to an extensive sensitivity analysis including controls for correlated business cycle shocks after labor market entry, endogenous timing of graduation, permanent cohort differences, and selective labor force participation.
    JEL: J0 J3 J6 E3
    Date: 2006–04
  58. By: James Mitchell; Martin Weale
    Abstract: The putative ability of consumer sentiment or expectational data to predict movements in consumption and income growth data is exploited widely by policymakers. But the informational content of these data has been little studied at the micro-level since they are often collected by cross-sectional rather than panel surveys and moreover are often published in aggregated form. This paper establishes at a micro-economic level whether expectational data are predictors of income and consumption growth, and whether they contain information additional to that already contained in past income and consumption data. This is conducted using panel structural vector autoregressive models, and exploits hitherto largely uninvestigated individual-level expectational data from the BHPS. Thereby we also shed light on whether consumers set their consumption patterns consistent with the rational expectations permanent income hypothesis. We conclude that the predictive power of the expectational data are quite weak when one controls for lagged income and consumption movements.
    Date: 2007–01
  59. By: Richard Rogerson
    Abstract: This paper argues that it is essential to explicitly consider how the government spends tax revenues when assessing the effects of tax rates on aggregate hours of market work. Different forms of government spending imply different elasticities of hours of work with regard to tax rates. I illustrate the empirical importance of this point by addressing the issue of hours worked and tax rates in three sets of economies: the US, Continental Europe and Scandinavia. While tax rates are highest in Scandinavia, hours worked in Scandinavia are significantly higher than they are in Continental Europe. I argue that differences in the form of government spending can potentially account for this pattern.
    JEL: E2 J2
    Date: 2007–02
  60. By: Frank Caliendo; Kevin X. D. Huang
    Abstract: Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a hump in consumption during the work life if and only if the elasticity of intertemporal substitution in consumption is less than unit. They find that underestimation of uncertainty has little effect on the long-run average behavior of consumption over the work life. Their calibrated model produces a hump-shaped work-life consumption profile with both the age and the amplitude of peak consumption consistent with empirical observations.
    Date: 2007
  61. By: Ögren, Anders (EHF/SSE & EconomiX - UPX)
    Abstract: The development of a well adapted financial system was a main part of the successful Swedish economic modernization in the latter half of the nineteenth century. In this paper it is shown that this development followed the pattern of a financial revolution. Major institutional and organizational changes that took place roughly between the late 1850s and early 1870s led to a rapid increase in liquidity and financial services. This financial revolution preceded the acceleration in economic growth in general and in the modern, industrial sector in particular. Especially the monetization encouraged growth, both in the industrial sector and in GDP as a whole. The basis of the financial system, measured as commercial bank assets and equity capital, was on the other hand also a result of GDP growth.
    Keywords: Financial Development; Growth; Institutions; Liquidity; Monetization; Nineteenth Century; Silver and Gold Standards; Structural Change
    JEL: E44 N13 N23 O16
    Date: 2006–12–21
  62. By: Lei Fang; Richard Rogerson
    Abstract: Recent empirical work finds a negative correlation between product market regulation and aggregate employment. We examine the effect of product market regulations on hours worked in a benchmark aggregate model of time allocation. We find that product market regulations affect time devoted to market work in effectively the same fashion as do taxes on labor income or consumption. In particular, if product market regulations are to affect aggregate market work in this model the key driving force is the size of income transfers associated with the regulation relative to labor income, and the key propagation mechanism is the labor supply elasticity. We show in a two sector model that industry level analysis is of little help in assessing the aggregate effects of product market regulation.
    JEL: E2 J2 L5
    Date: 2007–02
  63. By: Manuela Prieto Rodríguez (Centro de Estudios Andaluces); Diego Martínez López (Centro de Estudios Andaluces)
    Abstract: Este trabajo estudia los factores que explican los determinantes de la inversión pública regional a escala provincial. En particular, se analizan los criterios que han podido guiar las decisiones de inversión pública (en carreteras e hidráulicas) realizadas por la Administración Autonómica en las provincias andaluzas en el periodo 1985-2000. Nuestros principales resultados indican que mientras no parece existir una sólida relación entre indicadores de gastos e inversión pública, sí se encuentra una orientación redistributiva frente a criterios de eficiencia. Además, se detecta complementariedad entre la inversión autonómica y la realizada por el Estado, matizada los años en que ambas instituciones estaban gobernadas por partidos políticos distintos.
    Keywords: datos de panel, inversión pública, necesidades de gasto
    JEL: C23 E62 H53 H54 H72
    Date: 2007
  64. By: Eic W. Bond (Department of Economics, Vanderbilt University); Robert A. Driskill (Department of Economics, Vanderbilt University)
    Abstract: Previous literature has shown that local indeterminacy and local instability can arise in two-sector models when factor market distortions create a divergence between capital intensity ranking of the sectors on a physical basis and on a value basis. We identify a previously unnoticed source of indeterminacy that arises when there are value intensity - physical intensity reversals (VIPIRs), which is that there is a range of the phase plane in which there are 3 static equilibria (one with incomplete specialization and one with complete specialization in each of the respective goods). We show how this multiplicity of equilibria can be used to construct compound pathsin which the economy switches between production patterns over time. We show that in an open economy model with VIPIRs, there will exist compound paths that reach the steady in finite time. We also establish conditions for the existence of cyclical equilibria that alternate forever between specialization in the consumption and specialization in the investment good. Consideration of the compound paths can expand the range of parameter values for which the economy has a multiplicity of equilibrium paths and can generate paths to the steady in examples where the steady state is locally unstable.
    Keywords: Indeterminacy, multiple equilibria
    JEL: C62 E13 F16
    Date: 2006–12
  65. By: van de Coevering, Clement; Foster, Daniel; Haunit, Paula; Kennedy, Cathal; Meagher, Sarah; Van den Berg, Jennie
    Abstract: This paper examines the impact of two effects of the pension reform package that the UK Government put forward in the May White Paper Security in retirement: the likely increase in the number of older people working due to a higher State Pension age and the likely rise in saving due to more people putting away money for retirement. The overall effect of changes to State Pension age and the introduction of personal accounts on UK incomes is likely to be in the range of 0.9 – 3.1 per cent. Although these numbers are relatively small proportions of the total economy, they represent significant sums. In terms of today’s economy, they would be worth around £11 – 38 billion. This paper also applies an innovative economic analysis to examine the scale of the increase in people’s wellbeing as a result of improved consumption smoothing. It finds that if people save for retirement through personal accounts, then generally their wellbeing will be enhanced.
    Keywords: pension reform; consumption smoothing; social welfare
    JEL: E17 E20 H31
    Date: 2006–11–29
  66. By: Jerzy D. Konieczny (Wilfrid Laurier University)
    Abstract: Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis by Emmanuel Dhyne, Catherine Fuss, Hashem Pesaran and Patrick Sevestre, National Bank of Belgium International Conference on \"Price and Wage Rigidities in an Open Economy\", Brussels, October 12, 2006.
    Keywords: Costly Price Adjustment, Optimal Pricing
    JEL: E3
    Date: 2006–10–12
  67. By: Mehmet Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This paper examines the tax structures of the Middle East and North Africa (MENA) countries by focusing on the quality of governance and demographic changes as two influential factors in region’s economies. The objective of is to determine whether these factors can explain the variation in the tax structures of these countries. Results from regressions on the MENA countries and the ones based on a larger sample of 61 countries show that these factors affected the level of taxation, measured by the tax ratio, more strongly than they affected the tax composition. While the quality of governance seems to have affected the tax structures in the MENA countries more than in other comparable Non-OECD countries, demographics seems to have played a bigger role in determining the tax structures in other Non-OECD countries. However, neither of these factors explained changes in the income tax share satisfactorily. One key result is that the increase in the quality of governance has decreased the reliance on domestic taxes on goods and services. The paper provides a discussion on the policy implications of these results.
    Keywords: Tax structure, quality of governance, demographics, MENA countries
    JEL: E62 H20 H71 H87
    Date: 2006–12
  68. By: Diewert, Erwin
    Abstract: The paper summarizes the main ideas suggested in OECD-IMF Workshop on Real Estate Price Indexes which was held in Paris, November 6-7, 2006. The paper discusses possible uses and target indexes for real estate price indexes and notes that a major problem is that it is not possible to exactly match the quality of dwelling units over time due to the fact that the housing stock changes in quality due to renovations and depreciation. Four alternative methods for constructing real estate price indexes are discussed: the repeat sales model; the use of assessment information along with property sale information; stratification methods and hedonic methods. The paper notes that the typical hedonic regression method may suffer from specification bias and suggests a way forward. Problems with the user cost method for pricing the services of owner occupied housing are also discussed.
    JEL: C43 E31 R21
    Date: 2007–01–03
  69. By: Alessandra Bonfiglioli
    Abstract: This paper studies the relationship between investor protection, financial risk sharing and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk while lending to firms. This implies lower cost of external finance and better risk sharing between financiers and entrepreneurs. Investor protection, by boosting the market for risk sharing plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between the size of the market for risk sharing and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-eight countries, and a panel of fifty countries over the period 1976-2000, supports the predictions of the model.
    Keywords: Income inequality, stock market development, financial development, capital market frictions, investor protection
    JEL: D31 E44 G30 O15 O16
    Date: 2007–01–29
  70. By: Elizabeth M. Caucutt; Thomas F. Cooley; Nezih Guner
    Abstract: During the period from 1880 to 1950, publicly managed retirement security programs became an important part of the social fabric in most advanced economies. In this paper we study the social, demographic and economic origins of social security. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax, and social security emerges.
    JEL: E61 H2 H55
    Date: 2007–01
  71. By: Carlo Devillanova (Bocconi University, Milano, Italy.); Michele Di Maio (University of Macerata, Italy.); Pietro Vertova (University of Bergamo, Italy.)
    Abstract: This paper addresses the role of mobility costs in shaping the effects of trade integration on wage inequality and welfare. We present a three-factor, two-sector model in which the production technology exhibits capital-skill complementarity and the cost of moving across sectors differs between unskilled and skilled workers. We consider a proportional tax on skilled workers’ wage that is used to finance a re-training program to reduce the mobility costs of unskilled workers. We show that if the training program is sufficiently effective, a positive tax rate can both reduce wage inequalities and reinforce the welfare-enhancing effects of trade integration. In addition we show that, even when the public programme entails some welfare losses, it can make trade integration Pareto superior with respect to autarky.
    Keywords: Capital-Skill Complementarity, Intersectoral Labour Mobility, Wage In-equality, Trade Integration.
    JEL: E24 J31 R23
    Date: 2006–11
  72. By: Andrew Atkeson; Ariel Burstein
    Abstract: We study the implications for international relative prices of a simple Ricardian model of international trade with imperfect competition and variable markups, providing a tractable account of firm-level and aggregate prices. We show that both trade costs and imperfect competition with variable markups are needed to account for pricing-to-market at the firm and aggregate levels. We also show that international trade costs are essential, but pricing-to-market is not, to account for a high volatility of tradeable consumer prices relative to the overall CPI-based real-exchange rate.
    JEL: E31 F1 F12 F41
    Date: 2007–01
  73. By: Merrouche, Ouarda (Department of Economics)
    Abstract: In 1980, seven out of the seventeen Spanish regions were devolved education spending responsibility. Using a difference-in-differences approach, which I show to be particularly credible in this context, I evaluate the long term effect of this reform on human capital. I find no robust evidence to corroborate the theoretically predicted benefits of decentralization.
    Keywords: Decentralization; Education; Difference-in-differences estimator
    JEL: E61 E65
    Date: 2007–01–15
  74. By: Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: The issue of convergence has been hotly debated since the mid 1980s. Only recently certain consensus has arisen around some of the most fundamental issues. It seems hardly surprising, then, to find a large variation in how those issues are taught to undergraduates. This paper is an attempt at clarifying the different concepts of convergence, and their relation to both the neoclassical model of growth and available cross-country evidence. Evidence on some of the contradictory ways in which the issues are taught is provided, a simple way to teach the relevant concepts of convergence by means of numerical examples is presented, and relevant examples drawn from historical evidence are shown. Also, the implications of the neoclassical growth model are presented in a slightly different, but clearer way, and some of the difficulties to interpret the cross-country empirical evidence are reviewed.
    Keywords: International Convergence, Economic Growth, World income distribution
    JEL: O40 E10 O30 O50
    Date: 2006–12
  75. By: Federico Guerrero (Department of Economics, University of Nevada, Reno)
    Abstract: Using data from publicly traded South Korean corporations for the period 1980-94, this paper finds evidence that increases in financial liberalization that accompanied the more general process of financial globalization have significantly reduced the maturity structure of corporate debt contracts, thus lending partial empirical support to the idea that financial liberalization can be well described as “short-term pain, long-term gain”. This effect of financial liberalization on corporate debt maturity is robust to changes in econometric specification, and does not seem to be counteracted by opposing forces that tended to lengthen the maturity of corporate debt during the same period.
    Keywords: Globalization, corporate debt maturity, South Korea
    JEL: G32 G15 D92 E65 F39
    Date: 2006–12

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