nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒02‒17
eighty-six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features By Hernando Vargas
  2. Monetary policy, macroeconomic policy mix and economic performance in the Euro area By Eckhard Hein; Achim Truger
  3. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Mirko Abbritti
  4. Disequilibrium Macroeconomic Dynamics, Income Distribution and Wage-Price Phillips Curves By Ekkehard Ernst; Peter Flaschel; Christian Proano; Willi Semmler
  5. Wage bargaining and monetary policy in a Kaleckian monetary distribution and growth model: trying to make sense of the NAIRU By Eckhard Hein
  6. Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach By Frank Smets; Raf Wouters
  7. Investment-Specific Technology Shocks and Labor Market Frictions By Reinout De Bock
  8. Fiscal Policy and Macroeconomic Performance in the Euro area - Lessons for the Future By Eckhard Hein; Achim Truger
  9. Monetary Policy and the Political Support for a Labor Market Reform By Álvaro Aguiar; Ana Paula Ribeiro
  10. Macroeconomic policies, wage developments, and Germany's stagnation By Eckhard Hein; Achim Truger
  11. Inside Money, Credit, and Investment By Dressler, Scott; Li, Victor
  12. The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries By Lipinska, Anna
  13. Market structure and business cycles: Do nominal rigidities influence the importance of real shocks? By Dave, Chetan; Dressler, Scott
  14. Germany's post-2000 stagnation in the European context - a lesson in macroeconomic mismanagement By Eckhard Hein; Achim Truger
  15. Technology Shocks and Business Cycles: The Role of Processing Stages and Nominal Rigidities By Louis Phaneuf; Nooman Rebei
  16. Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities By Peter Flaschel; Christian Proano; Willi Semmler
  17. Can Opacity of a Credible Central Bank Explain Excessive Inflation? By Baeriswyl, Romain; Cornand, Camille
  18. The Role of Banks in the Transmission of Monetary Policy in the Baltics By Köhler, Matthias; Hommel, Judith; Grote, Matthias
  19. Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement? By Joerg Bibow
  20. New Keynesian macroeconomics: Entry For New Palgrave Dictionary of Economics, 2nd Edition By Dixon, Huw
  21. On the (in-)stability and the endogeneity of the "normal" rate of capacity utilisation in a post-Keynesian/Kaleckian "monetary" distribution and growth model By Eckhard Hein
  22. Interest, debt and capital accumulation - a Kaleckian approach By Eckhard Hein
  23. Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms By Ansgar Belke; Daniel Gros
  24. Estimating Germany's Potential Output By Gustav Horn; Camille Logeay; Silke Tober
  25. Hysteresis and Nairu in the Euro Area By Camille Logeay; Silke Tober
  26. Price Stickiness in Ss Models: New Interpretations of Old Results By Ricardo J. Caballero; Eduardo M.R.A. Engel
  27. The Macroeconomic Debate On Scaling up HIV/AIDS Financing By Terry McKinley; Degol Hailu
  28. The Suspension of Cash Payments as a Monetary Regime By Elisa Newby
  29. Inflation persistence in the euro-area, US, and new members of the EU: Evidence from time-varying coefficient models By Zsolt Darvas; Balázs Varga
  30. Pain or Gain? Short-term Budgetary Effects of Surprise Inflation - the Case of Hungary By Gábor P. Kiss
  31. Time-Consistent Control in Non-Linear Models By Steve Ambler; Florian Pelgrin
  32. Anticipations, prime de risque et structure par terme des taux d'intérêt : une analyse des comportements d'experts By Georges Prat; Remzi Uctum
  34. Guidelines for sustained growth in the EU ? The concept and consequences of the Broad Economic Policy Guidelines By Eckhard Hein; Thorsten Niechoj
  35. Interactions des politiques monétaire et budgétaires en union monétaire : évaluation dans un cadre nouveau keynésien By Pascale Duran-Vigneron
  36. Evaluating Forecasts from Factor Models for Canadian GDP Growth and Core Inflation By Calista Cheung; Frédérick Demers
  37. Monetary hyperinflations, speculative hyperinflations and modelling the use of money. By Alexandre Sokic
  38. Rentabilité d'actifs et fluctuations économiques : une perspective d'équilibre général dynamique et stochastique By Kevin Elie Beaubrun-Diant; Julien Matheron
  39. Housing Market Cycles and Duration Dependence in the United States and Canada By Rose Cunningham; Ilan Kolet
  40. Can heterogeneous preferences stabilize endogenous fluctuations ?. By Stefano Bosi; Thomas Seegmuller
  41. Real Wage Rigidities and the Cost of Disinflations: A Comment on Blanchard and Galí By Guido Ascari; Christian Merkl
  42. Monetary Policy Committees in Action: Is There Room for Improvement? By Philipp Maier
  43. On the relationship between inflation persistence and temporal aggregation By Ivan Paya; K Holden; A Duarte
  44. Evaluating An Estimated New Keynesian Small Open Economy Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  45. Unemployment Rate Dispersion in Melbourne: The Regional Dimension By Robert Dixon; Muhammad Mahmood
  46. The economic impact of central bank transparency: a survey By Cruijsen,Carin van der; Eijffinger,Sylvester
  47. Testing the Power of Leading Indicators to Predict Business Cycle Phase Changes By Allan Layton; Daniel R. Smith
  48. Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification By Harald Uhlig
  49. Unemployment Rate Dispersion within Australian Cities By Robert Dixon
  50. A Note on the Stability Properties of Goodwin's Predator-Prey Model By Luís Francisco Aguiar-Conraria
  51. The Unresolved Land Reform Debate: Beyond State-Led or Market-Led Models By Saturnino M. Borras Jr; Terry McKinley
  52. Indeterminacy and endogenous fluctuations under input-specific externalities. By Thomas Seegmuller
  53. Allocation chômage : entre efficacité et égalité. By Audrey Desbonnet
  54. Currency Crises in Emerging Markets: An Application of Signals Approach to Turkey By Mete Feridun
  55. Privatising Basic Utilities in Sub-Saharan Africa: The MDG Impact By Kate Bayliss; Terry McKinley
  56. Forecasting Employment for Germany By Darius Hinz; Camille Logeay
  57. Determinants of Currency Crises in Emerging Markets: An Empirical Investigation on Turkey By Mete Feridun
  58. On Skill Heterogeneity, Human Capital, and Inflation By Radhika Lahiri; Elisabetta Magnani
  59. Socio-political and economic determinants of de facto monetary institutions and inflationary outcomes By Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli
  60. Impacto Internacional de la Crisis de Asia - Un antes y un después By Emilia Zabaleta
  61. Financial Globalization, Economic Growth, and Macroeconomic Volatility By Hernán Rincón
  62. Goodwin's Predator-Prey Model with Endogenous Technological Progress By Miloslav Vošvrda; Jan Kodera
  63. The long memory story of real interest rates. Can it be supported? By Ivan Paya; Ioannis A. Venetis; A Duarte
  64. Moneychangers and Commodity Money By Vincent Bignon; Richard Dutu
  65. Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA By Eckhard Hein; Lena Vogel
  66. Household Consumption Expenditures and Confidence By Erdogdu, Oya
  68. Rent Taxation in a Small Open Economy: The Effect on Transitional Generations By Marko Koethenbuerger; Panu Poutvaara
  69. Money Market: Instruments, Products, and Interest Rates By Govori, Fadil
  70. The Hungarian Quarterly Projection Model (NEM) By Szilárd Benk; Zoltán M. Jakab; Mihály András Kovács; Balázs Párkányi; Zoltán Reppa; Gábor Vadas
  71. Talks, financial operations or both? Generalizing central banks’ FX reaction functions By Oscar Bernal; Jean-Yves Gnabo
  72. Reconsidering the Investment-Profit Nexus in Finance-Led Economies: an ARDL-Based Approach By Till van Treeck
  74. Public Budget Composition, Fiscal(De)Centralization, and Welfare By Calin Arcalean; Gerhard Glomm; Ioana Schiopu; Jens Suedekum
  75. Création de valeur actionnariale et chômage dans un modèle WS-PS By Nicolas Piluso
  76. Escaping the Unemployment Trap — The Case of East Germany By Christian Merkl; Dennis J. Snower
  77. Equilibres multiples avec chômage, coûts de transaction et concurrence monopolistique By Ludovic Alexandre Julien; Nicolas Sanz
  78. Intergenerational Transfers of Time and Public Long-term Care with an Aging Population By Atsue Mizushima
  79. AN EMPLOYMENT-TARGETED ECONOMIC PROGRAM FOR SOUTH AFRICA By Robert Pollin; Gerald Epstein; James Heintz; Leonce Ndikumana
  80. The economic consequences of the flight By Beja, Jr., Edsel
  81. Limits to international banking consolidation By Fecht, Falko; Grüner, Hans Peter
  82. Appraising Schumpeter's 'Essence' after 100 Years: From Walrasian Economics to Evolutionary Economics By Esben Sloth Andersen
  83. The Political Economy of Infrastructure Investment in India By Chetan Ghate
  84. Models of Labour Services and Estimates of Total Factor Productivity By Robert Dixon; David Shepherd
  86. Finance and Competition By Harris Dellas; Ana Fernandes

  1. By: Hernando Vargas
    Abstract: The Colombian economy experienced several shocks in the past ten years. The permanent fall of inflation, the adoption of inflation targeting (IT) and a financial crisis altered the transmission mechanism of monetary policy. Low inflation and IT reduced inflation persistence and contributed to anchor inflation expectations. The evidence is less conclusive with respect to the changes of the responsiveness of inflation to domestic conditions (output or marginal cost gaps). Increased competition may have encouraged a higher degree of price flexibility, but a more stable inflation environment may have raised the sensitivity of aggregate supply to inflation surprises. The short-run money-inflation relationship was broken in the presence of low inflation, exogenous shocks to the demand for money and a policy regime that stabilized short-run interest rates. The sensitivity of aggregate demand to the interest rate varied with the indebtedness of private agents and the credit channel was severed after the financial crisis. The IT regime implied a stabilization of short-run interest rates, making the monetary policy stance and objectives clearer to the public. However, interest rate pass-through appears to be incomplete and seems to respond to the varying importance of the credit channel and the general state of the economy.
    Keywords: Monetary Transmission Mechanisms, Inflation Targeting, Colombian Economy. Classification JEL:E42; E44; E52; E66.
  2. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: In order to explain slow growth and high unemployment in the Euro area, in particular if compared to the USA, we follow a macroeconomic policy view focussing on the more restrictive stance of monetary, fiscal and wage policies in the Euro area. In the present paper we focus on the particular role of monetary policy, because the European Central Bank (ECB) seems to be the major obstacle to higher growth and employment. Analysing the macroeconomic policy mix, wage policies and fiscal policies are taken into account at the outset, but then the determinants of ECB policies are assessed in more detail. Our analysis confirms that it is the ECB's overemphasising a too low inflation target which is a major problem for macroeconomic performance in the Euro area. The ECB is too exclusively occupied with inflation and wage developments and pays too little attention to the development of real variables. In order to improve growth and employment and to limit the risks of deflation in the largest economy of the Euro area, Germany, it is therefore required that the ECB raises its inflation target and that the central bank focuses more on real economic activity.
    Keywords: Monetary policy, macroeconomic policy mix, Euro area
    JEL: E52 E58 E61 E63 E65
    Date: 2006–05
  3. By: Mirko Abbritti (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemployment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of different market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their "degrees of imperfection", react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve, Monetary Policy
    JEL: E24 E31 E32 E52 J64
    Date: 2007–01
  4. By: Ekkehard Ernst (OECD); Peter Flaschel (University of Bielefeld); Christian Proano (University of Bielefeld, IMK at the Hans Boeckler Foundation); Willi Semmler (New School for Social Research, New York)
    Abstract: The authors of this paper formulate a disequilibrium AS-AD model based on sticky wages and prices, perfect foresight of current inflation rates and adaptive expectations concerning the inflation climate in which the economy operates. The model consists of a wage and a price Phillips curves, a dynamic IS curve as well as a dynamic employment adjustment equation and a Taylor-rule-type interest rate law of motion. Through instrumental variables GMM system estimation with aggregate time series data for the U.S. and the euro area economies, the authors obtain structural parameter estimates which support the specification of their theoretical model and show the importance of the inflationary climate, as well as of the Blanchard-Katz error correction terms, and indirectly of income distribution, in the dynamics of wage and price inflation in the U.S. and the euro area economies.
    Keywords: AS-AD disequilibrium, wage and price Phillips curves, real wage adjustment
    JEL: E24 E31 E32
    Date: 2006–03
  5. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In a Kaleckian monetary distribution and growth model with conflict inflation we assess the role of a Non Accelerating Inflation Rate of Unemployment (NAIRU). The short run stability of a NAIRU is examined taking into account real debt effects of accelerating and decelerating inflation, and the short run effectiveness of monetary policy interventions applying the interest rate tool is analysed. The problem of long run endogeneity of the NAIRU is addressed integrating the long run distribution effects of monetary policies’ real interest rate variations into the model. It is concluded that monetary policy interventions in order to stabilise inflation are either unnecessary or costly in terms of employment in the short run. In the long run, these policies bear the risk of continuously increasing the NAIRU in order to keep inflation under control, which yields a horizontal long run Phillips-curve and latent stagflation. Instead of relying on monetary policies, the cause of inflation should be directly addressed and wage bargaining co-ordination should be applied as an appropriate tool.
    Keywords: Monetary policy, wage bargaining, inflation, distribution, growth
    JEL: E12 E22 E24 E25 E52
    Date: 2005–10
  6. By: Frank Smets (ECB, CEPR and University of Ghent); Raf Wouters (NBB, Research Department)
    Abstract: Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the “Great Moderation”?
    Keywords: DSGE models, monetary policy
    JEL: E4 E5
    Date: 2007–02
  7. By: Reinout De Bock (Northwestern University, Department of Economics)
    Abstract: This paper studies the implications of technical progress through investment-specific technical change in a business cycle model with search and matching frictions and endogenous job destruction. The interaction between the capital formation needed to reap the benefits of an investment-specific technology shock and gradual labor-market matching, generates hump-shaped, persistent responses in output, vacancies, and unemployment. The endogenous job destruction decision also leads to small but persistent endogenous fluctuations in total factor productivity. Simulations suggest a limited role for investment-specific technology shocks as a source of business cycle fluctuations compared to a standard real business cycle model.
    Keywords: LaborMarket Frictions, Investment-specific Technology Shocks, Business Cycles
    JEL: E24 E32 J64
    Date: 2007–01
  8. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: Since the start of the European Monetary Union fiscal policy in the Euro area has been dominated by the Stability and Growth Pact (SGP). Quite obviously the SGP has been unsuccessful in fulfilling its goals, fiscal sustainability and supporting economic growth. More and more countries have exceeded the 3 percent of GDP limit for the budget deficit, while at the same time macroeconomic performance has been unsatisfactory. We analyse fiscal policy and its macroeconomic impact for the Euro area as a whole and for selected countries and compare it with US fiscal policy, with a special emphasis on the period 2001-2005. Whereas US fiscal policy has been strongly counter-cyclical, thus stabilising the economy, in the Euro area fiscal policy has been much more restrictive and has had pro-cyclical and therefore destabilising effects for many countries. However, one cannot put all the blame on fiscal policy. The ECB's restrictive monetary policy and divergent and destabilising wage developments across the Euro area are at least as important as fiscal policy in the explanation of the Euro area's weak economic performance. As a possible solution for the future, we suggest to replace the SGP by expenditure paths as coordination tool, and we discuss an important modification of the concept. Such expenditure paths could co-ordinate fiscal policies across the Euro area in a counter-cyclical way and at the same time ensure fiscal sustainability. Unfortunately, as long as monetary and wage policies remain un-coordinated and destabilising, any improvements in fiscal policy will not be very effective in enhancing economic performance.
    Keywords: Fiscal policy, consolidation strategies, macroeconomic policy mix, euro area
    JEL: E61 E62 E63 E65
    Date: 2006–05
  9. By: Álvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ana Paula Ribeiro (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: Lagged benefits relative to costs can politically block an efficiency-enhancing labor market reform, lending support to the two-handed approach. An accommodating monetary policy, conducted alongside the reform, could help bringing the positive effects of the reform to the fore. In order to identify the mechanisms through which monetary policy may affect the political sustainability of a reform, we add stylized features of the labor market to a standard New-Keynesian model for monetary policy analysis. A labor market reform is modeled as a structural change inducing a permanent shift in the flexible-price unemployment and output levels. In addition to the permanent gains, the impact of the timing and magnitude of the reform-induced adjustments on the welfare of workers - employed and unemployed - is crucial to the political feasibility of the reform. Since the adjustments depend, on one hand, on the macroeconomic structure and, on the other hand, can be influenced by monetary policy, we simulate various degrees of output persistence across different policy rules. We find that, if inertias are present, monetary policy, even when conducted by an independent central bank, affects the political support for the reform. In general, the more expansionary (or the less contractionary) the policy is, the faster is the recovery to the new steady-state equilibrium and, thus, the stronger is the political support.
    Keywords: Monetary policy rules; Labor market reforms; Unemployment benefit; Political economy; New-Keynesian models
    JEL: E24 E37 E52 E61
    Date: 2007–02
  10. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: The paper fundamentally challenges the institutional sclerosis explanation of the present German economic stagnation. Instead we present a macroeconomic explanation focusing on the combined effects of too restrictive monetary policies, too restrictive and sometimes pro-cyclical fiscal policies and overly moderate wage policies in Germany since the mid 1990s. This view is broadly consistent with modern macroeconomics and with empirical data. From this perspective we finally argue that Germany urgently needs more expansive fiscal and monetary policies in the short run, and that in the medium run the conditions for nominal wage growth in Germany according to the sum of long run national productivity growth and the ECB's inflation target have to be improved. Further pursuing a policy of structural reforms with respect to the labour market and the social benefit system in combination with a restrictive macroeconomic policy mix, however, will prolong Germany's economic stagnation and will considerably increase the risk of deflation.
    Keywords: monetary policy, fiscal policy, structural reform
    JEL: E63
    Date: 2005–04
  11. By: Dressler, Scott; Li, Victor
    Abstract: This paper presents a monetary explanation for several business-cycle facts: (i) household and business investment are procyclical, (ii) business investment lags household investment, (iii) household investment is positively correlated with M1, and (iv) household credit outstanding is positively correlated with and more volatile than household investment. We develop a dynamic general equilibrium model that features financial intermediaries accepting deposits and providing loans, credit-producing firms, and inside (bank-created) money. It is shown that the transmission of monetary shocks facilitated by credit and inside money creation is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.
    JEL: G11 E39 C68
    Date: 2007–01
  12. By: Lipinska, Anna
    Abstract: The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the micro founded loss function that represents the objective function of the optimal monetary policy not constrained to satisfy the criteria. I find that the optimal monetary policy should not only target ination rates in the domestic sectors and aggregate output fluctuations but also domestic and international terms of trade. Second, I show how the loss function changes when the monetary policy is constrained to satisfy the Maastricht criteria. The loss function of such a constrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the optimal monetary policy violates two criteria: concerning the CPI inflation rate and the nominal interest rate. The constrained optimal policy is characterized by a deflationary bias. This results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms) than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. Such a policy leads to additional welfare costs amounting to 30% of the optimal monetary policy loss.
    Keywords: Optimal monetary policy; Maastricht convergence criteria; EMU accession countries
    JEL: F41 E52
    Date: 2006–11
  13. By: Dave, Chetan; Dressler, Scott
    Abstract: This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.
    Keywords: Business Cycle Fluctuations; Nominal Rigidities; Exogenous Shocks
    JEL: E32 C51
    Date: 2007–02
  14. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: In the present paper we question the mainstream diagnosis of Germany’s post-2000 stagnation as well as the prescribed remedies. We show that the ‘institutional sclerosis’ view of Germany’s stagnation is unfounded and that therefore the political measures proposed and actually taken are misguided. Instead, we claim that macroeconomic mismanagement explains the German absolute and relative stagnation compared with the Euro area as a whole and with the USA. If the problem of macroeconomic mismanagement is not addressed and solved, irrespective of occasional cyclical upswings, we predict a continuing stagnation tendency for the German economy. And we argue that this is not only a German problem, but a matter of European concern, because the macroeconomic policies which have caused the German constellation will have major negative feedback effects on the other Euro area countries in the near future.
    Keywords: Macroeconomic policy, structural reforms, unemployment, growth, inflation
    JEL: E58 E61 E62 E63 E64 E65
    Date: 2006–03
  15. By: Louis Phaneuf; Nooman Rebei
    Abstract: This paper develops and estimates a dynamic general equilibrium model that realistically accounts for an input-output linkage between firms operating at different stages of processing. Firms face technological change which is specific to their processing stage and charge new prices according to stage-specific Calvo-probabilities. Only a fixed fraction of households have an opportunity to adjust nominal wages to new information each period. Intermediate-stage technology shocks account for the bulk of output variability at business cycle frequencies, while final-stage technology shocks do not explain much. Although technology shocks drive the business cycle, the model predicts weakly procyclical real wages, and a near-zero correlation between return to working and hours worked. Furthermore, the model has rich implications for the dynamics of business cycles.
    Keywords: Business fluctuations and cycles; Economic models
    JEL: E32
    Date: 2007
  16. By: Peter Flaschel (University of Bielefeld); Christian Proano (University of Bielefeld, IMK at the Hans Boeckler Foundation); Willi Semmler (New School for Social Research, New York)
    Abstract: The right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.
    Keywords: Mundell-Fleming-Tobin model, liability dollarisation, debt-financed investment, financial crisis, currency crisis, deflation.
    JEL: E31 E32 E37 E52
    Date: 2006–06
  17. By: Baeriswyl, Romain; Cornand, Camille
    Abstract: Excessive inflation is usually attributed to the lack of central bank’s credibility. In this context, most of the literature considers transparency a means to establish central bank’s credibility. The contribution of this paper is twofold. First, it shows that, even in the absence of inflationary bias, a credible central bank may find it optimal to implement an accommodating monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap, and thereby whether it will implement an expansionary or contractionary policy in response to cost-push shocks. Second, it stresses that transparency is not just a means to achieve credibility but is essential per se for the optimality of monetary policy of a fully credible central bank.
    Keywords: monetary policy; differential information; transparency; cost-push shocks
    JEL: E58 E52 D82
    Date: 2007–02
  18. By: Köhler, Matthias; Hommel, Judith; Grote, Matthias
    Abstract: The paper empirically investigates the monetary transmission mechanism in the Baltic States. The analysis of the transmission channels through which monetary policy shocks are transmitted is particularly important for the European Central Bank that makes monetary policy in an enlarged European Monetary Union. The paper focuses on the bank lending channel of monetary transmission due to the importance of banks in the financial system of the Baltic countries. The existence of this transmission channel is tested by using a panel structural approach that distinguishes banks according to size, capitalization, liquidity and ownership structure. The results indicate that a bank lending channel is present in the Baltic States and mainly caused by differences in liquidity.
    Keywords: Monetary Transmission, Bank Lending Channel, Transition Countries
    JEL: E43 E44 G15 G21
    Date: 2006
  19. By: Joerg Bibow (Franklin College, Lugano, Switzerland)
    Abstract: This study challenges the widely held view that the persistence in Euro area inflation above two percent, which has been observed in the euro area since 2001 despite the economic slump, may have been foremost a reflection of “structural rigidities” in labour and product markets. Accordingly, structural reforms that eliminate these rigidities are presented as necessary and sufficient conditions for boosting growth and purging inflation persistence. This view misses the fact that series of hikes in indirect taxes and administered prices contributed significantly to price increases in the euro area. Governments’ consolidation efforts in view of stagnation-induced budgetary pressures thus caused “tax-push inflation”, i.e. a persistent and sizeable upward distortion in headline inflation. Since inflation above two percent has, in turn, forestalled more growth-supportive monetary policies, the euro area has become stuck in a vicious circle of protracted domestic demand stagnation and budgetary pressures that continue to nurture tax push.
    Date: 2006–01
  20. By: Dixon, Huw (Cardiff Business School)
    Abstract: This dictionary entry defines the development of new Keynesian macroeconomics (NKM) since the 1980s. I argue that the key defining feature NKM is the introduction of imperfect competition, making price and/or wage setting endogenous and hence allowing for a rigorous understanding of nominal rigidity. This has led to a shift away from perfect competition in macroeconomics. The combination of NKM with dynamic macroeconomic modelling has led to the current orthodoxy: the new-neoclassical synthesis. Dynamic wage and price models lead to monetary neutrality in steady-state, non-neutrality out of steady-state. Other themes in NKM include efficiency wage theory and coordination failure.
    Keywords: Keynesian; nominal; rigidity; new
    JEL: E1 E3 E4 B22
    Date: 2007–02
  21. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In Kaleckian models of distribution and growth the equilibrium rate of capacity utilisation may persistently diverge from the ‘normal rate’ of utilisation. We assess this problem following the approach by Dumenil/Levy (1999) who consider the ‘normal rate’ of utilisation in a monetary production economy as the rate which is associated with price stability. Since inflation in our model is driven by distribution conflict, the ‘normal rate’ of utilisation is associated with consistent claims of firms and employees. Taking into account real debt effects of changes in inflation and distribution effects of monetary policy interventions we discuss the short-run stability of the ‘normal rate’ and address the issue of long-run endogeneity. Generally, we show that in a Kaleckian monetary distribution and growth model, which takes the major features of a credit economy seriously, the ‘normal rate’ of capacity utilisation is endogenous to distribution conflict and monetary policy intervention in the long run. And we also show that major Kaleckian results, in particular the paradox of costs, can be retained for the short and the long run.
    Keywords: distribution, growth, capacity utilisation, inflation, monetary policy
    JEL: E12 E22 E25 E52 O42
    Date: 2006–02
  22. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In the present paper we explicitly introduce interest payments and debt into a Kaleckian distribution and growth model with an investment function very close to Kalecki’s original writings. The effects of interest rate variations on the short-run equilibrium values of capacity utilisation, capital accumulation and the rate of profit are derived, and the long run effects on the equilibrium debt-capital-ratio are also analysed. It is shown, that the effects of interest variations on the endogenously determined equilibrium values of the model do not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and in some cases on initial conditions with respect to the interest rate and the debt-capital-ratio. If the conditions for short-run ‘normal’ effects of interest rate variations are given, the economy will be characterised by a long-run unstable debt-capital-ratio and by the macroeconomic ‘paradox of debt’. These results are similar to other models and hint to the robustness of Kaleckian ‘monetary’ models of distribution and growth with respect to the specification of the investment function.
    Keywords: Interest rate, debt, capital accumulation, Kaleckian model
    JEL: E12 E22 E25 E44 O42
    Date: 2005–08
  23. By: Ansgar Belke (University of Hohenheim and IZA); Daniel Gros (Centre for European Policy Studies, Brussels and San Paolo IMI Asset Management, Milan)
    Abstract: This paper deals with potential instabilities in the Eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-Euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions, which prevailed until some months ago, can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst (e.g., when housing prices stop rising) this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation. As a second step, we point out that risks for EMU are not only increasing because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the Euro area which threaten its long-term cohesiveness. The most manifest example of this threat comes from what promises to be a long-term divergence between Germany and Italy, which for the time being was offset by asynchronous developments of house prices in both countries. There are still large differences within the Euro area, with the small countries performing much better than the large ones on almost every indicator. This suggests that better policies can make a large difference even if monetary policy is the same for everybody.
    Keywords: asset prices, international competitiveness, EMU, instabilities, labor markets, monetary policy regime, structural reform
    JEL: D78 E52 E61
    Date: 2007–01
  24. By: Gustav Horn (IMK at the Hans Boeckler Foundation); Camille Logeay (IMK at the Hans Boeckler Foundation); Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: Potential output measures a country's attainable aggregate living standard and is thus one of the most important categories of economics. It is also a key indicator for monetary and fiscal policy. Despite its prominence, however, potential output is a difficult concept to pinpoint both theoretically and even more so empirically. The article discusses the reasons for the marked revisions of potential output estimates by major international organisations. The authors then present the results of our attempts to quantify Germany's potential output based on a production function approach coupled with the Kalman-filter technique to estimate the NAIRU. The authors find that potential output and potential output growth greatly depend on how the NAIRU and potential total factor productivity are modelled. Given the difficulties involved in robustly estimating potential output, especially in real time, economic policy makers need to learn to pursue their policy objectives without reference to this variable.
    Keywords: Potential Output, Nairu, Kalman-filter, revisions
    JEL: C5 E32 E52 O11
    Date: 2007–01
  25. By: Camille Logeay (IMK at the Hans Boeckler Foundation); Silke Tober (IMK at the Hans Boeckler Foundation)
    Abstract: This paper analyses the Nairu in the Euro Area and the influence that hysteresis had on its development. Using the Kalman-filter technique we find that the Nairu has varied considerably since the early seventies. The Kalman-filter technique is applied here using explicit exogenous variables. In order to test for hysteresis, the dependence of the Nairu on actual unemployment and long-term unemployment is estimated and found to be significant for the Euro Area and Germany respectively. The existence of hysteresis effects implies the possibility of a long-run non-superneutrality of monetary policy.
    Keywords: Nairu, hysteresis, Kalman Filter, Phillips curve, superneutrality
    JEL: C32 E32 E52
    Date: 2005–07
  26. By: Ricardo J. Caballero (MIT); Eduardo M.R.A. Engel (Cowles Foundation, Yale University)
    Abstract: What is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks? The answer to this question ranges from a one-to-one link (Calvo, 1983) to no connection whatsoever (Caplin and Spulber, 1987). The purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results. In doing so, we provide new interpretations of key results in this area. In particular, when price stickiness is measured in terms of the impulse response function, the monetary neutrality result of Caplin and Spulber is not a consequence of aggregation, as is often assumed, but is due instead to properties of the microeconomic impulse response function. We also show that the "selection effect," according to which units that adjust their prices are those that benefit the most, is an important feature of Ss-type models but is neither necessary nor sufficient to account for the higher aggregate flexibility of these models compared to Calvo models. Instead, the key concept is the contribution of the extensive margin of adjustment to the aggregate price response. The aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive.
    Keywords: Aggregate price stickiness, Adjustment hazard, Adjustment frequency, Generalized Ss model, Extensive margin, Calvo model, Strategic complementarities
    JEL: E32 E62
    Date: 2007–02
  27. By: Terry McKinley (International Poverty Centre); Degol Hailu
    Keywords: Poverty, ECONOMIC, Macroeconomic, HIV, AIDS
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–09
  28. By: Elisa Newby
    Abstract: By setting bounds on money growth, the commodity standard is a solution to the monetary authority’s time inconsistency problem, which arises from the fixed wage structure of the economy. If there is a supply shock to the backing commodity, the suspension of the commodity standard may be desirable in terms of stabilisation of production and consumption. By representing a credible commitment to return to the commodity standard, the suspension of cash payments maintains the value and circulation of money. Lessons and evidence are taken from England’s experience of the suspension of cash payments between 1797 and 1821.
    Keywords: Gold standard, Suspension of Cash Payments, Monetary policy, Monetary regimes.
    JEL: C61 E31 E4 E5 N13
    Date: 2007–02
  29. By: Zsolt Darvas (Corvinus University of Budapest); Balázs Varga (Corvinus University of Budapest)
    Abstract: This paper studies inflation persistence with time-varying-coefficient autoregressions in response to recently discovered structural breaks in historical inflation time series of the euro-area and the US. To this end, we compare the statistical properties of the well known ML estimation using the Kalman-filter and the less known Flexible Least Squares estimator by Monte Carlo simulation. We also suggest a procedure for selecting the weight for FLS based on an iterative Monte Carlo simulation technique calibrated to the time series in question. We apply the methods for the study of inflation persistence of the US, the euro-area and the new members of the EU
    Keywords: flexible least squares, inflation persistence, Kalman-filter, time-varying coefficient models
    JEL: C22 E31
    Date: 2007–02–02
  30. By: Gábor P. Kiss (Magyar Nemzeti Bank)
    Abstract: I study the short-term impact of surprise inflation on the primary balance by separating those budgetary items which immediately respond to inflation from non-responding ones. I assume a passive fiscal policy in a one-year horizon; therefore items fully controlled by the central government are treated as non-responding ones. In the case of the private sector and decentralised government, their responses to inflation depend on decisions. If a 1 percentage point inflation surprise is compensated in the private sector by an increase in wages and consumption, then the nominal increase of the related tax revenue is equivalent to 0.26% of the GDP, i.e. their real value and their proportion to the increase of the nominal GDP remains unchanged. Otherwise, the nominal value of the revenue remains unchanged, resulting in a decrease in its real value and an increase in the deficit-to-GDP ratio by 0.26%. Compensation decided in a decentralised government has the opposite effect, because if it is implemented, then the real value of decentralised expenditure and its proportion to the GDP remains the same through an increase in the nominal expenditure, while if the nominal expenditure is fixed, it results in a decrease of the real expenditure and approximately a 0.13% decrease in the deficit-to-GDP ratio. The fixing of the other nominal expenditure, which does not respond to inflation, results in a 0.08% decrease in the GDP-proportionate expenditure and deficit compared to an increase in the nominal GDP. Reviewing certain episodes in Hungary, we have found that owing to planning errors, the official inflation forecast usually resulted in a larger ‘surprise’ for the budget than for the private sector. Thus, at the time of the impact of the surprise on the budget, the private sector experienced either no surprise or very little, which if materialising was in most cases immediately compensated for. An exception in this case was the adjustment in 1995 - supported by an inflation surprise - when the ratio of the moderately increasing nominal tax revenue to the GDP and its real value significantly decreased. The increase of indirect taxes had an adversary effect on the increase in nominal consumption (inflationary compensation) (1995 and 2004). In addition to moderating consumption, the indirect tax increase in mid-2006 can also moderate wages in real terms since it was announced after the usual wage increases. The decentralised government behaved similarly, as indicated by the experiences in the developed OECD countries. The response of the decentralised government to the moderate nominal increase in central government transfers (i.e. to the decrease in real value of their funds) was to moderate the nominal increase of decentralised expenditure, i.e. real value loss was for the most part not compensated for. The rate of compensation was larger in those years when cheap financing was available (funds from privatisation in 2000), or when the surprise was not sizeable and coincided with the uprising phase of the election-related investment cycle (1998). In 2007 the optimistic inflation projection can result in lower-than-planned central transfers in real terms, which can in turn moderate the nominal increase of decentralised expenditure. Presumably, however, the size of the planning error and its deficit-decreasing effect will be not significant.
    Keywords: surprise inflation, inflation sensitivity, decentralised government.
    JEL: E31 E65 H61 H71 H72
    Date: 2007
  31. By: Steve Ambler; Florian Pelgrin
    Abstract: We show how to use optimal control theory to derive optimal time-consistent Markov-perfect government policies in nonlinear dynamic general equilibrium models, extending the result of Cohen and Michel (1988) for models with quadratic objective functions and linear dynamics. We replace private agents' costates by flexible functions of current states in the government's maximization problem. The functions are verified in equilibrium to an arbitrarily close degree of approximation. They can be found numerically by perturbation or projection methods. We use a stochastic model of optimal public spending to illustrate the technique.
    Keywords: Fiscal policy; Monetary policy framework
    JEL: E61 E62 C63
    Date: 2007
  32. By: Georges Prat; Remzi Uctum
    Abstract: Using Consensus Forecasts monthly surveys, we show that experts' interest rate expectations in the Eurofranc market do not verify the rational expectations hypothesis. Instead, these expectations are found to be generated by a mixed process combining the traditional adaptive, regressive and extrapolative processes augmented by macroeconomic effects (price, income, money). This mixed expectational process is shown to verify the term structure relation of interest rates based on the portfolio choice model, where a state-space representation is introduced to account for the unobservable part of the long term asset in the portfolio: (i) the risk premium depends on the variance of the short term asset and on the covariance between the latter and inflation, and (ii) the estimated values of the term structure parameter and of the risk aversion coefficient are in accordance with their theoretical values. Nevertheless, due to transaction costs, the adjustment of the market rates on the portfolio equilibrium relation occurs gradually.
    Keywords: Term structure of interest rates, expectations, risk premium.
    JEL: D84 E44 G14
    Date: 2006
  33. By: Gerald Epstein (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); James Heintz (Department of Economics and Political Economy Research)
    Abstract: This Country Study summarizes the findings and recommendations of a UNDP-supported study on the linkages among central bank policy, the financial structure and employment outcomes in Ghana. The study maintains that monetary policy must be coordinated with financial sector reforms in order to generate poverty-reducing employment. Its analysis highlights serious problems of restrictive inflation-targeting, a high real interest rate policy and insufficient lending of financial resources for productive private investment. In response, it recommends that monetary policy in Ghana should be specifically geared to promoting economic growth and employment along with maintaining moderate levels of inflation. Targeting such real variables, it maintains, will imply regular collection of data, such as on employment trends. In order to lower the cost of borrowing and foster greater access to credit, the study offers several policy recommendations, including credit guarantee schemes, reducing interest rates on government securities, using asset-based reserve requirements to direct credit and forging stronger links between formal and informal financial institutions. The study’s main point is that monetary and financial sector policies should be recast as crucial instruments of development and be well integrated into Ghana’s Poverty Reduction Strategy.
    Keywords: Poverty, ECONOMIC, GHANA, REDUCTION
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–06
  34. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Thorsten Niechoj (University of Goettingen)
    Abstract: The Broad Economic Policy Guidelines contain the answers of the European Commission and the governments of the EU-member countries to the European growth and employment problems. These guidelines have been the major EU-economic policy concept for around ten years now. They can be seen as a synthesis of the economic policy regime dominating the EU since the early to mid 1990s. However, this concept has not been able to generate sustained growth and low unemployment in the EU as a whole. Examining the guidelines we show the weaknesses of the underlying economic policy model and outline an alternative concept which promises more growth and employment for Europe in the long run.
    Keywords: Broad economic policy guidelines, European Union, monetary policy, wage policy, fiscal policy, policy co-ordination
    JEL: E61 E62 E63 E64
    Date: 2005–06
  35. By: Pascale Duran-Vigneron
    Abstract: In this paper, we focus on the interactions between monetary and fiscal policies in a two-country model of a monetary union. This model has micro foundations in a framework of monopolistic competition and sticky prices. By simulations, we study the combination of optimal policies face to an asymmetric supply shock in a heterogeneous monetary union. Then we want to explore the contribution of fiscal policies in economic stabilisation according to the form of the asymmetry between the countries.
    Date: 2006
  36. By: Calista Cheung; Frédérick Demers
    Abstract: This paper evaluates the performance of static and dynamic factor models for forecasting Canadian real output growth and core inflation on a quarterly basis. We extract the common component from a large number of macroeconomic indicators, and use the estimates to compute out-of-sample forecasts under a recursive and a rolling scheme with different window sizes. Factor-based forecasts are compared with AR(p) models as well as IS- and Phillips-curve models. We find that factor models can improve the forecast accuracy relative to standard benchmark models, for horizons of up to 8 quarters. Forecasts from our proposed factor models are also less prone to committing large errors, in particular when the horizon increases. We further show that the choice of the sampling-scheme has a large influence on the overall forecast accuracy, with smallest rolling-window samples generating superior results to larger samples, implying that using "limited-memory" estimators contribute to improve the quality of the forecasts.
    Keywords: Econometric and statistical methods
    JEL: C32 E37
    Date: 2007
  37. By: Alexandre Sokic
    Abstract: The aim of this paper is to clarify the failure of the Cagan model with perfect foresight and to draw new axes for investigation of monetary hyperinflation analysis. Firstly, the paper evaluates the relevancy of the Cagan ad-hoc model with perfect foresight as a theoretical framework for investigating hyperinflation processes. We show that deficits can never generate monetary hyperinflations, confirming the results of Buiter (1987). The only hyperinflationary processes that can occur are speculative hyperinflations. Secondly, the paper assesses consistency of hyperinflationary paths with the optimizing behaviour of representative agents within two perfect foresight inflationary finance frameworks modelling the use of money as a medium of exchange. In the context of a money-in-the-utility framework, the results obtained in the Cagan ad-hoc model with perfect foresight are founded and confirmed. This implies restricting the use of the latter model only to speculative hyperinflations analysis. In the context of a transaction costs based model, we show that deficits can generate monetary hyperinflations. Moreover, speculative hyperinflations remain possible. This result is in sharp contrast to that of the money-in-the-utility framework and implies a demand for money different from the Cagan form.
    JEL: E31 E41
    Date: 2007
  38. By: Kevin Elie Beaubrun-Diant; Julien Matheron
    Abstract: This review presents the main tools and results of the research between finance and macroeconomics. The ambition of this literature is to provide a joint analysis of the business cycle and financial asset returns. This paper adopts this perspective and suggests a critical analysis of the mechanisms of modelling a DSGE model, so that this one is compatible with the assets returns stylized facts without sacrificing for business cycle facts.
    JEL: E10 E20 G12
    Date: 2006
  39. By: Rose Cunningham; Ilan Kolet
    Abstract: Housing wealth is a large component of total wealth and plays an important role in aggregate business cycles. In this paper, we explore data on real house price cycles at the aggregate level and city level for the United States and Canada. Using a panel of 137 cities, we examine the duration, size, and correlations of housing market cycles in North America. We find that North American housing cycles are long, averaging five years of expansion and four years of contraction, and there is a fairly high degree of correlation in house price cycles between U.S. and Canadian cities. We estimate a discrete time survival model with a probit specification for house price expansions and contractions. This model allows us to test for duration dependence. We find that housing market expansions have positive duration dependence since their exit probabilities increase with duration, while contractions seem to have no duration dependence. Standard determinants of house prices (interest rates, income and population growth) are included as controls.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods
    JEL: E32 R21 C41
    Date: 2007
  40. By: Stefano Bosi (EQUIPPE et EPEE); Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: While most of the literature concerned with indeterminacy and endogenous cycles is based on the questionable assumption of a representative consumer, some recent works have investigated the role of heterogeneous agents on dynamics. This paper adds a contribution to the debate, highlighting the effects of heterogeneity in consumers' preferences within an overlapping generations economy with capital accumulation, endogenous labor supply and consumption in both periods. Using a mean-preserving approach to heterogeneity, we show that increasing the dispersion of propensities to save turns out to stabilize the macroeconomic volatility, by reducing the range of parameters compatible with indeterminacy and ruling out expectations-driven fluctuations under a sufficiently large heterogeneity.
    Keywords: Endogenous fluctuations, heterogeneous preferences, mean-preserving dispersion, overlapping generations.
    JEL: C62 E32
    Date: 2006–12
  41. By: Guido Ascari; Christian Merkl
    Abstract: This paper analyzes the cost of disinflation under real wage rigidities in a micro-founded New Keynesian model. Unlike Blanchard and Galí (2007) who carried out a similar analysis in a linearized framework, we take non-linearities into account. We show that the results change dramatically, both qualitatively and quantitatively, for the steady states and for the dynamic adjustment paths. In particular, a disinflation implies a prolonged slump without any need for real wage rigidities.
    Keywords: Disinflation, Sticky Prices, Real Rigidities
    JEL: E31 E52
    Date: 2007–02
  42. By: Philipp Maier
    Abstract: More than 80 central banks use a committee to take monetary policy decisions. The composition of the committee and the structure of the meeting can affect the quality of the decision making. In this paper we review economic, experimental, sociological and psychological studies to identify criteria for the optimal institutional setting of a monetary committee. These include the optimal size of the committee, measures to encourage independent thinking, a relatively informal structure of the meeting, and abilities to identify and evaluate individual members’ performances. Using these criteria, we evaluate the composition and operation of monetary policy committees in various central banks. Our findings indicate that e.g. the monetary policy committee of the Bank of England follows committee best-practice, while the committee structure of other major central banks could be improved.
    Keywords: Central bank research; Monetary policy framework
    JEL: C92 D70 E58
    Date: 2007
  43. By: Ivan Paya; K Holden; A Duarte
    Abstract: This paper examines the impact of temporal aggregation on alternative definitions of inflation persistence. Using the CPI and the core PCE deflator of the US, our results show that temporal aggregation from the monthly to the quarterly to the annual frequency induces persistence in the inflation series.
    Keywords: Aggregation, Inflation, Persistence
    Date: 2006
  44. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    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: DSGE; VAR; VECM; Open economy; Bayesian inference
    JEL: C11 C53 E17
    Date: 2007–02–01
  45. By: Robert Dixon; Muhammad Mahmood
    Abstract: In this paper we examine unemployment rate dispersion across the (statistical) regions in the Melbourne metropolitan area. We find that the level of dispersion is positively correlated with the unemployment rate in all the regions taken together and that the ‘elasticity’ of dispersion with respect to the unemployment rate is unity, with the result that there is a tendency for the level of dispersion relative to the average unemployment rate to remain stationary over our sample period. We discuss the implications of this and show that the unemployment rate differences are persistent in the sense that the same areas exhibit relatively high (or low) unemployment rates over the whole of our sample period. We also estimate equilibrium rates of unemployment for the different regions in Melbourne and conjecture possible explanations for the differences in the level and in the persistence of the equilibrium rates.
    Keywords: Regional Unemployment Disparities Business Cycle Unemployment
    JEL: E24 R11
    Date: 2007
  46. By: Cruijsen,Carin van der; Eijffinger,Sylvester (Tilburg University, Center for Economic Research)
    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: -the empirical research resolves all theoretical question marks, -how the findings of the literature match the actual practice of central banks, and -where there is scope for more research.
    Keywords: central bank transparency;monetary policy;survey
    JEL: E31 E52 E58
    Date: 2007
  47. By: Allan Layton; Daniel R. Smith (School of Economics and Finance, Queensland University of Technology)
    Abstract: In the business cycle literature researchers often want to determine the extent to which models of the business cycle reproduce broad characteristics of the real world business cycle they purport to represent. Of considerable interest is whether a model’s implied cycle chronology is consistent with the actual business cycle chronology. In the US, a very widely accepted business cycle chronology is that compiled by the National Bureau of Economic research (NBER) and the vast majority of US business cycle scholars have, for many years, proceeded to test their models for their consistency with the NBER dates. In doing this, one of the most prevalent metrics in use since its introduction into the business cycle literature by Diebold and Rudebusch (1989) is the so-called quadratic probability score, or QPS. However, an important limitation to the use of the QPS statistic is that its sampling distribution is unknown so that rigorous statistical inference is not feasible. We suggest circumventing this by bootstrapping the distribution. This analysis yields some interesting insights into the relationship between statistical measures of goodness of fit of a model and the ability of the model to predict some underlying set of regimes of interest. Furthermore, in modeling the business cycle, a popular approach in recent years has been to use some variant of the so-called Markov regime switching (MRS) model first introduced by Hamilton (1989) and we therefore use MRS models as the framework for the paper. Of course, the approach could be applied to any US business cycle model.
    Keywords: Markov Regime Switching, Business Cycle, Quadratic Probability Score
  48. By: Harald Uhlig
    Abstract: This paper analyzes the cost of disinflation under real wage rigidities in a micro-founded New Keynesian model. Unlike Blanchard and Galí (2007) who carried out a similar analysis in a linearized framework, we take non-linearities into account. We show that the results change dramatically, both qualitatively and quantitatively, for the steady states and for the dynamic adjustment paths. In particular, a disinflation implies a prolonged slump without any need for real wage rigidities.
    Keywords: Disinflation, Sticky Prices, Real Rigidities
    JEL: E31 E52
    Date: 2007–02
  49. By: Robert Dixon
    Abstract: In this paper we examine differences in the unemployment rates across regions within the five largest metropolitan areas in Australia using pooled regression analysis. We find that the level of within-city dispersion is positively correlated with the city-wide unemployment rate and that dispersion tends to be higher for females than for males. The elasticity of Absolute Dispersion with respect to the unemployment rate is close to unity implying, as we find, that Relative Dispersion is not related to the state of the labour market. We argue that this reflects the fact that there is considerable persistence of relative rates across regions within each city over time.
    Keywords: Regional Unemployment Disparities; Business Cycle; Unemployment
    JEL: E24 R11
    Date: 2007
  50. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE)
    Abstract: Goodwin's Predator-Prey model is structurally unstable. In its pure form, the model has an equilibrium that is neither stable nor unstable. Ploeg showed that relaxing the hypothesis of fixed proportion technology would stabilize the equilibrium. On the other hand, Goodwin showed that the equilibrium becomes unstable when endogenous productivity growth is considered. This paper studies the consequences of considering both effects, and concludes that the stabilizing effect of a flexible technology is much stronger than the destabilizing effect of endogenizing labor productivity.
    Keywords: Business cycles, nonlinear dynamics, distributive conflict, Goodwin, Marxian Economics
    JEL: E13 E20 E30
    Date: 2007
  51. By: Saturnino M. Borras Jr; Terry McKinley (International Poverty Centre)
    Keywords: Poverty, ECONOMIC, Macroeconomic, Land Reform
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–11
  52. By: Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: A lot of papers have analyzed the role of productive externalities on the occurrence of indeterminacy and endogenous cycles, assuming that the total productivity of factors increases with respect to average capital and labor. In this paper, we extend such type of analysis introducing a more general formulation of externalities, i.e. input-specific externalities. Indeed, we assume that different externalities affect each input in the production function. Considering a Woodford (1986) framework, we show that this generalized from of externalities allows us to obtain new dynamic results concerning the occurrence of local indeterminacy and endogenous cycles. Moreover, we exhibit some configurations where the emergence of endogenous fluctuations requires a weaker degree of increasing returns than in the usual case where externalities are represented by the total productivity of factors.
    Keywords: Indeterminacy, endogenous fluctuations, externalities, increasing returns, capital-labor substitution.
    JEL: C62 E32
    Date: 2006–12
  53. By: Audrey Desbonnet (Centre d'Economie de la Sorbonne)
    Abstract: This paper reconsiders the trade-off between efficiency and equality of unemployment insurance in a job search model with precautionary saving. Contrary to Cahuc and Lehmann [2000], we show that a decreasing profile of unemployment benefits is able to alleviate this trade-off when agents can save. It is due to a change in saving time profile and an increase in job search effort. The short term unemployed begins to save when unemployment benefits become declining. When the unemployment episode expands, he becomes long term unemployed and dissaves which enables to support his consumption to a higher level.
    Keywords: Unemployment benefits, precautionary saving, equality, efficiency.
    JEL: E24 D69 J65
    Date: 2006–12
  54. By: Mete Feridun (Department of Economics, Loughborough University)
    Abstract: This article aims at identifying the leading indicators of currency crises in Turkey in its post-liberalization history through the signals approach introduced by Kaminsky et al (1998). Based on a broad set of potential indicators, a number of variables are found to be persistently signaling the currency crises during the period 1980:01-2006:06. Particularly, variables such as short-term debt/international reserves, imports, exports, M2/international reserves, and current account balance/GDP are consistent with the results of previous work in the literature. Analysis of the average lead time of the indicators reveals that the first signal is issued 4.4 months before a crisis erupts with public debt/GDP offering the longest lead time with 10.2 months, and government consumption/GDP offering the shortest with 2.2 months. Analysis of the persistence of the indicators reveals that the indicator issuing the most persistent signals is the government consumption/GDP and the one issuing the least persistent signals is FDI/GDP. Results are encouraging from the vantage point of an early warning system since signaling, on average, occurs sufficiently early to allow preemptive policy actions.
    Keywords: Speculative attacks; currency crises; signals approach, Turkey.
    JEL: F30 E44
    Date: 2006–12
  55. By: Kate Bayliss; Terry McKinley (International Poverty Centre)
    Keywords: Poverty, ECONOMIC, Macroeconomic, Privatising,Sub-Saharan Africa, MDG
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2007–01
  56. By: Darius Hinz (University of Bielefeld (Student)); Camille Logeay (IMK at the Hans Boeckler Foundation)
    Abstract: This paper deals with the estimation of employment equations for Germany, which are to be used for forecasting and simulation purposes. The authors estimate both single and system error correction equations for German working hours using quarterly raw data covering the period 1980:1-2004:2. Since the focus is on the question whether German reunification has affected or even modified the underlying economic relationships, the authors compare the results to those reported in previous studies for West Germany and Germany, respectively. The authors find that the elasticity of employment with respect to output is robustly estimated and can therefore be restricted to one. The elasticity of employment with respect to the real wage, however, is affected by German reunification and relative factor prices no longer play a significant role. The forecasting quality of the employment equation is satisfactory.
    Keywords: employment, forecasting, cointegration, Germany
    JEL: E24 E27 C22 C32 C53
    Date: 2004–11
  57. By: Mete Feridun (Department of Economics, Loughborough University)
    Abstract: This article aims at identifying the determinants of currency crises in Turkey the period 1980:01-2006:06. Following a general-to-specific model selection methodology, a broad set of pre-selected variables were tested through bivariate logit regressions. Significant variables were then used in a multivariate logit model. Strong evidence emerged that current account balance/GDP, short-term debt/long-term debt, domestic credit/GDP, foreign liabilities/foreign assets of banks, and fiscal balance/GDP are significant with correct signs. The measures of goodness-of-fit and in-sample predictive power of the model turned out to be favorable. The resulting model correctly calls 87.18% and 73.08% of the months at 10% and 20% levels, respectively.
    Keywords: Speculative attacks; currency crises; logit model, Turkey.
    JEL: F30 E44
    Date: 2007–01
  58. By: Radhika Lahiri; Elisabetta Magnani (School of Economics and Finance, Queensland University of Technology)
    Abstract: This paper examines the welfare costs of inflation within a monetary dynamic general equilibrium framework with human capital that incorporates endogenous, ex ante skill heterogeneity among workers. Numerical experiments indicate that, overall, welfare costs are more likely to decrease with increases in skill heterogeneity. An implication of this feature is that a greater degree of skill heterogeneity may be associated with a higher tolerance for inflation, consequently implying a positive correlation between agent heterogeneity and inflation. Using a panel of several countries we empirically test this proposition. Our evidence lends some support to this hypothesis.
  59. By: Fabrizio Carmignani (Department of Economics, University of Milan-Bicocca); Emilio Colombo (Department of Economics, University of Milan-Bicocca); Patrizio Tirelli (Department of Economics, University of Milan-Bicocca)
    Abstract: In this paper we estimate a model where in°ation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and bene¯ts from the balance of powers between the executive and the parliament. In°ation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and ¯nancial) a®ects in°ation through the ex- change rate regime channel. Success in controlling in°ation, in turn is crucial to sustain central bank independence and exchange rate stability.
    Keywords: Infation, central bank independence, exchange rate regime, system estimation
    JEL: E52 E58 C31
  60. By: Emilia Zabaleta
    Abstract: Este ensayo presenta una evaluación macroeconómica cuantitativa del impacto de esta crisis sobre la economía mundial y su extensión a los países emergentes. Se ilustraran ciertas incertitudes relativas concernientes al contexto internacional del momento, como el impacto de la baja del dólar, y las reacciones de la política monetaria, entre otras.
    Keywords: rice crisis, asia, dolar, monetary policy
  61. By: Hernán Rincón
    Abstract: This paper evaluates the effects of financial globalization on growth and macroeconomic volatility, from 1984 to 2003, for a sample of 43 countries. Particular attention is given to those effects on the member countries of the Latin American Reserve Fund (FLAR): Bolivia, Colombia, Costa Rica, Ecuador, Peru, and Venezuela. The findings show that financial globalization spurs growth, when the countries’ income level is controlled; it does not increase macroeconomic volatility, as it is commonly stated, but does not reduce it either. Belonging to FLAR does not seem to make a difference in terms of growth and macroeconomic volatility; however, the findings of a strong negative effect on the volatility of consumption might be related to the fact that those countries have an insurer (FLAR) that has helped them to smooth consumption during periods of adverse external shocks.
    Keywords: Financial globalization; Economic growth; Macroeconomic volatility; Crosssection regression; Panel data regressions. Classification JEL:F30; F41; F43; G15; G18; C51.
  62. By: Miloslav Vošvrda (Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Kodera
    Abstract: Contemporary economics contains mainly two approaches for an explanation of fluctuations of economic activity indicators. The first approach expresses fluctuations as consequences of random external shocks. The second approach expresses fluctuations as a deterministic dynamical process producing more complex behaviour of the economic system. In our article both approaches are applied. A purpose of our paper is to re-formulate traditional Goodwin predator-prey model by including a specific differential equation describing technological progress in deterministic and/or stochastic way. A base of this system contains such variables in interest as a rate of employment, a share of labour, and different forms of a rate of the technological progress.
    Keywords: non-linear three-equation dynamic model; predator-prey market; limit cycle
    JEL: C6 E44
    Date: 2007–01
  63. By: Ivan Paya; Ioannis A. Venetis; A Duarte
    Abstract: This papers finds evidence of fractional integration for a number of monthly ex post real interest rate series using the GPH semiparametric estimator on data from fourteen European countries and the US. However, we pose empirical questions on certain time series requirements that emerge from fractional integration and we find that they do not hold pointing to "spurious" long memory and casting doubts with respect to the theoretical origins of long memory in our sample. Common stochastic trends expressed as the sum of stationary past errors do not seem appropriate as an explanation of real interest rate covariation. From an economic perspective, our results suggest that most European countries show higher speed of real interest rate equalization with Germany rather than the US.
    Keywords: Real interest rate; Long memory, Fractional Integration
    Date: 2006
  64. By: Vincent Bignon; Richard Dutu
    Abstract: We study the role played by coin experts, called moneychangers, in the metallic money system. To do that, we introduce intermediaries that can expertise and certify coins into the VeldeWeber and Wright’s (1999) model of commodity money with imperfectly recognizable coins. We show under which conditions buyers have their coins certified, how circulation by weight and circulation by tale equilibria are affected by moneychangers, and whether moneychangers increase welfare.
    Keywords: Commodity money, Search, Information, Moneychangers.
    JEL: D82 E42 N23
    Date: 2006
  65. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Lena Vogel (University of Hamburg (Student))
    Abstract: The authors analyse the relationship between functional income distribution and economic growth in Austria, France, Germany, the Netherlands, the UK and the USA from 1960 until 2005. The analysis is based on a demand-driven distribution and growth model for an open economy inspired by Bhaduri/Marglin (1990), which allows for profit- or wage-led growth. We find that growth in France, Germany, the UK, and the USA has been wage-led, whereas Austria and the Netherlands have been profit-led. In the case of Austria a domestically wage-led economy is turned profit-led when including the effect of distribution on external trade. The Netherlands, however, are already profit-led without external trade. Our results so far only partially confirm Bhaduri/Marglin's (1990) theoretical conclusion that wage-led growth becomes less feasible when the effects of distribution on foreign trade are taken into account. We conclude that following a strategy of profit-led growth via the net export channel, and therefore relying on a kind of 'beggar thy neighbour' policy, is not only harmful for the trading partners and hence for the world economy in the long run, but also for the wage-led countries pursuing such a strategy in the short run.
    Keywords: Distribution, growth, demand-led accumulation regimes
    JEL: E12 E21 E22 E23 E25
    Date: 2007–01
  66. By: Erdogdu, Oya
    Abstract: The permanent income hypothesis states a strong relationship between household consumption and lifetime income. Based on this argument, this study, following previous studies in that respect, analyzes the possible impact of expectations in this relationship in case of uncertainty in the model. The empirical analyses for Turkey could not find a statistically significant relationship between household consumption, income and confidence index which is used as a proxy for income expectations. However, besides, expectations on purchasing power and employmet opportunities having statistically significant effect on household consumption expenditures, they do decrease the percentage of unexplained variance.
    Keywords: Consumption; expectations; confidence index
    JEL: E21
    Date: 2006–11
  67. By: John Weeks (International Poverty Centre); Terry McKiley
    Abstract: This Country Study critically examines fiscal policies in Zambia, particularly the effect of recent and projected debt relief on ‘fiscal space’. The study finds that due to associated policy conditionalities and other factors, HIPC debt relief will result in less fiscal space, rather than more. And projected G-8 debt relief will only marginally expand fiscal space. Part of the problem is that the Zambian government has little leeway to choose its own fiscal policies, despite donor rhetoric about ‘national ownership’ of poverty-reduction policies. Drawing on the analysis of a national study, the Country Study also estimates the additional public expenditures that would enable Zambia to reach the MDGs. In order to finance these expenditures, it proposes a diversified strategy of increasing tax revenue, expanding the fiscal deficit and obtaining more ODA. Finally, it recommends core elements of an expansionary macro framework that could support a seven per cent rate of economic growth (needed to attain MDG #1, i.e., halving extreme income poverty) and buttress the government’s effort to reach the other MDGs. In the process, it seeks to dispel common fears about the possible adverse effects of such fiscal expansion.
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–09
  68. By: Marko Koethenbuerger (CES, University of Munich and CESifo); Panu Poutvaara (University of Helsinki and IZA)
    Abstract: We show that taxation of rents may yield an intergenerational Pareto-improvement in a small open economy provided tax revenues are earmarked to reduce wage taxes. Previous literature has shown that rent taxation benefits current young and future generations, while we show that it also benefits the current old generation when the initially prevailing tax mix is sufficiently skewed towards wage taxation.
    Keywords: rent taxes, capitalization, transitional dynamics, labor supply, asset prices
    JEL: H22 E62 F02
    Date: 2007–01
  69. By: Govori, Fadil
    Abstract: The basic function of the money market is to bring these two groups into contact to make borrowing and lending possible. The money market is the mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits. The money market provides a channel for the exchange of financial assets for money. It differs from other parts of financial markets in its emphasis on loans to meet purely short-term cash needs. Money market is defined as the market for securities with less than 1 year to maturity at the original issue date. Money market instruments include the following: Treasury bills; Federal funds (Interbank loans); Repurchase agreements; Certificates of deposit; Commercial paper; Bankers’ acceptance; Eurocurrency Certificates of Deposit; and Money Market Mutual Funds. In practice, each of these instruments has slightly different characteristics, and thus each has a slightly different interest rate. Since many investors regard the individual money market instruments as close substitutes, changes in all the money market interest rates are highly correlated. The money market can also be viewed simply as a collection of financial-service firms that produce, distribute and sell financial products most in demand by the public. Among the money market products most widely sought by the public and supplied by the markets, are the following: Bills; Deposits; Forward rate agreements; Short term interest rate futures; Swaps; Foreign exchange; and Securities borrowing agreement. One of the peculiarities of the money market is its way of quoting interest rates. Some money market instruments are quoted on a discount basis. Other 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; the semiannual and annual yields to maturity.
    Keywords: Money Market; Money Market Instruments; Money Market Products; Money Market Interest Rates
    JEL: E51 E52 G32 G12 G14 G13 G21 E58 E43
    Date: 2007–02
  70. By: Szilárd Benk (Magyar Nemzeti Bank); Zoltán M. Jakab (Magyar Nemzeti Bank); Mihály András Kovács (Magyar Nemzeti Bank); Balázs Párkányi (Magyar Nemzeti Bank); Zoltán Reppa (Magyar Nemzeti Bank); Gábor Vadas (Magyar Nemzeti Bank)
    Abstract: This document gives a detailed account of the current version of the Hungarian Quarterly Projection Model (NEM). It describes the main building blocks, presents the forecast performance of the model and, finally, it illustrates the responses to the most important shocks the Hungarian economy may face. This version of the model is used to produce the Bank’s quarterly projections, as well as to perform simulations and scenario analyses.
    Keywords: econometric modelling, forecasting, simulation.
    JEL: C50 C53 E17
    Date: 2006
  71. By: Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur)
    Abstract: This paper generalizes central banks’ FX interventions reaction functions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered probit explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. Our results indicate that monetary authorities tend to adopt progressively stronger measures as the exchange rate behaves in an increasingly unfavorable way. This suggests that words and acts are used as complements only in extreme cases.
    Keywords: Central banks; Foreign exchange market; Interventions; Communication policy
    JEL: E58 F31 G15
    Date: 2007–02
  72. By: Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: A simple Post Keynesian growth model is developed, in which financial variables are explicitly taken into account. Different possible accumulation regimes are derived with respect to changes of these variables. Several variants of an investment function are estimated econometrically. The ARDL-based approach proposed by Pesaran et al. (2001) is argued to be superior for this purpose to the traditional cointegration approach. The econometric results are discussed with respect to a remarkable phenomenon that can be observed for some important OECD countries since the early 1980s: accumulation has generally been declining while profit rates have shown a tendency to rise. The author concentrates on one potential explanation of this phenomenon which is particularly relevant for the USA and relies on the hypothesis of a high propensity to consume out of capital income. The paper also gives an alternative explanation of the so-called "New Economy boom" in the USA at the end of the 1990s.
    Keywords: Investment, Profitability, Financialisation, Time Series Econometrics.
    JEL: C22 D14 E22 E25 G3
    Date: 2007–01
  73. By: Terry McKinley (International Poverty Centre)
    Abstract: The U.S. economy is monopolizing global net savings, i.e., about two-thirds of the total. Other rich countries, such as Japan and Germany, oil exporters, such as Saudi Arabia, middleincome countries, such as China, and even some low-income countries, such as India and Indonesia, export capital to finance yearly U.S. current-account deficits. The resulting global imbalances are neither sustainable nor equitable. Capital should be recycled to poorer countries, instead of funneled, overwhelmingly, to the world’s largest rich country. Low-income countries need a substantially higher injection of real external resources and should be allowed to pursue more expansionary, growth-oriented economic policies. Blaming capital-exporting developing countries, such as China, for global imbalances is not the answer. Such countries are merely succeeding in developing rapidly. Other rich countries, which account for most capital exports, have to take the lead in dramatically restructuring their expenditures. They will be able thereafter to absorb a greater share of developing-country exports. The danger of a recession in the U.S. is rising, threatening growth in the rest of the world. U.S. policymakers have to move aggressively to contain private consumption, especially real estate spending, in favor of productive private investment, and boost exports relative to imports. Without such a structural adjustment, the danger of a ‘hard landing’ for the U.S. economy—and, by implication, for the rest of the world—will escalate.
    Keywords: Global capital flows, world economy, structural adjustment, poverty
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–03
  74. By: Calin Arcalean (Indiana University); Gerhard Glomm (Indiana University); Ioana Schiopu (Indiana University); Jens Suedekum (University of Konstanz)
    Abstract: We present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the “Oates conjecture” that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.
    Keywords: fiscal federalism, capital accumulation, infrastructure, public education
    JEL: E6 H5 H7
    Date: 2007–02
  75. By: Nicolas Piluso
    Abstract: The purpose of the article is to analyse the consequences of the constraint of shareholder value on the wage level and equilibrium unemployment rate. We will relate the new program of maximization of the firm, as well as the one of the trade union. We obtain an increase of the unemployment rate when progressing from a maximization of profit to a maximization of the EVA. The unemployment rate is also now depending on others financial variables.
    Keywords: Equilibrium unemployment; shareholder value; shareholding-employee; equilibrium wages; trade-union negotiations.
    JEL: E24 J23 G12
    Date: 2006
  76. By: Christian Merkl; Dennis J. Snower
    Abstract: This paper addresses the question of why prolonged regional unemployment differentials tend to persist even after their proximate causes have been reversed (e.g., after wages in the high-unemployment regions have fallen relative to those in the low-unemployment regions). We suggest that the longer people are unemployed, the greater is the likelihood of falling into a low-productivity "trap," through the attrition of skills and work habits. We develop and calibrate a model along these lines for East Germany and examine the effectiveness of three employment policies in this context: (i) a weakening of workers’ position in wage negotiations due to a drop in the replacement rate or firing costs, leading to a fall in wages, (ii) hiring subsidies, and (iii) training subsidies. We show that the employment effects of these policies depend crucially on whether low-productivity traps are present.
    Keywords: labor markets; labor market traps; calibration; East Germany
    JEL: E24 J30 J31 J64
    Date: 2007–01
  77. By: Ludovic Alexandre Julien; Nicolas Sanz
    Abstract: The properties of WS-PS model are modified when trade activity is explicitly modelled. We introduce transaction costs on the output market to capture multiplicity whatever the degree of returns to scale. The price setting curve can become downward-sloping in the unemployment rate-real wage space. Trading externalities reinforce the effect of strategic complementarities between firms, leading to multiple unemployment equilibria. Moreover, a positive shock on the bargaining power of workers decreases the unemployment rate and the real wage at the low equilibrium, but increases both of them at the high equilibrium.
    Keywords: Multiple unemployment equilibria, transaction costs, monopolistic competition.
    JEL: D43 E25 J64
    Date: 2006
  78. By: Atsue Mizushima (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we use a two-period overlapping generations model to examine the behavior of an economy that incorporates intergenerational transfers of time. In the first part, we describe the dynamics and steady state of the economy in which there is no government. We show that the rate of life expectancy has negative impact on the steady-state level of the capital stock. In the second part, we study the role and the effect of public long-term care policy. We also show that public long-term care lowers the steady-state level of the capital stock but enhances the welfare when the rate of tax is small.
    Keywords: time transfers, household production, overlapping generations
    JEL: E60 I12 J14 J22
    Date: 2007–02
  79. By: Robert Pollin (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); Gerald Epstein (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); James Heintz (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); Leonce Ndikumana (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst)
    Abstract: This is an independent report produced by a team of international and national consultants supported by the International Poverty Centre in Brasilia (IPC). Initial support for this report was provided by the Poverty Group of the United Nations Development Programme in New York. This report is part of a wider global research programme encompassing several other countries. The views in this report are the authors’ and not necessarily IPC’s. However, the IPC regards this report as an important contribution to the debate on economic policies and employment programmes in South Africa as well as in other countries in Africa. This report outlines a pro-poor, employment-focused economic policy framework for South Africa. Its specific focus is the severe problem of mass unemployment in South Africa today. Unemployment was between 26.5 and 40.5 percent as of March 2005, depending on whether one uses the ‘official’ or ‘expanded’ definition of unemployment (with the expanded definition including so-called ‘discouraged workers’). The paper’s concentration on the problem of mass unemployment is fully consistent with the stated goals of the current African National Congress (ANC) government. At the Growth and Development Summit in 2003, President Thabo Mbeki singled out “more jobs, better jobs, and decent work for all” as one of the country’s four key economic challenges. Currently, the preliminary presentations of the Government’s new economic policy framework, the “Accelerated and Shared Growth Initiative for South Africa (ASGISA)—indicate that it affirms its commitment to cutting the unemployment rate by half by 2014. This publication is a summary of the full report (which is on the website of the Political Economy Research Institute: Following an introductory first section, the full report consists of two short sections that lay out basic concerns, then two substantially longer sections presenting the framework for policy analysis and specific policy proposals. Section 2 presents evidence on the scope of the unemployment problem in South Africa today, considering the unemployed by gender, race, region, length of joblessness and age. It then examines how the country’s problem of mass unemployment can be usefully conceptualized in simple accounting terms—namely, as the result of 1) insufficiency in the rate of output growth, i.e., the economy’s production of goods and services, and 2) a declining number of jobs being created per unit of output. Section 3 examines supply-side perspectives on employment expansion. The fact that the South African economy is experiencing both high unemployment and rising capital intensity of production suggests to some analysts both an explanation for high unemployment and a solution to the problem. For these analysts, the explanation for the problem is straightforward: businesses will not hire more workers because they are convinced that the costs of doing so will exceed the benefits. Businesses therefore choose to either 1) maintain their operations at a lower level than they would if the benefits of hiring more workers exceeded the costs or 2) increase the use of machines in their operations as a substitute for employing workers as their preferred means of expanding their operations. Seen from this perspective, the solution to the problem of unemployment is also straightforward: lower the costs that businesses face in hiring more workers. In general, there are four possible ways in which the costs to businesses of hiring workers could fall: 1) workers receive lower overall compensation, including wages and benefits 2) the industrial relations system and labor market regulations—including laws and regulations regarding workers’ rights to organize, conflict resolution, and hiring and firing—operate with more flexibility for business 3) workers perform their workplace operations at a higher level of productivity or 4) the government absorbs some portion of the costs of hiring workers. In most discussions that consider the sources of unemployment from this business cost-oriented perspective, the focus generally is on the first way to reduce business costs, i.e., to lower wages and benefits for workers relative to both other input costs for production and the prices at which businesses can sell their final products. This study argues that the evidence linking mass unemployment to high labor costs is not persuasive. We also argue that wage cutting as a policy approach is certain to elicit strong resistance, which in turn will worsen the country’s investment climate. At the same time, we do indeed support measures to maintain wage increases in line with productivity growth and to improve the efficiency of the industrial relations system. This report also introduces a proposal for a hybrid program of credit and employment subsidies as a means through which the Government can effectively absorb a share of businesses’ labor costs. Section 4 of the report considers the demand-side forces in South Africa’s economy that will need to be mobilized to achieve faster economic growth and greater labor intensity. In terms of growth, the report discusses all four components of the conventional national income identity that, taken together, define economic growth—i.e., private investment, private consumption, net exports, and government spending. The report places particular stress in this section on the growth-enhancing effects of expanding public infrastructure investments. Indeed, public investment could expand both output and private sector productivity, and could correspondingly increase private investment and export competitiveness. It is significant that the ASGISA program also emphasizes the need for expanded public investment. In considering ways to increase the labor intensity of growth, the report examines two basic approaches. The first is the Expanded Public Works Program (EPWP) now being implemented by the national government. The second approach is to encourage accelerated growth in business activities within South Africa that are capable of generating large increases in employment. The report examines the relative labor intensity of various industries in South Africa as well as the ‘employment multipliers’ of industries, i.e., their capacity to generate relatively large numbers of new jobs through their upstream links with other business firms in the country. Section 5, which concludes the report, considers specific policy tools that can be deployed to promote faster growth, rising labor intensity and greater poverty reduction. It considers policy interventions in the following areas: fiscal policy, monetary policy, credit subsidies, and development banking; capital market and exchange rate controls; inflation control; and sectoral policies in the areas of a) monopolistic pricing and b) promoting growth of selected productivity-enhancing and import-substituting capital-intensive industries, on grounds other than employment benefits.
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–06
  80. By: Beja, Jr., Edsel
    Abstract: Capital flight is an economic threat to development. It aggravates resource constraints by making them more binding, thus undermining long-term economic growth. The downward spiral in the macroeconomic performance as the effect of capital flight results in lost jobs; in turn, this condition intensifies capital flight, thus creating a negative feedback process that undermines the structure of the country. As a result, the country that is lagging behind on the economic ladder is knocked several rungs down by capital flight, leading to the underdevelopment of the country. Counterfactual calculations for the Philippines reveal that capital flight lowered the quality of its economic growth and meant lost jobs. The sustained capital flight between 1970 and 2000 cost the country to lose its opportunity to achieve an economic take-off and to become an Asian economic tiger. Unless the Philippine government introduces decisive actions to address capital flight – its causes and the mitigation of the impacts – the country will remain caught in the perpetuity of crises, hollowed-out, and trapped in poverty.
    Keywords: Capital flight; Economic Consequences; Philippines
    JEL: E60 O40 E10 F40 O53
    Date: 2007–02–12
  81. By: Fecht, Falko; Grüner, Hans Peter
    Abstract: Heterogenous banking supervision and regulation is often considered as the most important impediment for Pan-European Bank mergers. In this paper we identify other more fundamental reasons for a limited degree of cross-country integration in retail banking. We argue that the distribution of regional liquidity shocks may pose a natural limit to the extent of cross-border bank mergers. The paper derives the impact of different underlying stochastic structures on the optimal structure of cross regional bank mergers. Imposing a symmetry restriction on the underlying stochastic structure of liquidity shocks we find that benefits from diversification and the costs of contagion may be optimally traded off if banks from some but not from all regions merge. Under an additional monotonicity assumption full integration is only desirable if the number of regions with diverse risks is sufficiently large.
    Keywords: Bank Mergers, Financial Integration, Liquidity Transformation, Liquidity Crisis, Risk Sharing
    JEL: D61 E44 G21
    Date: 2006
  82. By: Esben Sloth Andersen
    Abstract: Schumpeter’s unique type of evolutionary analysis can hardly be understood unless we recognise that he developed it in relation to a study of the strength and weaknesses of the Walrasian form of Neoclassical Economics. This development was largely performed in his first book Wesen und Hauptinhalt der theoretischen Nationalökonomie. This German-language book - which in English might be called ‘Essence and Scope of Theoretical Economics’ - was published a century ago (in 1908). Different readings of Wesen provide many clues about the emergence and structure of Schumpeter’s programme for teaching and research. This programme included a modernisation of static economic analysis but he concentrated on the difficult extension of economic analysis to cover economic evolution. Schumpeter thought that this extension required a break with basic neoclassical assumptions, but he tried to avoid controversy by presenting it as only requiring the introduction of innovative entrepreneurs into the set-up of the Walrasian System. Actually, he could easily define the function of his type of entrepreneurs in this manner, but the analysis of the overall process of evolution required a radical reinterpretation of the system of general economic equilibrium. He thus made clear that he could not accept the standard interpretation of the quick Walrasian process of adaptation (tâtonnement). Instead, he saw the innovative transformation of routine behaviour as a relatively slow and conflict-ridden process. This reinterpretation helped him to sketch out his theory of economic business cycles as reflecting the waveform process of economic evolution under capitalism.
    Keywords: Economic statics; evolutionary dynamics; business cycles; Joseph A. Schumpeter; Léon Walras
    JEL: B31 E30 O31
    Date: 2006
  83. By: Chetan Ghate
    Abstract: We construct a simple political economy model with imperfect capital markets to explain infrastructure investments across Indian states. The model predicts that: i) the fixed cost of accessing the modern sector, ii) the initial stock of infrastructure, iii) median voter wealth, and iv) corruption, can all potentially explain why different states have different level of infrastructure investments. The theoretical model is motivated by recent empirical work on India that argues that there as on why per capita income across Indian states have diverged is because of the distribution of infrastructure investments. The model suggests that reducing leakages in funds earmarked for infrastructure and reducing the ?xed costs of accessing the modern sector - beyond their other well known effects - are policy complements. Together, they can incentivize politicians to spend more on infrastructure.
    Keywords: Public investment, positive political economy, median voter theorem
    JEL: P16 E43 O40
    Date: 2007–02
  84. By: Robert Dixon; David Shepherd
    Abstract: This paper examines the manner in which labour services are modelled in the aggregate production function, concentrating on the relationship between numbers employed and average hours worked. It argues that numbers employed and hours worked are not perfect substitutes and that conventional estimates of total factor productivity which, by using total hours worked as the measure of labour services, assume they are perfect substitutes, will be biased when there are marked changes in average hours worked. The relevance of the theoretical argument is illustrated using data for the United States and the United Kingdom.
    Keywords: Labour Services, Production Function, Total Factor Productivity
    JEL: O4 E23
    Date: 2007
  85. By: Terry McKiley (International Poverty Centre); Farhad Mehran (Statistical Development and Analysis, Policy Integration Department, International Labour Office)
    Abstract: This Country Study seeks to identify employment policies for Yemen that would support an ambitious MDG-based Development Strategy. Based principally on Labour Force and Labour Demand Surveys, it analyzes Yemen’s labour force, structure of employment and unemployment, demand for labour, and hours and wages. The study shows that the country is caught in a scissors between slow economic growth and rapid growth of the labour force. The result is widespread underemployment and poverty. While Yemen currently enjoys a boon in oil revenues, its economy remains undiversified and suffers from low productivity and incomes. As a result, the Country Study proposes a four-pronged MDG-oriented Growth, Employment and Poverty Reduction Strategy that would help the country reach the MDGs. This strategy is designed to accelerate economic growth, improve the employment intensity of growth, focus more resources on the poor and stimulate private-sector expansion, particularly in sectors with strong potential for growth and employment.
    Keywords: Poverty, ECONOMIC, EMPLOYMENT, YEMEN
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–09
  86. By: Harris Dellas; Ana Fernandes
    Abstract: Financial constraints are often thought as representing a barrier to entry for new firms, thus potentially limiting competition in product markets. We investigate the relationship between finance and product market competition in the context of a general equilibrium, two-sector model. The analysis highlights the role played by firm heterogeneity as well as by the level and distribution of wealth. Financial development may lead to lower markups (and thus to more competitive markets) in financially dependent sectors, even when it reduces the number of firms and increases standard market concentration indexes. The analysis implies that incumbency is not a sufficient condition to oppose financial liberalization. It also implies that, for a given level of imperfect financial development, poorer countries will tend to have less competitive product markets.
    Keywords: Financial Development; Liberalization; Market Structure; Product Market Competition.
    JEL: L1 E2
    Date: 2007–02

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