nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒02‒24
sixty-nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy and Open-Economy Uncertainty By Alessandro Flamini
  2. Money in Monetary Policy Design under Uncertainty: The Two-Pillar Phillips Curve versus ECB-Style Cross-Checking By Beck, Günter; Wieland, Volker
  3. Inflation Persistence and the Phillips Curve Revisited By Marika Karanassou; Dennis J. Snower
  4. Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach By Smets, Frank; Wouters, Rafael
  5. Sticky Prices and Monetary Policy: Evidence from Disaggregated US Data By Boivin, Jean; Giannoni, Marc; Mihov, Ilian
  6. Testing the Opportunistic Approach to Monetary Policy By Christopher Martin; Costas Milas
  7. News Shocks and Optimal Monetary Policy By Guido Lorenzoni
  8. Macroeconomic Implications of Gold Reserve Policy of the Bank of England during the Eighteenth Century By Elisa Newby
  9. Monetary policy through the “credit-cost channel”. Italy and Germany By Giuliana Passamani; Roberto Tamborini
  10. Is Numérairology the Future of Monetary Economics? Unbundling Muméraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate By Buiter, Willem H
  11. Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate By Anton Nakov
  12. Vintage Capital and Expectations Driven Business Cycles By Flodén, Martin
  13. US Imbalances: The Role of Technology and Policy By Bems, Rudolfs; Dedola, Luca; Smets, Frank
  14. Debt and the Effects of Fiscal Policy By Favero, Carlo A; Giavazzi, Francesco
  15. BEMOD: a DSGE model for the Spanish economy and the rest of the Euro area By Javier Andrés; Pablo Burriel; Ángel Estrada
  16. Monetary Policy and Macroeconomic Stability in Latin America: The Cases of Brazil, Chile, Colombia and Mexico By Luiz de Mello; Diego Moccero
  17. Hitting and Hoping? Meeting the Exchange Rate and Inflation Criteria During a Period of Nominal Convergence By John Lewis
  18. Seigniorage By Willem H. Buiter
  19. The Business Cycle and the Equity Risk Premium in Real Time By Kizys, Renatas; Pierdzioch, Christian
  20. The Transition to Marked-Based Monetary Policy: What Can China Learn from the European Experience? By Oxelheim, Lars; Forssbæck , Jens
  21. Pension systems, Intergenerational Risk Sharing and Inflation By Beetsma, Roel; Bovenberg, A Lans
  22. Fiscal Policy Switching: Evidence from Japan, the U.S., and the U.K. By Arata Ito; Tsutomu Watanabe; Tomoyoshi Yabu
  23. Heterogeneity and learning in inflation expectation formation: an empirical assessment By Emiliano Santoro; Damjan Pfajfar
  24. Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts. By David Card
  25. Functional income distribution and aggregate demand in the Euro-area By Engelbert Stockhammer; Özlem Onaran; Stefan Ederer
  26. Amplifying Business Cycles through Credit Constraints By Chakraborty, Suparna
  27. Transmitting shocks to the economy: The contribution of interest and exchange rates and the credit channel By Edda Claus; ris Claus
  28. "FisherÕs Theory of Interest Rates and the Notion of ÒRealÓ: A Critique" By Eric Tymoigne
  29. Intertemporal Investment Strategies under Inflation Risk By Carl Chiarella; Chih-Ying Hsiao; Willi Semmler
  30. On the Relationship between Fiscal Plans in the European Union: An Empirical Analysis Based on Real-Time Data By Beetsma, Roel; Giuliodori, Massimo
  31. Money market uncertainty and retail interest rate fluctuations: A cross-country comparison By Burkhard Raunig; Johann Scharler
  32. Endogenous State Prices, Liquidity, Default, and the Yield Curve By Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos
  33. Employment fluctuations with downward wage rigidity: the role of moral hazard By James Costain; Marcel Jansen
  34. The Cyclical Behavior of Shadow and Regular Employment By Maurizio Bovi
  35. The monetary model of hyperinflation and the adaptive expectations: limits of the association and model validity. By Alexandre Sokic
  36. A note on the national contributions to euro area M3 By Mehrotra, Aaron
  37. Central Bank intraday collateral policy and implications for tiering in rtgs payment systems By John P. Jackson; Mark J. Manning
  38. Collective Risk Management in a Flight to Quality Episode By Ricardo J. Caballero; Arvind Krishnamurthy
  39. Macroeconomic Analyses and Microeconomic Analyses of Labor Supply By Orley Ashenfelter
  40. National accounts, fiscal rules and fiscal policy. Mind the hidden gaps By Maurizio Bovi
  41. Current Account Deficits in Rich Countries By Olivier Blanchard
  42. "Expensive Living: The Greek Experience under the Euro" By Taun N. Toay; Theodore Pelagidis
  43. Advertising, Consumption and Economic Growth: An Empirical Investigation By Günther Rehme; Sara-Frederike Weisser
  44. Taste for variety and endogenous fluctuations in a monopolistic competition model. By Thomas Seegmuller
  45. On the Ramsey equilibrium with heterogeneous consumers and endogenous labor supply. By Stefano Bosi; Thomas Seegmuller
  46. money demand and futures By Chiara Oldani
  47. Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities) By Del Negro, Marco; Schorfheide, Frank
  48. Consumer sentiment and householde expenditures in Italy: a disaggregated analysis according to the income of the people interviewed By Solange Leproux; Marco Malgarini
  49. Unemployment Insurance Taxes and the Cyclical Properties of Employment and Unemployment. By David Card; Phillip B. Levine
  50. Lange and his 1938-contribution – An early Keynesian? By Finn Olesen
  51. Trade Unions and the Rate of Change of Money Wages in the U.S. By Orley Ashenfelter; George Johnson; John Pencavel
  52. Information Technology, Organisational Change and Productivity By Crespi, Gustavo; Criscuolo, Chiara; Haskel, Jonathan
  53. Pricing to market of Italian exporting firms By Roberto Basile; Sergio de Nardis; Alessandro Girardi
  55. The Political Economy of Public Investment By Beetsma, Roel; van der Ploeg, Frederick
  56. Investor Information, Long-Run Risk, and the Duration of Risky Cash-Flows By Mariano M. Croce; Martin Lettau; Sydney C. Ludvigson
  57. A Q-model of labour demand By Cristina Barceló
  58. The cross-country effects of EU holidays on domestic GDP's By Giancarlo Bruno; Claudio Lupi; Carmine Pappalardo; Gianfranco Piras
  59. Random Walk Expectations and the Forward Discount Puzzle By Bacchetta, Philippe; van Wincoop, Eric
  60. Competition and price adjustment in the euro area By Luis J. Álvarez; Ignacio Hernando
  61. Financing Development: The Role of Information Costs By Jeremy Greenwood; Juan M. Sanchez; Cheng Wang
  62. Poverty and inequality effects of a high growth scenario in South Africa: A dynamic microsimulation CGE analysis By Ramos Mabugu; Margaret Chitiga
  63. "MAASTRICHT 2042 AND THE FATE OF EUROPE: Toward Convergence and Full Employment" By James K. Galbraith
  64. The Princeton Macro Model of the Labor Market: Rational and Efficiency of the Estimation Procedure By Harry H. Kelejian
  65. Solving Endogeneity in Assessing the Efficacy of Foreign Exchange Market Interventions By Seok Gil Park
  66. The Super Price Index: Irving Fisher, and after By Sydney Afriat; Carlo Milana
  67. Russian banks´ private deposit interest rates and market discipline By Peresetsky, A.A.; Karminsky, A.M.; Golovan, S.V.
  68. Expected optimal feedback with Time-Varying Parameters By Marco P. Tucci; David A. Kendrick; Hans M. Amman
  69. Social Change By Greenwood, Jeremy; Guner, Nezih

  1. By: Alessandro Flamini (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: This paper focuses on optimal monetary policy in presence of uncertainty of the structural parameters that characterize an open economy. The framework is a Markov jump-linear-quadratic new Keynesian model, where the central bank searches for the optimal policy in a non certainty equivalence environment. Comparing CPI and domestic inflation targeting, this paper shows that the latter implies considerably less variability in the central bank distribution forecast of the economic dynamics. In particular, the variability of the interest rates distribution forecast is much larger with CPI inflation targeting. The paper also shows that domestic inflation targeting is much less sensitive than CPI inflation targeting to interest rate smoothing and cost-push shocks.
    Keywords: Inflation Targeting; uncertainty; Markov jump linear quadratic system; non-certainty equivalence; small open-economy; optimal monetary policy; domestic and CPI inflation.
    JEL: E52 E58 F41
    Date: 2006–12
  2. By: Beck, Günter; Wieland, Volker
    Abstract: The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank's interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical 'two-pillar' Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favour of ECB-style cross-checking does not require direct effects of money on output or inflation.
    Keywords: European Central Bank; monetary policy; monetary policy under uncertainty; money; Phillips curve; quantity theory
    JEL: E32 E41 E43 E52 E58
    Date: 2007–02
  3. By: Marika Karanassou (Queen Mary, University of London and IZA); Dennis J. Snower (Kiel Institute for World Economics, CEPR and IZA)
    Abstract: A major criticism against staggered nominal contracts is that they give rise to the so called "persistency puzzle" - although they generate price inertia, they cannot account for the stylised fact of inflation persistence. It is thus commonly asserted that, in the context of the new Phillips curve (NPC), inflation is a jump variable. We argue that this "persistency puzzle" is highly misleading, relying on the exogeneity of the forcing variable (e.g. output gap, marginal costs, unemployment rate) and the assumption of a zero discount rate. We show that when the discount rate is positive in a general equilibrium setting (in which real variables not only affect inflation, but are also influenced by it), standard wage-price staggering models can generate both substantial inflation persistence and a nonzero inflation-unemployment tradeoff in the long-run. This is due to frictional growth, a phenomenon that captures the interplay of nominal staggering and permanent monetary changes. We also show that the cumulative amount of inflation undershooting is associated with a downward-sloping NPC in the long-run.
    Keywords: inflation dynamics, persistence, wage-price staggering, new Phillips curve, monetary policy, frictional growth
    JEL: E31 E32 E42 E63
    Date: 2007–02
  4. By: Smets, Frank; Wouters, Rafael
    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: business cycle; DSGE models; monetary policy
    JEL: E4 E5
    Date: 2007–02
  5. By: Boivin, Jean; Giannoni, Marc; Mihov, Ilian
    Abstract: This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a 'price puzzle'' contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions.
    Keywords: factor-augmented VAR; monetary policy; price stickiness
    JEL: C3 D2 E31 E4 E5
    Date: 2007–02
  6. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1intermediate target.
    Keywords: Monetary policy, zone of discretion, intermediate inflation target.
    JEL: C51 C52 E52 E58
    Date: 2007–01
  7. By: Guido Lorenzoni
    Abstract: This paper studies monetary policy in a model where output fluctuations are caused by shocks to public beliefs on the economy's fundamentals. I ask whether monetary policy can offset the effect of these shocks and whether this offsetting is socially desirable. I consider an environment with dispersed information and two aggregate shocks: a productivity shock and a "news shock" which affects aggregate beliefs. Neither the central bank nor individual agents can distinguish the two shocks when they hit the economy. The main results are: (1) despite the lack of superior information an appropriate monetary policy rule can change the economy's response to the two shocks; (2) monetary policy can achieve full aggregate stabilization, that is, it can induce a path for aggregate output that is identical to that which would arise under full information; (3) however, full aggregate stabilization is typically not optimal. The fact that monetary policy can tackle the two shocks separately is due to two crucial ingredients. First, agents are forward looking. Second, current fundamental shocks will become public information in the future and the central bank will be able to respond to them at that time. By announcing its response to future information, the central bank can influence the expected real interest rate faced by agents with different beliefs and, thus, induce an optimal use of the information dispersed in the economy.
    JEL: D83 E32 E52
    Date: 2007–02
  8. By: Elisa Newby
    Abstract: By imposing a simple adjustment cost on gold purchases the Bank of England was able to manage external drains of monetary gold while maintaining the convertibility of pound during the eighteenth century. This was a period during which constant political disturbances and external shocks on the market price of gold made monetary policy a challenging task. The implications of adjustment cost were not just limited to the gold reserves of the Bank, but stabilised consumption and the price level.
    Keywords: Gold standard, Monetary policy, Monetary regimes, Adjustment Costs.
    JEL: C61 E31 E4 E5 N13
    Date: 2007–02
  9. By: Giuliana Passamani; Roberto Tamborini
    Abstract: In this paper we wish to extend the empirical content of the "credit-cost channel" of monetary policy that we proposed in Passamani and Tamborini (2005). In the first place, we replicate the econometric estimation of the model for Italy, to which we add Germany. We find confirmation that, in both countries, firms' reliance on bank loans (“credit channel”) makes aggregate supply sensitive to bank interest rates (“cost channel”), which are in turn driven by the inter-bank rate controlled by the central bank plus a credit risk premium charged by banks on firms. The second extension consists of a formal econometric analysis of the idea that the interest rate is an instrument of control for the central bank. The empirical results of the CCC model that, according to Johansen and Juselius (2003), innovations in the inter-bank rate qualify this variables as a "control variable" in the system. Hence we replicate the Johansen and Juselius technique of simulation of rule-based stabilization policy. This is done for both Italy and Germany, on the basis of the respective estimated CCC models, taking the inter-bak rate as the instrument and the inflation of 2% as the target. As a result, we find confirmation that inflation-targeting by way of inter-bank rate control, grafted onto the estimated CCC model, would stabilize inflation through structural shifts of the "AS curve", that is, the path of realizations in the output-inflation space.
    Keywords: Macroeconomics and monetary economics, Monetary transmission mechanisms, Structural cointegration models, Italian economy, German economy
    JEL: E51 C32
    Date: 2006
  10. By: Buiter, Willem H
    Abstract: The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numéraire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numéraire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numérairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.
    Keywords: cashless economy; optimal inflation; price level determinacy; zero lower bound
    JEL: E3 E4 E5 E6
    Date: 2007–02
  11. By: Anton Nakov (Banco de España; Universitat Pompeu Fabra)
    Abstract: Recent treatments of the issue of a zero floor on nominal interest rates have been subject to some important methodological limitations. These include the assumption of perfect foresight or the introduction of the zero lower bound as an initial condition or a constraint on the variance of the interest rate, rather than an occasionally binding non-negativity constraint. This paper addresses these issues offering a global solution to a standard dynamic stochastic sticky price model with an explicit occasionally binding non-negativity constraint on the nominal interest rate. It turns out that the dynamics and sometimes the unconditional means of the nominal rate, inflation and the output gap are strongly affected by uncertainty in the presence of the zero lower bound. Commitment to the optimal rule reduces unconditional welfare losses to around one-tenth of those achievable under discretionary policy, while constant price level targeting delivers losses which are only 60% larger than under the optimal rule. Even though the unconditional performance of simple instrument rules is almost unaffected by the presence of the zero lower bound, conditional on a strong deflationary shock simple instrument rules perform substantially worse than the optimal policy.
    Keywords: monetary policy, zero floor, interest rate
    JEL: E31 E32 E37 E52
    Date: 2006–12
  12. By: Flodén, Martin
    Abstract: This paper demonstrates that increased optimism about future productivity can generate an immediate economic expansion in a neoclassical model with vintage capital and variable capacity utilization. Previous research has documented that standard neoclassical models cannot generate a simultaneous increase in consumption, investment, and hours in response to news shocks, and that optimism in these models tends to reduce investment and hours. When technology is vintage specific, however, expectations of higher future productivity raise the demand for new vintages of capital relative to installed capital. Capital depreciates faster when utilization is high, but this depreciation only affects installed capital. The cost of high depreciation therefore falls when the value of installed capital falls. It is demonstrated here that with standard parameter values, more optimism raises utilization, consumption, investment, hours, and output.
    Keywords: business cycles; capital-embodied technological change; expectations; news; vintage capital
    JEL: E13 E32
    Date: 2007–02
  13. By: Bems, Rudolfs; Dedola, Luca; Smets, Frank
    Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s.
    Keywords: global imbalances; open economy; VARs
    JEL: F3 F4
    Date: 2007–02
  14. By: Favero, Carlo A; Giavazzi, Francesco
    Abstract: Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio is not tracked. We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt. We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular the absence of an effect of fiscal shocks on long-term interest rates - a frequent finding in research based on VAR’s that omit a debt feedback - can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable. Using data for the U.S. economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings.
    Keywords: fiscal policy; government budget constraint; public debt
    JEL: E62 H60
    Date: 2007–02
  15. By: Javier Andrés (Banco de España; Universidad de Valencia); Pablo Burriel (Banco de España); Ángel Estrada (Oficina Económica de Presidencia del Gobierno)
    Abstract: In this paper we present the theoretical foundations and the simulation results obtained with a new dynamic general equilibrium model developed at the Banco de España for the Spanish economy and the rest of Euro area. The model is designed to help in simulating the effect of alternative shocks on the main aggregate variables. The main contributions of this work from a theoretical perspective are the modelling of a monetary union composed of two regions, the inclusion of housing as a durable good with its own sector of production and the degree and detail of the disaggregation considered for each country in the model, which replicates the Quarterly National Accounts. On the empirical side, the main contribution is the detailed calibration of the most important ratios of the Spanish and rest of the Euro area economies.
    Keywords: sdge model, open economy, simulation, shocks, macroeconomic policies
    JEL: E32 E50 F41
    Date: 2006–11
  16. By: Luiz de Mello; Diego Moccero
    Abstract: In 1999, new monetary policy regimes were adopted in Brazil, Chile, Colombia and Mexico, combining inflation targeting with floating exchange rates. These regime changes have been accompanied by lower volatility in the monetary stance in Brazil, Colombia and Mexico, despite higher inflation volatility in Brazil and Colombia. This paper estimates a conventional New Keynesian model for these four countries and shows that: i) the post-1999 regime has been associated with greater responsiveness by the monetary authority to changes in expected inflation in Brazil and Chile, while in Colombia and Mexico monetary policy has become less counter-cyclical, ii) lower interest-rate volatility in the post-1999 period owes more to a benign economic environment than to a change in the policy setting, and iii) the change in the monetary regime has not yet resulted in a reduction in output volatility in these countries. <P>Politique monétaire et stabilité macroéconomique en Amérique latine : Brésil, Chili, Colombie et Mexique <BR>De nouveaux régimes monétaires ont été adoptés par le Brésil, le Chili, la Colombie et le Mexique en 1999. Basés sur le ciblage de l’inflation et des taux de change flottants, ces régimes ont été accompagnés d’une réduction de la volatilité de la politique monétaire au Brésil, en Colombie et au Mexique, en dépit de l’augmentation de la volatilité de l’inflation au Brésil et en Colombie. Ce document estime un modèle conventionnel du type « New Keynesian » pour ces quatre pays et démontre que: i) les autorités monétaires ont réagi plus fortement aux changements des expectatives d’inflation à partir de 1999 au Brésil et au Chili, tandis que la politique monétaire est devenue moins contre-cyclique en Colombie et au Mexique, ii) la réduction de la volatilité du taux d’intérêt à partir de 1999 est due à un environnement économique plus favorable plutôt qu’à l’adoption d’un nouveau régime monétaire, et iii) le changement du régime monétaire n’a pas encore conduit à une réduction de la volatilité de l’activité en ces pays.
    JEL: C15 C22 E52 O52
    Date: 2007–02–14
  17. By: John Lewis
    Abstract: This paper analyses the problem faced by CEECs wishing to join the Euro who must hit both an inflation and exchange rate criterion during a period of nominal convergence. This process requires either an inflation differential, an appreciating nominal exchange rate, or a combination of the two, which makes it difficult to simultaneously satisfy the exchange rate and inflation criteria. The authorities can use their monetary policy to hit one criterion, but must essentially just "hope" to satisfy the other one. The paper quantifies the likely size and speed of these convergence effects, their impact on inflation and exchange rates, and their consequences for the simultaneous compliance with both criteria under an inflation targeting setup and under a fixed exchange rate regime. The key result is that under an inflation targeting regime, the nominal appreciation implied by convergence is not big enough to threaten a breach of the exchange rate criterion, but for countries with fixed exchange rates, inflation is likely to exceed the reference value. This result is robust to plausible changes in the assumed convergence scenario.
    Keywords: Central and Eastern Europe; Nominal Convergence; Euro Adoption
    JEL: E52 E61 E31
    Date: 2007–01
  18. By: Willem H. Buiter
    Abstract: Governments through the ages have appropriated real resources through the monopoly of the 'coinage'. In modern fiat money economies, the monopoly of the issue of legal tender is generally assigned to an agency of the state, the Central Bank, which may have varying degrees of operational and target independence from the government of the day. In this paper I analyse four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (the interest bill saved by the authorities on the outstanding stock of base money liabilities), (3) the inflation tax (the reduction in the real value of the stock of base money due to inflation and (4) the operating profits of the central bank, or the taxes paid by the Central Bank to the Treasury. To understand the relationship between these four concepts, an explicitly intertemporal approach is required, which focuses on the present discounted value of the current and future resource transfers between the private sector and the state. Furthermore, when the Central Bank is operationally independent, it is essential to decompose the familiar consolidated 'government budget constraint' and consolidated 'government intertemporal budget constraint' into the separate accounts and budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate the financial constraints on the Central Bank's ability to pursue and achieve an inflation target, and the importance of cooperation and coordination between the Treasury and the Central Bank when faced with financial sector crises involving the need for long-term recapitalisation or when confronted with the need to mimick Milton Friedman's helicopter drop of money in an economy faced with a liquidity trap.
    JEL: E4 E5 E6 H6
    Date: 2007–02
  19. By: Kizys, Renatas; Pierdzioch, Christian
    Abstract: Building on the stochastic discount factor model, we estimated a multivariate exponential GARCH-in-mean model to analyze the link between the business cycle and the equity risk premium in the United States. In order to measure the business cycle, we used revised and real-time monthly data on industrial production for the period from 1963 to 2006. The main result of our empirical analysis is that estimates of the equity risk premium based on real-time data may significantly differ from estimates of the equity risk premium based on revised data.
    Keywords: Stochastic discount factor model; multivariate exponential GARCH-in-mean model; United States; equity risk premium; real-time macroeconomic data
    JEL: E44 G12 C32 E32
    Date: 2007–02
  20. By: Oxelheim, Lars (Research Institute of Industrial Economics); Forssbæck , Jens (Lund University)
    Abstract: We discuss the prospects for Chinese money market development and transition to market-based monetary policy operations based on a comparative historical analysis of the present Chinese situation and the development in 11 European countries from 1979 up to the launch of European Economic and Monetary Union (EMU). Central banks in the latter group typically had an incentive to encourage the formation of efficient benchmark segments in the domestic money markets for the conduct of open market operations as traditional quantity-oriented instruments became increasingly ineffective. China is displaying many of the same symptoms as the European countries in the 1970s and 1980s, including poor monetary transmission due to excess liquidity and conflicts of interest due to unclear priority among multiple policy goals. We conclude that the current Chinese multiple-target monetary policy is counter-productive to efforts to develop an efficient money market that can serve as arena for an effective market-based monetary policy.
    Keywords: Monetary Policy Operations; Money Market; China; European Union; Deregulation
    JEL: E42 E52 F41
    Date: 2007–02–06
  21. By: Beetsma, Roel; Bovenberg, A Lans
    Abstract: We investigate intergenerational risk sharing in two-pillar pension systems with a pay-as-you-go pillar and a funded pillar. We consider shocks in productivity, depreciation of capital and inflation. The funded pension pillar can be either defined contribution or defined benefit, with benefits defined in real or nominal terms or indexed to wages. Optimal intergenerational risk sharing can be achieved only in the presence of a defined benefit pension system with appropriate restrictions on investment policy of the funded pillar. In this way, both generations have similar exposures to financial and human capital risks.
    Keywords: (funded) pensions; fiscal policy; nominal assets; overlapping generations; risk sharing
    JEL: E21 H55 J18
    Date: 2007–02
  22. By: Arata Ito (Graduate Student, Graduate School of Economics, Hitotsubashi University (E-mail:; Tsutomu Watanabe (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail: tsutomu.w@srv; Tomoyoshi Yabu (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper estimates fiscal policy feedback rules in Japan, the United States, and the United Kingdom for more than a century, allowing for stochastic regime changes. Estimating a Markov-switching model by the Bayesian method, we find the following: First, the Japanese data clearly reject the view that the fiscal policy regime is fixed, i.e., that the Japanese government adopted a Ricardian or a non-Ricardian regime throughout the entire period. Instead, our results indicate a stochastic switch of the debt-GDP ratio between stationary and nonstationary processes, and thus a stochastic switch between Ricardian and non-Ricardian regimes. Second, our simulation exercises using the estimated parameters and transition probabilities do not necessarily reject the possibility that the debt-GDP ratio may be nonstationary even in the long run (i.e., globally nonstationary). Third, the Japanese result is in sharp contrast with the results for the U.S. and the U.K. which indicate that in these countries the government's fiscal behavior is consistently characterized by Ricardian policy.
    Keywords: Fiscal Policy Rule, Fiscal Discipline, Markov-Switching Regression
    JEL: E62
    Date: 2007–02
  23. By: Emiliano Santoro; Damjan Pfajfar
    Abstract: Relying on Michigan Survey's monthly micro data on inflation expectations we try to determine the main features - in terms of sources and degree of heterogeneity - of inflation expectation formation over different phases of the business cycle. Different learning rules have been applied to the data, in order to test whether agents are learning and whether their expectations are converging towards perfect foresight. Results suggest that behaviour of agents in the right hand side of the distribution is more associated with learning dynamics. Tests for "static" and "dynamic" versions of sticky information are also conducted. Only agents in the middle of the distribution are regularly updating their information sets. Evidence of rational inattention has been found for agents comprised in the upper end of the distribution. We identify three regions of the overall distribution corresponding to different expectation formation processes, which display a heterogeneous response to main macroeconomic indicators : a static or highly autoregressive (LHS) group, a "nearly" rational group (middle), and a group of agents (RHS) behaving in accordance to adaptive learning and sticky information. The latter, generally speaking, are too "pessimistic" as they overreact to macroeconomic fluctuations.
    Keywords: Heterogeneous Expectations, Adaptive Learning, Sticky Information, Survey Expectations
    JEL: E31 C53 D80
    Date: 2006
  24. By: David Card
  25. By: Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Özlem Onaran (Department of Economics, Vienna University of Economics & B.A.); Stefan Ederer (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: An increase in the wage share has contradictory effects on the subaggregates of aggregate demand. Private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes. Investment expenditures ought to be negatively affected because investment will positively depend on profits. Net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labor costs and thus a loss in competitiveness. Theoretically aggregate demand can therefore be either wage led or profit led depending on how these effects add up. The results will crucially depend on how open the economy is internationally. The paper estimates a Post-Kaleckian macro model incorporating these effects for the Euro area and finds that the Euro area is presently in a wage-led demand regime. Implications for wage policies are discussed.
    JEL: E12 E20 E22 E25 E61
    Date: 2007–02
  26. By: Chakraborty, Suparna
    Abstract: Theory suggests that endogenous borrowing constraints amplify the impact of external shocks on the economy. How big is the amplification? In this paper, we quantitatively investigate this question in the context of a dynamic general equilibrium model with borrowing constraints under two alternatives: (1) borrowing constraint endogenously depends on the borrower's net worth (2) borrowing constraint is exogenous. Calibrating our model to the Japanese economy, we find evidence of significant amplification in our impulse responses. Quantitatively applying the model to the Japanese case, we find TFP can significantly account for the Japanese business cycle during the period 1980 to 2000 and the impact is much amplified when we assume that borrowing constraints are endogenously determined.
    Keywords: Borrowing constraint; Endogenous; Net worth; Business cycle; Amplification
    JEL: E32
    Date: 2006–12–11
  27. By: Edda Claus; ris Claus
    Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
    Keywords: Transmission channels, open economy, general equilibrium model
    Date: 2007–02–19
  28. By: Eric Tymoigne
    Abstract: By providing five different criticisms of the notion of real rate, the paper argues that this concept, as Fisher defined it or as a definition, is not relevant to economic analysis. Following Keynes and other post-Keynesians, the article shows that the notion of real rate is microeconomically and macroeconomically unfounded. Adjusting interest rates for inflation does not protect the purchasing power of wealth, and it is impossible to do so at the macroeconomic level. In addition, an empirical interpretation of the break in the correlation between interest rates and inflation since 1953 is provided.
    Date: 2006–12
  29. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Chih-Ying Hsiao (School of Finance and Economics, University of Technology, Sydney); Willi Semmler (University of Bielefeld)
    Abstract: This paper studies intertemporal investment strategies under inflation risk by extending the intertemporal framework of Merton (1973) to include a stochastic price index. The stochastic price index gives rise to a two-tier evaluation system: agents maximize their utility of consumption in real terms while investment activities and wealth evolution are evaluated in nominal terms. We include inflation-indexed bonds in the agents? investment opportunity set and study their effectiveness in hedging against inflation risk. A new multifactor term structure model is developed to price both inflation-indexed bonds and nominal bonds, and the optimal rules for intertemporal portfolio allocation, both with and without inflation-indexed bonds are obtained in closed form. The theoretical model is estimated using data of US bond yield, both real and nominal, and S&P 500 index. The estimation results are employed to construct the optimal investment strategy for an actual real market situation. Wachter (2003) pointed out that without inflation risk, the most risk averse agents (with an infinite risk aversion parameter) will invest all their wealth in the long term nominal bond maturing at the end of the investment horizon. We extend this result to the case with inflation risk and conclude that the most risk averse agents will now invest all their wealth in the inflation-indexed bond maturing at the end of the investment horizon.
    Keywords: inflation-indexed bonds; intertemporal asset allocation; inflationary expectations
    Date: 2007–01–01
  30. By: Beetsma, Roel; Giuliodori, Massimo
    Abstract: We investigate the interdependence of fiscal policies, and in particular deficits, in the European Union using an empirical analysis based on real-time fiscal data. There are many potential reasons why fiscal policies could be interdependent, such as direct externalities due to cross-border public investments, yardstick competition, tax competition and peer pressure among governments. The advantage of using real-time data is that they better reflect the policymakers’ intentions than revised data. Real-time data allow us to investigate how available information is mapped into policymakers’ plans, while revised data are generally 'polluted' with ad hoc reactions to unexpected developments that have taken place after the plan was made. Controlling for a large set of relevant determinants of primary cyclically adjusted deficits, we find indeed evidence of fiscal policy interdependence. However, the interdependence is rather asymmetrically distributed: the fiscal stances of the large countries affect the fiscal stances of the small countries, but not vice versa.
    Keywords: European Union; fiscal policy interdependence; monetary union; primary cyclically adjusted deficit; real-time data
    JEL: E62 H60
    Date: 2007–02
  31. By: Burkhard Raunig (Oesterreichische Nationalbank, Economic Studies Division, Vienna, Austria); Johann Scharler (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper analyzes empirically the relationship between money market uncertainty and unexpected deviations in retail interest rates in a sample of 10 OECD countries. We find that, with the exception of the US, money market uncertainty has only a modest impact on the conditional volatility of retail interest rates. Even for the US we find that the effects of money market uncertainty are spread out over time. Our results are consistent with the hypothesis that banking relationships include implicit insurance arrangements and thereby reduce uncertainty.
    Keywords: Interest Rate Pass-Through; Relationship Banking; Conditional Volatility
    JEL: E43 G21
    Date: 2007–02
  32. By: Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos
    Abstract: We show, in an exchange economy with default, liquidity constraints and no aggregate uncertainty, that state prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank. Our model is derived along the lines of Dubey and Geanakoplos (1992). Two agents trade goods and nominal assets (Arrow-Debreu (AD) securities) to smooth consumption across periods and future states, in the presence of cashin-advance financing costs. We show that, with Von Neumann-Morgenstern logarithmic utility functions, the price of AD securities, are inversely related to liquidity. The upshot of our argument is that agents’ expectations computed using risk-neutral probabilities give more weight in the states with higher interest rates. This result cannot be found in a Lucas-type representative agent general equilibrium model where there is neither trade or money nor default. Hence, an upward yield curve can be supported in equilibrium, even though short-term interest rates are fairly stable. The risk-premium in the term structure is therefore a pure default risk premium.
    Keywords: cash-in-advance constraints; risk-neutral probabilities; state prices; term structure of interest rates
    JEL: E43 G12
    Date: 2006
  33. By: James Costain (Banco de España); Marcel Jansen (Universidad Carlos III de Madrid)
    Abstract: This paper considers a dynamic matching model with imperfectly observable worker effort. In equilibrium, the wage distribution is truncated from below by a no-shirking condition. This downward wage rigidity induces the same type of inefficient churning and "contractual fragility" as in Ramey and Watson (1997). Nonetheless, the surprising lesson of our analysis is that workers' shirking motive reduces the cyclical fluctuations in job destruction, because firms are forced to terminate some marginal jobs in booms which they cannot commit to maintain in recessions. This time-inconsistency problem casts doubt upon the importance of inefficient churning as an explanation of observed employment fluctuations. On the other hand, the no-shirking condition implies that firms' share of surplus is procyclical, which can amplify fluctuations in job creation. Thus, our model is consistent with recent evidence that job creation is more important than job destruction in driving labor market fluctuations. Furthermore, unlike most models with endogenous job destruction, we obtain a robust Beveridge curve.
    Keywords: job matching, wage rigidity, efficiency wages, contractual fragility
    JEL: C78 E24 E32 J64
    Date: 2006–11
  34. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Using data from the Italian Institute of Statistics, I examine the cyclical properties of three labor inputs - regular employees, regular self-employed, and underground workers. Results support the widespread view that, in Italy, the shadow employment functions as an improper tool for increasing the labor market flexibility. My analysis uncovers more details. While the contemporaneous correlation between shadow labor and output is significant, as time passes their association looses momentum. The opposite is found for regular employees, which show significant positive correlations with lagged output gaps only. Somewhat puzzling, self-employment seems to be the less sensitive to the course of business cycles. Possibly, hidden employment substitutes it as shock-absorber. Sectoral data tell different stories.
    Keywords: Underground economy; VAR models; Labor Market Flexibility, Business Cycle
    JEL: C32 C53 E26 H26 J30
    Date: 2006–01
  35. By: Alexandre Sokic
    Abstract: This article highlights the strict association met in the literature between the adaptive expectations assumption and the correct running of the monetary model of hyperinflation. A complete resolution of the model is carried out under the adaptive expectations hypothesis. It is shown that the assumption of adaptive expectations is not sufficient to ensure the validity of the model for the explanation of monetary hyperinflation. This result raises the question of the field of validity of this model already posed by the introduction of rational expectations. The possibility of development of self-generating hyperinflationary bubbles strengthens the relevance of this question.
    Keywords: hyperinflation, seigniorage, hyperinflationary bubbles
    JEL: E31
    Date: 2007
  36. By: Mehrotra, Aaron (Bank of Finland, BOFIT)
    Abstract: We examine developments in national contributions to euro area M3 for a sample of nine euro area countries during 1999–2005. We investigate the co-movements of national contributions with euro area M3 and discuss possible reasons for divergencies in growth rates of national contributions. Finally, we evaluate the information content of national contributions to M3 using formal tests of causality between monetary aggregates, consumer prices and equity prices.
    Keywords: national contribution; M3; euro area
    JEL: E31 E51
    Date: 2007–01–19
  37. By: John P. Jackson; Mark J. Manning
    Abstract: In this paper we present a model of a Real-Time Gross Settlement (RTGS) payment system with tiered membership where settlement is facilitated by intraday credit extensions from the central bank. RTGS systems process and settle payment instructions individually in real time, ensuring intraday finality. Furthermore, central banks typically provide the settlement accounts across which payments are processed; hence, settlement is typically effected in central bank money, thereby eliminating counterparty risks between members once settlement has taken place. The model allows us to examine the key factors that influence both an agent.s decision over whether to participate directly in an RTGS payment system, and a central bank.s decision as to whether to require collateralisation of intraday credit extensions to payment system participants.
    Date: 2007–01
  38. By: Ricardo J. Caballero; Arvind Krishnamurthy
    Abstract: We present a model of optimal intervention in a flight to quality episode. The reason for intervention stems from a collective bias in agents' expectations. Agents in the model make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with systemwide shocks, treating the latter uncertainty as Knightian. We show that when aggregate liquidity is low, an increase in uncertainty leads agents to a series of protective actions -- decreasing risk exposures, hoarding liquidity, locking-up capital -- that reflect a flight to quality. However, the conservative actions of agents leave the aggregate economy over-exposed to negative shocks. Each agent covers himself against his own worst-case scenario, but the scenario that the collective of agents are guarding against is impossible. A lender of last resort, even if less knowledgeable than private agents about individual shocks, does not suffer from this collective bias and finds that pledging intervention in extreme events is valuable. The intervention unlocks private capital markets.
    JEL: E30 E44 E5 F34 G1 G21 G22 G28
    Date: 2007–02
  39. By: Orley Ashenfelter
  40. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Underground activities affect crucial fiscal ratios generating “gaps” both in government revenues and in national accounts. I address this topic exploiting the peculiarities of the Italian situation. First, I describe the pros and cons of the Italian method to estimate the (non trivial share of) shadow economy. This sheds some light on the reliability of GDP estimates and allows unraveling some policy-relevant national accounts gaps. Second, I examine the links between undeclared incomes, tax burden and fiscal policy in a system possibly suffering from unpleasant arithmetic. Data suggest that government revenues and tax evasion go hand-in-hand and highlight the difficulties of policymaking.
    Keywords: Fiscal Rules, National Accounts, Shadow Economy, Taxation.
    JEL: C32 C53 E26 H26
    Date: 2007–01
  41. By: Olivier Blanchard
    Abstract: Current account imbalances have steadily increased in rich countries over the last 20 years. While the U.S. current account deficit dominates the numbers and the news, other countries, especially within the Euro area, are also running large deficits. These deficits are different from the Latin American deficits of the early 1980s, or the Mexican deficit of the early 1990s. They involve rich countries; they reflect mostly private saving and investment decisions, and fiscal deficits often play a marginal role; and the deficits are financed mostly through equity, FDI, and own-currency bonds rather than through bank lending. Yet, there appears a widely shared worry that these deficits are too large, and government intervention is required. My purpose, in this lecture, is to examine the logic of this argument. I ask the following question: Assume that deficits reflect private saving and investment decisions. Assume also that people and firms have rational expectations. Should the government intervene, and, if so, how? To answer the question, I construct a simple benchmark. In the benchmark, the outcome is first best and there is no need nor justification for government intervention. I then introduce simple distortions in either goods, labor, or financial markets, and characterize the equilibrium in each case. I derive optimal policy and the implications for the current account. I show that optimal policy may or may not lead to smaller current account deficits. I see the model and the extensions very much as a first pass. Sharper conclusions require a better understanding of the exact nature and the extent of distortions, and we do not have it. Such understanding is needed however to improve the quality of the current debate.
    JEL: E62 F41
    Date: 2007–02
  42. By: Taun N. Toay; Theodore Pelagidis
    Abstract: Apart from its widely accepted direct advantages, the introduction of the euro has been accompanied by a surge of inflation in most of the EU member states. At the same time, wagesÐin part, wages of the unskilledÐare relatively losing ground, while the purchasing power of the average European seems also to have weakened since the introduction of the single currency. In this paper we deal with five relevant central issues to interpret "expensiveness" in Greece. First, we examine to what extent recent inflation trends are attributable to the constraints imposed by the monetary unionÐnamely negative demand disturbances in certain Greek regions. Second, we investigate to what extent these patterns are also due to the adoption of the euroÐincluding conversion period effectsÐover product market and other domestic rigidities. Third, we investigate the impact of seasonal effects on inflation, in the context of the Greek so-called traditional "petit-bourgeois capitalism." Fourth, we explore the extent to which unemployment is another factor that drives wages and purchasing power down. Fifth, we apply the Balassa-Samuelson effect to see whether it constitutes the culprit for price hikes in nontradable products in particular. We find that all the aforementioned factors contribute to the Greek expensiveness.
    Date: 2006–12
  43. By: Günther Rehme (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Sara-Frederike Weisser
    Abstract: It is sometimes argued that more advertising raises consumption which in turn stimulates output and so economic growth. We test this hypothesis using annual German data expressed in terms of GDP for the period 1950-2000. We find that advertising does not Granger-cause growth but Granger-causes consumption. Consumption, in turn, Granger-causes GDP growth. The data imply that the immediate impact of more advertising on consumption is positive. However, the long-run effect is negative. Further- more, the immediate impact of higher consumption on growth is negative. But the long-run effect is positive. These results raise interesting questions for standard theory, political debates and advertising practitioners.
    Keywords: Advertising, Consumption, Economic Growth
    JEL: O4 M3 E2
    Date: 2007–02
  44. By: Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost) and monopoly profits affect the occurence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies : consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Benassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions : a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity which has a direct influence on the real wage and the real interest rate.
    Keywords: Endogenous fluctuations, taste for variety, imperfect competition.
    JEL: C62 D43 E32
    Date: 2007–01
  45. By: Stefano Bosi (EQUIPPE - Université de Lille 1 et EPEE); Thomas Seegmuller (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we address the question of deterministic cycles in a Ramsey model with heterogeneous infinite-lived agents and borrowing constraints, augmented to take into account the case of elastic labor supply. Under usual restrictions, not only we show that the steady state is unique, but also we clarify its stability properties through a local analysis. We find that, in many cases, the introduction of elastic labor supply promotes convergence by widening the range of parameters for saddle-path stability and endogenous cycles can eventually disappear. These results are robustly illustrated by means of canonical examples in which consumers have separable, KPR or homogeneous preferences.
    Keywords: Saddle-path stability, endogenous cycles, heterogeneous agents, endogenous labor supply, borrowing constraint.
    JEL: C62 D30 E32
    Date: 2007–01
  46. By: Chiara Oldani (ISAE - Institute for Studies and Economic Analyses)
    Abstract: This paper introduces a micro-model of portfolio utility to look at the effects of futures in the allocation process, starting from Lancaster-type utility model (1991), further developed by Glennon and Lane (1996) on money demand; results underline the role of portfolio substitution and crowding out of inefficient financial assets. The synthetic model can be represented by money and financial innovation, lowering the dimension of the assets from 3 to 2. Statistical evidences confirm the validity of assumptions for the US economy at a static level.
    Keywords: futures, money demand model, utility, substitution.
    JEL: D8 E41 G11
    Date: 2006–05
  47. By: Del Negro, Marco; Schorfheide, Frank
    Abstract: In Bayesian analysis of dynamic stochastic general equilibrium (DSGE) prior distributions for some of the taste-and-technology parameters can be obtained from microeconometric or pre-sample evidence, but it is difficult to elicit priors for the parameters that govern the law of motion of unobservable exogenous processes. Moreover, since it is challenging to formulate beliefs about the correlation of parameters, most researchers assume that all model parameters are independent of each other. We provide a simple method of constructing prior distributions for (a subset of) DSGE model parameters from beliefs about the moments of the endogenous variables. We use our approach to investigate the importance of nominal rigidities and show how the specification of prior distributions affects our assessment of the relative importance of different frictions.
    Keywords: Bayesian analysis; DSGE models; model comparisons; nominal rigidities; prior elicitation
    JEL: C32 E3
    Date: 2007–02
  48. By: Solange Leproux (ISAE - Institute for Studies and Economic Analyses); Marco Malgarini (ISAE - Institute for Studies and Economic Analyses)
    Abstract: The aim of the paper is to evaluate the relationship between consumers’ climate and consumption, looking – respectively – at income-based indicators of confidence and at consumption expenditures disaggregated by durability. We find that confidence significantly contributes explaining consumption behaviour, especially when service expenditures are considered in the analysis: we interpret this result as an evidence that services are discretional, not strictly necessary expenditures, that may be influenced by the willingness to buy, as was originally suggested by Katona (1951) with reference to durable goods. Moreover, confidence calculated for the poorest people in the ISAE sample is found to have a particular strong relationship with consumption, confirming the recent Souleles (2004) hypothesis that it is especially the opinion of some group of individuals to influence consumption patterns.
    Keywords: trading confidence climate, consumption theory,heterogeneous behaviour
    JEL: E21 E32
    Date: 2006–04
  49. By: David Card; Phillip B. Levine
  50. By: Finn Olesen (Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: In February 1936 John Maynard Keynes gave birth to modern macroeconomics when he published The General Theory of Employment, Interest and Money. In some ways Oskar Lange was seemly also very critical of mainstream neoclassi-cal thinking although known as a working marginalist for the greater part of his life. In this note we try to identify what Lange might have had so say of Keynesian nature especially in an important contribution from 1938. I would like to thank Danuta Tomczak, Oestfold University College Remmen, Halden, Norway, and Heine Ruppert, Department of Environmental and Busi-ness Economics, for comments to an earlier draft of this paper.
    Date: 2006–12
  51. By: Orley Ashenfelter; George Johnson; John Pencavel
  52. By: Crespi, Gustavo; Criscuolo, Chiara; Haskel, Jonathan
    Abstract: We examine the relationships between productivity growth, IT investment and organisational change (DO) using UK firm data. Consistent with the small number of other micro studies we find (a) IT appears to have high returns in a growth accounting sense when DO is omitted; when DO is included the IT returns are greatly reduced, (b) IT and DO interact in their effect on productivity growth, (c) non-IT investment and DO do not interact in their effect on productivity growth. Some new findings are (a) DO is affected by competition; (b) US-owned firms are much more likely to introduce DO relative to foreign owned firms who are more likely still relative to UK firms; (c) our predicted measured TFP growth slowdown for firms who are not doing DO and/or are in the early stages of IT investment compare well with the macro numbers documenting a UK measured TFP growth slowdown.
    Keywords: information technology; organisational change; productivity growth
    JEL: D24 E22 L22 O31
    Date: 2007–02
  53. By: Roberto Basile (ISAE - Institute for Studies and Economic Analyses); Sergio de Nardis (ISAE - Institute for Studies and Economic Analyses); Alessandro Girardi (ISAE - Institute for Studies and Economic Analyses)
    Abstract: This paper investigates the pricing-to-market (PTM) behaviour of Italian exporting firms, using quarterly survey data by sector and by region over the period 1999q1-2005q2. A partial equilibrium imperfect competition model provides the structure according to which the orthogonality of structural shocks is derived. Impulse-response analysis shows non-negligible reactions of exportdomestic price margins to unanticipated changes in cost competitiveness and in foreign and domestic demand levels, even though these effects appear to be of a transitory nature. For the period 1999-2001 a typical PTM behaviour emerges, while during the most recent years favourable foreign demand conditions allowed firms to increase their export-domestic price margins in face of a strong deterioration of their cost competitiveness. Macroeconomic implications of the observed PTM behaviour are also discussed.
    Keywords: Pricing to market, survey data, panel-VAR models
    JEL: E30 F31 F41
    Date: 2006–06
  54. By: Hyun H. Son (International Poverty Centre, United Nations Development Programme); Nanak Kakwani (International Poverty Centre, United Nations Development Programme)
    Abstract: This paper develops a methodology to measure the impact of price changes on poverty measured by an entire class of additive separable poverty measures. This impact is captured by means of price elasticity of poverty. The total effect of changes in price on poverty is explained in terms of two components. The first component is the income effect of the change in price and the second is the distribution effect captured by the price changes. It is the distribution effect which determines whether the price changes benefit the poor proportionally more (or less) than the non-poor. This paper also derives a new price index for the poor (PIP). While this index can be computed for any poverty measures, our empirical analysis applied to Brazil is based on three poverty measures, the head-count ratio, the poverty gap ratio and the severity of poverty. The empirical results show that price changes in Brazil during the 1999-2006 period have occurred in a way that favors the non-poor proportionally more than the poor. Nevertheless, during the last 2-3 years the price changes have favored the poor relative to the non-poor.
    Keywords: Inflation, Price elasticity, Money metric utility, Price index for the poor
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–11
  55. By: Beetsma, Roel; van der Ploeg, Frederick
    Abstract: The political distortions in public investment projects are investigated within the context of a bipartisan political economy framework. The role of scrapping and modifying projects of previous governments receives special attention. The party in government has an incentive to overspend on large ideological public investment projects in order to bind the hands of its successor. This leads to a bias for excessive debt, especially if the probability of being removed from office is large. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the level of public debt that would prevail under the socially optimal outcome. Social welfare may be boosted even more by appropriate investment restrictions: with a restriction on (future) investment in ideological projects, the current government perceives a large benefit of a debt reduction. However, debt and investment restrictions are not needed if investment projects only have a financial return.
    Keywords: bipartisan; deficit rule; golden rule; ideological projects; investment restriction; market projects; political economy; public investment; scrapping public investment
    JEL: E6 H6 H7
    Date: 2007–02
  56. By: Mariano M. Croce; Martin Lettau; Sydney C. Ludvigson
    Abstract: We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in order to explain empirical finding that long-horizon equity is less risky than short-horizon equity, the properties of the cash flow model and the values of primitive preference parameters must be quite different from those emphasized in the existing long-run risk literature.
    JEL: E44 G10 G12
    Date: 2007–02
  57. By: Cristina Barceló (Banco de España)
    Abstract: This paper studies the labour demand using a Q model in which labour and capital entail adjustment costs. The estimates are based on an unbalanced panel of Spanish firms over the period 1989-96. The corresponding Q variable for labour is significant in explaining hiring rates. Its estimated coefficient varies across sectors in a way that suggests that the use of temporary labour is more widespread in those economic sectors that incur smaller costs of adjusting labour factor due to the specific characteristics of their technology and economic activity. Interaction effects between investment and labour demands are also observed in their adjustment costs.
    Keywords: q model, adjustment costs, labour demand, panel data
    JEL: J23 J32 E22
    Date: 2006–10
  58. By: Giancarlo Bruno (ISAE - Institute for Studies and Economic Analyses); Claudio Lupi (University of Molise, Dept. SEGeS, Faculty of Economics); Carmine Pappalardo (ISAE - Institute for Studies and Economic Analyses); Gianfranco Piras (University of Pescara, Faculty of Economics)
    Abstract: The number and the distribution of non-working days during the year has recently entered the policy debate related to the slow pace of the European economy.The fact that the number of non-working days can affect the quarter to quarter performance of GDP is well known and hardly disputable. It has recently been argued that not only domestic holidays can in principle be important in each single economy, but also foreign ones, as far as there exist strict connections among the national economies. Given the existing evidence at the national level relative to the influence of calendar effects on GDP, the first step of the econometric analysis in the present research is a check on the existence (and significance) of international spillover effects. Our investigation uses both structural time series models and the ARIMA model-based approach. These two different approaches are used jointly and their specific features are exploited to represent and estimate the time series components of our interest. The empirical evidence does not support the spillover hypothesis.
    Keywords: trading days effects, national accounts, international spillover effects
    JEL: C22 E01 E32
    Date: 2006–02
  59. By: Bacchetta, Philippe; van Wincoop, Eric
    Abstract: Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest differentials naturally results when participants in the FX market adopt random walk expectations. We find that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we find that high interest rate currencies depreciate much more than what UIP would predict.
    Keywords: excess return; incomplete information; predictability
    JEL: E4 F3 G1
    Date: 2007–02
  60. By: Luis J. Álvarez (Banco de España); Ignacio Hernando (Banco de España)
    Abstract: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.
    Keywords: price setting, competition, survey data
    JEL: D40 E31
    Date: 2006–10
  61. By: Jeremy Greenwood (University of Pennsylvania); Juan M. Sanchez (University of Rochester); Cheng Wang (Iowa State University)
    Abstract: How does technological progress in financial intermediation affect the economy? To address this question a costly-state verification framework is embedded into a standard growth model. In particular, financial intermediaries can invest resources to monitor the returns earned by firms. The inability to monitor perfectly leads to firms earning rents. Undeserving firms are financed, while deserving ones are under funded. A more efficient monitoring technology squeezes the rents earned by firms. With technological advance in the financial sector, the economy moves continuously from a credit-rationing equilibrium to a perfectly efficient competitive equilibrium. A numerical example suggests that finance is important for growth.
    Keywords: financial intermediation, economic development, costly state verification
    JEL: E13 O11 O16
    Date: 2007–03
  62. By: Ramos Mabugu (Financial and Fiscal Commission, South Africa); Margaret Chitiga (Department of Economics, University of Pretoria)
    Abstract: The debate about the consequences of economic growth on poverty and welfare was recently rekindled in South Africa by announcements that the government would be targeting a sustainable growth rate of 6 percent per annum under the Accelerated and Shared Growth Initiative for South Africa (ASGISA). This paper uses a sequential dynamic computable general equilibrium model linked to a nationally representative household survey to assess the poverty and economic consequences of a higher economic growth scenario. The main findings are that higher economic growth induces reductions in poverty both in the short and long run. It enhances capital accumulation, particularly in the agriculture and textiles sectors. An interesting observation is that the Mining industry benefits the least from a high economic growth scenario. However, this is not related to domestic savings/investment. Mining is strongly dependent on foreign investments and the industry return to capital is less profitable to domestic institutions, particularly households and this is what explains the lower benefits to the sector. African and Coloured households reap most of the benefits, with greater gains among urban unskilled dwellers. These findings suggest that lifting of growth constraints rather than macroeconomic stimulation would induce higher growth with the resulting beneficial effects. Economic growth of the levels simulated does not appear to be inconsistent with macroeconomic balance, as reflected in price stability, balance of payments and sectoral effects.
    Keywords: Sequential dynamic CGE, microsimulation, ASGISA, poverty, welfare, growth, South Africa
    JEL: D58 E27 F17 I32 O15 O55
    Date: 2007
  63. By: James K. Galbraith
    Abstract: Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. According to Senior Scholar James K. Galbraith, European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in EuropeÐlabor market rigiditiesÐis wrong. The application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.
    Date: 2006–11
  64. By: Harry H. Kelejian
  65. By: Seok Gil Park (Indiana University)
    Abstract: Sterilized foreign exchange market interventions have been suspected of being inefficient by many empirical studies, but they are plagued by endogeneity problems. To solve the problems, this paper identifies a system that depicts interactions between the interventions and the foreign exchange rate. The model shows that the interventions are effective when the interventions alter the market participants' conditional expectations of the rate without decreasing the conditional variances. This paper estimates Markov-switching type policy reaction functions by conditional MLE, and market demand/supply curves by IV estimation with generated regressors. The empirical results verify that the interventions of the Bank of Korea from 2001 to 2002 were indeed effective.
    Keywords: Sterilized intervention, Endogeneity, Markov-switching policy function
    JEL: F31 E58 G15
    Date: 2007–02
  66. By: Sydney Afriat; Carlo Milana
    Abstract: It is submitted that, for the very large number of different traditional type formulae to determine price indices associated with a pair of periods, which are joined with the longstanding question of which one to choose, they should all be abandoned. A method is proposed whereby price levels associated periods are first all computed together, subject to a consistency of the data, and then price indices that are all true are determined from their ratios. An approximation method can apply in the case of inconsistency.
    JEL: C43 E31
    Date: 2007–01
  67. By: Peresetsky, A.A. (BOFIT); Karminsky, A.M. (BOFIT); Golovan, S.V. (BOFIT)
    Abstract: This paper examines the extent to which the observed diversity of private deposit interest rates in Russia is explained by bank financial indicators. We also test for whether the introduction of the bank deposit insurance scheme in 2005 affected deposit interest rates. Our results suggest market discipline in the Russian banking system involves Russian depositors demanding higher deposit interest rates from banks with risky financial policies. This discipline seems stronger than in developed countries. Our study suggests also that the risks taken by banks increased after introducing the deposit insurance.
    Keywords: banking; deposit interest rates; moral hazard; deposit insurance; Russia
    JEL: D43 E53 G21 P34
    Date: 2007–02–20
  68. By: Marco P. Tucci; David A. Kendrick; Hans M. Amman
    Abstract: In this paper we derive, by using dynamic programming, the closed loop form of the Expected Optimal Feedback rule with time varying parameter. As such this paper extends the work of Kendrick (1981, 2002, Chapter 6) for the time varying parameter case. Furthermore, we show that the Beck and Wieland (2002) model can be cast into this framework and can be treated as a special case of this solution.
    JEL: C63 E61
    Date: 2007–02
  69. By: Greenwood, Jeremy; Guner, Nezih
    Abstract: Society is characterized by the common attitudes and behaviour of its members. Such behaviour reflects purposive decision making by individuals, given the environment they live in. Thus, as technology changes, so might social norms. There were big changes in social norms during the 20th Century, especially in sexual mores. In 1900 only six percent of unwed females engaged in premarital sex. Now, three quarters do. It is argued here that this was the result of technological improvement in contraceptives, which lowered the cost of premarital sex. The evolution from an abstinent to a promiscuous society is studied using an equilibrium-matching model.
    Keywords: technological progress in contraceptives; the sexual revolution
    JEL: E1 J1 O3
    Date: 2007–02

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