nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒03‒03
53 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary conservatism and fiscal policy By Klaus Adam; Roberto M. Billi
  2. Optimal Monetary Policy and Expectation Driven Business Cycles By Guo, Shen
  3. The Term Structure of Real Rates and Expected Inflation By Andrew Ang; Geert Bekaert; Min Wei
  4. The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features By Hernando Vargas H.
  5. Why should central banks be independent? By Harashima, Taiji
  6. The New Keynesian Phillips Curve: from Sticky Inflation to Sticky Prices By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  7. Anticipated Fiscal Policy and Adaptive Learning By George W. Evans; Seppo Honkapohja; Kaushik Mitra
  8. Seigniorage By Buiter, Willem H
  9. Fiscal Policy in an Estimated Model of the European Monetary Union By Aurélien Eyquem (CREM - CNRS)
  10. The Optimal Quantity of Money Consistent with Positive Nominal Interest Rates By Harashima, Taiji
  11. Welfare Gains from Optimal Policy in a Partially Dollarized Economy By Carlos Gustavo Machicado
  12. Financial Globalization and Monetary Policy By Devereux, Michael B; Sutherland, Alan
  13. Observed Inflation Forecasts and the New Keynesian Phillips Curve By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  14. Optimal Opportunistic Monetary Policy in A New-Keynesian Model By M. Marzo; I. Strid; P. Zagaglia
  15. Price Stickiness in Ss Models: New Interpretations of Old Results By Ricardo J. Caballero; Eduardo M.R.A. Engel
  16. A state-level analysis of the great moderation By Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
  17. Unit Labor Cost Growth Differentials in the Euro Area, Germany, and the US : Lessons from PANIC and Cluster Analysis By Ulrich Fritsche; Vladimir Kuzin
  18. Monetary policy with heterogeneous and misspecified expectations By Michele Berardi
  19. Real Origins of the Great Depression: Monopolistic Competition, Union Power, and the American Business Cycle in the 1920s By Ebell, Monique; Ritschl, Albrecht
  20. Monetary policy in a small open economy with a preference for robustness By Richard Dennis; Kai Leitemo; Ulf Söderström
  21. Balanced growth and the great ratios: new evidence for the US and UK By Cliff L. F. Attfield; Jonathan R. W. Temple
  22. Endogenous State Prices, Liquidity, Default, and the Yield Curve By Raphael A. Espinoza; Charles A. E. Goodhart; Dimitrios P. Tsomocos
  23. The Role of Debt and Equity Finance over the Business Cycle By Covas, Francisco; Den Haan, Wouter
  24. Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance By Ismihan, Mustafa; Ozkan, F Gulcin
  25. Price setting in the euro area: some stylised facts from individual producer price data By Philip Vermeulen; Daniel Dias; Maarten Dossche; Erwan Gautier; Ignacio Hernando; Roberto Sabbatini; Harald Stahl
  26. Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates By Pierre-Richard Agénor; Peter J. Montiel
  27. Vector autoregressions and reduced form representations of DSGE models By Federico Ravenna
  28. The welfare effects of government's preferences over spending and its financing By Alper, C. Emre; Ardic, Oya Pinar; Mumcu, Ayşe; Saglam, Ismail
  29. SUSTAINABILITY OF FISCAL DEFICITS: THE U.S. EXPERIENCE 1929-2004 By Ananda Jayawickrama; Tilak Abeysinghe
  30. Measurement of monetary aggregates across countries By Yueh-Yun C. O'Brien
  31. Can heterogeneous preferences stabilize endogenous fluctuations ? By Stéphano Bosi; Thomas Seegmuller
  32. Macroeconomic uncertainty, private investment and financialization of real sectors in Emerging Markets By Firat, Demir
  33. Efectos de los cambios en la tasa de intervención del Banco de la República sobre la estructura a plazo By Luis Eduardo Arango; Andrés González; Jhon Jairo León; Luis Fernando Melo
  34. Financial Globalization, Economic Growth, and Macroeconomic Volatility By Hernán Rincón
  35. Public Investment in Infrastructure in Latin America: Is Debt the Culprit? By Eduardo Lora
  36. Argentina’s unimpressive recovery: insights from a real business cycle approach By Carlos E. J. M. Zarazaga
  37. FDI and credit constraints : firm level evidence in China. By Jérôme Héricourt; Sandra Poncet
  38. Pregled metodologije konjunkturnih istraživanja zemalja Europske unije i hrvatsko iskustvo By Ivan Šošić; Vlasta Bahovec; Mirjana Čižmešija
  39. Poverty and the City By Alejandro Grinspun
  40. Indeterminacy and endogenous fluctuations under input-specific externalities By Thomas Seegmuller
  41. POLÍTICA MONETARIA Y CAMBIARIA Y ESTABILIDAD DEL TIPO DE CAMBIO EN ALGUNOS PAÍSES EMERGENTES: Hungría, Chile, China, Perú y Brasil By Gloria Alonso; Pilar Esguerra; Luz Adriana Flórez; Franz Hamann
  42. Money, Tobin Effect, and Increasing Returns By Basci, Erdem; Erdogan, Ayse M.; Saglam, Ismail
  43. The Joint Design of Unemployment Insurance and Employment Protection. A First Pass By Blanchard, Olivier J; Tirole, Jean
  44. Macroeconomic Implications of Size-Dependent Policies By Guner, Nezih; Ventura, Gustavo; Xu, Yi
  45. Social protection - the role of cash transfers By Dag Ehrenpreis
  47. Capital taxation and Laffer effects in endogenous growth models By Fredriksson, Anders
  48. Abolishing GDP By Jeroen C.J.M. van den Bergh
  49. Derived Measurement in Macroeconomics: Two Approaches for Measuring the NAIRU Considered By Peter Rodenburg
  50. Uncollateralized Overnight Loans Settled in LVTS By Scott Hendry; Nadja Kamhi
  51. Branch Banking as a Device for Discipline: Competition and Bank Survivorship During the Great Depression By Mark Carlson; Kris James Mitchener
  52. A Macroeconomic perspective on skill shortages and the skill premium in New Zealand By Razzak, Weshah; Timmins, Jason
  53. Periodic Dynamic Conditional Correlations between Stock Markets in Europe and the US By Christos S. Savva; Denise R. Osborn; Len Gill

  1. By: Klaus Adam; Roberto M. Billi
    Abstract: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation, as this eliminates the steady state biases associated with lack of monetary and fiscal commitment. It also leads to stabilization policy that is close to if not fully optimal.
    Date: 2007
  2. By: Guo, Shen
    Abstract: We explore the optimal response of central bank when a news shock hits the economy, that is, agents’ optimistic expectation of an improvement in technology does not realize. Ramsey optimal policy and simple policy rules are studied in a two-sector model with price rigidities in each of non-durable and durable sector. We find that a simple policy rule reacting to the inflation rates in both non-durable and durable sector with appropriate weights can mimic the performance of the Ramsey policy closely. Another interesting result is that monetary policy plays an important role in generating expectation driven business cycles.
    Keywords: News shocks; Expectation driven business cycles; Optimal monetary policy
    JEL: E52 E32
    Date: 2007–02–10
  3. By: Andrew Ang; Geert Bekaert; Min Wei
    Abstract: Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the U.S. is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.
    JEL: C50 E31 E32 E43 G12
    Date: 2007–02
  4. By: Hernando Vargas H.
    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.
    Date: 2007–02–01
  5. By: Harashima, Taiji
    Abstract: Most explanations for the necessity of an independent central bank rely on the time-inconsistency model and therefore assume that governments are weak, foolish, or untruthful and tend to cheat people. The model in this paper indicates, however, that an independent central bank is not necessary because governments are weak or foolish. Central banks must be independent because governments are economic Leviathans. Only by severing the link between the political will of a Leviathan government and economic activities is inflation perfectly guaranteed not to accelerate. A truly independent central bank is necessary because it severs this link.
    Keywords: Central Bank Independence; Inflation; The Fiscal Theory of the Price Level; Leviathan; Monetary Policy
    JEL: E61 E58 E52 E63
    Date: 2007–01–15
  6. By: Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
    Abstract: The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that inflation inertia, rather than inflation expectations, dominate the dynamics of the short-run aggregate supply curve. This paper examines this inconsistency by investigating multiple structural changes in the NKPC for the US over 1968-2005. Both inflation expectations survey data and a rational expectations approximation are used to capture expectations. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing support for the empirical coherence of sticky prices models over the last two decades. A further break in the intercept of the NKPC is identified around 2001 and this may be associated with monetary policy in the recent period.
    Date: 2006
  7. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge); Kaushik Mitra (University of St Andrews)
    Abstract: We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.
    Keywords: Taxation, expectations, Ramsey model
    JEL: E62 D84 E21 E43
    Date: 2007–02–18
  8. By: Buiter, Willem H
    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.
    Keywords: central bank budget constraint; coordination of monetary and fiscal policy; inflation targeting; inflation tax
    JEL: E4 E5 E6 H6
    Date: 2007–02
  9. By: Aurélien Eyquem (CREM - CNRS)
    Abstract: We explore the welfare implications of several fiscal policies in an estimated two-country New Open Economy Macroeconomics (NOEM) model of the EuropeanMonetary Union (EMU). The model features incomplete financial markets and home bias in final consumption baskets. We define the optimal monetary and fiscal policy and contrast the (small) contribution of financial markets incompleteness to welfare losses. We also investigate the welfare implications of simple public spending rules. We find (i) that welfare maximizing public spending rules imply significant welfare losses with respect to the optimal policy - equivalent to an average 7.3% drop in permanent consumption and (ii) that estimated public spending rules imply low welfare losses with respect to welfare maximizing rules - equivalent to an average 1% drop in permanent consumption. In our framework, these losses can be reduced by either promoting a deeper trade integration in the EMU, or by increasing the number of available fiscal instruments.
    Keywords: Monetary Union, Fiscal Stabilization, Optimal Monetary and Fiscal Policy, Welfare Analysis, Fiscal Rules
    JEL: E52 E61 E62 E63 F32
    Date: 2007
  10. By: Harashima, Taiji
    Abstract: The Friedman rule is strongly immune to most model modifications although it has not actually been observed. The Friedman rule implicitly assumes that a government is perfectly under the control of the representative household. This paper shows that, if a government is not perfectly under the control of the representative household, but also pursues political objectives, the optimal quantity of money generally is accompanied by positive nominal interest and inflation rates through the simultaneous optimization of government and the representative household. The fact that nominal interest and inflation rates are usually positive conversely implies that a government usually pursues political objectives.
    Keywords: The Optimal Quantity of Money; The Friedman rule; Inflation; The fiscal theory of the price level; Leviathan
    JEL: E41 E42 E63 E51
    Date: 2007–01–16
  11. By: Carlos Gustavo Machicado (Institute for Advanced Development Studies)
    Abstract: This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.
    Keywords: Dollarization, Optimal Fiscal and Monetary Policy, Second-order approximation technique.
    JEL: F31 E61 E63
    Date: 2006–09
  12. By: Devereux, Michael B; Sutherland, Alan
    Abstract: The process of financial globalization has significantly altered the environment in which national monetary policy authorities operate. What implications does this have for the design of monetary policy? The question can be properly addressed only in the context of a model where monetary policy interacts with financial market efficiency. This paper is concerned with the effects of monetary policy when international portfolio choice is endogenous. We analyze the link between monetary policy and gross national bond and equity portfolios. With endogenous portfolio structure and incomplete markets, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Despite this, we find that the case for price stability as an optimal monetary rule still remains. In fact, it is reinforced. Even without nominal price rigidities, price stability has a welfare benefit through its enhancement of the risk sharing properties of nominal bond returns.
    Keywords: international risk sharing; portfolio choice
    JEL: E52 E58 F41
    Date: 2007–02
  13. By: Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
    Abstract: Estimating the micro-founded New Keynesian Phillips Curve using rational inflation expectation proxies has often found that the output gap is not a valid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation, using observed measures of inflation expectations and taking account of serial correlation in the stylized NKPC. Contrary to recent results indicating no role for the GDP gap, we find it to be a statistically significant driving variable for inflation while labor income share is generally insignificant. The paper also develops an extended model in which serial correlation is absent and the output gap remains a valid inflation driving force. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models.
    Date: 2006
  14. By: M. Marzo; I. Strid; P. Zagaglia
    Date: 2006–09
  15. By: Ricardo J. Caballero (MIT and NBER); Eduardo M.R.A. Engel (Department of Economics, 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 propose new interpretations of key results in this area, which in turn suggest the kind of Ss model that is likely to generate substantial price rigidity. The first result we revisit is Caplin and Spulber's monetary neutrality model. We show that when price stickiness is measured in terms of the impulse response function, this result is not a consequence of aggregation, but is due instead to the absence of price-stickiness at the microeconomic level. We also show that the “selection effect,” according to which units that adjust their prices are those that benefit the most, is neither necessary nor sufficient to account for the higher aggregate flexibility of Ss-type 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
  16. By: Michael T. Owyang; Jeremy M. Piger; Howard J. Wall
    Abstract: A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s. Using an empirical model of business cycles, we extend this line of research to state-level employment data and find significant heterogeneity in the timing and magnitude of the state-level volatility reductions. In fact, some states experience no statistically-important reductions in volatility. We then exploit this cross sectional heterogeneity to evaluate hypotheses about the origin of the aggregate volatility reduction. We show that states with relatively high concentrations in the durable-goods and extractive industries tended to experience later breaks. We interpret these results as contradictory to hypotheses that the Great Moderation could have been caused by improved inventory management or less-volatile shocks to energy and/or productivity. Instead, we find results that are more consistent with the view that the most significant contributor to the volatility reduction was improved monetary policy.
    Keywords: Macroeconomics ; Econometric models ; Monetary policy
    Date: 2007
  17. By: Ulrich Fritsche; Vladimir Kuzin
    Abstract: Inflation differentials in the Euro area are mainly due to a sustained divergence of wage developments across the Euro area, and narrower differences in labour productivity growth (Alvarez et al., 2006). We investigate convergence of inflation using unit labour cost (ULC) growth and applying PANIC (Bai and Ng, 2004) and cluster procedures (Hobijn and Franses, 2000, Busetti et al., 2006) to Euro area countries as well as US States, US Census Regions and German Länder. Euro area differs in that dispersion in general (and its fraction due to idiosyncratic factors in specific) is larger and common factors are much less important in explaining the variance of ULC growth. We report evidence for convergence clusters in all countries.
    Keywords: Unit labor costs, inflation, European Monetary Union, Germany, United States of America, convergence, convergence clubs, panel unit root tests, PANIC
    JEL: E31 O47 C32 C33
    Date: 2007
  18. By: Michele Berardi
    Abstract: In recent literature on monetary policy and learning, it has been suggested that private sector’s expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector’s expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigates the impact of this heterogeneity in expectations on central bank’s policy implementation and on the ensuing economic outcomes.
    Date: 2006
  19. By: Ebell, Monique; Ritschl, Albrecht
    Abstract: Most treatments of the Great Depression have focused on its onset and its aftermath. In contrast, we take a unified view of the interwar period. We look at the slide into and the emergence from the 1920-21 recession and the roaring 1920s boom, as well as the slide into the Great Depression after 1929, and attempt to explain these phenomena in a unified framework. The model framework combines monopolistic product market competition with search frictions and bargaining in the labour market, allowing for both individual and collective (unionized) wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. The pro-union provisions of the Clayton Act of 1914 contributed to the slide in asset prices and the depression of 1920-21, while a series of tough anti-union Supreme Court decisions in late 1921 and 1922 coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark court decisions in favour of trade unions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, made the economy increasingly susceptible to collapsing profit expectations. We model the onset of the great depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices.
    Keywords: collective bargaining; Great Depression; trade unions
    JEL: E24 J51 J64 N12 N22
    Date: 2007–02
  20. By: Richard Dennis; Kai Leitemo; Ulf Söderström
    Abstract: We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.
    Keywords: Monetary policy
    Date: 2007
  21. By: Cliff L. F. Attfield; Jonathan R. W. Temple
    Abstract: Standard macroeconomic models suggest that the ‘great ratios’ of consumptionto output and investment to output should be stable functions of structural parameters. We examine whether the ratios are stationary for the US and UK, allowing for structural breaks that could reflect timevarying parameters. We find stronger evidence for stationarity than previous work. We then use the long-run restrictions associated with the stationarity of the great ratios to extract measures of trend output from the joint behaviour of consumption, investment and output. This approach isattractive because it uses information from several series without requiring restrictive assumptions.
    Date: 2006
  22. 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 rate
    JEL: E43 G12
    Date: 2007
  23. By: Covas, Francisco; Den Haan, Wouter
    Abstract: This paper documents that debt and equity issuance are procyclical for most size-sorted firm categories of listed U.S. firms. The procyclicality of equity issuance decreases monotonically with firm size. At the aggregate level, however, the results are not conclusive. The reason is that issuance is countercyclical for very large firms which, although few in number, have a large effect on the aggregate because of their enormous size. We show that the shadow price of external funds is procyclical if firms use the standard one-period contract. This model property generates procyclical equity and - as in the data - the procyclicality decreases with firm size. Another factor that causes equity to be procyclical in the model is a countercyclical cost of equity issuance. The calibrated model (i) generates a countercyclical default rate, (ii) generates a stronger cyclical response for small firms, and (iii) magnifies shocks, whereas the model without equity as an external financing source does the exact opposite.
    Keywords: agency problems; firm heterogeneity; magnification
    JEL: E32 E44
    Date: 2007–02
  24. By: Ismihan, Mustafa; Ozkan, F Gulcin
    Abstract: This paper explores the implications of public investment for macroeconomic performance within a simple two-period policymaking model. We show that under the balanced-budget rule, the contribution of public investment to future output plays a key role in determining its effects on macroeconomic performance. When policymakers resort to debt issue in financing expenditures, the attractiveness of public investment crucially depends on the return from capital spending relative to the cost of public borrowing. We also consider the case of a capital borrowing rule where only public investment could be financed by additional borrowing and find similar results. Our findings point to the key role of the quality of public investment in its impact on macroeconomic outcome and highlight the importance of efficient mechanisms for selection, implementation and monitoring of public investment projects in both developed and developing countries.
    Keywords: macroeconomic performance; public debt; public investment
    JEL: E62 H50 H63
    Date: 2007–02
  25. By: Philip Vermeulen (European Central Bank); Daniel Dias (Banco de Portugal); Maarten Dossche (National Bank of Belgium); Erwan Gautier (Banque de France); Ignacio Hernando (Banco de España); Roberto Sabbatini (Banca d’Italia); Harald Stahl (Deutsche Bundesbank)
    Abstract: This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: price-setting, producer prices
    JEL: E31 D40 C25
    Date: 2007–02
  26. By: Pierre-Richard Agénor; Peter J. Montiel
    Abstract: This paper develops a simple static model with credit market imperfections and flexible prices for monetary policy analysis in a fixed-exchange rate economy. Lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself depends on firms' net worth. In the basic framework, banks' funding sources are perfect substitutes and the provision of liquidity by the central bank is perfectly elastic at the prevailing refinance rate. The model is used to perform a variety of experiments, such as changes in the refinance and reserve requirement rates, central bank auctions, shifts in the premium and contract enforcement costs, and changes in public spending and world interest rates. The analysis is then extended to examine credit targeting and sterilization policies.
    Date: 2006
  27. By: Federico Ravenna (University of California)
    Abstract: Dynamic Stochastic General Equilibrium models are often tested against empirical VARs or estimated by minimizing the distance between the model's and the VAR impulse response functions. These methodologies require that the data-generating process consistent with the DSGE theoretical model has a VAR representation. This paper discusses the assumptions needed for a finite-order VAR(p) representation of any subset of a DSGE model variables to exist. When a VAR(p) is only an approximation to the true VAR, the paper shows that the truncated VAR(p) may return largely incorrect estimates of the impulse response function. The results do not hinge on an incorrect identification strategy or on small sample bias. But the bias introduced by truncation can lead to bias in the identification of the structural shocks. Identification strategies that are equivalent in the true VAR representation perform differently in the approximating VAR.
    Keywords: vector autoregression, dynamic stochastic general equilibrium model, business cycle shocks
    JEL: C13 C22 E32
    Date: 2006–08
  28. By: Alper, C. Emre; Ardic, Oya Pinar; Mumcu, Ayşe; Saglam, Ismail
    Abstract: In this paper we examine the welfare effects of government's preferences over consumption and investment spending under different methods of financing in a two-period OLG model. The government has a utility function defined over the decomposition of her spending over two periods and raises funds by issuing bonds and by printing money. She allocates her funds into consumption expenditure that benefits the current population and investment expenditure which benefits the future population. The model is calibrated using data on the U.S. economy for the period 1981-2004. The findings reveal that the government's choice of financing as well as composition of spending into consumption-investment have differing impacts on the welfare of the young and old generations.
    Keywords: Seigniorage; Bond financing; Composition of government spending; Overlapping generations
    JEL: O42 E62
    Date: 2006–05
  29. By: Ananda Jayawickrama (Department of Economics, National University of Singapore); Tilak Abeysinghe (Department of Economics, National University of Singapore)
    Abstract: Recurrent large fiscal deficits and accumulating public debt frequently ring alarm bells around the world on the sustainability of U.S. federal fiscal policy. The present-value borrowing constraint, which states that, for the fiscal policy to be sustainable the current debt stock should match the discounted sum of expected future primary surpluses, provides a framework for analysing fiscal sustainability. Incorporating rational expectations we extend the methodology developed by Hamilton and Flavin (1986) to test the sustainability hypothesis in a cointegrating framework that can accommodate both stationary and non-stationary variables. Our model predicts dynamically diverse episodes of the debt series extremely well. Our results support the hypothesis that the U.S. government is solvent despite the large increase in the debt stock in recent years.
    Keywords: Fiscal Policy Sustainability, Present-value Borrowing Constraint, Rational Expectations, Cointegration.
    JEL: E62 H62 H63
  30. By: Yueh-Yun C. O'Brien
    Abstract: This paper compares the compositions and definitions of monetary aggregates being published by the 30 countries belonging to the Organization for Economic Co-operation and Development (OECD) and 10 non-OCED countries. These countries are divided into 5 groups according to the similarity of their monetary aggregates and their membership in the European Union (EU) and/or OECD. The first three groups are countries in the EU who have adopted the European Central Bank's definitions of the monetary aggregates with some variations. Their monetary aggregates are discussed together and presented in one table. The monetary aggregates for the countries in the other two groups are very heterogeneous and each country is discussed separately. The criteria used to classify and define monetary aggregates by individual countries are compared and summarized. Variations among the countries' monetary aggregates resulting from emphasis on different criteria for money definitions are also addressed.
    Date: 2006
  31. By: Stéphano Bosi (EQUIPPE - Département d'Economie - [Université des Sciences et Technologie de Lille - Lille I], EPEE - [Université d'Evry-Val d'Essonne]); Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    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.
    Date: 2007–02–09
  32. By: Firat, Demir
    Abstract: Using micro level panel data, we analyze the impacts of uncertainty and risk on real investment performance in three emerging markets, Argentina, Mexico and Turkey. We offer a simple model to explain the disappointingly low fixed investment rates in developing countries during the 1990s. We suggest that under increasing risk and uncertainty combined with capital market imperfections, and rising rates of return in the financial markets over and above those in the real sectors, industrial firms face a portfolio allocation problem in their investment decisions between fixed and financial investments. Our empirical findings support this financialization hypothesis highlighting the conditions and bottlenecks, which become instrumental in directing real sector savings to liquid shortterm investments instead of long-term fixed capital formation and result in a deindustrialization run.
    Keywords: Private Investment; Macroeconomic Uncertainty; Financialization; Deindustrialization
    JEL: O16 E22 C33
    Date: 2007–01
  33. By: Luis Eduardo Arango; Andrés González; Jhon Jairo León; Luis Fernando Melo
    Abstract: Se analizan los efectos de los movimientos de las tasas de intervención del Banco de la República en la estructura a plazo. La evidencia sugiere que, en frecuencia diaria, las reacciones son imperceptibles. Sin embargo, con datos en frecuencia semanal, la evidencia muestra un “efecto empinamiento” de la curva de rendimientos cuando aumenta la tasa de subastas. Esto puede ser síntoma de que los agentes perciben un nivel importante de transparencia pero una baja credibilidad de la política monetaria. Esto es, que los agentes están esperando más variaciones de la tasa de intervención en el futuro. En cualquier frecuencia, diaria o semanal, y con las tasas spot se cumple la hipótesis de paridad descubierta de intereses con el mecanismo de expectativas seleccionado.
    Date: 2006–12–20
  34. 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.
    Date: 2007–01–29
  35. By: Eduardo Lora (Research Department, Inter-American Development Bank)
    Abstract: Panel data for seven Latin American countries are used to assess the influence of public indebtedness on public investment in infrastructure in the period 1987- 2001. Debt increases are associated with higher public infrastructure investment, an effect that is robust to the inclusion of many other fiscal and macroeconomic variables. This paper also finds some evidence of complementarity between public and private investment and of the negative effect of IMF adjustment loans on infrastructure expenditures. No evidence is found that debt defaults affect public investment in infrastructure.
    Keywords: Public investment; Public infrastructure; Public debt; Fiscal policies; Default; Latin America
    Date: 2007–01
  36. By: Carlos E. J. M. Zarazaga
    Abstract: Argentina’s GDP increased 30% between 2002 and 2005, prompting optimistic assessments that the country had finally left behind its secular stagnation. However, this strong performance followed a sharp decline in economic activity and therefore could be the manifestation of a bounce-back effect with no lasting impact on Argentina’s mediocre long-run growth rates. The paper examines this conjecture with the quantitative discipline imposed by a Real Business-Cycle methodology and concludes that the 2002-05 expansion was not only a rebound, but also considerably weaker than the model predicts, a finding not consistent with upbeat views about the country’s long-run prospects.
    Date: 2006
  37. By: Jérôme Héricourt (Université de Sciences et de Technologies Lille 1); Sandra Poncet (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we analyze whether incoming foreign investment in China plays an important role in alleviating domestic firms' credit constraints. Access to external finance is a crucial determinant of business expansion. Using firm-level data on 2,200 domestic companies for the period 1999-2002, we investigate the extent to which firms are fiancially constrained and whether direct foreign investment relaxes financing constraints of firms. When we split domestic firms into public and private firms, we find that public firms' investment decisions are not sensitive to debt ratios or the cost of debt. Nor is there any evidence that public firms are affected by foreign firms presence. We interpret this as evidence in support of the notion of a soft budget constraint for public firms. In contrast, private domestic firms appear more credit constrained than state-owned firms but their financing constraints tend to ease in a context of abundant foreign investment.
    Keywords: Financial constraint, corporate finance, Foreign Direct Investment.
    JEL: E22 E44 G31 O16
    Date: 2007–02
  38. By: Ivan Šošić (Faculty of Economics and Business, University of Zagreb); Vlasta Bahovec (Faculty of Economics and Business, University of Zagreb); Mirjana Čižmešija (Faculty of Economics and Business, University of Zagreb)
    Abstract: Business and consumer surveys (B-C-S) are qualitative economic surveys designed to deal with judgments and expectations of economic agents and consumers. They are a necessary complement to the quantitative statistical surveys. Information from business and consumer surveys serve as a subset of information set important for evaluation of the state of business climate and activities, economic trends and forecasting. B-C- S information are summarised in the form of various indicators such as: industrial confidence indicator, service confidence indicator, consumer confidence indicator, construction confidence indicator, retail trade confidence indicator, economic sentiment indicator. There is the joint harmonised EU programme of (B-C-S) and it is carried out by member states. There is a harmonized EU methodology, but differences exist in applied sample designs and methods of sample selection, treatment of non-responses, seasonal adjustment methods etc. The surveys are conducted by various organisations: statistical institutes, statistical bureau offices, specialised firms, national banks. In this paper comparatively and detailed are presented the main methodological characteristics of B-C-S of EU member countries and candidate countries. B-S is carried out in Croatia from 1995. The applied methodology of Croatian B-C-S is highly harmonised with those of EU methodology. There is the problem of relatively high no-response rate. It is necessary to make some questionnaire revisions. Monthly based surveys should be introduced as well as the investment test. In order to improve the Croatian B-C-S it is necessary to ensure the organisational and financial stability of conducting the surveys.
    Keywords: business surveys, sample design, sampling frame, response rate, research institutions, seasonal adjustment methods
    JEL: C82 C42 E32
    Date: 2007–02–13
  39. By: Alejandro Grinspun (International Poverty Centre)
    Keywords: Poverty, City, Rocinha, Gavea
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2005–08
  40. By: Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    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: Inderterminacy, endogenous fluctuations, externalities, increasing returns, capital-labor substitution.
    Date: 2007–02–08
  41. By: Gloria Alonso; Pilar Esguerra; Luz Adriana Flórez; Franz Hamann
    Abstract: Este documento resume las principales conclusiones del ejercicio realizado con el objetivo de analizar la forma cómo algunos países emergentes, con diversos esquemas de política monetaria, manejan su política cambiaria. La pregunta que suscitó este análisis fue: ¿Cómo han logrado los países analizados mantener un determinado nivel de la tasa de cambio durante un período de tiempo más o menos prolongado? Cada uno de los países analizados aporta algo a este interrogante: en el caso de Hungría, las autoridades han logrado defender con éxito un determinado nivel de la tasa de cambio aún en la presencia de fuertes ataques especulativos. En el caso de la China, sus peculiaridades de organización política e institucional, además de su tamaño, son parte de la explicación. En el caso de Perú y Brasil, sus notorios avances a una disminución de la vulnerabilidad fiscal y externa parecen haber contribuido a una mayor estabilidad cambiaria.
    Date: 2006–12–20
  42. By: Basci, Erdem; Erdogan, Ayse M.; Saglam, Ismail
    Abstract: This paper shows that unregulated decentralized equilibrium is viable under increasing returns technologies in an overlapping generations model of production with cash-in-advance constraints. We also demonstrate that the model exhibits both the Tobin effect and the reverse Tobin effect.
    Keywords: Increasing returns; cash-in-advance constraints; overlapping generations; Phillips curve.
    JEL: E52 D51 D91 D52
    Date: 2006–09
  43. By: Blanchard, Olivier J; Tirole, Jean
    Abstract: Unemployment insurance and employment protection are typically discussed and studied in isolation. ln this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk averse workers, risk neutral firms, and random shocks to productivity. We show that, in the 'first best', unemployment insurance comes with employment protection - in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations from first best: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and ex-ante heterogeneity of firms or workers. We show how the design must be modified in each case. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.
    Keywords: employment protection; experience rating; layoff taxes; layoffs; severance payments; unemployment benefits; Unemployment insurance
    JEL: D60 E62 H21 J30 J32 J38 J65
    Date: 2007–02
  44. By: Guner, Nezih; Ventura, Gustavo; Xu, Yi
    Abstract: Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this class. We study a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the (observed) large share of employment in large establishments. Then, we ask: quantitatively, how costly are policies that distort the size of production units? What is the impact of these policies on productivity measures, the equilibrium number of establishments and their size distribution? We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%).
    Keywords: establishment size; productivity differences; size distortions
    JEL: E23 O40
    Date: 2007–02
  45. By: Dag Ehrenpreis (International Poverty Centre)
    Keywords: Poverty, protection, cash transfers
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–06
  46. By: Grupo Macroeconomía 2006
    Abstract: En este documento se hace una evaluación tanto de las fortalezas de la economía colombiana que contribuirían a la sostenibilidad actual del crecimiento, como de los factores de riesgo y vulnerabilidades que podrían afectarlo negativamente. Con este propósito se compara el desempeño macroeconómico actual con el observado en la década de los noventa, a fin de determinar si los desequilibrios que desembocaron en la crisis de finales de esa década podrían llegar a repetirse. Para obtener mayor precisión en la identificación de riesgos a la sostenibilidad del crecimiento económico actual, el documento presenta proyecciones macroeconómicas para el período 2006-2011, con referencia a un escenario que supone ausencia de choques externos. Sobre esa base se examinan las consecuencias para el crecimiento y la balanza de pagos que se derivarían de choques desfavorables a los términos de intercambio, caída de la demanda mundial y reversión de los flujos de capital. Igualmente se analizan las consecuencias para la sostenibilidad fiscal y para la vulnerabilidad del sistema financiero de choques de esa naturaleza. Con este análisis se busca ofrecer elementos claves de información para las autoridades económicas y agentes del mercado, que contribuyan al afianzamiento de un crecimiento alto y sostenido, a través de la identificación de riesgos que estimulen la prudencia y faciliten la toma oportuna de decisiones.
    Date: 2006–12–20
  47. By: Fredriksson, Anders (Institute for international economic studies)
    Abstract: This paper adds to a literature asking whether tax cuts rather than tax increases can improve the government budget. We use an endogenous growth model with physical and human capital to study possibilities for such self-financing tax cuts. Apart from the standard dynamic effect from taxation in endogenous growth models a second margin is introduced when physical and human capital are taxed differently. Endogenizing leisure with a raw-time specification introduces both a consumption/leisure trade-off and a dynamic effect through leisure´s impact on the growth rate. By providing analytical expressions for when Laffer effects occur the influence of each of these margins is shown. The addition of these margins adds scope for Laffer effects that are not present in the AK-models previously studied.
    Keywords: Human capital; compositional effects from taxation; dynamic effects from taxation; Laffer effect; dynamic scoring
    JEL: E62 H30 O41
    Date: 2007–02–23
  48. By: Jeroen C.J.M. van den Bergh (Vrije Universiteit Amsterdam)
    Abstract: Expectations and information about the growth of GDP per capita have a large influence on decisions made by private and public economic agents. It will be argued here that GDP (per capita) is far from a robust indicator of social welfare, and that its use as such must be regarded as a serious form of market and government failure. This article presents an update on the most important criticisms of GDP as an indicator of social welfare and economic progress. It further examines the nature and extent of the impact of GDP information on the economy, revisits the customary arguments in favour of the GDP indicator, and critically evaluates proposed alternatives to GDP. The main conclusion is that it is rational to dismiss GDP as an indicator to monitor economic progress and to guide public policy. As is clarified, this conclusion does not imply a plea against growth, innovation or national accounting.
    Keywords: Distribution; externalities; genuine savings; happiness; HDI; informal sector; ISEW; status goods
    JEL: D31 D63 E01 I31 O15
    Date: 2007–02–09
  49. By: Peter Rodenburg (Universiteit van Amsterdam)
    Abstract: This paper investigates two different procedures for the measurement of the NAIRU; one based on structural modeling while the other is a statisticai approach using Vector Auto Regression (VAR)-models. Both measurement procedures are assessed by confronting them with the dominant theory of measurement, the Representation Theory of Measurement, which states that for sound measurement a strict isomorphism (strict one-to-one mapping) is needed between variations in the phenomenon (the NAIRU) and numbers. The paper argues that shifts of the Phillips-curve are not a problem for the structural approach to measurement of the NAIRU, as the NAIRU itself is a time-varying concept. It is however, the impossibility to identify the exact shape of the Phillips-curve that causes problems of multiple empirical, relational forms and hence non-unique isomorphic mappings for measurement. While VAR-models are being accused of being ‘atheoretical macroeconometrics’ in the literature, the Wold decomposition theorem applied to the VAR brings out a stable correspondence between variance of the phenomenon (the NAIRU) and numbers and turns the set of equations into an isomorphic mapping that can serve as a useful foundation for the construction of a measuring instrument.
    Keywords: NAIRU; Phillips curve; VAR-models; Measurement in macroeconomics
    JEL: B E
    Date: 2007–02–01
  50. By: Scott Hendry; Nadja Kamhi
    Abstract: Loan-level data on the uncollateralized overnight loan market is generated using payment data from Canada's Large Value Transfer System (LVTS) and a modified version of the methodology proposed in Furfine (1999). There were on average just under 100 loans extended in this market each day from March 2004 to March 2006 for a total daily value of about $5 billion. This makes the market slightly larger than the brokered repo market but only about one-tenth of the estimate for the direct trade repo market. The implied uncollateralized overnight rate was found to be remarkably stable relative to other measures of the overnight rate. Loan rates are found to vary with market conditions, the size of the loan, and the type (big vs. small) of the borrower and lender.
    Keywords: Financial markets; Interest rates
    JEL: E44 E50 G12
    Date: 2007
  51. By: Mark Carlson; Kris James Mitchener
    Abstract: Because California was a pioneer in the development of intrastate branching, we use its experience during the 1920s and 1930s to assess the effects of the expansion of large-scale, branch-banking networks on competition and the stability of banking systems. Using a new database of individual bank balance sheets, income statements, and branch establishment, we examine the characteristics that made a bank a more likely target of a takeover by a large branching network, how incumbent unit banks responded to the entry of branch banks, and how branching networks affected the probability of survival of banks during the Great Depression. We find no evidence that branching networks expanded by acquiring "lemons"; rather those displaying characteristics of more profitable institutions were more likely targets for acquisition. We show that incumbent, unit banks responded to increased competition from branch banks by changing their operations in ways consistent with efforts to increase efficiency and profitability. Results from survivorship analysis suggest that unit banks competing with branch bank networks, especially with the Bank of America, were more likely to survive the Great Depression than unit banks that did not face competition from branching networks. Our statistical findings thus support the hypothesis that branch banking produces an externality in that it improves the stability of banking systems by increasing competition and forcing incumbent banks to become more efficient.
    JEL: E44 G21 L1 N22
    Date: 2007–02
  52. By: Razzak, Weshah; Timmins, Jason
    Abstract: Qualification and occupation-based measures of skilled labour are constructed to explain the skill premium – the wage of skilled labour relative to unskilled labour in New Zealand. The data exhibit a more rapid growth in the supply of skilled labour than the skill premium, and a very large increase in the real minimum wage over the period from 1986 to 2005. We estimate the rate of increase in the relative demand for skills and the elasticity of substitution. The data are consistent with skill shortages and a skill-bias technical change. We examine the effects of the minimum wage, capital complementarity, and the exchange rate on the skill premium. We also test whether the demand for skills and the elasticity of substitution varied across industries and over time.
    Keywords: Skill-bias technical change; skill premium; the exchange rate
    JEL: J31 C23 O3
    Date: 2007–02–08
  53. By: Christos S. Savva; Denise R. Osborn; Len Gill
    Abstract: This study extends the dynamic conditional correlation model to allow day-specific correlations of shocks across international stock markets. The properties of the resulting periodic dynamic conditional correlation (PDCC) model are examined, with the model then applied to study the intra-week interactions between six developed European stock markets and the US over the period 1993 - 2005. We find very strong evidence of periodic effects in the conditional correlations of the shocks. The highest correlations are generally observed on Thursdays, with these Thursday correlations in some cases being twice those on Monday or Tuesday. Prior to estimating the PDCC model, periodic mean and volatility effects are removed using a PAR model for returns combined with a periodic EGARCH specification for the variance equation. Strong periodic mean effects are found for returns in the French, Italian and Spanish stock markets, whereas such effects are present in volatility for all stock markets except Italy.
    Date: 2006

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