nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒03‒10
68 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inflation Expectations and Learning about Monetary Policy By David Andolfatto; Scott Hendry; Kevin Moran
  2. Money, Inflation, and Growth in Pakistan By Qayyum, Abdul
  3. The Great Inflation and Early Disinflation in Japan and Germany By Nelson, Edward
  4. Fiscal policies and business cycles in an enlarged euro area By Karsten Staehr
  5. Anticipated Fiscal Policy and Adaptive Learning By George W. Evans; Seppo Honkapohja; Kaushik Mitra
  6. Staggered wages, inflation, and discounting By Bonini, Patricia; Da Silva, Sergio
  7. The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money By Ritter, Moritz
  9. Speculative hyperinflations: when can we rule them out? By Óscar J. Arce
  10. Inflation and Finance: Evidence from Brazil By Manoel F. Bittencourt
  11. The economic effects of exogenous fiscal shocks in Spain: a SVAR approach By Francisco de Castro; Pablo Hernández de Cos
  12. Does Indexation Bias the Estimated Frequency of Price Adjustment? By Maral Kichian; Oleksiy Kryvtsov
  13. Embodied Technical Change And The Fluctuations Of Wages and Unemployment By Michael Reiter
  14. Macroeconomic uncertainty and banks' lending decisions: The case of Italy By Mario Quagliariello
  15. A policy-sensible core-inflation measure for the euro area By Stefano Siviero; Giovanni Veronese
  16. Financing Constraints, Irreversibility, and Investment Dynamics By Andrea Caggese
  17. A Simple Test of the New Keynesian Phillips Curve By Andrea Carriero
  18. Firm Size and Monetary Policy Transmission: A Theoretical Model on the Role of Capital Investment Expenditures By Katharina Raabe; Ivo Arnold; Clemens Kool
  19. Currency substitution in a de-dollarizing economy: The case of Russia By Harrison , Barry; Vymyatnina, Yulia
  20. Have real interest rates really fallen that much in Spain? By Roberto Blanco; Fernando Restoy
  21. International Evidence on the Efficacy of new-Keynesian Models of Inflation Persistence By Norman Swanson; Oleg Korenok; Stanislav Radchenko
  22. A Back-of-the-Envelope Rule to Identify Atheoretical VARs By Urzúa, Carlos M.
  23. The Incremental Predictive Information Associated with Using Theoretical New Keynesian DSGE Models Versus Simple Linear Alternatives By Norman Swanson; Oleg Korenok
  24. Are Fiscal Adjustments less Successful in Decentralized Governments? By Christoph A. Schaltegger; Lars P. Feld
  25. Optimal Monetary Policy with Imperfect Common Knowledge By Klaus Adam
  26. Does inflation targeting matter? By Laurence Ball; Niamh Sheridan
  27. Public and Private Information in Monetary Policy Models By Jeffery D. Amato; Hyun Song Shin
  28. Information variables for monetary policy in a small structural model By Francesco Lippi; Stefano Neri
  29. The economic impact of central bank transparency: a survey By Carin van der Cruijsen; Sylvester Eijffinger
  30. Beliefs, Doubts and Learning: Valuing Economic Risk By Lars Peter Hansen
  31. Central Bank Communication and Output Stabilization By Marco Hoeberichts; Mewael Tesfaselassie; Sylvester Eijffinger
  32. The Labor Market Effects of Technology Shocks By Fabio Canova; David Lopez-Salido; Claudio Michelacci
  33. Informational inefficiency of the Brazilian stockmarket By Guttler, Caio; Meurer, Roberto; Da Silva, Sergio
  34. Central Bank's Action and Communication By Baeriswyl, Romain
  35. A Comparison of Methods for the Construction of Composite Coincident and Leading Indexes for the UK By Andrea Carriero; Massimiliano Marcellino
  36. Expectations and the Effects of Money Illusion By Ernst Fehr; Jean-Robert Tyran
  37. A Bayesian Framework for the Expectations Hypothesis. How to Extract Additional Information from the Term Structure of Interest Rates By Andrea Carriero
  38. Inflation, Price Dispersion, and Market Structure By Mustafa Caglayan; Alpay Filiztekin; Michael T. Rauh
  39. Fertility` Money Holdings` and Economic Growth: Evidence from Ukraine By Svitlana Maksymenko
  40. On the robust effects of technology shocks on hours worked and output By Fabio Canova; Claudio Michelacci
  41. Regensburger Diskussionsbeiträge zur Wirtschaftswissenschaft; Nr. 420: Skewness and location of distributions of wage change rates in the presence of downward nominal wage rigidity By Knoppik, Christoph
  42. Market discipline and the use of government bonds as collateral in the EMU By Ullrich, Katrin
  43. How Sticky Is Sticky Enough? A Distributional and Impulse Response Analysis of New Keynesian DSGE Models. Extended Working Paper Version By Norman Swanson; Oleg Korenok
  44. Banking Sector Integration and Competition in CEMAC By Saab, Samer; Vacher, Jerome
  45. Threshold dynmamics of short-term interest rates : empirical evidence and implications for the term structure By Archontakis, Theofanis; Lemke, Wolfgang
  46. Debt sustainability and procyclical fical policies in Latin America By Enrique Alberola; José M. Montero
  47. Skill wage premia, employment, and cohort effects : are workers in Germany all of the same type? By Fitzenberger, Bernd; Kohn, Karsten
  48. International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"? By Enrique G. Mendoza; Jonathan D. Ostry
  49. Long Run Macroeconomic Relations in the Global Economy By Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith
  50. On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables By Adrian Pagan; M. Hashem Pesaran
  51. Term Structure Forecasting: No-arbitrage Restrictions vs. Large Information Set By Carlo A. Favero, Linlin Niu and Luca Sala
  52. A Critical Look at Measures of Macroeconomic Uncertainty By Kjellberg, David; Post, Erik
  53. The interaction between house prices and loans for house purchase. The Spanish case By Ricardo Gimeno; Carmen Martínez-Carrascal
  54. Convergência real e infra-estruturas By Carlos Pinho
  55. Congestion in the Chinese automobile and textile industries revisited By A.T. Flegg; D.O. Allen
  56. Adjustment to Target Capital, Finance, and Growth By Antonio Ciccone; Elias Papaioannou
  57. Analysing the contribution of business services to European economic growth By Kox, Henk L.M.; Rubalcaba, Luis
  58. Walking up the down escalator : public investment and fiscal stability By Easter ly, William; Irwin, Timothy; Serven, Luis
  59. Band-Pass Filters By Everts, Martin
  60. An "almost-too-late" warning mechanism for currency crises By Crespo Cuaresma, Jesýs; Slacik, Tomas
  61. Estimating Hedonic Price Indices for Personal Computers in Russia By Parkhomenko, Alexander; Redkina, Anastasia
  62. Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints By Juan A. Rojas; Carlos Urrutia
  63. ¿Qué se puede esperar en materia de crecimiento, devaluación e inflación para 2007? By FEDESARROLLO
  64. The waning and restoration of social norms: a formal model of the dynamics of norm compliance and norm violation By Paul T. de Beer; Robert H.J. Mosch
  65. Why is Europe lagging behind? By Pyyhtiä, Ilmo
  66. Real exchange rates, dollarization and industrial employment in Latin America By Arturo Galindo; Alejandro Izquierdo; José M. Montero
  67. Exchange Rate Arrangements in Central and Eastern European Countries – Evolutions and Characteristics By Toma, Ramona
  68. Irreversible Investment in Stochastically Cyclical Markets By Francisco Ruiz-Aliseda; Jianjun Wu

  1. By: David Andolfatto; Scott Hendry; Kevin Moran
  2. By: Qayyum, Abdul
    Abstract: This paper attempts to investigate the linkage between the excess money supply growth and inflation in Pakistan and to test the validity of the monetarist stance that inflation is a monetary phenomenon. The results from the correlation analysis indicate that there is a positive association between money growth and inflation. The money supply growth at first-round affects real GDP growth and at the second round it affects inflation in Pakistan. The important finding from the analysis is that the excess money supply growth has been an important contributor to the rise in inflation in Pakistan during the study period, thus supporting the monetarist proposition that inflation in Pakistan is a monetary phenomenon. This may be due to the loose monetary policy adopted by the State Bank of Pakistan to show the high priority of the growth objective. The important policy implication is that inflation in Pakistan can be cured by a sufficiently tight monetary policy. The formulation of monetary policy must consider development in the real and financial sector and treat these sectors as constraints on the policy.
    Keywords: Money Supply; Inflation; Growth; Quantity Theory; Monetary Policy; Pakistan
    JEL: E31
    Date: 2006
  3. By: Nelson, Edward
    Abstract: This paper considers the Great Inflation of the 1970s in Japan and Germany. From 1975 onward these countries had low inflation relative to other large economies. Traditionally, this success is attributed to stronger discipline on the part of Japan and Germany’s monetary authorities - for example, more willingness to accept temporary unemployment, or stronger determination not to monetize government deficits. I instead attribute the success of these countries from the mid-1970s to their governments’ and monetary authorities’ acceptance that inflation is a monetary phenomenon. Their higher inflation in the first half of the 1970s is attributable to the fact that their policymakers over this period embraced non-monetary theories of inflation.
    Keywords: Germany; Great Inflation; incomes policy; Japan; monetary targeting
    JEL: E52 E58 E64 E65
    Date: 2007–03
  4. By: Karsten Staehr
    Abstract: This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995-2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Autonomous fiscal policy has little or no effect on cyclical variability in either of the two groups of countries. Counter-cyclical fiscal policy appears to be effective in Central and Eastern European countries, but largely ineffective in eurozone countries
    Keywords: fiscla policy determinants, fiscal policy effects, eurozone expansion
    JEL: E62 E63 E32
    Date: 2007–03–08
  5. By: George W. Evans; Seppo Honkapohja; Kaushik Mitra
    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
  6. By: Bonini, Patricia; Da Silva, Sergio
    Abstract: In the literature of staggered wages (Taylor, 1979, 1980; Blanchard, 1986; Ball and Cecchetti, 1991) the discount factor is neglected in the workers’ loss function. Yet discounting is to be viewed as an extra piece of micro-foundation with implications for discretionary monetary policy. We revisit the issue and show that discounting in the model of staggered wages actually lowers the time consistent steady inflation.
    Keywords: Staggered wage model; Time consistent steady inflation; Discounting
    JEL: E52 E31 E12
    Date: 2007
  7. By: Ritter, Moritz
    Abstract: This paper incorporates a distortionary tax into the microfoundations of money framework and revisits the optimum quantity of money. An optimal policy may consist of both a positive tax rate and a positive nominal interest rate: if the buyer’s surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy combines a sales tax with a money growth rate above that prescribed by the Friedman rule. Monetary, but not fiscal, policy alters the agent’s bargaining position, leaving a special role for a deviation from the Friedman rule. Under similar conditions, this conclusion carries over to competitive pricing.
    Keywords: Money; Search; Friedman Rule; Sales Tax
    JEL: H21 E63 E62
    Date: 2007–02–27
  8. By: Oscar Mauricio Valencia
    Abstract: This paper explores the welfare effects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disinflation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e. precautionary demand for money balance).
    Date: 2006–10–15
  9. By: Óscar J. Arce (Banco de España)
    Abstract: Motivated by a strong degree of hysteresis in the stock of monetization observed after the end of hyperinflations, I provide a cash-and-credit model in which the use of money exhibits some persistence because individuals can establish long-lasting credit relationships. This feature helps to account for the main stylized facts of extreme hyperinflations and reconcile some conflicting views on their causes, development and end without departing from rational expectations. Unlike the existing literature, I show that when hysteresis is possible, an orthodox fiscal-monetary reform that successfully stops a speculative hyperinflation may not be sufficient to prevent it.
    Keywords: hyperinflation, fiscal-monetary reform, multiple equilibria, hysteresis
    JEL: E31 E41 E63
    Date: 2006–04
  10. By: Manoel F. Bittencourt
    Abstract: In this paper we examine the impact of inflation on financial development in Brazil. The data available permit us to cover the eventful period between 1985 and 2002 and the results-based initially on time series and then on panel time series data and analysis, and robust for different estimators, specifications and financial development measures-suggest that high and erratic rates of inflation presented deleterious effects on finance at the time. The main policy implication arising from the results is that poor macroeconomic performance, exemplified by high rates of inflation, can only have detrimental effects on finance, a variable that is important for directly affecting, e.g., economic growth and development, and income inequality. Therefore, low and stable inflation is a necessary first step to achieve a more inclusive and active financial sector with all its attached benefits.
    Keywords: Financial development, inflation, growth, inequality, Brazil.
    JEL: E31 E44 O11 O54
    Date: 2007–01
  11. By: Francisco de Castro (Banco de España); Pablo Hernández de Cos (European Central Bank)
    Abstract: This paper estimates the effects of exogenous fiscal policy shocks in Spain in a VAR framework. Government expenditure expansionary shocks are found to have a positive impact on output in the short term at the cost of higher inflation and public deficits and lower output in the medium and long term. Tax increases are found to have a negative impact on economic activity in the medium term while having only a temporary effect on the improvement of the public deficit. The application of these results to the analysis of fiscal policy in Spain since the mid nineties point to the conclusion that the consolidation process does not seem to have involved costs in terms of output growth and the stance of fiscal policy has become more counter cyclical.
    Keywords: var, fiscal shocks, fiscal multipliers
    JEL: E62 H30
    Date: 2006–02
  12. By: Maral Kichian; Oleksiy Kryvtsov
    Abstract: We assess the implications of price indexation for estimated frequency of price adjustment in sticky price models of business cycles. These models predominantly assume that non-reoptimized prices are indexed to lagged or average inflation. The assumption of price indexation adds tractability although it is not likely reflective of the price practices of firms at the micro level. Under indexation firms have less incentive to adjust their prices, which implies downward bias in the estimated frequency of price changes. To evaluate the bias, we generate data with Calvo-type models without indexation. The artificial data are then used to estimate the frequency of price changes with indexation. Considering different assumptions about the degree of price rigidity and the level of trend inflation in the data-generating model, we find that the estimated indexation bias can be substantial, ranging up to 12 quarters in some cases.
    Keywords: Inflation and prices; Economic models; Econometric and statistical methods
    JEL: E31 E37
    Date: 2007
  13. By: Michael Reiter
    Abstract: The paper shows that a matching model where technological change is partially embodied in the job match is successful in explaining the variability of unemployment and vacancies. If we incorporate long-term wage contracts into the model, it also explains a number of stylized facts on the dynamics of real wages, which have been found in the empirical labor literature.
    Keywords: Unemployment, wage dynamics, embodied technical change
    JEL: E24 E32 J64
    Date: 2006–10
  14. By: Mario Quagliariello (Banca d’Italia)
    Abstract: This paper discusses the role that macroeconomic uncertainty plays in banks’ decisions on the optimal asset allocation. Using a portfolio model recently proposed in the literature, the paper aims at disentangling how Italian banks choose between loans and risk-free assets when uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of banks’ investment decisions, also after controlling for other factors. In periods of increasing turmoil, banks’ ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.
    Keywords: bank, business cycle, uncertainty, lending decisions, GARCH
    JEL: E44 G21 G28
  15. By: Stefano Siviero (Banca d'Italia); Giovanni Veronese (Banca d'Italia)
    Abstract: Although the concept of core inflation is apparently well defined and intuitively appealing, its practical usefulness has often been questioned on at least two accounts: first, existing core inflation measures are by and large exclusively based on statistical criteria and thus lack a firm theoretical justification; second, there appears to be no generally accepted and plausible criterion to assess the empirical performance of competing measures. Both criticisms are indeed justified. In this paper we propose an approach to build a benchmark measure of core inflation that aims to overcome those drawbacks. Our measure is based on a criterion that explicitly treats core inflation as a wholly artificial concept whose usefulness rests only on its role in defuse inflationary pressures that may be in the pipeline. Our measure is obtained by conveniently combining disaggregate information coming from price sub-indices, as is the case for the most popular core inflation measures. However, we depart from all other approaches by combining the information available in price sub-indices in such a way so as to provide the best guidance to a forward-looking monetary policy-maker. Accordingly, our measure of core inflation is based on the solution of a standard monetary policy optimisation problem. We illustrate our approach using a simple estimated model of the euro-area economy and appraise the performance of a few of the most popular core inflation measures in use. We find, generally speaking, that one cannot recommend that those measures be used to support monetary policy-making.
    Keywords: core inflation, optimal monetary policy rules, Eurosystem
    JEL: C53 E52
  16. By: Andrea Caggese
    Abstract: We develop a model of an industry with many heterogeneous firms that face both financing constraints and irreversibility constraints. The financing constraint implies that firms cannot borrow unless the debt is secured by collateral; the irreversibility constraint that they can only sell their fixed capital by selling their business. We use this model to examine the cyclical behavior of aggregate fixed investment, variable capital investment, and output in the presence of persistent idiosyncratic and aggregate shocks. Our model yields three main results. First, the effect of the irreversibility constraint on fixed capital investment is reinforced by the financing constraint. Second, the effect of the financing constraint on variable capital investment is reinforced by the irreversibility constraint. Finally, the interaction between the two constraints is key for explaining why input inventories and material deliveries of US manufacturing firms are so volatile and procyclical, and also why they are highly asymmetrical over the business cycle.
    Keywords: Financing Constraints, Irreversibility, Investment
    JEL: D21 E22 E32 G31
    Date: 2001–06
  17. By: Andrea Carriero (Queen Mary, University of London)
    Abstract: We propose a way to test the New Keynesian Phillips Curve (NKPC) without estimating the structural parameters governing the curve, i.e. price stickiness and firms’ backwardness. Using this strategy we can test the NKPC avoiding the identification problems related to the GMM approach. We find that it does not exist a combination of the structural parameters which is consistent with US data. This result does not necessarily imply that the idea of a forward looking price setting behaviour should be entirely disregarded, as the rejection might be due to the failure of the joint hypothesis of rational expectations. Thus further research should be aimed at providing alternative models for agents’ expectations.
    Keywords: VARs, Inflation, Phillips curve
    JEL: C32 E31
    Date: 2007–03
  18. By: Katharina Raabe; Ivo Arnold; Clemens Kool
    Abstract: This paper presents a dynamic investment model that explains differences in the sensitivity of small- and large-sized firms to changes in the money market interest rate. In contrast to existing studies on the firm size effects of monetary policy, the importance of firms as monetary transmission channel does not originate from credit market imperfections, but from size-related differences in the degree of investment irreversibility. The degree of investment irreversibility is determined by sunk capital investment expenditures. We show that size-related differences in sunk investment expenditures have two interdependent effects: they (i) affect the optimal investment behavior of small- and large-sized firms and (ii) account for differences in the interest rate sensitivity of small- and large-firm investment. We illustrate that sunk investment expenditures affect the region of zero and non-zero investment activity and, hence, the frequency at which large and small firms change investment regimes. Furthermore, sunk investment costs determine the extent to which small- and large-firm investment displays discrete jumps. We find that large firms change investment regimes less frequently than small firms and that swings in investment are more accentuated for large than for small firms. We illustrate that the response of small- and large-firm investment to monetary policy actions depends on the magnitude of the monetary policy shock.
    Keywords: Monetary Policy Transmission, Market Structure, Investment, Investment Irreversibility
    JEL: E22 E52 L22
    Date: 2006–09
  19. By: Harrison , Barry (BOFIT); Vymyatnina, Yulia (BOFIT)
    Abstract: Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution re-duces the stability of money demand functions in ways that can seriously undermine cen-tral bank credibility and its efforts to implement monetary policy. Most transition econo-mies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia’s financial meltdown in 1998, its monetary authorities intro-duced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substi-tution in the Russian economy in the post-crisis period of 1999–2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian mone-tary policy.
    Keywords: currency substitution; transition economies; de-dollarization
    JEL: E58 F31 F41
    Date: 2007–03–02
  20. By: Roberto Blanco (Banco de España); Fernando Restoy (Banco de España)
    Abstract: This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.
    Keywords: real interest rates, intertemporal marginal rate of substitution
    JEL: E43 G12
    Date: 2007–02
  21. By: Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University); Stanislav Radchenko (University of North Carolina, Charlotte)
    Abstract: In this paper we take an agnostic view of the Phillips curve debate, and carry out an empirical investigation of the relative and absolute efficacy of Calvo sticky price (SP), sticky information (SI), and sticky price with indexation models (SPI), with emphasis on their ability to mimic inflationary dynamics. In particular, we look at evidence for a group of 13 OECD countries, and we consider three alternative measures of inflationary pressure, including the output gap, labor share, and unemployment. We find that the Calvo SP and the SI models essentially perform no better than a strawman constant inflation model, when used to explain inflation persistence. Indeed, virtually all inflationary dynamics end up being captured by the residuals of the estimated versions of these models. We find that SPI model is preferable because it captures the type of strong inflationary persistence that has in the past characterized the economies of the countries in our sample. However, two caveats to this conclusion are that improvement in performance is driven mostly by the time series part of the model (i.e. lagged inflation) and that the SPI model overemphasizes inflationary persistence. Thus, there appears to be room for improvement via either modified versions of the above models, or via development of new models, that better “track” inflation persistence.
    Keywords: empirical distribution, model selection, sticky information, sticky price
    JEL: C32 E12 E3
    Date: 2006–09–22
  22. By: Urzúa, Carlos M. (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: Vector autoregressive models are often used in Macroeconomics to draw conclusions about the effects of policy innovations. However, those results depend on the researcher’s priors about the particular ordering of the variables. As an alternative, this paper presents a simple rule based on the Maximum Entropy principle that can be used to find the “most likely” ordering. The proposal is illustrated in the case of a VAR model of the U.S. economy. It is found that monetary policy shocks are better represented by innovations in the federal funds rate rather than by innovations in non-borrowed reserves.
    Keywords: VAR, impulse-response functions, varimin, maximum entropy, monetary policy shocks
    JEL: C32 C51 E52
    Date: 2007–02
  23. By: Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University)
    Abstract: In this paper we construct output gap and inflation predictions using a variety of DSGE sticky price models. Predictive density accuracy tests related to the test discussed in Corradi and Swanson (2005a) as well as predictive accuracy tests due to Diebold and Mariano (1995) andWest (1996) are used to compare the alternative models. A number of simple time series prediction models (such as autoregressive and vector autoregressive (VAR) models) are additionally used as strawman models. Given that DSGE model restrictions are routinely nested within VAR models, the addition of our strawman models allows us to indirectly assess the usefulness of imposing theoretical restrictions implied by DSGE models on unrestricted econometric models. With respect to predictive density evaluation, our results suggest that the standard sticky price model discussed in Calvo (1983) is not outperformed by the same model augmented either with information or indexation, when used to predict the output gap. On the other hand, there are clear gains to using the more recent models when predicting inflation. Results based on mean square forecast error analysis are less clear-cut, although the standard sticky price model fares best at our longest forecast horizon of 3 years, and performs relatively poorly at shorter horizons. When the strawman time series models are added to the picture, we find that the DSGE models still fare very well, often winning our forecast competitions, suggesting that theoretical macroeconomic restrictions yield useful additional information for forming macroeconomic forecasts.
    Keywords: model selection, predictive density, sticky information, sticky price
    JEL: C32 E12 E3
    Date: 2006–09–22
  24. By: Christoph A. Schaltegger; Lars P. Feld
    Abstract: A common political claim is that decentralized governments undermine policy makers’ ability to fight fiscal imbalance. This paper examines how different fiscal institutions influence the likeli-hood of a successful fiscal adjustment. Using a panel of the Swiss cantons from 1981 to 2001, we first analyze the episodes of tight fiscal policy and their macroeconomic consequences. Then, we empirically investigate the determinants of successful long-la¬sting deficit reductions. Contrary to the popular claim, we find that fiscal decentralization increases the probability of a successful fiscal consolidation. In addition, the results point to an important role of intergovernmental grants and the circumstances, in particular the size of fiscal imbalance in the years before the consolida-tion in determining a successful adjustment policy. Furthermore, coalition governments and large parliaments less likely implement successful fiscal stabilizations. Finally, there is some weak evidence that spending cuts are more promising in reaching a long-lasting fiscal adjustment than revenue increases.
    Keywords: Fiscal Adjustment; Consolidation Policy; Fiscal Decentralization; Fiscal Institutions
    JEL: E61 E63 H61
    Date: 2007–03
  25. By: Klaus Adam
  26. By: Laurence Ball; Niamh Sheridan
  27. By: Jeffery D. Amato; Hyun Song Shin
  28. By: Francesco Lippi; Stefano Neri
  29. By: Carin van der Cruijsen; Sylvester Eijffinger
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its e¤ects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: - the empirical research resolves all theoretical question marks, -how the endings of the literature match the actual practice of central banks, and - where there is scope for more research.
    Keywords: Central Bank Transparency; Monetary Policy; Surve
    JEL: E31 E52 E58
    Date: 2007–02
  30. By: Lars Peter Hansen
    Abstract: This paper explores two perspectives on the rational expectations hypothesis. One perspective is that of economic agents in such a model, who form inferences about the future using probabilities implied by the model. The other is that of an econometrician who makes inferences about the probability model that economic agents are presumed to use. Typically it is assumed that economic agents know more than the econometrician, and econometric ambiguity is often withheld from the economic agents. To understand better both of these perspectives and the relation between them, I appeal to statistical decision theory to characterize when learning or discriminating among competing probability models is challenging. I also use choice theory under uncertainty to explore the ramifications of model uncertainty and learning in environments in which historical data may be insufficient to yield precise probability statements. I use both tools to reassess the macroeconomic underpinnings of asset pricing models. I illustrate how statistical ambiguity can alter the risk-return tradeoff familiar from asset pricing; and I show that when real time learning is included risk premia are larger when macroeconomic growth is lower than average.
    JEL: C11 C32 C52 E21 E44 G1 G12
    Date: 2007–03
  31. By: Marco Hoeberichts; Mewael Tesfaselassie; Sylvester Eijffinger
  32. By: Fabio Canova; David Lopez-Salido; Claudio Michelacci
    Abstract: We analyze the labor market effects of neutral and investment-specific technology shocks along the intensive margin (hours worked) and the extensive margin (unemployment). We characterize the dynamic response of unemployment in terms of the job separation and the job finding rate. Labor market adjustments occur along the extensive margin in response to neutral shocks, along the intensive margin in response to investment specific shocks. The job separation rate accounts for a major portion of the impact response of unemployment. Neutral shocks prompt a contemporaneous increase in unemployment because of a sharp rise in the separation rate. This is prolonged by a persistent fall in the job finding rate. Investment specific shocks rise employment and hours worked. Neutral shocks explain a substantial portion of the volatility of unemployment and output; investment specific shocks mainly explain hours worked volatility. This suggests that neutral progress is consistent with Schumpeterian creative destruction, while investment-specific progress operates as in a neoclassical growth model.
    Keywords: Search frictions, technological progress, creative destruction
    JEL: E00 J60 O33
    Date: 2006–05
  33. By: Guttler, Caio; Meurer, Roberto; Da Silva, Sergio
    Abstract: Employing both cointegration analysis and a variety of Granger causality tests, we examine whether the Brazilian stockmarket is efficient in processing new information about public macroeconomic data (semi-strong efficiency). We find the stockmarket to be inefficient, which is in line with most results for other emerging markets.
    Keywords: stockmarket semi-strong informational efficiency; cointegration; Granger causality; macroeconomic variables; Brazilian economy
    JEL: G14 E44
    Date: 2006
  34. By: Baeriswyl, Romain
    Abstract: This paper contributes to the ongoing debate about the welfare effect of public information. In an environment characterized by imperfect common knowledge and strategic complementarities, Morris and Shin (2002)argue that noisy public information may be detrimental to welfare because public information is attributed too large a weight relative to its face value since it serves as a focal point. While this argument has received a great deal of attention in central banks and in the financial press, it considers communication as the sole task of a central bank and ignores that communication usually goes with a policy action. This paper accounts for the action task of a central bank and analyzes whether public disclosure is beneficial in the conduct of monetary policy when the central bank primarily tries to stabilize the economy with an instrument that is optimal with respect to its perhaps mistaken view. In this context, it turns out that transparency is particularly beneficial when central bank’s information is poorly accurate because it helps reducing the distortion associated with badly suited policies.
    Keywords: differential information; monetary policy; transparency
    JEL: D82 E52 E58
    Date: 2006
  35. By: Andrea Carriero (Queen Mary, University of London); Massimiliano Marcellino (IEP-Bocconi University, IGIER and CEPR)
    Abstract: In this paper we provide an overview of recent developments in the methodology for the construction of composite coincident and leading indexes, and apply them to the UK. In particular, we evaluate the relative merits of factor based models and Markov switching specifications for the construction of coincident and leading indexes. For the leading indexes we also evaluate the performance of probit models and pooling. The results indicate that alternative methods produce similar coincident indexes, while there are more marked di.erences in the leading indexes.
    Keywords: Forecasting, Business cycles, Leading indicators, Coincident indicators, Turning points
    JEL: E32 E37 C53
    Date: 2007–03
  36. By: Ernst Fehr; Jean-Robert Tyran
  37. By: Andrea Carriero (Queen Mary, University of London)
    Abstract: Even if there is a fairly large evidence against the Expectations Hypothesis (EH) of the term structure of interest rates, there still seems to be an element of truth in the theory which may be exploited for forecasting and simulation. This paper formalizes this idea by proposing a way to use the EH without imposing it dogmatically. It does so by using a Bayesian framework such that the extent to which the EH is imposed on the data is under the control of the researcher. This allows to study a continuum of models ranging from one in which the EH holds exactly to one in which it does not hold at all. In between these two extremes, the EH features transitory deviations which may be explained by time varying (but stationary) term premia and errors in expectations. Once cast in this framework, the EH holds on average (i.e. after integrating out the effect of the transitory deviations) and can be safely and effectively used for forecasting and simulation.
    Keywords: Bayesian VARs, Expectations theory, Term structure
    JEL: C11 E43 E44 E47
    Date: 2007–03
  38. By: Mustafa Caglayan (Department of Economics, University of Glasgow); Alpay Filiztekin (Faculty of Arts and Social Sciences, Sabanci University); Michael T. Rauh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: In this paper, we use a unique micro-level data set from Istanbul to investigate the empirical relationship between inflation and price dispersion. In particular, our data set includes price observations from three distinct store types: bakkals (convenience stores), pazars (bazaars), and supermarkets. Our findings indicate that pazars exhibit the least amount of price dispersion on average, which is consistent with the fact that menu and search costs are very low in the pazar and that such sellers seem to have very little market power. Moreover, we find that several of the basic inflation-dispersion channels identified by the theoretical literature seem to be operating in our data.
    Keywords: inflation, market structure, menu cost models, micro panel data, price dispersion
    JEL: L0 C23 D40 D83 E31
    Date: 2006–01
  39. By: Svitlana Maksymenko
    Abstract: . . .
    Date: 2006–03
  40. By: Fabio Canova; Claudio Michelacci
    Abstract: We analyze the effects of neutral and investment-specific technology shocks on hours worked and output. Low frequency movements in hours are captured in a variety of ways. Hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks. The percentage of the variance of hours (output) explained by neutral shocks is small (large); the opposite is true for investment specific shocks. News shocks and other shocks are uncorrelated with the estimated neutral and investment specific shocks.
    Keywords: Technology disturbances, structural VARs, low frequency movements, news shocks
    JEL: E00 J60 O33
    Date: 2006–11
  41. By: Knoppik, Christoph
    Abstract: The skewness-location approach to the analysis of downward nominal wage rigidity in micro data judges the existence of rigidity on the basis of estimated functional relationships between measures of location and of skewness of the distributions of individual rates of wage change in different years. Here it is shown that the properties of theoretical skewness-location relationships can deviate from those asserted by the skewness-location approach thus invalidating its test logic. Consequently, judgment based on the skewness-location approach is biased away from finding evidence for rigidity.
    Keywords: Nominal wage rigidity, skewness, skewness-location approach, nominal price rigidity, downward nominal wage rigidity
    JEL: E24 J30
    Date: 2007–02–26
  42. By: Ullrich, Katrin
    Abstract: The confidence that financial markets are able to discipline the debt behaviour of governments is not very high. Therefore, the Stability and Growth Pact has been implemented as an institutional constraint to substitute for the market mechanism. With the weakening of the Pact, market discipline could gain importance again. To strengthen market discipline, reasons for its failure in the euro area have to be analysed. One possible reason could be that the European Central Bank accepts all European government bonds without distinction in its monetary policy auctions as collateral. This could provide the financial market with a signal that these government securities are equally (non-)risky and that a differentiation with respect to risk premia is not needed.
    Keywords: Stability and Growth Pact, Market Discipline, Collateral, Repo
    JEL: E51 E52 G12 H63
    Date: 2006
  43. By: Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University)
    Abstract: In this paper, we add to the literature on the assessment of how well RBC simulated data reproduce the dynamic features of historical data. In particular, we evaluate a variety of new Keynesian DSGE models, including the standard sticky price model discussed in Calvo (1983), the sticky price with dynamic indexation model discussed in Christiano, Eichenbaum and Evans (2001), Smets and Wouters (2003), and Del Negro and Schorfheide (2005), and the sticky information model of Mankiw and Reis (2002). We carry out our evaluation by using standard impulse response and correlation measures and via use of a distribution based approach for comparing all of our (possibly) misspecified DSGE models via direct comparison of simulated inflation and output gap values with corresponding historical values. In this sense, our analysis can be thought of as an empirical model selection exercise. In addition, and given that one of our objectives is to choose the model which yields simulation distributions that are closest to the historical record, our analysis can be viewed as a type of predictive density model selection, where the “best” simulated distributions can be used as predictive densities whenever the starting values for the simulations correspond to those actual historical values which are most recently available. Some important precedents to our approach to accuracy assessment include DeJong, Ingram, and Whiteman (1996) and Geweke (1999a,b). One of our main findings is that for a standard level of stickiness (i.e. annual price or information adjustment), the sticky price model with indexation dominates other models. However, when models are calibrated using the lower level of information and price stickiness, there is much less to choose from between the models.
    Keywords: empirical distribution, model selection, sticky information, sticky price
    JEL: C32 E12 E3
    Date: 2006–09–22
  44. By: Saab, Samer; Vacher, Jerome
    Abstract: This paper considers the extent of retail banking integration in the Communauté Economique et Monétaire d'Afrique Centrale (CEMAC) and the level of bank competition at the regional level. Using a mix of quantitative and qualitative indicators, the paper finds some evidence of price convergence in average interest rate spreads. However, this observed fact is not supported by an increase in cross-border flows in retail loans and deposits, and price convergence may merely reflect excess liquidity in the region. Other data also indicate that bank competition within the CEMAC as a region is limited, complementing the findings on integration. Addressing shortfalls in legal and regulatory frameworks, infrastructure, and markets would facilitate integration.
    Keywords: Central African Economic and Monetary Community; Banks; Competition; Bank soundness; Financial soundness indicators; Monetary unions; Economic cooperation; CEMAC
    JEL: G21 E58
    Date: 2007–01–01
  45. By: Archontakis, Theofanis; Lemke, Wolfgang
    Abstract: This paper studies a nonlinear one-factor term structure model in discrete time. The single factor is the short-term interest rate, which is modeled as a self-exciting threshold autoregressive (SETAR) process. Our specification allows for shifts in the intercept and the variance. The process is stationary but mimics the nearly I(1) dynamics typically encountered with interest rates. In comparison with a linear model, we find empirical evidence in favor of the threshold model for Germany and the US. Based on the estimated short-rate dynamics we derive the implied arbitrage-free term structure of interest rates. Since analytical solutions are not feasible, bond prices are computed by means of Monte Carlo integration. The resulting term structure exhibits properties that are qualitatively similar to those observed in the data and which cannot be captured by the linear Gaussian one-factor model. In particular, our model captures the nonlinear relation between long rates and the short rate found in the data.
    Keywords: Non-affine term structure models, SETAR models, Asset pricing
    JEL: C22 E43 G12
    Date: 2007
  46. By: Enrique Alberola (Banco de España); José M. Montero (Banco de España)
    Abstract: The computation of structural primary balances for the nine main Latin American countries and their comparison of their changes with their cyclical position during the period 1981 2004 confirms that fiscal policy is procyclical in the region. From this evidence, the paper shows strong evidence that the fiscal behaviour is closely linked to the financial vulnerability position of the economies and in particular to the perception on the sustainability of debt. The current threshold balance, defined as the primary balance which would render the debt stable under the existing economic and financial conditions, is used as our gauge for measuring debt sustainability at each point in time. The empirical analysis reveals that the fiscal stance tightens when the debt sustainability perceptions worsen, and that this effect is stronger the less sustainable debt is perceived. The results are robust to different specifications and estimation methods.
    Keywords: procyclical fiscal policy, debt sustainability
    JEL: H6 E6 F3
    Date: 2006–05
  47. By: Fitzenberger, Bernd; Kohn, Karsten
    Abstract: This paper studies the relationship between employment and wage structures in West Germany based on the IAB employment subsample 1975{1997. It extends the analytical framework of Card and Lemieux (2001) which simultaneously includes skill and age as important dimensions of heterogeneity. After having identified cohort effects in skill wage premia and in the evolution of relative employment measures, we estimate elasticities of substitution between employees in three different skill groups and between those of different age, taking account of the endogeneity of wages and employment. Compared to estimates in the related literature, we find a rather high degree of substitutability. Drawing on the estimated parameters, we simulate the magnitude of wage changes within the respective skill groups that would have been necessary to halve skill-specific unemployment rates in 1997. The required nominal wage reductions range from 8.8 to 12.2% and are the higher the lower the employees' skill level.
    Keywords: Labor Demand, Heterogeneity, Age, Skill, Wage Structure, Employment, Cohort Effects, Unemployment
    JEL: E24 J21 J31
    Date: 2006
  48. By: Enrique G. Mendoza; Jonathan D. Ostry
    Abstract: This paper looks at fiscal solvency and public debt sustainability in both emerging market and advanced countries. Evidence of fiscal solvency, in the form of a robust positive conditional relationship between public debt and the primary fiscal balance, is established in both groups of countries, as well as in the sample as a whole. Evidence of fiscal solvency is much weaker, however, at high debt levels. The debt-primary balance relationship weakens considerably in emerging economies as debt rises above 50 percent of GDP. Moreover, the relationship vanishes in high-debt countries when the countries are split into high- and low-debt groups relative to sample means and medians, and this holds for industrial countries, emerging economies, and in the combined sample. These findings suggest that many industrial and emerging economies, including several where fiscal solvency has been the subject of recent debates, appear to conduct fiscal policy responsibly. Yet our results cannot reject the hypothesis of fiscal insolvency in groups of countries with high debt ratios, where the response of the primary balance to increases in debt is not statistically significant.
    JEL: E62 F34 F41 H6 H68
    Date: 2007–03
  49. By: Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith
    Abstract: This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence pro.les. We .nd strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.
    Keywords: Global VAR, interdependencies, Fisher relationship, Uncovered Interest Rate Parity , Purchasing Power Parity, persistence profile, error variance decomposition
    JEL: C32 E17 F47 R11
    Date: 2007–01
  50. By: Adrian Pagan; M. Hashem Pesaran
    Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the in.uential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side e¤ects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.
    Keywords: Permanent shocks, structural identification, error correction models, IS-LM models.
    JEL: C30 C32 E10
    Date: 2007–01
  51. By: Carlo A. Favero, Linlin Niu and Luca Sala
    Abstract: This paper addresses the issue of forecasting the term structure. We provide a unified state-space modelling framework that encompasses different existing discrete-time yield curve models. within such framework we analyze the impact on forecasting performance of two crucial modelling choices, i.e. the imposition of no-arbitrage restrictions and the size of the information set used to extract factors. Using US yield curve data, we find that: a. macro factors are very useful in forecasting at medium/long forecasting horizon; b. financial factors are useful in short run forecasting; c. no-arbitrage models are effective in shrinking the dimensionality of the parameter space and, when supplemented with additional macro information, are very effective in forecasting; d. within no-arbitrage models, assuming time-varying risk price is more favorable than assuming constant risk price for medium horizon-maturity forecast when yield factors dominate the information set, and for short horizon and long maturity forecast when macro factors dominate the information set; e. however, given the complexity and the highly non-linear parameterization of no-arbitrage models, it is very difficult to exploit within this type of models the additional information offered by large macroeconomic datasets.
  52. By: Kjellberg, David (Department of Economics); Post, Erik (Department of Economics)
    Abstract: This paper takes a critical look at available proxies of uncertainty. Two questions are adressed: (i) How do we evaluate proxies given that subjective uncertainty is inherently unobservable? (ii) Is there such a thing as a general macroeconomic uncertainty? Using correlations, some narrative evidence and a factor analysis we find that disagreement and stock market volatility proxies seem to be valid measures of uncertainty whereas probability forecast measures are not. This result is reinforced when we use our proxies in standard macroeconomic applications where uncertainty is supposed to matter. Uncertainty is positively correlated with the absolute value of the GDP-gap.
    Keywords: Uncertainty; Macroeconomics; Survey Data
    JEL: C42 C82
    Date: 2007–02–28
  53. By: Ricardo Gimeno (Banco de España); Carmen Martínez-Carrascal (Banco de España)
    Abstract: The aim of this paper is to analyse, using a vector error-correction model (VECM), the dynamic interaction between house prices and loans for house purchase in Spain. The results show that both variables are interdependent in the long run: loans for house purchase depend positively on house prices, while house prices adjust when this credit aggregate departs from the level implied by its long-run determinants. In contrast, disequilibria in house prices are corrected only through changes in this variable. As for short-run dynamics, the results show that the two variables have a positive contemporaneous impact on each other, indicating the existence of mutally reinforcing cycles in both variables.
    Keywords: mortgage debt, housing prices, error correction
    JEL: E32 G21 R21
    Date: 2006–02
  54. By: Carlos Pinho (Universidade de Aveiro)
    Abstract: Using panel data, this paper explores the role of infrastructure and human capital in the convergence of income levels and growth in the European Union, during the period 1960-2000. According to the neo-classical theory diminishing returns of capital result in poor economies growing faster than rich economies. The findings suggest that it is difficult to reject the hypothesis of non-convergence in per capita incomes of UE countries, but the results do not support the hypothesis that the speed of convergence is affected by infrastructures.
    Keywords: GDP growth, convergence, infrastructure
    JEL: O47 J23 E62
    Date: 2007–02
  55. By: A.T. Flegg (School of Economics, University of the West of England); D.O. Allen (School of Economics, University of the West of England)
    Abstract: This paper re-examines a problem of congested inputs in the Chinese automobile and textile industries, which was identified by Cooper et al. (Socio-Economic Planning Sciences 35 (2001) 227-242). These authors employed a single approach to measuring congestion, however, so it is of interest to see whether other approaches would yield very different answers as regards the severity of this problem. Indeed, the measurement of congestion is an area where there has been much theoretical debate but relatively little empirical work. Here we use the data set assembled by Cooper et al. for the period 1981-1997 to compare and contrast the measurements of congestion generated by three alternative approaches. We find that these measurements are indeed very different.
    Keywords: Monetary Policy;
    Date: 2007–03
  56. By: Antonio Ciccone; Elias Papaioannou
    Abstract: Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis.
    Keywords: Financial development, sector analysis, growth, measurement error, investment opportunities
    JEL: E23 E O40 F30 G10
    Date: 2006–11
  57. By: Kox, Henk L.M.; Rubalcaba, Luis
    Abstract: The sector business services contributes directly and indirectly to aggregate economic growth in Europe. The direct contribution comes from the sector’s own dynamism. Though the business-services industry appears to be characterised by strong cyclical volatility, there was also a strong structural growth. Business services actually generated more than half of total net employment growth in the European Union since the second half of the 1990s. Apart from this direct growth contribution, the sector also contributed in an indirect way to economic growth by generating knowledge and productivity spill-overs for other industries. The knowledge role of business services is reflected in its employment characteristics. The business-services industry created spill-overs in three ways: original innovations, knowledge diffusion, and the reduction of human capital indivisibilities at firm level. The share of knowledge-intensive business services in the intermediate inputs of the total economy has risen sharply in the last decade. Firm-level scale diseconomies with regard to knowledge and skill inputs are reduced by external deliveries of such inputs, thereby exploiting positive external scale economies. The process goes along with an increasingly complex social division of labour between economic sectors. The European business-services industry itself is characterised by a relatively weak productivity growth. Does this contribute to growth stagnation tendencies à la the so-called “Baumol disease”? The paper argues that there is no reason to expect this as long as the productivity and growth spill-overs from business services to other sectors are large enough. Finally, the paper concludes by suggesting several policy elements that could boost the role of business services in European economic growth. This might to achieve some of the ambitious Lisbon goals with respect to employment, productivity and innovation.
    Keywords: business services; structural change; economic growth; Europe; services; productivity
    JEL: E32 O4 O52 L2 L84 O3 L8
    Date: 2007–02
  58. By: Easter ly, William; Irwin, Timothy; Serven, Luis
    Abstract: Fiscal adjustment becomes like walking up the down escalator when growth-promoting spending is cut so much as to lower growth and thus the present value of future tax revenues to a degree that more than offsets the improvement in the cash deficit. Although short-term cash flows matter, a preponderant focus on them encourages governments to invest too little. Cash flow targets also encourage governments to shift investment spending off budget, by seeking private investment in public projects-irrespective of its real fiscal or economic benefits. To evade the action of cash flow targets, some have suggested excluding from their scope certain investments (such as those undertaken by public enterprises deemed commercial or financed by multilaterals). These stopgap remedies might sometimes help protect investment, but they do not provide a satisfactory solution to the underlying problem. Governments can more effectively reduce the biases created by the focus on short-term cash flows by developing indicators of the long-term fiscal effects of their decisions, including accounting and economic measures of net worth, and where appropriate including such measures in fiscal targets or even fiscal rules, replacing the exclusive focus on liquidity and debt.
    Keywords: Public Sector Expenditure Analysis & Management,Public Sector Economics & Finance,Investment and Investment Climate,Economic Stabilization,Fiscal Adjustment
    Date: 2007–03–01
  59. By: Everts, Martin
    Abstract: In the following article the ideal band-pass filter is derived and explained in order to subsequently analyze the approximations by Baxter and King (1999) and Christiano and Fitzgerald (2003). It can be shown that the filters by Baxter and King and Christiano and Fitzgerald primarily differ in two assumptions, namely in the assumption about the spectral density of the analyzed variables as well as in the assumption about the symmetry of the weights of the band-pass filter. In the article at hand it is shown that the different assumptions lead to characteristics for the two filters which distinguish in three points: in the accuracy of the approximation with respect to the length of the cycles considered, in the amount of calculable data points towards the ends of the data series, as well as in the removal of the trend of the original time series.
    Keywords: Business Cycle; Band-Pass Filter
    JEL: C1 E3
    Date: 2006–01
  60. By: Crespo Cuaresma, Jesýs (BOFIT); Slacik, Tomas (BOFIT)
    Abstract: We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.
    Keywords: currency crisis; term structure of interest rates; transition economies
    JEL: E43 F31 F34
    Date: 2007–03–02
  61. By: Parkhomenko, Alexander; Redkina, Anastasia
    Abstract: Economist have noted for decades that Consumer Price Index (CPI) in the developed countries is overstating inflation by 0,5-2,0% per year. A significant part of such a bias is found to be caused by the presence of technology products and differentiated products in CPI. An increasing weight of these products in the Russian CPI may also lead to a substantial upward bias. Nowadays hedonic indices are believed to be the most efficient way to reduce the bias. Following Triplett we have developed the taxonomy of hedonic price indices within the “direct approach”. This first step is essential in constructing a detailed set of hedonic price indices. They can be used in two ways: to estimate the bias in CPI and to elaborate alternative official price indices for IT-products. We've estimated 11% fall of price for personal computers in 2005 with the usage of hedonic price indices, a 11-23% positive bias in price index for PC in Russia was also calculated. We also have found that Russian CPI could be upward biased by 0,12-0,23% per year due to new goods and quality change effects for PC.
    Keywords: Hedonic; Price index; bias; CPI; PC; inflation; new economy
    JEL: L0 E31 C43
    Date: 2006–06–07
  62. By: Juan A. Rojas (Banco de España); Carlos Urrutia (Centro de Investigación Económica, Instituto Tecnológico Autónomo de México (ITAM))
    Abstract: We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with fixed borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced.
    Keywords: social security, borrowing constraints, retirement accounts
    JEL: E6 G23 H55
    Date: 2006–02
    Abstract: · El año 2007 comenzó con un favorable panorama económico. La mayoría de indicadores hacen prever que, a pesar una moderación en materia de crecimiento, éste será de nuevo un año favorable para la economía. · Para el año 2007, Fedesarrollo tiene un pronóstico de crecimiento de 5,3% y la mayoría de sectores seguirán registrando un buen dinamismo. Por el lado de la demanda, el impulso seguirá viniendo del consumo y de la inversión. · Fedesarrollo prevé que este año la devaluación será muy baja y que al final de 2007 el dólar estaría fluctuando alrededor de 2.285 pesos, lo que significa una depreciación del peso de 2,1% para fin de período. · En general, por lo menos durante los primeros meses de 2007, el dólar seguirá mostrando una marcada volatilidad con tendencia hacia la revaluación, mientras se despeja la incertidumbre de los mercados acerca de la evolución de la economía norteamericana. · El ritmo de devaluación dependerá críticamente del efecto de las medidas de política monetaria en los Estados Unidos sobre los flujos de capitales a las economías emergentes, como Colombia. · La inflación en 2006 alcanzó 4,48% y el Banco cumplió la meta. Para el presente año, algunos factores podrían jugar en contra del buen comportamiento de la inflación. Fedesarrollo estima que el Banco realizará dos nuevos incrementos en su tasa de intervención, de 25 pb cada uno, y que en 2007 la inflación terminará en el rango establecido por el Banco de la República. A pensar en los vecinos y diversificar mercados · Si bien la firma del Tratado de Libre Comercio con Estados Unidos tendrá efectos positivos sobre el comercio exterior colombiano, también resulta preponderante consolidar y ampliar otros mercados estratégicos, tanto al interior como fuera del continente americano, más aún si se tienen en cuenta los resultados electorales obtenidos en 2006. · El viraje a la izquierda en América Latina es un hecho incontrovertible. En este grupo se destacan los proyectos del reelecto presidente de Venezuela, Hugo Chávez, y el del presidente de Ecuador, Rafael Correa, que obtuvieron cómodas victorias en los comicios de sus respectivos países. Estos resultados merecen nuestra atención, pues son precisamente estos dos países, los más importantes para Colombia, desde el punto de vista comercial. · Son varios los posibles riesgos que asumirá Colombia en 2007 en materia comercial, ya sea directamente, a través de decisiones comerciales unilaterales o mediante cambios en la demanda de estos dos países por productos colombianos; o indirectamente, debido a que el nuevo ambiente político que está viviendo América Latina incida negativamente sobre la llegada de flujos de capitales a la región. · Aunque existen argumentos económicos que inciden hacia la reducción de estos riesgos, por ejemplo, las presiones inflacionarias que vive Venezuela en la actualidad, la situación actual requiere un enorme esfuerzo en nuestras relaciones diplomáticas, tendiendo a evitar a toda costa que las decisiones políticas afecten negativamente las buenas relaciones comerciales que tradicionalmente ha mantenido Colombia con sus vecinos más cercanos. Encuesta de Opinión Financiera · Las expectativas de inflación aumentaron levemente. · La política monetaria y los factores externos se mantienen como las principales preocupaciones a la hora de invertir. · El Índice de Confianza del Mercado muestra un leve retroceso. Encuesta de Opinión del Consumidor · La confianza de los consumidores cierra en 2006 con un máximo histórico. · Medellín presenta la mayor variación anual en la confianza de los consumidores. · Destacado desempeño del sector automotor en el 2006. · Frente a noviembre, mejoró la percepción sobre la situación de desempleo Encuesta de Opinión Empresarial · El 2006, año de confianza para los empresarios. · Las condiciones para la inversión siguen en niveles satisfactorios. · La utilización de la capacidad instalada continúa en niveles elevados. · La confianza comercial se recupera levemente.
    Date: 2007–01–17
  64. By: Paul T. de Beer; Robert H.J. Mosch
    Abstract: Recent debates about crime on the one hand and the purported deterioration of values and norms on the other hand implicitly refer to two kinds of coordination mechanisms. Crime is supposed to be a consequence of deficient material incentives in the form of detection and formal sanctions. Values and norms are related to immaterial incentives, such as feelings of shame or loss of reputation, originatingfrom informal social supervision, and by feelings of guilt or repentance, originating from the personal conviction that one ought to behave otherwise. In order to investigate the relationship between rising crime and other breaches of norms on the one hand and the deterioration of both material and immaterial incentives on the other hand, a simple rational choice model is developed. This model proves to be a useful framework for analyzing behavior in a context in which different incentives for individual behavior, i.e. individual self-interest, formal sanctions, internalized social norms and social norms that are enforced by external sanctions, play a role simultaneously. It is shown that the waning and restoration of norms are asymmetric processes in which the restoration of eroded norms involves a much larger effort than was needed to maintain the norms in the original situation.
    JEL: E31 E52 E58
    Date: 2007–02
  65. By: Pyyhtiä, Ilmo (Bank of Finland Research)
    Abstract: This paper builds on the literature on growth in searching for explanations for the divergent growth performance between the EU countries and the United States. We emphasise the role of R&D investment and perhaps different degrees of elasticity of substitution between capital and labour. We estimate two different production functions, namely Cobb-Douglas and CES specifications, with physical capital, a measure of labour, and residual ‘technical trend’ as inputs. <p> Our first finding is that in many ICT-producing and using countries such as Denmark, Finland, Ireland, Sweden and the United States technical progress has been accelerating during the past decade. Secondly, this speeding up of technical progress has been associated with R&D investment and perhaps with increasing elasticity of substitution between capital and labour. Hence, our results suggest that there is no growth paradox in Europe: the R&D factor and the elasticity of substitution between capital and labour which have been known to be important factors of economies’ growth potential, actually explain a significant part of the divergent growth performance of the European economies as well.
    Keywords: endogenous growth; panel data estimation; production function; R&D; technical progress; elasticity of substitution
    JEL: E22 E23 O51 O52
    Date: 2007–02–28
  66. By: Arturo Galindo (Universidad de los Andes); Alejandro Izquierdo (Inter-American Development Bank (IDB)); José M. Montero (Banco de España)
    Abstract: We use a panel dataset on industrial employment and trade for 9 Latin American countries for which liability dollarization data at the industrial level is available. We test whether real exchange rate fluctuations have a significant impact on employment, and analyze whether the impact varies with the degree of trade openness and liability dollarization. Econometric evidence supports the view that real exchange rate depreciations can impact employment growth positively, but this effect is reversed as liability dollarization increases. In industries with high liability dollarization, the overall impact of a real exchange rate depreciation can be negative.
    Keywords: manufacturing employment, real exchange rates, debt composition, balance sheet effects
    JEL: E24 F31 F34 G32
    Date: 2006–01
  67. By: Toma, Ramona
    Abstract: The process of choosing the exchange rate regime for the new EU member states has been influenced by other criteria than the traditional ones, which belong to macroeconomic criteria. This paper make a comparative analyze of the exchange rate arrangements in Central and Eastern European after 1990. These arrangements are dynamic on the one hand due to their permanent diversification and on the other hand because the values established this way are rapidly changing. In essence, they differ according to the degree of flexibility adopted when the exchange rate is established: from more rigid forms – currency board or pegging the currency to a foreign currency – to free floating.
    Keywords: exchange rate; arrangements; Central and Eastern European countries
    JEL: F31 F33 E42
    Date: 2007–03–01
  68. By: Francisco Ruiz-Aliseda; Jianjun Wu
    Abstract: This paper presents a new framework for studying irreversible (dis)investment when a market follows a random number of random-length cycles (such as a high-tech product market). It is assumed that a firm facing such market evolution is always unsure about whether the current cycle is the last one, although it can update its beliefs about the probability of facing a permanent decline by observing that no further growth phase arrives. We show that the existence of regime shifts in fluctuating markets suffices for an option value of waiting to (dis)invest to arise, and we provide a marginal interpretation of the optimal (dis)investment policies, absent in the real options literature. The paper also shows that, despite the stochastic process of the underlying variable has a continuous sample path, the discreteness in the regime changes implies that the sample path of the firm’s value experiences jumps whenever the regime switches all of a sudden, irrespective of whether the firm is active or not.
    Keywords: Real Options, Regime-Switching, Bad News Principle, Signal Extraction Problem, Entry and Exit, Industry Life Cycles
    JEL: D92 G31 L12
    Date: 2007–03

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