nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒03‒17
forty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Abbritti, Mirko; Boitani, Andrea; Damiani, Mirella
  2. Two-Pillar Monetary Policy and Bootstrap Expectations By Heinz-Peter Spahn
  3. Global Monetary Policy Shocks in the G5: A SVAR Approach By Joao Miguel Sousa; Andrea Zaghini
  4. Endogenous Business Cycles and the Economic Response to Exogenous Shocks By Stéphane Hallegatte; Michael Ghil
  5. Procyclicality or Reverse Causality? By Dany Jaimovich; Ugo Panizza
  6. Disentangling business cycles and macroeconomic policy in Mercosur: a VAR and unobserved components model approaches By Jean-Pierre Allegret; Alain Sand-Zantman
  7. Media Coverage and Macroeconomic Information Processing By Alexandra Niessen
  8. The Taylor rule and interest rate uncertainty in the U.S. 1955-2006 By Mandler, Martin
  9. Understanding the New-Keynesian Model when Monetary Policy Switches Regimes By Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha
  10. The monetary transmission mechanism in Pakistan: a sectoral analysis By Alam, Tasneem; Waheed, Muhammad
  11. Predicting the Term Structure of Interest Rates: Incorporating parameter uncertainty, model uncertainty and macroeconomic information By Michiel D. de Pooter; Francesco Ravazzolo; Dick van Dijk
  12. Inflation Illusion, Credit, and Asset Pricing By Monika Piazzesi; Martin Schneider
  13. Efficiency of stability-oriented institutions: the European case By Fabrice Capoen; Jerome Creel
  14. Stress testing of the stability of the Italian banking system: a VAR approach By Renato Filosa
  15. Financial Expectations, Consumption and Saving: A Microeconomic Analysis. By Sarah Brown; Karl Taylor
  16. Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-run Divergence? : Results from a Comparison with the United States of America and Germany By Sebastian Dullien; Ulrich Fritsche
  17. World Real Interest Rates: A Global Savings and Investment Perspective By Brigitte Desroches; Michael Francis
  18. Firms Dynamics, Bankruptcy Laws and Total Factor Productivity By Hajime Tomura
  19. Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy By Jean-Michel Grandmont
  20. Significant Shift in Causal Relations of Money, Income, and Prices in Pakistan: The price Hikes in the Early 1970s By Husain, Fazal; Rashid, Abdul
  21. A Structural Model of Australia as a Small Open Economy By Kristoffer Nimark
  22. Consumption Smoothing and Liquidity Income Redistribution By Giuseppe Bertola; Winfried Koeniger
  23. On the Consequences of Demographic Change for Rates of Returns to Capital, and the Distribution of Wealth and Welfare By Dirk Krueger; Alexander Ludwig
  24. Taxing Capital? Not a Bad Idea After All! By Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
  25. Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy By Kemal, M. Ali
  26. Quantitative approaches to fiscal sustainability analysis : a new World Bank tool applied to Turkey By Budina, Nina; van Wijnbergen, Sweder
  27. Dollarization and exchange rate fluctuations By Honohan, Patrick
  28. Family labor supply, precautionary behavior, aggregate saving and employment By Santos Monteiro, Paulo
  29. The Effects of External Debt Management on Sustainable Economic Growth and Development: Lessons from Nigeria By Adepoju, Adenike Adebusola; Salau, Adekunle Sheu; Obayelu, Abiodun Elijah
  30. Disentangling the Importance of the Precautionary Saving Motive By Arthur Kennickell; Annamaria Lusardi
  31. "Quantity or Quality: The Impact of Labor-Saving Innovation on US and Japanese Growth Rates, 1960-2004" By Ryuzo Sato; Tamaki Morita
  32. An Introduction to World Economic Long Wave-Crises and Depressions: From Study to Anticipation By dong, congcong
  33. Credit Cards: Facts and Theories By Carol C. Bertaut; Michael Haliassos
  34. Simultaneous Search with Heterogeneous Firms and Ex Post Competition By Gautier, Pieter A; Wolthoff, Ronald
  35. Current Account Deficits: The Australian Debate By Rochelle Belkar; Lynne Cockerell; Christopher Kent
  36. Le capital-risque aux Etats-Unis By Bernard Paulré
  37. A Theory of Liquidity and Regulation of Financial Intermediation By Emmanuel Farhi; Mikhail Golosov; Aleh Tsyvinski
  38. Projecting Behavioral Responses to the Next Generation of Retirement Policies By Alan L. Gustman; Thomas Steinmeier
  39. Entrepreneurship, Liquidity Constraints and Start-up Costs By Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth
  40. Bonds futures: Delta? No gamma! By Henrard, Marc
  41. Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy,and Housing Wealth By Annamaria Lusardi; Olivia S. Mitchell

  1. By: Abbritti, Mirko; Boitani, Andrea; Damiani, Mirella
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemploy- ment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persis- tence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of di¤erent market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their degrees of imperfection, react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.
    Keywords: Hiring Costs; Wage bargaining; Output Gap; New Keynesian Phillips Curve; Monetary Policy
    JEL: E24 J64 E32 E31 E52
    Date: 2006–09
  2. By: Heinz-Peter Spahn
    Abstract: The paper integrates the two-pillar Phillips curve, which explains expected inflation by the money growth trend, within a simple macro model. A Taylor-like interest rule contains also a money growth target. The model takes into account serially correlated supply and money demand shocks; the latter induce goods demand shocks, thereby establishing a feedback mechanism from money to markets which is missing in the modern New Keynesian approach. Two groups of market agents are distinguished from which one derives inflation expectations from money growth trend figures whereas the other builds rational expectations by way of learning. The inspection of output and inflation variances show that a policy of reacting to excess money growth requires precise information on shock characteristics whereas inflationgap and output-gap oriented interest policies provide more robust stabilization services.
    Date: 2007
  3. By: Joao Miguel Sousa (Banco de Portugal); Andrea Zaghini (Banca d'Italia and CFS)
    Abstract: The paper constructs a global monetary aggregate, namely the sum of the key monetary aggregates of the G5 economies (US, Euro area, Japan, UK, and Canada), and analyses its indicator properties for global output and inflation. Using a structural VAR approach we find that after a monetary policy shock output declines temporarily, with the downward effect reaching a peak within the second year, and the global monetary aggregate drops significantly. In addition, the price level rises permanently in response to a positive shock to the global liquidity aggregate. The similarity of our results with those found in country studies might supports the use of a global monetary aggregate as a summary measure of worldwide monetary trends.
    Keywords: Monetary Policy, Structural VAR, Global Eco
    JEL: E52 F01
    Date: 2006–12–20
  4. By: Stéphane Hallegatte (Centre International de Recherche sur l'Environnement et le Développement and Ecole Nationale de la Météorologie); Michael Ghil (University of California)
    Abstract: In this paper, we investigate the macroeconomic response to exogenous shocks, namely natural disasters and stochastic productivity shocks. To do so, we make use of an endogenous business cycle model in which cyclical behavior arises from the investment–profit instability; the amplitude of this instability is constrained by the increase in labor costs and the inertia of production capacity and thus results in a finite-amplitude business cycle. This model is found to exhibit a larger response to natural disasters during expansions than during recessions, because the exogenous shock amplifies pre-existing disequilibria when occurring during expansions, while the existence of unused resources during recessions allows for damping the shock. Our model also shows a higher output variability in response to stochastic productivity shocks during expansions than during recessions. This finding is at odds with the classical real-cycle theory, but it is supported by the analysis of quarterly U.S. Gross Domestic Product series; the latter series exhibits, on average, a variability that is 2.6 times larger during expansions than during recessions.
    Keywords: Business cycles, Natural disasters, Productivity shocks, Output variability
    JEL: E01 E20 E32 E40 Q54
    Date: 2007–02
  5. By: Dany Jaimovich (Inter-American Development Bank); Ugo Panizza (United Nations Conference on Trade and Development)
    Abstract: There is a large literature showing that fiscal policy is either acyclical or countercyclical in industrial countries and procyclical in developing countries. Most of this literature is based on OLS regressions that focus on the correlation between a fiscal variable (usually the budget balance or expenditure growth) and either GDP growth or some measure of the output gap. This paper argues that such a methodology does not permit the identification of the effect of the business cycle on fiscal policy and hence cannot be used to estimate policy reaction functions. The paper proposes a new instrument for GDP growth and shows that, once GDP growth is properly instrumented, procyclicality tends to disappear.
    Keywords: Fiscal Policy, Business Cycle, Emerging Markets
    JEL: E62 E32 H62
    Date: 2007–03
  6. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines]); Alain Sand-Zantman (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: Monetary integration in Mercosur processed in a context of strong macroeconomic volatility. This paper analyzes the feasibility of a monetary union within this zone. Instead of taking in account all the criteria of the optimal currencies areas, this study focuses on the macroeconomic cycles in Argentina, Brazil, and Uruguay. First, we analyse cross-correlation to identify the degree of cycle synchronization. Second, a structural VAR model is built for each country. It allows us to determine the sources of shocks which hit these countries. Third, we decompose structural innovations -especially economic policies shocks- of domestic SVAR into unobservable common and idiosyncratic components using a state-space model. We assess in what extent economic policies are coordinated between the Mercosur countries.
    Keywords: Business Cycles ; OCA, Comovement ; VAR ; Unobserved components model ; Mercosur
    Date: 2007–03–01
  7. By: Alexandra Niessen
    Abstract: This paper investigates how media coverage influences macroeconomic information processing at the bond market. I provide evidence that a high media coverage of an economic topic increases investor attention prior to the release of the corresponding economic indicator: High media coverage of the business cycle leads to a stronger market reaction to the release of gross domestic product, industrial production and IFO business index than low media coverage. High media coverage of the price level increases the market reaction to the release of producer and consumer price index than low media coverage. High media coverage of unemployment leads to a stronger market reaction to the release of the unemployment rate than low media coverage.
    Keywords: Media Coverage, Information Processing, Economic Indicators.
    JEL: G23 E44 G14
    Date: 2007–03
  8. By: Mandler, Martin
    Abstract: We use a Taylor rule with time-varying policy coefficients in combination with an unobserved components model for the output gap to estimate the uncertainty about future values of the Federal Funds Rate. The model makes it possible to separate ex-ante interest rate uncertainty into three components: 1) uncertainty about the Fed's future policy coefficients, 2) uncertainty about future economic fundamentals, and 3) residual uncertainty. The results show important changes in uncertainty about future short-term interest rates over time with peaks in the late 1960s/early 1970s, mid 1970s and late 1970s/early 1980s. While for one-quarter forecasts uncertainty about the Fed's policy reaction is more important than uncertainty about economic fundamentals this result is reversed for the two-quarter forecast horizon. Results from a modified model with regime shifts in the variance of the policy shocks confirm the previous findings but show changes in residual uncertainty to be important as well.
    Keywords: monetary policy rules; interest rate uncertainty; Kalman filter
    JEL: C53 C32 E52
    Date: 2007–03
  9. By: Roger E.A. Farmer; Daniel F. Waggoner; Tao Zha
    Abstract: This paper studies a New-Keynesian model in which monetary policy may switch between regimes. We derive sufficient conditions for indeterminacy that are easy to implement and we show that the necessary and sufficient condition for determinacy, provided by Davig and Leeper, is necessary but not sufficient. More importantly, we use a two-regime model to show that indeterminacy in a passive regime may spill over to an active regime, no matter how active the latter regime is. As a result, a passive monetary policy is more damaging than has been previously thought. Our results imply that the propagation of shocks in an active regime, such as that of the Federal Reserve in the post-1982 period, may be substantially affected by the possibility of a return to a passive regime of the kind that was followed in the 1960s and 1970s.
    JEL: E3 E5 E52
    Date: 2007–03
  10. By: Alam, Tasneem; Waheed, Muhammad
    Abstract: The present paper takes a first step in investigating the monetary transmission mechanism in Pakistan at a sectoral level. Using quarterly data spanning from 1973:1 to 2003:4, we examine whether monetary policy shocks have different sectoral effects. Taking note of structural transformation of the economy and the monetary and financial reforms during 1990s, we also assess whether the reform process has notable impact on the monetary transmission mechanism. We find evidence supporting sector-specific variation in the real effects of monetary policy. Our results also suggest significant changes in the transmission of monetary shock to real sector of the economy during post-reform period.
    Keywords: Monetary transmission mechanism; VAR; Pakistan; Sectoral analysis
    JEL: C22 E52
    Date: 2006–09
  11. By: Michiel D. de Pooter (Erasmus Universiteit Rotterdam); Francesco Ravazzolo (Erasmus Universiteit Rotterdam); Dick van Dijk (Erasmus Universiteit Rotterdam)
    Abstract: We forecast the term structure of U.S. Treasury zero-coupon bond yields by analyzing a range of models that have been used in the literature. We assess the relevance of parameter uncertainty by examining the added value of using Bayesian inference compared to frequentist estimation techniques, and model uncertainty by combining forecasts from individual models. Following current literature we also investigate the benefits of incorporating macroeconomic information in yield curve models. Our results show that adding macroeconomic factors is very beneficial for improving the out-of-sample forecasting performance of individual models. Despite this, the predictive accuracy of models varies over time considerably, irrespective of using the Bayesian or frequentist approach. We show that mitigating model uncertainty by combining forecasts leads to substantial gains in forecasting performance, especially when applying Bayesian model averaging.
    Keywords: Term structure of interest rates; Nelson-Siegel model; Affine term structure model; forecast combination; Bayesian analysis
    JEL: C5 C11 C32 E43 E47 F47
    Date: 2007–03–09
  12. By: Monika Piazzesi; Martin Schneider
    Abstract: This paper considers asset pricing in a general equilibrium model in which some, but not all, agents suffer from inflation illusion. Illusionary investors mistake changes in nominal interest rates for changes in real rates, while smart investors understand the Fisher equation. The presence of smart investors ensures that the equilibrium nominal interest rate moves with expected inflation. The model also predicts a nonmonotonic relationship between the price-to-rent ratio on housing and nominal interest rates -- housing booms occur both when the nominal rate is especially low and when it is especially high. In either situation, disagreement about real interest rates between smart and illusionary investors stimulates borrowing and lending and drives up the price of collateral. The resulting housing boom is stronger if credit markets are more developed. We document that many countries experienced a housing boom in the high-inflation 1970s and a second, stronger, boom in the low-inflation 2000s.
    JEL: E2 E4 G1
    Date: 2007–03
  13. By: Fabrice Capoen (Université de Caen); Jerome Creel (Observatoire Français des Conjonctures Économiques)
    Abstract: Stability-oriented European institutions correspond to the general prescriptions of the ‘new macroeconomics consensus’. This contribution provides an assessment of the pros and cons of these institutions in terms of macro stabilisation and exchange-rate swings drawing on different scenarios. We argue that the institutions which have been associated with the Euro – limits on public deficits and a conservative central bank – have somewhat jeopardized the efficiency of this new exchange-rate regime. Adaptation of institutions is thus needed: either cooperation or coordination may enhance European welfare.
    Keywords: monetary policy, fiscal policy, central bank; stability pact; time-consistency; exchange rate, cooperation, coordination
    JEL: E63 F41 H60
    Date: 2007
  14. By: Renato Filosa
    Abstract: With the aim of contributing to the use of stress testing techniques, by now a commonly-used practice adopted by the financial community to understand the determinants of financial instability, and to measure the size of financial risk, this work represents an application of macro stress testing to the Italian banking system. The paper tries to provide an answer to two interrelated questions. Whether, and the extent to which, procyclicality is a prominent feature of banks’ soundness and whether exogenous, or policy induced, tightening of monetary conditions (sharp and sustained increases in the interest rate and/or appreciation of the exchange rate) significantly increases banks’ fragility. The task is accomplished by the estimation of three alternative VAR models each using different indicators of banks’ soundness: the ratio of non performing loans (flow and stock data) and interest margins to outstanding loans. Two main conclusions emerge. First: the behaviour of either non performing loans or interest margins is only weakly procyclical: i.e. that the solidity of Italian banks could be seriously undermined only in case of falls in output far more severe than in any previous recession since the end of the World War II. The preoccupation expressed by the literature about the dangers of financial procyclicality seems, therefore, grossly exaggerated in the case of Italy. Second: in a hypothetical scenario where monetary conditions are drastically tightened our banks’ soundness indicators exhibit little variations. In this case too the importance attached by the literature to exchange rate swings, or monetary tightening more generally, for the setting off of financial crises is vastly overstated.
    Keywords: banking crises; financial crises; procyclicality; profitability; stress testing; VAR
    JEL: E32 E44 G21
    Date: 2007–03
  15. By: Sarah Brown; Karl Taylor (Department of Economics, The University of Sheffield)
    Abstract: We explore the determinants of individuals´ financial expectations using data from the British Household Panel Survey (BHPS) 1991-2001. Our findings suggest that individuals´ financial predictions are influenced by both the life cycle and the business cycle. We also investigate the extent to which the accuracy of past financial expectations affects current financial expectations. Interestingly, only past financial optimism matters, regardless of the accuracy of the prediction. We also explore the relationship between financial realisations and expectations and we find that expectations tend to fall short of financial realisations. Finally, we investigate the relationship between financial expectations, savings and consumption. Our findings suggest that financial optimism is inversely associated with savings and that current financial expectations serve to predict future consumption.
    Keywords: Consumption, Financial Expectations, Financial Realisations, Forecasting Accuracy, Savings.
    JEL: D10 D84 E32
    Date: 2006–05
  16. By: Sebastian Dullien; Ulrich Fritsche
    Abstract: Using unit labor cost (ULC) data from Euro area countries as well as US States and German Länder we investigate inflation convergence using different approaches, namely panel unit root tests, co-integration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.
    Keywords: Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs
    JEL: E31 O47 C32
    Date: 2007
  17. By: Brigitte Desroches; Michael Francis
    Abstract: Over the past 15 years, long-term interest rates have declined to levels not seen since the 1970s. This paper explores possible shifts in global savings and investment that have led to this fall in the world real interest rate. There are several key findings. First, the authors identify the relative weakness in investment demand as more important than the relative increase in desired global savings to explain the decline in global interest rates. Second, the results indicate that the key factors explaining movements in savings and investment are variables that evolve relatively slowly over time, such as labour force growth and age structure. The conclusions suggest that over the coming years, world real interest rates are likely to continue to adjust slowly, reflecting longterm trends.
    Keywords: Interest rates; International topics
    JEL: E2 E4 F3
    Date: 2007
  18. By: Hajime Tomura
    Abstract: This paper analyzes endogenous fluctuations in total factor productivity (TFP) in a dynamic general equilibrium model with heterogeneous agents, and illustrates the interaction of credit market frictions, asset prices, the entry and exit of firms, and fluctuations in TFP in response to firm-level productivity and aggregate credit-market shocks. I also analyze the effect of bankruptcy and foreclosure laws on fluctuations in TFP through their effect on credit market frictions. Implications of the model are consistent with the features of the stagnation in Japan in the 1990s.
    Keywords: Financial stability; Productivity
    JEL: D24 E44 G33
    Date: 2007
  19. By: Jean-Michel Grandmont (CREST, Malakoff Cédex, France)
    Abstract: This paper introduces efficiency wages designed to provide workers with incentives to make appropriate effort levels, and involuntary unemployment, along the pioneering lines of Negishi (1979), Solow (1979), Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont, Pintus and de Vilder (GPV, 1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labour incomes. Increasing unemployment insurance is beneficial to employment along the deterministic stationary state, and can even in some cases lead to a Pareto welfare improvement for all agents, through general equilibrium effects, by generating higher individual real labour incomes, hence larger consumptions of employed and unemployed workers, and thus a higher production. On the other hand, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model (GPV, 1998) : local determinacy (indeterminacy) occurs for elasticities of capitalefficient labour substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and thus to generate dynamic inefficiencies due to the corresponding expectations coordination failures.
    Keywords: Efficiency wages, involuntary unemployment, unemployment insurance, effort incentives, local indeterminacy, capital-labour substitution, local bifurcations.
    JEL: E24 E32 C62
    Date: 2006
  20. By: Husain, Fazal; Rashid, Abdul
    Abstract: This study extends the analysis of casuality by Husain and Rashid by taking care of the shift in the variables due to the price hikes in the early 1970s. We investigate the casual relations between real money and real income, between nominal money and nominal income, and between nominal money and prices using using the annual data set from 1959-60 to 2003-04, examining the stochastic properties of the variables used in the analysis and taking care of the expected shifts in the series through dummies. The analysis indicates significant shifts in the variables during the sample period. In this context, the shift of the early 1970s seems to be more important to be incorporated in the analysis. The study finds an active role of money in the Pakistani economy, as it is found to be the leading variable in changing prices without any feed back. In the case of income, the study finds the feed back mechanism of money, which is generally missing in the earlier studies probably because of not taking care of the shift in the macroeconomic variables in Pakistan in the early 1970s.
    Keywords: Money; Income; Prices; Price hikes; Casual relations; Pakistan
    JEL: E3 N4 E4
    Date: 2006
  21. By: Kristoffer Nimark (Reserve Bank of Australia)
    Abstract: This paper sets up and estimates a structural model of Australia as a small open economy using Bayesian techniques. Unlike other recent studies, the paper shows that a small micro-founded model can capture the open economy dimensions quite well. Specifically, the model attributes a substantial fraction of the volatility of domestic output and inflation to foreign disturbances and matches the evidence from reduced-form studies. In addition, the model relies much less than other estimated models on a persistent shock to the risk premium to explain changes in the nominal exchange rate. The paper also investigates the effects of various exogenous shocks on the Australian economy.
    Keywords: small open economy; Australia; Bayesian methods
    JEL: E30 F41
    Date: 2007–02
  22. By: Giuseppe Bertola (University of Turin and CFS); Winfried Koeniger (Institute for the Study of Labor (IZA))
    Abstract: We show theoretically that income redistribution benefits borrowingconstrained individuals more than is implied by standard relative-income and uninsurable-risk considerations. Empirically, we find in international opinion-survey data that younger and lower-income individuals express stronger support for government redistribution in countries where consumer credit is less easily available. This evidence supports our theoretical perspective if such individuals are more strongly affected by tighter credit supply, in that expectations of higher incomes in the future increase their propensity to borrow.
    Keywords: Consumption, Smoothing
    JEL: E21
    Date: 2007–01–02
  23. By: Dirk Krueger (University of Frankfurt, CEPR, CFS, MEA, and NBER); Alexander Ludwig (University of Mannheim and MEA,)
    Abstract: This paper employs a multi-country large scale Overlapping Generations model with uninsurable labor productivity and mortality risk to quantify the impact of the demographic transition towards an older population in industrialized countries on world-wide rates of return, international capital flows and the distribution of wealth and welfare in the OECD. We find that for the U.S. as an open economy, rates of return are predicted to decline by 86 basis points between 2005 and 2080 and wages increase by about 4.1%. If the U.S. were a closed economy, rates of return would decline and wages increase by less. This is due to the fact that other regions in the OECD will age even more rapidly; therefore the U.S. is “importing” the more severe demographic transition from the rest of the OECD in the form of larger factor price changes. In terms of welfare, our model suggests that young agents with little assets and currently low labor productivity gain, up to 1% in consumption, from higher wages associated with population aging. Older, asset-rich households tend to lose, because of the predicted decline in real returns to capital.
    Keywords: Population Aging, International Capital Flows, Distribution of Welfare
    JEL: E17 E25 D33 C68
    Date: 2006–08–07
  24. By: Juan Carlos Conesa (Universitat Autonoma de Barcelona); Sagiri Kitao (New York University); Dirk Krueger (University of Frankfurt, CEPR, CFS and NBER)
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    Keywords: Progressive Taxation, Capital Taxation, Optimal Taxation
    JEL: E62 H21 H24
    Date: 2006–10–06
  25. By: Kemal, M. Ali
    Abstract: Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005.
    Keywords: Underground Economy; Tax Evasion
    JEL: H26 E26
    Date: 2007
  26. By: Budina, Nina; van Wijnbergen, Sweder
    Abstract: Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis. The authors review various quantitative approaches to FSA with a major objective to bring these approaches together and to present a user-friendly tool for FSA that reflects modern developments. They combine a dynamic simulations approach with a simplified version of the steady-state consistency approach. They also incorporate two different methods to deal with uncertainty: user-defined stress tests and stochastic simulations. The tool goes further by evaluating the required fiscal adjustment as a consequence of the stochastic realizations of the exogenous variables. Furthermore, the fiscal sustainability tool incorporates an endogenous debt feedback rule for the primary surplus, a fiscal policy reaction function. Besides outlining the theoretical framework, the authors also present a case study for Turkey.
    Keywords: Economic Theory & Research,External Debt,Economic Stabilization,Banks & Banking Reform,Public Sector Economics & Finance
    Date: 2007–03–01
  27. By: Honohan, Patrick
    Abstract: Although the worldwide growth in dollarization of bank deposits has recently slowed, it has already reached very high levels in dozens of countries. Building on earlier findings that allowed the main cross-country variations in the share of dollars to be explained in terms of national policies and institutions, this paper turns to analysis of short-run variations, particularly the response of dollarization to exchange rate changes, which is shown to be too small to warrant " fear of floating " by dollari zed economies. But high dollarization is shown to increase the risk of depreciation and even suspension, as indicated by interest rate spreads. While specific policy is needed to deal with the risks associated with dollarization, the underlying causes of unwanted dollarization should also be tackled.
    Keywords: Economic Theory & Research,Banks & Banking Reform,Macroeconomic Management,Fiscal & Monetary Policy,Financial Economics
    Date: 2007–03–01
  28. By: Santos Monteiro, Paulo
    Abstract: I study the impact of idiosyncratic earnings uncertainty on aggregate saving and employment in an economy populated by families consisting of two members. Families incur a fixed cost of participation when both members are employed. I argue that, because of market incompleteness and private information, the presence of this fixed cost can generate multiplicity of equilibrium. In particular there might be one equilibrium with high (female) employment and low savings and another one with low employment and high savings. The model suggests that aggregate saving and employment rates should be negatively correlated across countries. Finally, I present empirical evidence that supports both the partial and the general equilibrium predictions of the model.
    Keywords: Aggregate saving; Employment; Family labor supply; Multiplicity
    JEL: J22 D52 E21
    Date: 2005
  29. By: Adepoju, Adenike Adebusola; Salau, Adekunle Sheu; Obayelu, Abiodun Elijah
    Abstract: This paper reviewed the roles of debt management practices on sustainable economic growth and development with particular emphasis on Nigeria. Information was generated extensively from literature, the Nigeria Central Bank and National Bureau of Statistic reports. The analyses of the data collected with descriptive statistics shows that, availability of access to external finance strongly influences the economic development process of any nation. Debt is an important resources needed to support sustainable economic growth. But a huge external debt without servicing as it is the case for Nigeria before year 2000 constituted a major impediment to the revitalization of her shattered economy as well as the alleviation of debilitating poverty. The much needed inflow of foreign resources for investment stimulation, growth and employment were hampered. Without credit cover, Nigerian importers were required to provide 100 percent cash covers for all orders and this therefore placed them to a competitive disadvantage compared to their counterparts elsewhere. Failure of any owing country to service her debt obligation results in repudiation risk preventing such to obtain new loans since little or no confidence will be placed on the ability to repay. It will also undermine the effort to obtain substantive debt relief over the medium term with a tremendous increase in interest, arrears and other penalties. This will subsequently depress the economy both in the long and short runs. Best arrangement in debt payment must be put in place from time to time in response to changes in the economy and the polity. Debt can only be productive if well managed so as to make the rate of return higher than the cost of debt servicing.
    Keywords: Debt Management; Sustainability; Economic Growth; Economic Development; and Nigeria
    JEL: E6 E62
    Date: 2007–03–01
  30. By: Arthur Kennickell (Board of Governors of the Ferderal Reserve System); Annamaria Lusardi (Dartmouth College, Department of Economics)
    Abstract: We evaluate the importance of the precautionary saving motive by relying on a direct question about precautionary wealth from the 1995 and 1998 waves of the Survey of Consumer Finances. In this survey, a new question has been designed to elicit the amount of desired precautionary wealth. This allows us to assess the amount of precautionary accumulation and to overcome many of the problems of previous works on this topic. We find that a precautionary saving motive exists and affects virtually every type of household. However, precautionary savings account for only 8 percent of total wealth holdings. Even though this motive does not give rise to large amounts of wealth, particularly for young and middle-age households, it is particularly important for two groups: older households and business owners. Overall, we provide strong evidence that we need to take the precautionary saving motive into account when modeling saving behavior.
    Keywords: Risk, Buffer-stock Models of Saving, Old Cohorts Wealth, Business Owners Wealth
    JEL: D91 E21 C21
    Date: 2006–06–20
  31. By: Ryuzo Sato (The Center for Japan-US Business and Economic Studies, New York University and Faculty of Economis, University of Tokyo); Tamaki Morita (National Graduate Institute for Policy Studies)
    Abstract: This article deals with both theoretical and empirical analyses of the post-war period (1960-2004) for the United States and Japan. We investigated three factors contributing to growth: the growth rates of capital, labor, and labor-saving innovation. It is shown that in Japan, the growth rate of the labor force has been much less important than its quality improvement-i.e., labor-saving technical change-while in the US, the growth rate of labor and population has contributed more than their quality improvement. The policy implication here is Japan's declining population can be compensated for by additional quality improvement of the existing labor force.
    Date: 2007–03
  32. By: dong, congcong
    Abstract: As is considered in this paper,none of the ever existing long wave theories can totally describe or correctly explain the chronic fluctuating characters of the capitalist world economy system since the year 1857. Based on Karl Marx’s greatest work “Capital” and combined with considerable quantities of historical materials such as all kinds of writings about economic long wave both at home and abroad,the paper analyzes four inherently identical waves,tries to draw a fluctuating graph of the world economy with the wavelength supposed to be 50 years,and then forecasts the future of the world.
    Keywords: economic crisis; long wave; forecasting
    JEL: E37 E32 E17 E11
    Date: 2006–02–27
  33. By: Carol C. Bertaut (Board of Governors of the Federal Reserve System); Michael Haliassos (University of Frankfurt and CFS)
    Abstract: We use data from several waves of the Survey of Consumer Finances to document credit and debit card ownership and use across US demographic groups. We then present recent theoretical and empirical contributions to the study of credit and debit card behavior. Utilization rates of credit lines and portfolios of card holders present several puzzles. Credit line increases initiated by banks lead households to restore previous utilization rates. High-interest credit card debt co-exists with substantial holdings of low-interest liquid assets and with accumulation of retirement assets. Although available evidence disputes ignorance of credit card terms by card holders, credit card rates do not respond to competition. There is a rising trend in bankruptcy and delinquency, partly attributable to an increased tendency of households to declare bankruptcy associated with reduced social stigma, ease of procedures, and financial incentives. Co-existence of credit card debt with retirement assets can be explained through self-control hyperbolic discounting. Strategic default motives contribute partly to observed co-existence of credit card debt with low-interest liquid assets. A framework of “accountant-shopper” households, in which a rational accountant tries to control an impulsive shopper, seems consistent with both types of co-existence and with observed utilization of credit lines.
    Keywords: Credit Cards, Debit Cards, Revolving Debt, Consumer Credit, Portfolios
    JEL: G11 E21
    Date: 2006–09–19
  34. By: Gautier, Pieter A; Wolthoff, Ronald
    Abstract: We study a search model where workers can apply to high and or low productivity firms. Firms that compete for the same candidate can increase their wage offers as often as they like. We show that if workers apply to two jobs, there is a unique symmetric equilibrium where workers mix between sending both applications to the high and sending both to the low productivity sector. But, efficiency requires that they apply to both sectors because a higher matching rate in the high-productivity sector can then be realized with fewer applications (and consequently fewer coordination frictions) if workers always accept the offer of the most productive sector. However, in the market the worker's payoff is determined by how much the firm with the second highest productivity is willing to bid. This is what prevents them from applying to both sectors. For many configurations, the equilibrium outcomes are the same under directed and random search. Allowing for free entry creates a second source of inefficiency. We discuss the effects of increasing the number of applications and show that our results can easily be generalized to N-firms.
    Keywords: simultaneous search; directed search; efficiency; heterogeneous firms
    JEL: D83 E24 J23 J24 J64
    Date: 2007–03
  35. By: Rochelle Belkar (Reserve Bank of Australia); Lynne Cockerell (Reserve Bank of Australia); Christopher Kent (Reserve Bank of Australia)
    Abstract: This paper documents the clear change of view, which has taken place in Australia over the past three decades or so, concerning the relevance of the current account deficit for policy. Historical experience under a fixed exchange rate regime suggested that large persistent deficits were unsustainable and could leave the economy vulnerable to sudden reversals in sentiment. These concerns persisted after the floating of the Australian dollar and financial deregulation, and it was thought that all arms of policy should help to rein in the then much larger current account deficits. However, these policies were shown to be ineffective and, by the early 1990s, the argument that current account deficits represent the optimal outcomes of decisions made by ‘consenting adults’ gained wide support. This paper presents some empirical evidence consistent with optimal smoothing in the face of temporary shocks; the persistence of the deficit is attributed to a modest degree of impatience relative to the rest of the world. Although it is now widely accepted that policy should not seek to influence the current account balance, the issue of external vulnerability remains of interest. Here, country-specific considerations are important, and it is argued that the factors that have made Australia relatively resilient to external shocks are also those that helped to attract foreign capital in the first place.
    Keywords: current account; external vulnerability; exchange rate regimes
    JEL: E60 F32 N10
    Date: 2007–03
  36. By: Bernard Paulré (MATISSE - Modélisation Appliquée, Trajectoires Institutionnelles et Stratégies Socio-Économiques - [CNRS : UMR8595] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Sur une période longue de trente années, l'évolution du capital-risque aux Etats-Unis est caractérisée par une montée en puissance progressive marquée par quelques cycles mineurs et débouchant sur un cycle d'une amplitude relative considérable entre 1995 et 2001. A partir des données primaires tirées de la base de données Venture Expert et de traitements originaux, nous apportons des éléments d'information quantifiés sur l'évolution du système de capital-risque aux Etats-Unis et, notamment, sur certains aspects de sa structure : place de l'intervention des groupes, types de fonds, places relatives du capital-risque et du capital-transmission, structure sectorielle des investissements, délais séparant les différents tours de table, nature et caractéristiques des sorties etc.<br /><br />Un certain nombre de règles et de normes ont joué un rôle important dans le franchissement d'étapes significatives du développement du système de capital-risque. Des événements exogènes également (taxation des gains en capitaux, règles prudentielles des Fonds de pension notamment). Ces éléments ont eu vraisemblablement un rôle plus important que l'évolution conjoncturelle. C'est parce que le système était en place et “ bien structuré ” dès le début des années quatre-vingt qu'il a pu occuper la place qui a été la sienne durant les années quatre-vingt dix. Dans une perspective dynamique et historique nous fournissons les éléments permettant de justifier la thèse selon laquelle le système capital-risque est un système dont l'émergence traduit un phénomène d'auto-organisation.<br /><br />Dans cette étude nous mettons à mal l'image banale du capital-risque présenté comme réservé au financement de sociétés très jeunes ou en cours de création dans des secteurs de pointe. Nous approfondissons également sa dimension industrielle. Nous mettons en évidence les trajectoires de certains secteurs et soulignons les enchaînements de cycles technologiques qui caractérisent la dynamique de longue période du système. La répartition des investissements en capital-risque entre secteurs de haute technologie les autres secteurs est également approfondie.<br /><br />L'étude comprend trois chapitres. Dans le premier nous rendons compte de la structure du système à partir de certains ratios et de l'évolution de quelques grandeurs agrégées. Nous analysons plus particulièrement les caractéristiques de l'activité des acteurs du système : les investisseurs, les Fonds, les sociétés de capital-risque et les compagnies bénéficiaires. Nous insistons sur les difficultés méthodologiques d'appréciation de ces caractéristiques. Dans le second chapitre nous mettons en perspective le fonctionnement du système de capital-risque en soulignant son rôle comme système de gestion de l'incertitude. Nous approfondissons certains aspects de son fonctionnement qui illustrent cette dimension ainsi que les interfaces entre ce système et la sphère industrielle. Nous soulignons la montée en puissance des sorties par acquisition alors que l'on évoque le plus souvent les sorties par introduction en bourse. Nous fournissons quelques arguments statistiques tendant à montrer que le comportement des groupes industriels, lorsqu'ils investissent en capital-risque, est analogue à celui des Fonds privés indépendants. Dans le troisième et dernier chapitre, nous abordons le système de capital-risque sous l'angle de la dynamique longue et des fluctuations.
    Keywords: capital-risque ; Etats-Unis ; capital-investissement ; capital-transmission ; cycle du capital-investissement ; investissement ; innovation ; financement en capitaux propres ; gestion de l'incertitude
    Date: 2007–03–07
  37. By: Emmanuel Farhi; Mikhail Golosov; Aleh Tsyvinski
    Abstract: This paper studies a mechanism design model of financial intermediation. There are two informational frictions: agents receive unobservable shocks and can participate in markets by engaging in trades unobservable to intermediaries. Without regulations, intermediaries provide no risk sharing because of an externality arising from arbitrage opportunities. We identify a simple regulation -- a liquidity requirement -- that corrects such an externality by affecting the interest rate on the markets. We characterize the form of the optimal liquidity adequacy requirement for a general class of preferences. We show that whether markets underprovide or overprovide liquidity, and whether a liquidity cap or a liquidity floor should be used depends on the nature of the shocks that agents experience. Moreover, we prove that the optimal liquidity adequacy requirement implements a constrained efficient allocation subject to unobservable types and trades. We provide closed form solutions for the optimal liquidity requirement and welfare gains of imposing such requirements for two important special cases. In contrast with the existing literature, the necessity of regulation does not depend on exogenous incompleteness of markets for aggregate shocks.
    JEL: E6 G18 G2 G28
    Date: 2007–03
  38. By: Alan L. Gustman; Thomas Steinmeier
    Abstract: This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.
    JEL: D31 D91 E21 H55 I3 J08 J14 J26 J32 J38
    Date: 2007–03
  39. By: Raquel Fonseca; Pierre-Carl Michaud; Thepthida Sopraseuth
    Abstract: We study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. We develop a dynamic occupational choice model that yields predictions that can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and start-up costs. We use three highly comparable micro datasets (SHARE, ELSA and HRS) focusing on the population age 50+ in 9 countries. These countries have very different levels of start-up costs and potential liquidity constraints. Reduced form results support our theoretical predictions. While higher liquidity constraints yield a steeper wealth profile for the fraction of workers in entrepreneurship, startup costs flatten this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.
    Keywords: entrepreneurship, liquidity constraints, start-up costs, occupational choice, cross-country comparisons
    JEL: E21 E23 J20
    Date: 2007–02
  40. By: Henrard, Marc
    Abstract: Bond futures are liquid but complex instruments. Here they are analysed in a one-factor Gaussian HJM model. The in-the-model delta and out-of-the-model delta and gamma are studied. An explicit formula is provided for in-the-model delta. The out-of-the-model delta and gamma are equivalent to partial derivatives with respect to discount factors. In particular cases the derivative can not be obtained by standard techniques. The same situations lead to cases where the gammas (second order partial derivatives) do not exists.
    Keywords: Bond future; delivery option; delta; gamma; HJM gaussian model; in-the-model; out-of-the-model.
    JEL: G13 E43
    Date: 2006–04–12
  41. By: Annamaria Lusardi (Dartmouth College and NBER); Olivia S. Mitchell (University of Pennsylvania and NBER)
    Abstract: We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.
    Keywords: Wealth Holdings, Housing Wealth, Lack of Planning, Literacy, Cohorts
    JEL: D91 E21
    Date: 2006–09–28

This nep-mac issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.