nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒03‒24
sixty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Money and Inflation By Ansgar Belke; Thorsten Polleit
  2. Identifying the Role of Labor Markets for Monetary Policy in an Estimated DSGE Model By Kai Christoffel; Keith Kuester; Tobias Linzert
  3. The Narrative Approach for the Identification of Monetary Policy Shocks in a Small Open Economy By Eleni Angelopoulou
  4. Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter? By Alessandro Calza; Tommaso Monacelli; Livio Stracca
  5. Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility By Nicholas Apergis; Stephen M. Miller
  6. A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment By Mirko Abbritti
  7. A New Keynesian Model with Unemployment By Olivier Blanchard; Jordi Galí
  8. Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S. Data By Jean Boivin; Marc P. Giannoni; Ilian Mihov
  9. A Dynamic New Keynesian Life-Cycle Model: Societal Ageing, Demographics and Monetary Policy By Ippei Fujiwara; Yuki Teranishi
  10. Inflation and Growth in the Euro Zone By Dino Martellato
  11. The Mistake of 1937: A General Equilibrium Analysis By Gauti B. Eggertsson; Benjamin Pugsley
  12. Robustly Optimal Monetary Policy with Near-Rational Expectations By Michael Woodford
  13. Is the Quantity of Government Debt a Constraint for Monetary Policy? By Srobona Mitra
  14. Are there gains from including monetary aggregates and stock market indices in the monetary policy reaction function? A simulation study of recent U.S. monetary policy By Mandler, Martin
  16. Sources of Inflation in Sub-Saharan Africa By Shanaka J. Peiris; Regis Barnichon
  17. The Quest for Price Stability in Central America and the Dominican Republic By Luis Ignacio Jácome; Eric Parrado
  18. Gradualism, Transparency and Improved Operational Framework: A Look at the Overnight Volatility Transmission By Silvio Colarossi; Andrea Zaghini
  19. Is core money growth a good and stable inflation predictor in the euro area? By Kai Carstensen
  20. Three Great American Disinflations By Michael Bordo; Christopher Erceg; Andrew Levin; Ryan Michaels
  21. Determinants of Cyclicality of Fiscal Surpluses in The OECD Countries By Michal Mackiewicz
  22. Precautionary Monetary and Fiscal Policies By Pelin Berkmen
  23. Does Capital Account Openness Lower Inflation? By Abhijit Sen Gupta
  24. Business Cycle Comovement in the G-7: Common Shocks or Common Transmission Mechanisms? By Fabio C. Bagliano; Claudio Morana
  25. Why does overnight liquidity cost more than intraday liquidity? By Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine
  26. Money Illusion and Housing Frenzies By Brunnermeier, Markus K; Julliard, Christian
  27. Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach By Guidolin, Massimo; Timmermann, Allan G
  28. Inflation in Poland: How Much Can Globalization Explain? By Celine Allard
  29. Outward FDI and Domestic Investment By Dierk Herzer; Mechthild Schrooten
  30. Resurrecting the Wealth Effect on Consumption: Further Analysis and Extension By Nicholas Apergis; Stephen M. Miller
  31. Unemployment Fluctuation with Staggered Nash Wage Bargaining By Mark Gertler; Antonella Trigari
  32. Modeling the impact of real and financial shocks on Mercosur: the role of the exchange rate regime By Jean-Pierre Allegret; Alain Sand
  33. Menu Costs, Multi-Product Firms, and Aggregate Fluctuations By Virgiliu Midrigan
  34. Strategies for Fiscal Consolidation in Japan By Hali J. Edison; Papa M'B. P. N'Diaye; Dennis P. J. Botman
  35. Fixed Exchange Rates and the Autonomy of Monetary Policy: The Franc Zone Case By Romain Veyrune
  36. Central bank intervention, sterilization and monetary independence: the case of Pakistan By Waheed, Muhammad
  37. Bayesian and Adaptive Optimal Policy under Model Uncertainty By Lars E.O. Svensson; Noah Williams
  38. The effect of monetary policy on exchange rates during currency crisis : the role of debt, institutions and financial openness By Eijffinger,Sylvester C.W.; Goderis,Benedikt
  39. On the Welfare Benefits of an International Currency By Prakash Kannan
  40. Changes in the Taxation of Superannuation:Macroeconomic and Welfare Effects By John Creedy; Ross Guest
  41. Public Budget Composition, Fiscal (De)Centralization and Welfare By Calin Arcalean; Gerhard Glomm; Ioana Schiopu; Jens Suedekum
  42. On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables By Adrian Pagan; M. Hashem Pesaran
  43. Tax Incentives and Business Investment: New Evidence from Mexico By Ramirez Verdugo, Arturo
  44. Foreign Exchange Intervention and Equilibrium Real Exchange Rates By Dimitrios A. Sideris
  45. Household Heterogeneity and Real Exchange Rates By Kocherlakota, Narayana; Pistaferri, Luigi
  46. The Great Moderation and the Relationship between Output Growth and Its Volatility By WenSho Fang; Stephen M. Miller
  47. Identification of a Loan Supply Function: A Cross-Country Test for the Existence of a Bank Lending Channel By Sophocles N. Brissimis; Matthaios D. Delis
  48. International Evidence on Fiscal Solvency: Is Fiscal Policy "Responsible"? By Jonathan David Ostry; Enrique G. Mendoza
  49. Dynamic Inefficiency in an Overlapping Generations Economy with Production By Guido Cazzavillan; Patrick Pintus
  50. House prices and real interest rates in Spain By Juan Ayuso; Roberto Blanco; Fernando Restoy
  51. Controls on capital inflows and external shocks By David, Antonio C.
  52. Role of the Egyptian securities market on saving development By Alasrag, Hussien
  53. Wage Risk and Employment Risk Over the Life Cycle By Low, Hamish; Meghir, Costas; Pistaferri, Luigi
  54. The " how to " of fiscal sustainability : a technical manual for using the fiscal sustainability tool By Bandiera, Luca; Budina, Nina; Klijn, Michel; van Wijnbergen, Sweder
  55. Sharing and Anti-Sharing in Teams By Roland Kirstein; Robert D. Cooter
  57. Employment Protection Legislation and Wages By Marco Leonardi; Giovanni Pica
  58. Los principales rasgos y experiencias de la integración de la economía española en la UEM By José Luis Malo de Molina
  59. Estimating the Equilibrium Effective Exchange Rate for Potential EMU members By Nikolaos Giannellis; Athanasios Papadopoulos
  60. The Bazaar Economy Hypothesis Revisited By Ansgar Belke; Anselm Mattes; Lars Wang
  61. The optimal rating philosophy for the rating of SMEs By Rikkers, F.; Thibeault, A.
  62. Inequality in individual mortality and economic conditions earlier in life By van den Berg, Gerard; Lindeboom, Maarten; López, Marta

  1. By: Ansgar Belke; Thorsten Polleit
    Abstract: We turn our attention to the role of money for determining nominal magnitudes. Using US data, we find that the aggregate “nominal output plus and stock market capitalisation” is closely related to the money stock, lending support to one of Milton Friedman’s key monetarist propositions. This finding should be particularly important for ECB monetary policy: an inflation-free euro plays a crucial role for European economic and political integration. We conclude that monetary policy must keep a very close eye on money supply if it wants to prevent consumer and asset price inflation.
    JEL: C22 E52 G12
    Date: 2007
  2. By: Kai Christoffel (European Central Bank); Keith Kuester (European Central Bank); Tobias Linzert (European Central Bank)
    Abstract: We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy.
    Keywords: Labor Market, Wage Rigidity, Bargaining, Bayesian Estimation
    JEL: E32 E52 J64 C11
    Date: 2007–02–14
  3. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business)
    Abstract: This paper reviews 22 years of UK monetary policy in the pre-inflation targeting period (1971-1992) using official record from the Bank of England Quarterly Bulletin. A transparent definition of policy episodes is used. The empirical analysis shows that output displays the usual hump-shaped response after a shock to the policy indicator. All variables display theory-consistent behaviour. Monetary policy and exchange rate volatility are found to cause substantial output fluctuation in a four year horizon. The “narrative model” extended to a small open economy compares well with a structural VAR.
    Keywords: Monetary Policy Shocks; Narrative Approach; UK.
    JEL: E52 E58
    Date: 2007–02
  4. By: Alessandro Calza (European Central Bank); Tommaso Monacelli (Bocconi University); Livio Stracca (European Central Bank)
    Abstract: We study the role of institutional characteristics of mortgage markets in affecting the strength and timing of the effects of monetary policy shocks on house prices and consumption in a sample of OECD countries. We document three facts: (1) there is significant divergence in the structure of mortgage markets across the main industrialised countries; (2) at the business cycle frequency, the correlation between consumption and house prices increases with the degree of flexibility/development of mortgage markets; (3) the transmission of monetary policy shocks on consumption and house prices is stronger in countries with more flexible/developed mortgage markets. We then build a two-sector dynamic general equilibrium model with price stickiness and collateral constraints, where the ability of borrowing is endogenously linked to the nominal value of a durable asset (housing). We study how the response of consumption to monetary policy shocks is affected by alternative values of three key institutional parameters: (i) down-payment rate; (ii) mortgage repayment rate; (iii) interest rate mortgage structure (variable vs. fixed interest rate). In line with our empirical evidence, the sensitivity of consumption to monetary policy shocks increases with lower values of (i) and (ii), and is larger under a variable-rate mortgage structure.
    Keywords: House Prices, Mortgage Markets, Collateral Constraints, Monetary Policy
    JEL: E21 E44 E52
    Date: 2007–02–16
  5. By: Nicholas Apergis (University of Macedonia); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper empirically assesses whether monetary policy affects real economic activity through its affect on the aggregate supply side of the macroeconomy. Analysts typically argue that monetary policy either does not affect the real economy, the classical dichotomy, or only affects the real economy in the short run through aggregate demand %G–%@ new Keynesian or new classical theories. Real business cycle theorists try to explain the business cycle with supply-side productivity shocks. We provide some preliminary evidence about how monetary policy affects the aggregate supply side of the macroeconomy through its affect on total factor productivity, an important measure of supply-side performance. The results show that monetary policy exerts a positive and statistically significant effect on the supply-side of the macroeconomy. Moreover, the findings buttress the importance of countercyclical monetary policy as well as support the adoption of an optimal money supply rule. Our results also prove consistent with the effective role of monetary policy in the Great Moderation as well as the more recent rise in productivity growth.
    Keywords: Total Factor Productivity; Monetary Policy; Volatility; GARCH models
    JEL: E32 E51
    Date: 2007–03
  6. By: Mirko Abbritti (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper derives a DSGE currency union model with labor market frictions, real wage rigidities and price staggering. The model combines many realistic features, but it is still tractable: like standard open-economy models, it can be closed in six equations. We derive and discuss the constrained efficient allocation and the decentralised equilibrium, under both flexible and sticky prices. We use the model to analyse how different labor market institutions or degrees of real wage rigidities influence the functioning of the currency union and the size and persistence of inflation and output differentials. We show that the presence of non trivial real imperfections affects substantially the transmission mechanism of shocks in general and, in particular, of monetary policy. Interestingly, we find that the implications of real wage rigidities and labor market frictions for business cycle fluctuations are likely to operate in opposite directions: a high degree of real wage rigidities tends to amplify the response of the real economy to shocks; when labor market are more sclerotic, instead, unemployment volatility tends to decrease while inflation volatility increases.
    Keywords: Currency Union, labor market frictions, real wage rigidities, unemployment, sticky prices, inflation and output differentials
    JEL: E32 E52 F41
    Date: 2007–01
  7. By: Olivier Blanchard (Massachusetts Institute of Technology); Jordi Galí (Universitat Pompeu Fabra)
    Abstract: We develop a utility based model of fluctuations, with nominal rigidities, and unemployment. In doing so, we combine two strands of research: the New Keynesian model with its focus on nominal rigidities, and the Diamond-Mortensen-Pissarides model, with its focus on labor market frictions and unemployment. In developing this model, we proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and we draw the implications for optimal monetary policy.
    Keywords: New Keynesian Model, Labor Market Frictions, Search Model, Unemployment, Sticky Prices, Real Wage Rigidities
    JEL: E32 E50
    Date: 2007–02–15
  8. By: Jean Boivin (HEC Montréal); Marc P. Giannoni (Columbia Business School); Ilian Mihov (INSEAD)
    Abstract: This paper uses factor-augmented vector autoregressions (FAVAR) estimated using a large data set to disentangle fluctuations in disaggregated consumer and producer prices which are due to macroeconomic factors from those due to sectorial conditions. This allows us to provide consistent estimates of the effects of US monetary policy on disaggregated prices. While sectorial prices respond quickly to sector-specific shocks, we find that for a large number of price series, there is a significant delay in the response of prices to monetary policy shocks. In addition, price responses display little evidence of a “price puzzle,” contrary to existing studies based on traditional VARs. The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power, as predicted by models with monopolistic competition.
    Keywords: Sticky Prices, Monetary Policy, Disaggregated Prices, Imperfect Competition, Factor-Augmented Vector Autoregression Model (FAVAR)
    JEL: E32 E52
    Date: 2007–02–20
  9. By: Ippei Fujiwara (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yuki Teranishi (Bank of Japan and Columbia University (E-mail:
    Abstract: In this paper, we first construct a dynamic new Keynesian model that incorporates life-cycle behavior a la Gertler (1999), in order to study whether structural shocks to the economy have asymmetric effects on heterogeneous agents, namely workers and retirees. We also examine whether considerations of life-cycle and demographic structure alter the dynamic properties of the monetary business cycle model, specifically the degree of amplification in impulse responses. According to our simulation results, shocks indeed have asymmetric impacts on different households and the demographic structure does alter the size of responses against shocks by changing the degree of the trade-off between substitution and income effects.
    Keywords: Heterogenous Agents, Life-Cycle, New Keynesian Model
    JEL: E32 E50 J14
    Date: 2007–03
  10. By: Dino Martellato (Department of Economics, University Of Venice Ca’ Foscari)
    Abstract: Although euro area-wide inflation was from 1999 to 2005 almost right, i.e. “close to balance, but below 2%”, and although it combined with real growth as predicted by the long-run money demand equation in the euro area, the picture that emerges at country level is more scattered. Inside a monetary union, inflation divergences could be destabilizing and an excessive dispersion could be a problem, thus the scattered performance of the single members in terms of HICP inflation and real growth is an issue that the euro area governance is illprepared to manage. It may be of interest, therefore, to understand whether observed differences come from the money market or from the costs side or from the interaction between supply and demand when agents are forward looking. The paper sets out to ascertain whether the patterns of inflation and growth data observed in the twelve members and Slovenia compare to what is predicted by the long-run money demand equation in the euro area, the Balassa-Samuelson construct or the New Keynesian model.
    Keywords: Inflation, stability, euro zone
    JEL: E12 E41 E52 E63
    Date: 2006
  11. By: Gauti B. Eggertsson (Federal Reserve Bank of New York); Benjamin Pugsley (University of Chicago)
    Abstract: This paper studies a dynamic general equilibrium model with sticky prices and rational expectations in an environment of low interest rates and deflationary pressures. We show that small changes in the public’s beliefs about the future inflation target of the government can lead to large swings in both inflation and output. This effect is much larger at low interest rates than under regular circumstances. This highlights the importance of effective communication policy at zero interest rates. We argue that confusing communications by the US Federal Reserve, the President of the United States, and key administration officials about future price objectives were responsible for the sharp recession in the US in 1937-38, one of the sharpest recessions in US economic history. Poor communication policy is the mistake of 1937. Before committing the mistake of 1937 the US policy makers faced economic conditions that are similar in some respect to those confronted by Japanese policy makers in the first half of 2006.
    Keywords: Sticky Prices, Central Bank Communication, Stochastic General Equilibrium Model
    JEL: E61 E52 E32
    Date: 2007–02–12
  12. By: Michael Woodford (Columbia University)
    Abstract: The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed.
    Keywords: Optimal Monetary Policy, Commitment, History-Dependent Policy
    JEL: E42 E52 E58
    Date: 2007–02–19
  13. By: Srobona Mitra
    Abstract: This paper derives an interest rate rule for monetary policy in which the interest rate response of the central bank toward an increase in expected inflation falls as debts increase beyond a certain threshold level. A debt-constrained interest rate rule and the threshold level of debt are jointly estimated for Canada during the first decade of its inflation targeting regime of the 1990s. There are three main findings of this paper. First, a high government debt could constrain monetary policy if government spending-rather than taxes-is expected to adjust in future in line with debt service costs. The 'constraint' operates through an altered policy transmission mechanism through changes in the IS curve. Second, the effects of the debt-constraint on monetary policy are quite different during booms and recessions. Third, empirical estimates show that Canadian monetary policy might have been constrained by a high government debt-GDP ratio during the 1990s. Policy was less loose than what inflation indicators called for.
    Keywords: Monetary policy , government debt , interest rate rule , Canada ,
    Date: 2007–03–15
  14. By: Mandler, Martin
    Abstract: We study how the inclusion of growth rates of monetary aggregates or changes in stock market indices affects the stabilization performance of optimal monetary policy rules when there is uncertainty about the structure of the economy. With a simulation model of the U.S. economy we show that the performance of monetary policy rules that include these variables deteriorates much stronger than that of rules without them if the true economic structure deviates from the one used to derive the rule. We also investigate whether money growth and changes in stock market indices help explaining the Fed's recent monetary policy.
    Keywords: optimal monetary policy; monetary policy reaction function; robust monetary policy
    JEL: E52 E47 C15
    Date: 2006
  15. By: Robert Pollin (Department of Economics and Political Economy); James Heintz (Research Institute, University of Massachusetts-Amherst)
    Abstract: This IPC Country Study by Robert Pollin and James Heintz examines three policy areas related to monetary policies in Kenya: inflation dynamics and the relationship between inflation and long-run growth; monetary policy targets and instruments; and exchange rate dynamics and the country’s external balance. It concludes with five main policy recommendations.
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2007–03
  16. By: Shanaka J. Peiris; Regis Barnichon
    Abstract: This paper explores the sources of inflation in Sub-Saharan Africa by examining the relationship between inflation, the output gap, and the real money gap. Using heterogeneous panel cointegration estimation techniques, we estimate cointegrating vectors for the production function and the real money demand function to recover the structural output and money gaps for seventeen African countries. The central finding is that both gaps contain significant information regarding the evolution of inflation, albeit with a larger role played by the money gap. There is no significant evidence of asymmetry in the relationship.
    Keywords: Inflation , Phillips curve , money demand , panel cointegration , growth accounting , Inflation , Sub-Saharan Africa , Demand for money , Production , Accounting , Economic models ,
    Date: 2007–02–21
  17. By: Luis Ignacio Jácome; Eric Parrado
    Abstract: This paper addresses the question of why inflation has not yet converged to price stability in Central America and the Dominican Republic and is currently relatively high by Latin American standards. It suggests that despite the institutional strengthening of monetary policy, important flaws remain in most central banks, in particular a lack of a clear policy mandate and little political autonomy, which are adversely affecting the consistency of policy implementation. Empirical analysis reveals that all central banks raise interest rates to curtail inflation but only some of them increase it sufficiently to effectively tackle inflation pressures. It also shows that some central banks care simultaneously about exchange rate stability. The potential policy conflict arising from a dual central bank mandate and the unpredictable policy response is probably undermining markets' confidence in central banks' commitment to price stability, thereby perpetuating an inflation bias.
    Keywords: Monetary policy , inflation , Central America , monetary policy rules , Price stabilization , Central America , Dominican Republic ,
    Date: 2007–03–09
  18. By: Silvio Colarossi (Banca d'Italia); Andrea Zaghini (Banca d'Italia and CFS)
    Abstract: This paper proposes a possible way of assessing the effect of interest rate dynamics on changes in the decision-making approach, communication strategy and operational framework of a Central bank. Through a GARCH specification we show that the USA and Euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policymaking and found empirical evidence that the transmission of overnight volatility along the yield curve vanished soon after specific policy changes of the FED and ECB.
    Keywords: Monetary Policy, Yield Curve, GARCH
    JEL: E4 E5 G1
    Date: 2007–03–09
  19. By: Kai Carstensen
    Abstract: In this paper, it is analyzed whether core money growth helps to predict future inflation in a useful and reliable way. Using an out-of-sample forecasting exercise and a stability analysis, it is shown that core money growth carries important information not contained in the inflation history, that its inclusion in a forecasting model can increase the forecasting accuracy, and that it has had a strong and stable long-run link to inflation over the last decades. A particularly promising forecasting model at all horizons is the one proposed by Gerlach (2004) that includes the inflation gap, the difference between core money growth and core inflation, and the output gap. This model has a very good track record, exhibits stable parameters over both the pre-EMU and the EMU era. What makes it appealing from a more theoretical perspective is that it relies on the stable long-run relationship between money growth and inflation.
    Keywords: Forecasting, core money growth, stability, filter
    JEL: E47 E58
    Date: 2007–02
  20. By: Michael Bordo (Rutgers and Cambridge University); Christopher Erceg (Board of Governors of the Federal Reserve System); Andrew Levin (Board of Governors of the Federal Reserve System); Ryan Michaels (University of Michigan)
    Abstract: In this paper, we examine three famous episodes of deliberate deflation (or disinflation) in U.S. history, including episodes following the Civil War, World War I, and the Volcker disinflation of the early 1980s. These episodes were associated with widely divergent effects on the real economy, which we attribute both to differences in the policy actions undertaken, and to the transparency and credibility of the monetary authorities. We attempt to account for the salient features of each episode within the context of a stylized DSGE model. Our model simulations indicate how a more predictable policy of gradual deflation could have helped avoid the sharp post-WWI depression. But our analysis also suggests that the strong argument for gradualism under a transparent monetary regime becomes less persuasive if the monetary authority lacks credibility; in this case, an aggressive policy stance (as under Volcker) can play a useful signalling role by making a policy shift more apparent to private agents.
    Keywords: DSGE Model, Credibility, Deflation
    JEL: E31 E32 E52
    Date: 2007–02–09
  21. By: Michal Mackiewicz (Institute of Economics, University of Lodz)
    Abstract: In this paper we examine factors that make some governments revert to procyclical fiscal policies despite the standard normative prescription being to conduct fiscal policy countercyclically. In order to avoid the pitfalls of the two-step methods previous studies have typically used we used a one-step method with interaction variables. We found robust statistical evidence that procyclical fiscal policies are typically run by countries with weak institutions. There was also some empirical support for a hypothesis that countries that have accumulated a high debt-to-GDP ratio tend to run procyclical fiscal policies, possibly as a result of the financial constraints. We found no evidence that any other variable among the ones suggested in the literature explains the way in which governments react to the business cycle.
    Keywords: procyclical fiscal policy, financial constraints, fiscal institutions
    JEL: E60 E63
    Date: 2006–09
  22. By: Pelin Berkmen
    Abstract: This paper explains why the debt reduction motive for countries that are subject to borrowing constraints and a volatile environment is greater than for those with a more stable environment and relatively better access to the financial markets. In particular, it shows that the possibility of losing the ability to borrow in the future induces precautionary debt reduction. When a government loses its ability to borrow, shocks are more costly to the economy, since they cannot be spread over time. The precautionary motive arises from the need to make these adjustments less painful when the borrowing constraints bind. To avoid large losses in the constrained period, the government prefers to raise taxes and inflation in earlier periods more than would be implied otherwise, leaving less debt to the future periods, and thereby shifting some of the required adjustment to the earlier periods. In other words, the coexistence of large shocks and borrowing constraints forces the government to be more prudent in its management of debt.
    Keywords: Monetary policy , fiscal policy , debt , precautionary motive , Monetary policy , Fiscal policy , Debt ,
    Date: 2007–02–15
  23. By: Abhijit Sen Gupta (Indian Council for Research on International Economic Relations)
    Abstract: This paper investigates the relationship between capital account openness and inflation since the 1980s. It argues that widespread capital account liberalization during the last two decades appears to have contributed to the worldwide disinflation observed during the same period. The paper builds a theoretical model to motivate the presence of a negative link between financial integration and inflation. It tests the prediction of the theoretical model by employing static and dynamic panel data procedures. Financial integration appears to discipline monetary authorities, or to help them convince the private sector that they will be more disciplined in the future.
    Keywords: Capital Account Openness, Inflation, Seignorage, Discipline Effect
    JEL: F36 F41 E32
    Date: 2007–01
  24. By: Fabio C. Bagliano; Claudio Morana
    Abstract: What are the sources of macroeconomic comovement among G-7 countries? Two main candidate explanations may be singled out: common shocks and common transmission mechanisms. In the paper it is shown that they are complementary, rather than alternative, explanations. By means of a large-scale factor vector autoregressive (FVAR) model, allowing for full economic and statistical identification of all global and idiosyncratic shocks, it is found that both common disturbances and common transmission mechanisms of global and country-specific shocks account for business cycle comovement in the G-7 countries. Moreover, spillover effects of foreign idiosyncratic disturbances seem to be a less important factor than the common transmission of global or domestic shocks in the determination of international macroeconomic comovements.
    Keywords: business cycle comovement, factor vector autoregressive model, transmission mechanisms.
    JEL: C32 E32
    Date: 2007
  25. By: Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output while the cost of intraday liquidity only affects the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity follows from the Friedman rule and it is optimal to deviate from the the Friedman rule with respect to overnight liquidity. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.
    Keywords: Friedman rule; monetary policy; random-relocation models.
    JEL: E5
    Date: 2007–03–20
  26. By: Brunnermeier, Markus K; Julliard, Christian
    Abstract: A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We decompose the price-rent ratio in a rational component — meant to capture the proxy effect and risk premia — and an implied mispricing. We find that inflation and nominal interest rates explain a large share of the time-series variation of the mispricing, and that the tilt effect is very unlikely to rationalize this finding.
    Keywords: behavioural finance; housing; inflation illusion; interest rate; money illusion; mortgages; real estate
    JEL: G12 R2
    Date: 2007–03
  27. By: Guidolin, Massimo; Timmermann, Allan G
    Abstract: This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.
    Keywords: forecast combinations; term structure of interest rates
    JEL: C53 G12
    Date: 2007–03
  28. By: Celine Allard
    Abstract: This paper analyses how globalization has affected inflation in the New EU Members States (NMS), and Poland in particular, since 1995. It finds prices have become less sensitive to domestic economic conditions as trade integration rose, possibly because monetary policy incentives increasingly shifted toward meeting price stability objectives. Quantitatively, globalization appears to have lowered Polish prices by ½ to 1 percentage point annually since 1995, substantially more than in advanced economies. However, future inflation-dampening effects in the NMS are likely to be smaller as the pace of increases in trade openness moderates.
    Keywords: Globalization , inflation , transition , Inflation , Poland , Globalization , Trade policy ,
    Date: 2007–02–26
  29. By: Dierk Herzer; Mechthild Schrooten
    Abstract: This paper examines the impact of outward foreign direct investment (OFDI) on domestic investment by applying co-integration techniques to macroeconomic time series data for the United Sates and Germany. We show that the two countries differ: In the case of the US, OFDI has positive long-run effects on domestic investment while in the case of Germany the reverse effect is reported.
    Keywords: Foreign Direct Investment, Investment, Open Economy Macroeconomics
    JEL: F21 E22 F41
    Date: 2007
  30. By: Nicholas Apergis (University of Macedonia); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper investigates whether various components of wealth affect real consumption asymmetrically through a threshold adjustment model. The empirical findings for the U.S. show that only stock market assets, financial assets including stock market assets, and household net assets exert a practical wealth effect on consumption expenditure. By contrast, financial assets excluding stock market assets, tangible assets, total assets, and the Lettau-Ludvigson measure of net assets do not exert a practical wealth effect on consumption expenditure. In addition, the empirical findings favor the presence of an asymmetric effect on real consumption for the former cases, with negative 'news' affecting consumption less than positive 'news'.
    Keywords: Consumption; Stock market; Wealth effect; Asymmetry
    JEL: E21 E44
    Date: 2005–11
  31. By: Mark Gertler (New York University); Antonella Trigari (Bocconi University)
    Abstract: A number of authors have recently emphasized that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the MP framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. An interesting side-product is the emergence of spillover effects of average wages on the bargaining process. We then show that a reasonable calibration of the model can account well for the cyclical behavior of wages and labor market activity observed in the data. The spillover effects turn out to be important in this respect.
    Keywords: Unemployment, Labor Market, Nash Bargaining, Wage Rigidity
    JEL: E32 E50 J64
    Date: 2007–02–15
  32. By: Jean-Pierre Allegret (GATE CNRS); Alain Sand (GATE CNRS)
    Abstract: This paper studies to what extent the diversity of exchange rate regimes within Mercosur exerts an influence on the feasibility of a monetary union in this area. A semi-structural VAR model is built for each country, including a set of international and domestic variables. Based on impulse response functions and forecast error decomposition, we conclude that differences of exchange rate regime explain significantly the divergences of economic dynamics triggered by foreign or domestic shocks. Second, we decompose the structural innovations generated by each country model into unobservable common and idiosyncratic components, using a state-space model. This last exercise, intended to assess the degree of policy coordination between the Mercosur members, did not disclose any common component for the structural innovations generated by the three national models.
    Keywords: co-movement, cycles, Mercosur, optimum currency area, unobserved components model, VAR
    JEL: C32 E32 F42
    Date: 2007–01
  33. By: Virgiliu Midrigan (The Ohio University)
    Abstract: I employ a large set of scanner price data collected in retail stores to document that (i) although the average magnitude of price changes is large, a substantial number of price changes are small in absolute value; (ii) the distribution of non-zero price changes has fat tails; and (iii) stores tend to adjust prices of goods in narrow product categories simultaneously. I extend the standard menu costs model to a multi-product setting in which firms face economies of scale in the technology of adjusting prices. The model, because of its ability to replicate this additional set of micro-economic facts, can generate aggregate fluctuations much larger than those in standard menu costs economies.
    Keywords: State-Dependent Pricing, Multi-Products Firms
    JEL: E31 E32
    Date: 2007–02–19
  34. By: Hali J. Edison; Papa M'B. P. N'Diaye; Dennis P. J. Botman
    Abstract: Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.
    Keywords: Fiscal adjustment , aging , debt sustainability , tax reform , spillover effects , GFM , Fiscal policy , Japan , Tax reforms , Aging , Adjustment policy , Debt sustainability analysis , Public finance , Economic models ,
    Date: 2007–02–23
  35. By: Romain Veyrune
    Abstract: This paper compares monetary policy of currency boards with that of the franc zone during the period 1956-2005. It concludes that monetary policy in the zone was more autonomous than under a currency board, even though both systems faced the same exchange rate constraint. So far, the contingency line provided by the French treasury and capital controls have allowed the zone to combine a fixed exchange rate and a relatively autonomous monetary policy. Financial development and zone enlargement would challenge this relative autonomy for two reasons: (1) the potential cost to the French treasury would increase; and (2) residents would potentially be able to avoid capital controls. For the zone to maintain its fixed exchange rate, close targeting of foreign reserves would become important.
    Keywords: Franc zone , currency boards , monetary policy , fixed exchange rate , Exchange rate policy , Monetary unions , Currency boards , Monetary policy ,
    Date: 2007–02–21
  36. By: Waheed, Muhammad
    Abstract: This paper analyzes the response of the State bank of Pakistan—the central bank, to foreign exchange inflows for the period of 2001:1 to 2006:8. In this context, we estimated sterilization and offset coefficients using vector autoregression (VAR) model to account for the issue of endogeneity of domestic credit with the foreign exchange interventions. In addition, the paper also analyzes the role of foreign and domestic interest rate differentials in pulling in or pushing out of these foreign exchange flows. We found that the offset coefficient is very small and insignificant (0.16) implying that changes in credit resulted in very minimal offsetting reserve flows. The study found out that for the sample period, SBP only partially sterilized the inflows with magnitude of coefficient at (0.50) confirming the stylized facts. Results also indicate that inflows were neither pulled into the country due to high domestic interest rates due to some domestic policy nor they are pushed into Pakistan owing to low interest rates abroad.
    Keywords: Sterilization; Monetary independence; VAR
    JEL: E58 C32
    Date: 2007–03–16
  37. By: Lars E.O. Svensson (Princeton University); Noah Williams (Princeton University)
    Abstract: We study the problem of a policymaker who seeks to set policy optimally in an economy where the true economic structure is unobserved, and policymakers optimally learn from their observations of the economy. This is a classic problem of learning and control, variants of which have been studied in the past, but little with forward-looking variables which are a key component of modern policy-relevant models. As in most Bayesian learning problems, the optimal policy typically includes an experimentation component reflecting the endogeneity of information. We develop algorithms to solve numerically for the Bayesian optimal policy (BOP). However the BOP is only feasible in relatively small models, and thus we also consider a simpler specification we term adaptive optimal policy (AOP) which allows policymakers to update their beliefs but shortcuts the experimentation motive. In our setting, the AOP is significantly easier to compute, and in many cases provides a good approximation to the BOP. We provide a simple example to illustrate the role of learning and experimentation in an MJLQ framework.
    Keywords: Optimal Monetary Policy, Learning, Recursive Saddlepoint Method
    JEL: E42 E52 E58
    Date: 2007–02–16
  38. By: Eijffinger,Sylvester C.W.; Goderis,Benedikt (Tilburg University, Center for Economic Research)
    Abstract: This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature.
    Keywords: currency crisis;institutions;monetary policy;short-term debt;external debt; capital account openness
    JEL: E52 E58
    Date: 2007
  39. By: Prakash Kannan
    Abstract: Is it beneficial for a country's currency to be used internationally? And, if so, can we quantify the benefit? Since the emergence of the euro, there has been great interest in the consequences of a transfer of the US dollar's premier international role to the euro. Building on recent advancements in the literature on search models of money, this paper presents a novel model-based approach towards assessing the welfare benefits associated with the international use of a country's currency. The welfare gain for the Euro area in having the euro internationally used ranges from 1.7% to 2.1% of consumption.
    Keywords: International curency , search models of money , Currencies , Money , Economic models ,
    Date: 2007–03–06
  40. By: John Creedy; Ross Guest
    Abstract: This paper provides an applied general equilibrium analysis of several alternative taxation regimes applying to superannuation. It is motivated by the decision, announced by the Australian Government in its 2006 Budget, to exempt from tax all superannuation benefits received by recipients over 60 years of age. The analysis focuses on the implications of this and other superannuation tax regimes for intergenerational equity, national living standards, labour supply, saving and social welfare. The method of analysis is simulation of an open economy overlapping generations CGE model, calibrated to Australia. Acknowledgements The authors wish to thank the Australian Research Council for financial support for this work; and the Productivity Commission for providing data on age-specific government spending.
    JEL: H31 H32 J18 E21
    Date: 2007
  41. By: Calin Arcalean (Indiana University Bloomington); Gerhard Glomm (Indiana University Bloomington); Ioana Schiopu (Indiana University Bloomington); Jens Suedekum (University of Konstanz and IZA)
    Abstract: We present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the "Oates conjecture" that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.
    Keywords: fiscal federalism, decentralization, capital accumulation, infrastructure
    JEL: H72 H74 E62
    Date: 2007–02
  42. By: Adrian Pagan (Queensland University of Technology); M. Hashem Pesaran (CIMF, Cambridge University and IZA)
    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 influential 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 effects. 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: 2007–02
  43. By: Ramirez Verdugo, Arturo
    Abstract: This paper provides new evidence on the response of business investment to tax incentives. I use the variation provided by recent reforms to the Mexican corporate tax system, including the elimination and reintroduction of accelerated depreciation allowances applicable to investment undertaken outside the three main Mexican metropolitan areas. I show that investment is very sensitive to changes in tax variables and interest rates, with an estimated elasticity of investment with respect to the user cost around -2.0. The results are robust to different specifications and instrumental variables approaches. The large elasticity is shown to be the result of the large cross sectional variation in the user cost of capital and also a product of the small open economy nature of the Mexican economy. In particular, large investment responses of plants owned by multinational firms and a elasticity of imported assets considerably larger than that of domestically purchased goods. Furthermore, the use of panel data at the establishment level allows me to identify the discrete nature of investment decisions and to show that the capital accumulation pattern is consistent with nonconvex adjustment costs and irreversibilities, similar to those found for the US. Thus, the large elasticity compared to US estimates cannot be attributed to differences in adjustment costs. Finally, I provide evidence that the large investment response is not an artifact of misreporting or tax evasion since the elasticity of investment in other assets such as transportation equipment and land, which is harder to misreport, is also high.
    Keywords: Investment; taxes; user cost; manufacturing plants; Mexico
    JEL: E22 H25 E62
    Date: 2005–08–01
  44. By: Dimitrios A. Sideris (Bank of Greece and University of Ioannina)
    Abstract: Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects -when they are significant- would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.
    Keywords: Foreign Exchange Market Intervention; Real Exchange Rates; PPP.
    JEL: F31 C32 E58
    Date: 2007–02
  45. By: Kocherlakota, Narayana; Pistaferri, Luigi
    Abstract: We assume that individuals can fully insure themselves against cross-country shocks, but not against individual-specific shocks. We consider two particular models of limited risk-sharing: domestically incomplete markets (DI) and private information-Pareto optimal (PIPO) risk-sharing. For each model, we derive a restriction relating the cross-sectional distributions of consumption and real exchange rates. We evaluate these restrictions using household-level consumption data from the US and the UK. We show that the PIPO restriction fits the data well when households have a coefficient of relative risk aversion of around 5. The restrictions implied by the complete risk-sharing model and the DI model fare poorly.
    Keywords: market incompleteness; Pareto optimality; precautionary savings; real exchange rate
    JEL: D63 E21 F31
    Date: 2007–03
  46. By: WenSho Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This study examines the effect of the Great Moderation on the relationship between U.S. output growth and its volatility over the period 1947 to 2006. First, we consider the possible effects of structural change in the volatility process. In so doing, we employ GARCH-M and ARCH-M specifications of the process describing output growth rate and its volatility with and without a one-time structural break in volatility. Second, our data analyses and empirical results suggest no significant relationship between the output growth rate and its volatility, favoring the traditional wisdom of dichotomy in macroeconomics. Moreover, the evidence shows that the time-varying variance falls sharply or even disappears once we incorporate a one-time structural break in the unconditional variance of output starting 1982 or 1984. That is, the integrated GARCH effect proves spurious. Finally, a joint test of a trend change and a one-time shift in the volatility process finds that the one-time shift dominates.
    Keywords: Great Moderation, economic growth and volatility, structural change in variance, IGARCH
    JEL: C32 E32 O40
    Date: 2007–03
  47. By: Sophocles N. Brissimis (Bank of Greece and University of Piraeus); Matthaios D. Delis (Athens University of Economics and Business)
    Abstract: Using the theoretical predictions of the Bernanke-Blinder (1988) model, we seek to examine the existence of a bank lending channel through the empirical identification of a loan supply function and to assess the impact of differential bank characteristics on banks’ ability to supply loans. To this end, we estimate a loan supply model and test for the restrictions implied by perfect substitutability between loans and bonds in bank portfolios. Estimations are carried out on bank panel data for 16 OECD countries, the results showing that a bank lending channel is at work in only two of them. Moreover, and contrary to standard accounts, we find that the relevance of bank characteristics is hardly a decisive factor in the identification of a loan supply function.
    Keywords: Bank lending channel; financial structure; dynamic panels
    JEL: C23 C52 E44 E52
    Date: 2007–01
  48. By: Jonathan David Ostry; Enrique G. Mendoza
    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. Evidence of fiscal solvency is much weaker, however, at high debt levels. These findings suggest that many industrial and emerging market 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.
    Keywords: Fiscal Solvency; Fiscal Policy; Debt Sustainability ,
    Date: 2007–03–14
  49. By: Guido Cazzavillan (Department of Economics, University Of Venice Ca’ Foscari); Patrick Pintus (Universitè de la Mèditerranée and GREQAM-IDEP, France)
    Abstract: Reichlin (JET, 1986) has shown in an OLG model with productive capital that whenever the steady state is locally indeterminate and undergoes a Hopf bifurcation, it is Pareto-optimal. While these results were established under the assumption of Leontief technology, the author has partially extended them to show that the Hopf bifurcation is robust with respect to the introduction of capital-labor substitution. In this note, we prove that the Pareto-optimality of the steady state does not extend to technologies with capital-labor substitution. When the steady state is a sink or undergoes a Hopf bifurcation, it is characterized by over-accumulation with respect to the Golden Rule - the interest rate is negative - hence not Pareto-optimal. Most importantly, it follows that stabilization policies targeting the steady state leave room for welfare losses associated with productive inefficiency, apart from the very special case of Leontief technology.
    Keywords: Endogenous fluctuations, local bifurcations, dynamic inefficiency
    JEL: C62 D61 E32
    Date: 2006
  50. By: Juan Ayuso (Banco de España); Roberto Blanco (Banco de España); Fernando Restoy (Banco de España)
    Abstract: This paper analyses the contribution of interest rates to explain recent house price developments in Spain trying to reconcile different pieces of evidence. On the one hand, empirical evidence supports the view that interest rates are a key variable to explain house price developments. As a matter of fact, using simple asset pricing relations recent changes in house prices could be fully explained by movements in ex-post real interest rates. However, more refined asset pricing models show that the changes in the discount factor cannot fully explain the recent course of house prices in Spain. To resolve this puzzle we provide evidence that shows that the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.
    Keywords: house prices, real interest rates, intertemporal marginal rate of substitution, stochastic discount factor
    JEL: E43 G12
    Date: 2006–12
  51. By: David, Antonio C.
    Abstract: The author attempts to analyze whether price-based controls on capital inflows are successful in insulating economies against external shocks. He presents results from vector auto regressive (VAR) models that indicate that Chile and Colombia, countries that adopted controls on capital inflows, seem to have been relatively well insulated against external disturbances. Subsequently, he uses the auto regressive distributed lag (ARDL) approach to co-integration to isolate the effects of the capital controls on the pass-through of external disturbances to domestic interest rates in those economies. The author concludes that there is evidence that the capital controls allowed for greater policy autonomy.
    Keywords: Macroeconomic Management,Economic Theory & Research,Economic Stabilization,Capital Flows,Financial Economics
    Date: 2007–03–01
  52. By: Alasrag, Hussien
    Abstract: This thesis studies the role of the Egyptian securities market on saving development.It`s divided into two sections.section one studies the natural and importance of securities market through defining both the capital and securities markets ,determining the requirements of setting up stock market.then its studies the relation between securities market and some aggregate variables in the economy and its position in both the classical and the modern theory.the thesis goes on to studies the factors affecting the stock market performance. the importance of this market and the relation between saving and securities market.then it sheds lights on the securities in both the Egyptian and the global capital markets .section two focuses on the role of the Egyptian securities market on saving development during (1982-2000).so it studies the Egyptian securities market development.then it evaluate the role of both the primary and secondary markets on saving development during the period under review. Finally the thesis explains and recommends some policies in order to activate the Egyptian market. it also analyzes more particularly some guiding principles to develop and activate the role of both the primary and secondary markets on saving development .
    JEL: G1 E01 G18 G15 E24 E00
    Date: 2002–03
  53. By: Low, Hamish; Meghir, Costas; Pistaferri, Luigi
    Abstract: This paper decomposes the sources of risk to income that individuals face over their lifetimes. We distinguish productivity risk from employment risk and identify the components of each using the Survey of Income and Program Participation and the Panel Study of Income Dynamics. Estimates of productivity risk controlling for employment risk and for individual labour supply choices are substantially lower than estimates that attribute all wage variation to productivity risk. We use a partial equilibrium life-cycle model of consumption and labour supply to analyse the choices individuals make in the light of these risks and to measure the welfare cost of the different types of risk. Productivity risk induces a considerably greater welfare loss than employment risk primarily because productivity shocks are more persistent. Reflecting this, the welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks.
    Keywords: Employment risk; life-cycle models; Precautionary savings; Uncertainty; unemployment; Wage risk
    JEL: D91 E21 H31 J64
    Date: 2007–03
  54. By: Bandiera, Luca; Budina, Nina; Klijn, Michel; van Wijnbergen, Sweder
    Abstract: Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis for many developing countries. To further enhance understanding of fiscal policy and the constraints faced by policymakers, the authors develop a toolkit for FSA in middle-income countries which builds on previous work in this area and on new developments in dealing with uncertainty. The FSA toolkit includes an Excel-based FSA tool and a technical manual accompanying it. The FSA tool is standardized and simple, but at the same time flexible enough to allow for user-defined country-specifics. This manual provides step-by-step technical instructions for running the FSA tool and includes mathematical appendices and a glossary.
    Keywords: Economic Theory & Research,External Debt,Strategic Debt Management,Economic Stabilization,Public Sector Economics & Finance
    Date: 2007–03–01
  55. By: Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Robert D. Cooter
    Abstract: Compared to budget-balanced Sharing contracts, Anti-Sharing may improve the efficiency of teams. The Anti-Sharer collects a fixed payment from all team members; he receives the actual output and pays out its value to them. If a team members becomes Anti-Sharer, he will be unproductive in equilibrium. Hence, internal Anti-Sharing fails to yield the first-best outcome. Anti-Sharing is more likely to yield a higher team profit than Sharing, the larger the team, the curvature of the production function, or the marginal effort cost. Sharing is more likely to be better, the greater the marginal product, the cross-partials of the production function, or the curvature of the effort cost.
    Keywords: North-South, growth model, innovation assimilation
    JEL: E32 R10
    Date: 2006–12
  56. By: Mario Denni; G. Frewer
    Abstract: The present study aims at providing new evidence on the price re- lationships between crude oil and petroleum products. We employ single-equation error correction models (ECM) in which both changes in crude oil price and deviations from the long-run equilibrium are used to explain product price dynamics. A GARCH structure is applied to models' residuals to account for the time-varying volatility. Our key piece of innovation is the introduction of re¯ning margin e®ects to the analysis of the asymmetric products price movements. Results suggest that the overall balance in the re¯nery sector plays an important part in the adjustment to crude price shocks.
    Keywords: Oil prices; Market integration; Cointegration; Error correction models;
    JEL: E32 C22 D40 Q40
  57. By: Marco Leonardi (University of Milan and IZA); Giovanni Pica (University of Salerno and CSEF)
    Abstract: In a perfect labor market severance payments can have no real effects as they can be undone by a properly designed labor contract (Lazear 1990). We give empirical content to this proposition by estimating the effects of EPL on entry wages and on the tenure-wage profile in a quasi-experimental setting. We consider a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. Estimates which account for the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold show no effect of the reform on entry wages and a decrease of the returns to tenure by around 20% in the first year and by 8% over the first two years. We interpret these findings as broadly consistent with Lazear’s (1990) prediction that firms make workers prepay the severance cost.
    Keywords: Costs of Unjust Dismissals, Severance Payments, Regression Discontinuity Design
    JEL: E24 J63 J65
    Date: 2007–03–01
  58. By: José Luis Malo de Molina (Banco de España)
    Abstract: En este artículo se hace un repaso de la favorable evolución que ha mostrado la economía española desde su entrada en la unión monetaria y se analizan los principales factores que se encuentran detrás de este comportamiento. Entre estos, cabe destacar el cambio de régimen macroeconómico asociado al proceso de convergencia y de integración económica, y el impulso demográfico inducido principalmente por la inmigración. También se alude a los posibles riesgos para la sostenibillidad del crecimiento que podrían derivarse de aspectos tales como la pérdida de competitividad y el excesivo endeudamiento del sector privado.
    Keywords: convergencia, integración económica, crecimiento demográfico, competitividad y endeudamiento
    JEL: E0 F15
    Date: 2007–02
  59. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: In this study, we attempt to examine the possibility of emergence of significant fluctuations of the exchange rates in the future for the candidate EMU countries. In doing so, we estimate the equilibrium rate of the nominal effective exchange rate for Poland, Hungary, Slovak Republic and Malta through the BEER and PEER approaches. While the PEER-based estimation implies a large misalignment rate for the Hungarian forint, the BEER-based analysis shows that the present exchange rates of the countries considered do not deviate significantly from their equilibrium rates. As a consequence, based on BEER analysis, we do not expect large fluctuations in the effective exchange rates among the currencies considered. Hence, the relevant effective exchange rates are expected to be relatively stable. As a matter of fact, the entry of those countries into EMU is not expected to weaken the stability of Euro.
    Keywords: Exchange rate - cointegration - BEER - PEER
    JEL: C32 C51 C52 E52
    Date: 2005–12–01
  60. By: Ansgar Belke; Anselm Mattes; Lars Wang
    Abstract: In this paper we argue that traditional measures of openness of an economy usually overstate the actual degree. This is due to the fact that traditional export or import shares are measured as a share of the gross domestic product. The former are expressed in gross terms, the latter in value added terms. In this way the actual interdependences between economies are overstated. We develop a new value based openness indicator that includes interregional and interindustrial dependencies. Based on a Leontief production system and input-output-tables we argue that export-induced imports of intermediate parts must be subtracted of the value of exports in order to obtain the real value added in the export sector. The same reasoning applies to the import side. We use these measures of actual openness to calculate openness indicators for Germany using GTAP data. We show that traditional measures of openness exaggerate the actual openness and argue that these new indicators are an important contribution to the debate about the German “bazaar economy”.
    JEL: C67 E20 F15 F41
    Date: 2007
  61. By: Rikkers, F.; Thibeault, A.
    Abstract: The objective of this research is to determine the optimal rating philosophy for the rating of SMEs, and to describe the consequences of the chosen philosophy on several related aspects. As to our knowledge, this is the first paper that studies the considerations of financial institutions on what rating philosophy to adopt for specific portfolios. The importance for banks to have a solid risk framework to predict credit risk of their counterparties is well reflected by the quality and the quantity of research on this subject. Moreover, a good risk framework is vital to become compliant with the new Basel II framework. Problem is that financial institutions nearly always neglect the first step in the rating model development process: the determination of the rating philosophy. It is very important for financial institutions to decide whether they want their internal rating systems to grade borrowers according to their current condition (point-in-time), or their expected condition over a cycle and in stress (through-the-cycle), because the rating philosophy influences many aspects such as: credit approval, pricing, credit and portfolio monitoring, the regulatory and internal capital requirements and the competitive position of a bank. This makes the question which rating philosophy to use very important. Moreover, many different modelling techniques exist to determine credit risk, but few attempts have been devoted to credit risk assessment of small commercial loans, although SME exposures are relatively important for European banks. SMEs have specific characteristics that influence the rating philosophy and therefore the development and use of credit risk models. These SME characteristics are taken into account in the analysis to determine the optimal rating philosophy.
    Keywords: rating philosophy, small business, Basel II, credit rating, banks
    JEL: D82 E32 G20 G28 G33
    Date: 2007–02–27
  62. By: van den Berg, Gerard (IFAU - Institute for Labour Market Policy Evaluation); Lindeboom, Maarten (Free University Amsterdam); López, Marta (Free University Amsterdam)
    Abstract: We analyze the effect of being born in a recession on the mortality rate later in life in conjunction with social class. We use individual data records from Dutch registers of birth, marriage, and death certificates, covering the period 1815-2000, and we merge these with historical data on macro-economic outcomes and health indicators. We estimate duration models and inequality measures. The results indicate that being born in a recession increases the mortality rate later in life for most of the population. Lower social classes suffer disproportionally from being born in recessions. This exacerbates mortality inequality. This is not affected by social mobility: upward mobility does not vary much with the business cycle at birth, for each social class.
    Keywords: Death; longevity; recession; life expectancy; lifetimes; social inequality; social class; health
    JEL: C41 E32 I12 J14 N13 N33
    Date: 2007–02–18

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