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on Macroeconomics |
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Issue of 2007‒03‒31
100 papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Guenter W. Beck (Frankfurt University and CFS); Volker Wieland (Frankfurt University, CFS and CEPR) |
| Abstract: | The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. |
| Keywords: | Monetary Policy, Money, Quantity Theory, Phillips Curve, European Central Bank, Policy Under Uncertainty |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2007–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200718&r=mac |
| By: | Guenter W. Beck (Frankfurt University and CFS); Volker Wieland (Frankfurt University, CFS and CEPR) |
| Abstract: | The European Central Bank has assigned a special role to money in its two pillar strategy and has received much criticism for this decision. In this paper, we explore possible justifications. The case against including money in the central bank’s interest rate rule is based on a standard model of the monetary transmission process that underlies many contributions to research on monetary policy in the last two decades. Of course, if one allows for a direct effect of money on output or inflation as in the empirical “two-pillar” Phillips curves estimated in some recent contributions, it would be optimal to include a measure of (long-run) money growth in the rule. In this paper, we develop a justification for including money in the interest rate rule by allowing for imperfect knowledge regarding unobservables such as potential output and equilibrium interest rates. We formulate a novel characterization of ECB-style monetary cross-checking and show that it can generate substantial stabilization benefits in the event of persistent policy misperceptions regarding potential output. Such misperceptions cause a bias in policy setting. We find that cross-checking and changing interest rates in response to sustained deviations of long-run money growth helps the central bank to overcome this bias. Our argument in favor of ECB-style cross-checking does not require direct effects of money on output or inflation. |
| Keywords: | Monetary Policy, Quantity Theory, Phillips Curve, European Central Bank Policy Under Uncertainty |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2007–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200717&r=mac |
| By: | A. Kia (Department of Economics, Carleton University) |
| Abstract: | This paper focuses on internal and external factors, which influence the inflation rate in developing countries. A monetary model of inflation rate, capable of incorporating both monetary and fiscal policies as well as other internal and external factors, was developed and tested on Iranian data. It was found that, over the long run, a higher exchange rate leads to a higher price and that the fiscal policy is very effective to fight inflation. The major factors affecting inflation in Iran, over the long run, are internal rather than external. However, over the short run, the sources of inflation are both external and internal. |
| Keywords: | Demand for money, inflation, fiscal and monetary policies, external and internal factors |
| JEL: | E31 E41 E62 |
| Date: | 2006–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:06-03&r=mac |
| By: | Woodford, Michael |
| Abstract: | I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. (Here I give particular attention to the implications of ``two-pillar Phillips curves'' of the kind proposed by Gerlach (2004).) And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provide a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy. |
| Keywords: | monetarism; monetary targeting; new Keynesian model; two-pillar strategy |
| JEL: | E52 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6211&r=mac |
| By: | Paul Castillo (Central Reserve Bank of Peru); Alberto Humala (Central Reserve Bank of Peru); Vicente Tuesta (Central Reserve Bank of Peru) |
| Abstract: | This paper evaluates the link between inflation and inflation uncertainty in a context of monetary policy regime shifts for the Peruvian economy. We use a model of unobserved components subject to regime shifts to evaluate this link. We verify that periods of high(low) inflation me an were accompanied by periods of high(low) both short -and long- run uncertainty in inflation. Interestingly, unlike developed countries, short run uncertainty is important. These relationaships are consistent with the presence of three clearly differentiated regimes. First, a period of price stability, then a high -inflation high-volatility regime, and finally a hyperinflation period. We also verify that during a recent period of price stability, both permanent and transitory shocks to inflation have decreased in volatility. Finally, we find evidence that inflation and money growth rates share similar regime shifts. |
| Keywords: | inflation dynamics, monetary policy, Markov-switching models, unobserved component models, sthocastic trends |
| JEL: | C22 E31 E42 E52 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-005&r=mac |
| By: | Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rafael Wouters (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.) |
| Abstract: | Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the “Great Moderation”? JEL Classification: E4-E5. |
| Keywords: | Keywords: DSGE models; monetary policy |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070722&r=mac |
| By: | Ramón Adalid (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carsten Detken (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks. JEL Classification: C33, E41, E51, E58 |
| Keywords: | Liquidity shocks; asset price booms; money and credit aggregates; role of money; monetary policy; real estate prices. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070732&r=mac |
| By: | Marc-André Gosselin |
| Abstract: | The inflation targeting (IT) regime is 17 years old. With practice of IT now in more than 21 countries, there is enough evidence gathered to take stock of the IT experience. In this paper, we analyze the inflation record of IT central banks. We extend the work of Albagli and Schmidt-Hebbel (2004) by looking at a broad range of factors that can influence inflation target deviations and by identifying the empirical determinants of successful monetary policy under IT. We find that part of the cross-country and time variation in inflation deviations from targets can be explained by exchange rate movements, fiscal deficits, and differences in financial sector development. With respect to the components of the IT framework, we find that a higher inflation target and a larger inflation control range are associated with more variable inflation (and output) outcomes. Although the literature tends to suggest that greater central bank transparency is desirable, our findings imply that transparency might be associated with less satisfactory inflation performance. Interestingly, central banks using economic models do a better job of stabilizing inflation around the target and output around trend. |
| Keywords: | Central bank research; Inflation targets; Monetary policy framework |
| JEL: | E31 E52 E58 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-18&r=mac |
| By: | Roc Armenter; Martin Bodenstein |
| Abstract: | We argue that there are conditions such that any inflation targeting regime is preferable to full policy discretion, even if long-run inflation rates are identical across regimes. The key observation is that strict inflation targeting outperforms the discretionary policy response to sufficiently persistent shocks. Under full policy discretion, inflation expectations over the medium term respond to the shock and thereby amplify its impact on output. As a result, little output stabilization is achieved at the cost of large and persistent inflation fluctuations. |
| Keywords: | Inflation (Finance) ; Anti-inflationary policies ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:885&r=mac |
| By: | Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carlo Altavilla (University of Naples "Parthenope", Via Medina 40, 80133 Naples, Italy.) |
| Abstract: | This paper explores the role that inflation forecasts play in the uncertainty surrounding the estimated effects of alternative monetary rules on unemployment dynamics in the euro area and the US. We use the inflation forecasts of 8 competing models in a standard Bayesian VAR to analyse the size and the timing of these effects, as well as to quantify the uncertainty relative to the different inflation models under two rules. The results suggest that model uncertainty can be a serious issue and strengthen the case for a policy strategy that takes into account several sources of information. We find that combining inflation forecasts from many models not only yields more accurate forecasts than those of any specific model, but also reduces the uncertainty associated with the real effects of policy decisions. These results are in line with the model-combination approach that central banks already follow when conceiving their strategy. JEL Classification: C53; E24; E37. |
| Keywords: | Inflation forecasts; unemployment; model uncertainty. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070725&r=mac |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]) |
| Abstract: | Extending Asensio's closed-economy framework (2005a,b) to a monetary union, we show that the<br />principles of governance which emanate from the so called "New Consensus in Macroeconomics"<br />(NCM), and therefore have been designed for presumed stationary regimes, may cause severe<br />dysfunctions, such as depressive macroeconomic policies and unemployment traps, in non-ergodic<br />regimes. The Keynesian approach, on the other hand, pleads in favour of important changes in the<br />current governance of the eurozone. First, since the European Central Bank can not repress distributive<br />inflationary pressures without having non-temporary depressive effects on aggregate demand and<br />employment, authorities should recognize that the best way for controlling this type of inflation rests<br />on a consensual distribution of income. Second, authorities should abandon any "optimal rule"<br />designed in order to stabilize the economy near to an imaginary "natural" trend. Keynesian uncertainty<br />rather suggests a gradual and pragmatic approach to macroeconomic policy. From this perspective, we<br />show that the European Monetary Union could take advantage of the complementarity between the<br />common monetary policy and the national budgetary and fiscal instruments. |
| Keywords: | Monetary policy, Fiscal policy, Monetary union, Macroeconomic governance,<br />Post-Keynesian |
| Date: | 2007–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00139025_v1&r=mac |
| By: | Carlos Montoro (Central Bank of Peru, LSE) |
| Abstract: | We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisions are taken by a single policymaker, considering instead that monetary policy decisions are taken collectively in a committee. We introduce a Monetary Policy Committee (MPC), whose members have different preferences between output and inflation variability and have to vote on the level of the interest rate. This paper helps to explain interest rate smoothing from a political economy point of view, in which MPC members face a bargaining problem on the level of the interest rate. In this framework, the interest rate is a non-linear reaction function on the lagged interest rate and the expected inflation. This result comes from a political equilibrium in which there is a strategic behaviour of the agenda setter with respect to the rest MPC’s members. Our approach can also reproduce both features documented by the empirical evidence on interest rate smoothing: a) the modest response of the interest rate to inflation. and output gap; and. b) the dependence on lagged interest rate. Features that are difficult to reproduce alltogether in standard New Keynesian models. It also provides a theoretical framework on how disagreement among policymakers can slow down the adjustment on interest rates and on “menu costs” in interest rate decisions. Furthermore, a numerical excercise shows that this inertial behaviour of the interest rate is internalised by the economic agents through an increase in expected inflation. |
| Keywords: | Monetary Policy Committees , Interest Rate Smoothing, New Keynesian Economics, Political Economy |
| JEL: | E43 E52 D72 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-003&r=mac |
| By: | Claude Lavoie; Hope Pioro |
| Abstract: | The authors assess the performance of the Canadian economy under a variety of interest rate rules when the zero bound on nominal interest rates can bind. Their assessment is based on numerical simulations of a dynamic stochastic general-equilibrium model in a stochastic environment. Consistent with the literature, the authors find that the probability and consequences of the zero bound depend strongly on the targeted rate of inflation and that price-level targeting generally leads to better outcomes. Their results show that a non-linear rule is preferable to a linear rule under both inflation and price-level targeting, because of the zero-bound issue. This suggests that central banks should be pre-emptive and adopt an aggressive monetary policy when expected inflation falls below its desired level. The authors' results also show that the monetary authority must be much more forward looking under price-level targeting than under inflation targeting. |
| Keywords: | Inflation: costs and benefits; Interest rates; Monetary policy framework |
| JEL: | E43 E47 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:07-1&r=mac |
| By: | Carlos Montoro |
| Abstract: | We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisionsare taken by a single policymaker, considering instead that monetary policy decisions are takencollectively in a committee. We introduce a Monetary Policy Committee (MPC), whose membershave different preferences between output and inflation variability and have to vote on the level of theinterest rate. This paper helps to explain interest rate smoothing from a political economy point ofview, in which MPC members face a bargaining problem on the level of the interest rate. In thisframework, the interest rate is a non-linear reaction function on the lagged interest rate and theexpected inflation. This result comes from a political equilibrium in which there is a strategicbehaviour of the agenda setter with respect to the rest of the MPC's members. Our approach can alsoreproduce both features documented by the empirical evidence on interest rate smoothing: a) themodest response of the interest rate to inflation and output gap; and b) the dependence on laggedinterest rate; features that are difficult to reproduce in standard New Keynesian models all together. Italso provides a theoretical framework on how disagreement among policymakers can slow down theadjustment on interest rates and on "menu costs" in interest rate decisions. Furthermore, a numericalexercise shows that this inertial behaviour of the interest rate is internalised by the economic agentsthrough an increase in expected inflation. |
| Keywords: | Monetary Policy Committee, interest rate smoothing, New KeynesianEconomics, political economy |
| JEL: | E43 E52 D72 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0780&r=mac |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]) |
| Abstract: | Because it was designed for efficient stationary regimes, the New-Consensus Macroeconomic governance carries several drawbacks when implemented in Keynesian non-ergodic regimes. As long as Keynesian unemployment is interpreted in terms of 'natural' rate, it serves as a macroeconomic policy target in such a way that the policy mix may anchor the system far from full employment. We develop an argument that suggests a Keynesian explanation (which involves inappropriate economic policy) of what New Keynesians have referred to as unemployment hysteresis. However, difficulties do not vanish when authorities adopt the Keynesian vision of the world, for policy makers also have to deal with uncertainty. In contrast with the automatic economic-policy rules of the New Consensus Macroeconomics (NCM), we put forward a Keynesian pragmatic and progressive approach, based on intermediate targets designed with respect to the confidence that authorities have in the chances of success (which depends on the context and moves with it). Monetary and budgetary-fiscal policy interactions are discussed in such a context. Even if the monetary policy ability to reduce interest rates and increase effective demand is doubtful, it matters indirectly through avoiding increases in interest rates when fiscal and budgetary policy aims to stimulate effective demand. |
| Keywords: | Monetary policy, fiscal policy, macroeconomic governance, post-Keynesian |
| Date: | 2007–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00139029_v1&r=mac |
| By: | Evans, George W; Honkapohja, Seppo; Mitra, Kaushik |
| Abstract: | We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks. |
| Keywords: | expectations; Ramsey model; taxation |
| JEL: | D84 E21 E43 E62 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6216&r=mac |
| By: | Sharon Kozicki; P.A. Tinsley |
| Abstract: | This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of U.S. monetary policy and in the implied central-bank target for inflation. Empirical results support a description of policy with an effective inflation target of roughly 7 percent in the 1970s. Moreover, the evidence suggests that mismeasurement of the degree of economic slack was largely irrelevant for explaining the Great Inflation while favouring a passive-policy description of monetary policy. FOMC transcripts provide a neglected interpretation of the source of passive policy--intermediate targeting of monetary aggregates. |
| Keywords: | Central bank research; Monetary aggregates; Monetary policy implementation |
| JEL: | E3 E5 N1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-19&r=mac |
| By: | Michael D. Bordo; Christopher Erceg; Andrew Levin; Ryan Michaels |
| Abstract: | This paper analyzes the role of transparency and credibility in accounting for the widely divergent macroeconomic effects of three episodes of deliberate monetary contraction: the post-Civil War deflation, the post-WWI deflation, and the Volcker disinflation. Using a dynamic general equilibrium model in which private agents use optimal filtering to infer the central bank's nominal anchor, we demonstrate that the salient features of these three historical episodes can be explained by differences in the design and transparency of monetary policy, even without any time variation in economic structure or model parameters. For a policy regime with relatively high credibility, our analysis highlights the benefits of a gradualist approach (as in the 1870s) rather than a sudden change in policy (as in 1920-21). In contrast, for a policy institution with relatively low credibility (such as the Federal Reserve in late 1980), an aggressive policy stance can play an important signalling role by making the policy shift more evident to private agents. |
| JEL: | E32 E42 E52 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12982&r=mac |
| By: | Huw Dixon and Engin Kara |
| Abstract: | We develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. Using the Bils-Klenow distribution of contract lengths, we find that the corre- sponding GTE tracks the US data well. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner. |
| Keywords: | Persistence, Taylor contract, Calvo |
| JEL: | E50 E24 E32 E52 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:07-01&r=mac |
| By: | Bandholz, Harm; Clostermann, Joerg; Seitz, Franz |
| Abstract: | We analyze if and to what extent fundamental macroeconomic factors, temporary influences or more structural factors have contributed to the low levels of US bond yields over the last few years. For that purpose, we start with a general model of interest rate determination. The empirical part consists of a cointegration analysis with an error correction mechanism. We are able to establish a stable long-run relationship and find that the behavior of bond yields, even during the last two years, can well be explained. Alongside the more traditional macroeconomic determinants like core inflation, monetary policy and the business cycle, we also include foreign holdings of US Treasuries. The latter should capture the frequently mentioned structural effects on long-term interest rates. Finally, our bond yield equation outperforms a random walk model in different forecasting exercises. |
| Keywords: | bond yields; interest rates; cointegration; inflation; forecasting |
| JEL: | E47 E43 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2386&r=mac |
| By: | Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper examines bond and stock market volatility reactions in the euro area and the US following their respective economies’ monetary policy decisions, over a uniform sample period (April 1999 to May 2006). For this purpose, intraday data on the US and euro area bond and stock markets are used. A strong upsurge in intraday volatility at the time of the release of the monetary policy decisions by the two central banks is found, which is more pronounced for the US financial markets following Fed monetary policy decisions. Part of the increase in intraday volatility in the two economies surrounding monetary policy decisions can be explained by both news of the level of monetary policy and revisions in the expected future monetary policy path. The observed strong discrepancy between asset price reactions in the US and in the euro area following monetary policy decisions still remains a puzzle, although some tentative explanations are provided in the paper. JEL Classification: E52; E58; G14. |
| Keywords: | Monetary policy; intraday data. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070726&r=mac |
| By: | Sharon McCaw (Reserve Bank of New Zealand) |
| Abstract: | This memo characterises the business cycles of the New Zealand economy,`a la Stock and Watson (1998). The paper provides a set of stylised facts that New Zealand macroeconomic models should, ideally, be capable of emulating. This paper therefore serves as an important backdrop to macro modelling efforts. We also examine the same data series for the US and Australia, providing an indication of which features of New Zealand’s business cycles may be idiosyncratic. |
| JEL: | E20 E32 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2007/04&r=mac |
| By: | Matteo Iacoviello (Boston College); Stefano Neri (Banca D'Italia) |
| Abstract: | The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: First, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant. The structural nature of the model allows identifying and quantifying the sources of áuctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles. |
| Keywords: | Housing, Collateral Constraints, Bayesian Estimation, Two-sector Models |
| JEL: | E32 E44 E47 R21 R31 |
| Date: | 2007–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:659&r=mac |
| By: | Filippo Altissimo (Brevan Howard, Almack House, 28 King Street, London, SW1Y 6XA, UK.); Benoît Mojon (Federal Reserve Bank of Chicago, 230 S La Salle St., Chicago, IL 60604, USA.); Paolo Zaffaroni (Tanaka Business School, Imperial College London, South Kensington campus, London SW7 2AZ, UK.) |
| Abstract: | An aggregation exercise is proposed that aims at investigating whether the fast average adjustment of the disaggregate inflation series of the euro area CPI translates into the slow adjustment of euro area aggregate inflation. We first estimate a dynamic factor model for 404 inflation sub-indices of the euro area CPI. This allows to decompose the dynamics of inflation sub-indices in two parts: one due to a common "macroeconomic" shock and one due to sector specific "idiosyncratic" shocks. Although "idiosyncratic" shocks dominate the variance of sectoral prices, one common factor, which accounts for 30 per cent of the overall variance of the 404 disaggregate in.ation series, is the main driver of aggregate dynamics. In addition, the heterogenous propagation of this common shock across sectoral inflation rates, and in particular its slow propagation to inflation rates of services, generates the persistence of aggregate in.ation. We conclude that the aggregation process explains a fair amount of aggregate in.ation persistence. JEL Classification: E31; E32. |
| Keywords: | Inflation dynamics; aggregation and persistence; euro area. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070729&r=mac |
| By: | Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]) |
| Abstract: | The paper presents both the New Consensus and Keynesian equilibrium within the usual four<br />competitive macro-markets structure. It gives theoretical explanations of the pernicious<br />effects that the NCM governance, which has been designed for ergodic stationary regimes,<br />brings about in Keynesian non-ergodic regimes. It put forward Keynesian principles of<br />governance which include monetary, budgetary and fiscal instruments, and suggest new<br />directions for the positive and normative analysis of macro-policies. |
| Keywords: | Fiscal policy, Macroeconomic governance, Monetary policy, Post-Keynesian |
| Date: | 2007–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00139113_v1&r=mac |
| By: | Gaspar, Vítor; Levin, Andrew; Martins, Fernando Manuel; Smets, Frank |
| Abstract: | Understanding the features and the determinants of individual price setting behaviour is important for the formulation of monetary policy. These behavioural mechanisms play a fundamental role in influencing the characteristics of aggregate inflation and in determining how monetary policy affects inflation and real economic activity. The Inflation Persistence Network, a collaborative research effort of the Eurosystem, analysed a large number of panel data sets of individual price records and conducted surveys of price-setting managers in many euro area countries. This paper discusses to what extent the extensive evidence coming from those two data sources provides support for some basic elements of the New Keynesian perspective. It analyses the implications of the micro evidence for distinguishing between competing theories of price stickiness and provides some brief reflections about the lessons for monetary policy. |
| Keywords: | monetary policy; New Keynesian models; price setting; price stickiness |
| JEL: | D4 E1 E3 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6227&r=mac |
| By: | W.H. Buiter |
| Abstract: | The paper discusses some fundamental problems in monetary economics associated with thedetermination and role of the numéraire. The issues are introduced by formalising a proposal,attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling thenuméraire and medium of exchange/means of payment functions of money. The monetary authoritiesmanage the exchange rate between the numéraire ('sterling') and the means of payment ('drachma').The short nominal interest rate on sterling bonds can then be used to target stability for the sterlingprice level. The paper puts question marks behind two key bits of conventional wisdom incontemporary monetary economics. The first is the assumption that the monetary authorities defineand determine the numéraire used in private transactions. The second is the proposition that pricestability in terms of that numéraire is the appropriate objective of monetary policy. The paper alsodiscusses the merits of the next step following the decoupling of the numéraire from the currency:doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominalrigidities, monetary economics needs to devote more attention to numérairology - the study of theindividual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour. |
| Keywords: | Zero lower bound, cashless economy, price level determinacy, optimal inflation |
| JEL: | E3 E4 E5 E6 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0776&r=mac |
| By: | Paul Castillo; Carlos Montoro; Vicente Tuesta |
| Abstract: | This paper provides a fully micro-founded New Keynesian framework to study the interactionbetween oil price volatility, pricing behavior of firms and monetary policy. We show that when oilhas low substitutability, firms find it optimal to charge higher relative prices as a premium incompensation for the risk that oil price volatility generates on their marginal costs. Overall, in generalequilibrium, the interaction of the aforementioned mechanisms produces a positive relationshipbetween oil price volatility and average inflation, which we denominate inflation premium. Wecharacterize analytically this relationship by using the perturbation method to solve the rationalexpectations equilibrium of the model up to second order of accuracy. The solution implies that theinflation premium is higher when: a) oil has low substitutability, b) the Phillips Curve is convex, andc) the central bank puts higher weight on output fluctuations. We also provide some quantitativeevidence showing that a calibrated model for the US with an estimated active Taylor rule produces asizable inflation premium, similar to the levels observed in the US during the 70s. |
| Keywords: | Second Order Solution, Oil Price Shocks, Endogenous Trade-off |
| JEL: | E52 E42 E12 C63 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0782&r=mac |
| By: | Mierzejewski, Fernando |
| Abstract: | The extent to which the money supply affects the aggregate cash balance demanded at a certain level of nominal income and interest rates is determined by the interest-rate-elasticity and stability of the money demand. An actuarial approach is adopted in this paper for dealing with investors facing liquidity constraints and maintaining different expectations about risks. Under such circumstances, a level of surplus exists which maximises expected value. Moreover, when the distorted probability principle is introduced, the optimal liquidity demand is expressed as a Value-at-Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the more unstable the economy, the greater the interestrate-elasticity of the money demand. Moreover, for different parametric characterisation of risks, market parameters are expressed as the weighted average of sectorial or individual estimations, in such a way that multiple equilibria of the economy are possible. |
| Keywords: | money demand; monetary policy; economic capital; distorted risk principle; Value-at-Risk |
| JEL: | E41 G18 E52 G15 E44 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2424&r=mac |
| By: | Meredith Beechey |
| Abstract: | Nominal forward rates are sensitive at surprisingly long horizons to macroeconomic news and monetary-policy surprises. This paper takes advantage of affine term-structure modelling to demonstrate that movements in term premia, not expected future short rates, account for most of the reaction of forward rates at long horizons. Specifically, term premia account for about three quarters of the reaction of nominal forward rates 10 to 15 years hence to the surprise component of numerous macroeconomic news announcements. This has strong implications for the interpretation of interest-rate sensitivity. Contrary to some recent conjectures, long-horizon expectations of the level of inflation and real rates appear reasonably well anchored in the United States, but the associated term premia are quite variable. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-06&r=mac |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper investigates the role of domestic and external factors in explaining business cycle and international trade developments in fifteen emerging market economies. Results from sign-restricted VARs show that developments in real output, inflation, real exchange rates and international trade variables are dominated by domestic shocks. External shocks on average explain a fraction of no more than 10% of the variation in the endogenous variables considered. Moreover, real imports fail to display a cross-regional pattern, while technology shocks appear to be the disturbances playing a somewhat more important role in explaining consumer prices developments. Consumer prices and – depending on the disturbance considered – real imports are the variables showing larger impulse responses to unit shocks. JEL Classification: C32; E32; F41. |
| Keywords: | Business cycles; international trade; emerging markets; structural shocks. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070730&r=mac |
| By: | Matteo Iacoviello (Boston College); Fabio Schiantarelli (Boston College); Scott Schuh (Federal Reserve Bank of Boston) |
| Abstract: | We build and estimate a two-sector (goods and services) dynamic general equilibrium model with two types of inventories: finished goods (output) inventories yield utility services while materials (input) inventories facilitate the production of goods. The model, which contains neutral and inventory-specific technology shocks and preference shocks, is estimated by Bayesian methods. The estimated model replicates the volatility and cyclicality of inventory investment and inventory-target ratios. When estimated over subperiods, the results suggest that changes in the volatility of inventory shocks, or in structural parameters associated with inventories, play a minor role in the reduction of the volatility of output. |
| Keywords: | Inventories, business cycles, output volatility, Bayesian estimation |
| JEL: | E22 E32 E37 |
| Date: | 2007–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:658&r=mac |
| By: | Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | The key question asked by standard monetary models used for policy analysis is how do changes in short term interest rates affect the economy. All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:650&r=mac |
| By: | J. Stephen Ferris and Stanley L. Winer (Department of Economics, Carleton University) |
| Abstract: | In this paper Engel-Granger time series methodology is used to combine trending economic variables with stationary political factors to search for well-defined political influences on central government budgets in Canada over the entire post-Confederation time period from 1870 to 2000. To motivate such an inquiry we first investigate and find evidence of partisan political influence on Canada’s macro aggregates. However, because politics can influence economic outcomes only if there is a transmission mechanism through actual public policy choices, our finding of cycles in real output growth begs the question of whether such cycles arise through fiscal policy. Our analysis of three main fiscal policy instruments - public non-interest expenditure, taxation and the deficit net of interest - gives little support to any current political theory of public budgets, but does support the hypothesis that the degree of political competition matters for policy choices in both the long and short run. This new channel for the influence of politics on economic policy has not previously been isolated empirically in Canada and poses new questions in trying to reconcile the previous mixed results with respect to the influence of politics on economic aggregates. |
| Keywords: | expenditure size of government, tax-share, government deficits, political competition, political business cycles, political budget cycles, monetary policy, cointegration and error correction analysis. |
| JEL: | H1 H3 H5 |
| Date: | 2006–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:06-05&r=mac |
| By: | Imbs, Jean; Jondeau, Eric; Pelgrin, Florian |
| Abstract: | The New Keynesian Phillips Curve is at the centre of two raging empirical debates. First, how can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behaviour is relevant to both questions. We detail the conditions under which imposing homogeneity results in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias. |
| Keywords: | heterogeneity; inflation persistence; marginal costs; New Keynesian Phillips Curve; nominal rigidities |
| JEL: | C10 C22 E31 E52 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6184&r=mac |
| By: | Ullrich, Katrin |
| Abstract: | The discussion about country-specific influence on the interest rate decisions of the European Central Bank does not cease. To investigate the possibility of regional influence on the determination of the policy rate, we estimate Taylor-type reaction functions for the period from 1999 to 2005 and include country-specific variables of the euro zone member states. We do not find convincing evidence that country-specific economic developments influence the decisions of the ECB Governing Council. However, the maximum inflation rate and the minimum economic sentiment of the euro area seem to have an effect on the decisions. |
| Keywords: | Taylor rule, ECB, monetary policy |
| JEL: | E52 E58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5442&r=mac |
| By: | James B. Bullard; George W. Evans; Seppo Honkapohja |
| Abstract: | We study how the use of judgment or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We examine the possibility of a new phenomenon, which we call exuberance equilibria, in the New Keynesian monetary policy framework. Inclusion of judgment in forecasts can lead to self-fulfilling fluctuations in a subset of the determinacy region. We study how policymakers can minimize the risk of exuberance equilibria. |
| Keywords: | Rational expectations (Economic theory) ; Monetary policy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-008&r=mac |
| By: | Matias Vernengo (Assistant Professor, Department of Economics, University of Utah) |
| Abstract: | This Conference Paper by Matias Vernengo was presented at the “Global Conference on Gearing Macroeconomic Policies to Reverse the HIV/AIDS Epidemic”, jointly organized by UNDP’s HIV/AIDS Group and IPC and held in Brasilia, November 2006. It is part of an IPC-supported Research Programme on “Macroeconomic Policies to Combat HIV/AIDS”. The paper maintains that the monetary policies best suited to manage the macroeconomic effects of an MDG-related scaling up of HIV/AIDS financing are those that support the needed expansion of public spending - namely, monetary policies that maintain low rates of interest, increase overall liquidity in the economy and try to achieve a relatively depreciated currency. |
| Keywords: | Poverty, MDG, HIV/AIDS, Monetary Policies |
| JEL: | B41 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:cpaper:0002&r=mac |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2340&r=mac |
| By: | Fisher, Walter H. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Heijdra, Ben J. (Department of Economics, University of Groningen, Groningen, The Netherlands) |
| Abstract: | In this paper we consider the implications of relative consumption externalities in the Blanchard-Yaari overlapping generations framework. Unlike most of the macroeconomic literature that studies this question, the differences between agents, and, thus, in their relative position, persist in equilibrium. We show in our fixed employment model that consumption externalities lower consumption and the capital stock in long-run equilibrium, a result in sharp contrast to the recent findings of Liu and Turnovsky (2005). In addition, we solve for the intertemporal path of the economy to investigate its response to demographic shocks, specifically, to permanent changes in the birth and death rates. |
| Keywords: | Relative consumption, Overlapping generations, Demographic shocks |
| JEL: | D91 E21 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:204&r=mac |
| By: | Filippo Altissimo; Benoît Mojon; Paolo Zaffaroni |
| Abstract: | An aggregation exercise is proposed that aims at investigating whether the fast average adjustment of the disaggregate inflation series of the euro area CPI translates into the slow adjustment of euro area aggregate inflation. We first estimate a dynamic factor model for 404 inflation sub-indices of the euro area CPI. This allows to decompose the dynamics of inflation sub-indices in two parts: one due to a common |
| Keywords: | Inflation (Finance) ; Consumer price indexes |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-07-02&r=mac |
| By: | Favero, Carlo A; Niu, Linlin; Sala, Luca |
| Abstract: | This paper addresses the issue of forecasting the term structure. We provide a unified state-space modelling framework that encompasses different existing discrete-time yield curve models. Within such framework we analyze the impact on forecasting performance of two crucial modelling choices, i.e. the imposition of no-arbitrage restrictions and the size of the information set used to extract factors. Using US yield curve data, we find that: a. macro factors are very useful in forecasting at medium/long forecasting horizon; b. financial factors are useful in short run forecasting; c. no-arbitrage models are effective in shrinking the dimensionality of the parameter space and, when supplemented with additional macro information, are very effective in forecasting; d. within no-arbitrage models, assuming time-varying risk price is more favourable than assuming constant risk price for medium horizon-maturity forecast when yield factors dominate the information set, and for short horizon and long maturity forecast when macro factors dominate the information set; e. however, given the complexity and the highly non-linear parameterization of no-arbitrage models, it is very difficult to exploit within this type of models the additional information offered by large macroeconomic datasets. |
| Keywords: | factor models; forecasting; large data set; term structure of interest rates; Yield curve |
| JEL: | C33 C53 E43 E44 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6206&r=mac |
| By: | Vasco Curdia |
| Abstract: | This paper proposes a model to investigate the effects of monetary policy in an emerging market economy that experiences a sudden stop of capital inflows. The model features credit frictions, debt denominated in foreign currency, imported inputs, and households that have access to the international capital market only indirectly, through their ownership of leveraged firms. The sudden stop is modeled as a change in the perceptions of foreign lenders that brings about an increase in the cost of borrowing. I show that the higher the elasticity of foreign demand, the lower the contraction in output - leading, at the extreme, to the possibility of an expansion, depending on policy. A second result is that the recession is most severe in a fixed exchange rate regime. Taylor rules that react to inflation and output are more stabilizing. A comparison of alternative rules shows that low commitment to inflation stabilization allows for less contraction in output and even expansion but at the cost of much stronger contraction in capital inflows and higher interest rates. Credibility is also shown to have an important role, with low credibility and the risk of loose policy implying increased trade-offs, stronger contraction of the economy, and higher interest rates. |
| Keywords: | Emerging markets ; Monetary policy ; Capital movements ; Loans, Foreign |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:278&r=mac |
| By: | Javier Andrés; J. David López-Salido; Edward Nelson |
| Abstract: | We examine the role of money, allowing for three competing environments: the New Keynesian model with separable utility and static money demand; a non-separable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, as it is optimal for agents to allow their forecast of future interest rates to affect current portfolio decisions. We distinguish between these specifications by conducting a structural econometric analysis for the U.S. and the euro area. FIML estimates confirm the forward-looking character of money demand. Using these estimates we find that, in response to preference and technology shocks, real money balances are valuable in anticipating future variations in the natural interest rate. |
| Keywords: | Money ; Interest rates |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-005&r=mac |
| By: | Roberto Frenkel |
| Abstract: | This article, originally published in Spanish in La Nación, December 31, 2006, explains the mechanics of the Argentine Central Bank's intervention in exchange rates markets to target a stable and competitive exchange rate, a macroeconomic policy that has played a significant role in Argentina's economic growth since 2002. |
| JEL: | E58 E52 E42 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-3&r=mac |
| By: | Erwan Gautier (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01.); Ignacio Hernando (Banco de España, Alcalá 50, E-28014 Madrid, España.); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Daniel Dias (Banco de Portugal, 148, rua do Comerico, 1150 Lisbon, Portugal.); Maarten Dossche (National Bank of Belgium, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Roberto Sabbatini (Banca dÍtalia – Research Department, Via Nazionale 91, 00184 Roma, Italy.); Harald Stahl (Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt am Main, Germany.) |
| Abstract: | This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable nonfood and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices. JEL Classification: E31, D40, C25 |
| Keywords: | Price-setting, producer prices |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070727&r=mac |
| By: | Darby, Julia; Mélitz, Jacques |
| Abstract: | The macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure, aside from unemployment compensation. Our results go sharply contrary to this view. We engage in an empirical analysis of 20 OECD countries from 1980-2001 and find that age- and health-related social expenditure as well as incapacity benefits all react to the cycle in a stabilizing manner. While possibly new in the macro literature, this conforms to many results in studies of labour and health. Moreover, when the focus is on the ratio of the net surplus to output, automatic stabilization comes essentially from the spending side. Taxes contribute nothing at all. |
| Keywords: | automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy |
| JEL: | E0 E6 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6230&r=mac |
| By: | Dean Baker |
| Abstract: | Much has been written in this business cycle regarding the rapid increases in productivity and the stagnant growth in wages. From the peak of the last business cycle in the first quarter of 2001 to the second quarter of 2006, productivity increased by 17.9 percent, an average growth rate of 3.2 percent per year. But real wages have barely moved, with the average hourly wage for production and nonsupervisory workers increasing by just 1.2 percent, an average annual growth rate of just over 0.2 percent. This report explores the forces behind this difference. It looks at cyclical trends in labor and capital income, and the difference between gross and net productivity. |
| JEL: | E32 E24 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-5&r=mac |
| By: | Jacek Krawczyk; Rishab Sethi (Reserve Bank of New Zealand) |
| Abstract: | Computing the optimal trajectory over time of key variables is a standard exercise in decision-making and the analysis of many dynamic systems. In practice however, it is often enough to ensure that these variables evolve within certain bounds. In this paper we study the problem of setting monetary policy in a `good enough' sense, rather than in the optimising sense more common in the literature. Important advantages of our satisficing approach over policy optimisation include greater robustness to model, parameter, and shock uncertainty, and a better characterisation of imprecisely defined monetary policy goals. Also, optimisation may be unsuitable for determining prescriptive policy in that it suggests a unique `best' solution while many solutions may be satisficing. Our analysis frames the monetary policy problem in the context of viability theory which rigorously captures the notion of satisficing. We estimate a simple closed economy model on New Zealand data and use viability theory to discuss how inflation, output, and interest rate may be maintained within some acceptable bounds. We derive monetary policy rules that achieve such an outcome endogenously. |
| JEL: | C60 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2007/03&r=mac |
| By: | Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper contributes to the old theme of testing for rationality of inflation expectations in surveys, using two very different surveys in parallel. Focusing on the euro area and using two well-known surveys that include questions on inflation expectations, the Consensus Forecast survey and the European Commission Household survey, a battery of tests is applied to inflation forecasts. Tests are based on a preliminary discussion of the meaning of Rational Expectations in the macroeconomic literature, and how this maps into specific econometric tests. Tests used are both standard ones already reported in the literature and less standard ones of potential interest within the framework discussed. Tests focus on in-sample properties of the forecasts, both in static and dynamic settings, and in out-of sample tests to explore the performance of the forecasts in a simulated out-of-sample setting. As a general conclusion, both surveys are found to contain potentially useful information. Although the Consensus Forecasts survey is the best one in terms of quality of the forecasts, rationality in the European Commission Household survey, once measurement issues are taken into account, cannot be ruled out. JEL Classification:C40; C42; C50; C53; E37. |
| Keywords: | Rational expectations; tests of rationality; inflation forecasting. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070721&r=mac |
| By: | Eijffinger, Sylvester C W; Goderis, Benedikt |
| 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: | capital account openness; currency crises; external debt; institutions; monetary policy; short-term debt |
| JEL: | E52 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6217&r=mac |
| By: | KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki; INABA Masaru |
| Abstract: | The boom-bust cycles such as the episode of the "Internet bubble" in the late 1990s may be described as the business cycle driven by changes in expectations or news about the future. The comovements in consumption, labor, and investment, in response to news about productivity changes in the future can be called the news-driven cycles. We show that with the assumption that firms are subject to the collateral constraint in financing input costs, a fairly standard Real Business Cycle model can generate the news-driven cycles. The collateral constraint models have several virtues: (1) The model structure is simple; (2) introduction of the intermediate input enables our models to reproduce procyclical movements in the total factor productivity; (3) our models can generate procyclical movements in price of capital (Tobin's q); and (4) the second model in our paper, which is a modified version of the Carlstrom-Fuerst model, can generate countercyclical movements in bankruptcies, while the original Carlstrom-Fuerst model cannot. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:07013&r=mac |
| By: | Samu Kurri (Bank of Finland, Monetary Policy and Research, PO Box 160, FI-00101 Helsinki, Finland.) |
| Abstract: | In this paper we analyse the Finnish consumer price changes from February 1997 to December 2004 on the basis of a set of microdata which covers over half of the items included in the Finnish CPI. Our findings can be summarised with four stylised facts. Firstly, only a small fraction of prices change monthly. In the period under review, an average 80% of prices remained unchanged in consecutive months. Secondly, price changes can be large in both directions. Thirdly, positive inflation is due to the higher number of price increases compared to decreases, and the magnitude of price changes is more or less in balance. Finally, the decomposition of monthly inflation to the weighted fraction of products with price changes and the weighted average of those price changes seems to give support for the time-dependent modelling of Finnish consumer prices, although signs of state-dependent pricing can also be found in the data. JEL Classification: E31, D40, L11. |
| Keywords: | consumer prices, rigidity, time-dependent pricing, state-dependent pricing. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070728&r=mac |
| By: | Hughes Hallett, Andrew; Kattai, Rasmus; Lewis, John |
| Abstract: | The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time data set containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of the OECD's Economic Outlook. We find that data revisions are so great that real time CABs have low power in detecting fiscal slippages as defined by the ex-post data. We find that around half the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages. Our results are consistent with the conjecture that policy makers have presented favourable estimates of their fiscal position in order to reduce scrutiny or the probability of sanctions for lax behaviour. |
| Keywords: | Cyclically Adjusted Budget Deficits; False and Missed Alarms; Potential Output; Real Time Data |
| JEL: | C82 E62 H62 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6213&r=mac |
| By: | Leonard I. Nakamura; Tom Stark |
| Abstract: | Is it possible to forecast using poorly measured data? According to the permanent income hypothesis, a low personal saving rate should predict rising future income (Campbell, 1987). However, the U.S. personal saving rate is initially poorly measured and has been repeatedly revised upward in benchmark revisions. The authors use both conventional and real-time estimates of the personal saving rate in vector autoregressions to forecast real disposable income; using the level of the personal saving rate in real time would have almost invariably made forecasts worse, but first differences of the personal saving rate are predictive. They also test the lay hypothesis that a low personal saving rate has implications for consumption growth and find no evidence of forecasting ability. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-8&r=mac |
| By: | Juan de Dios Tena; Cesar Salazar |
| Abstract: | We present a data oriented analysis of the effect of different kind of economic shocks on Chilean output growth and inflation over the last 40 years. Two important results are: (1) foreign shocks only explain 17% of the variability of the output growth in the period 1984-2006 whereas it used to account for the 47,2% of output variability in 1966-1983; (2) The participation of foreign shocks to explain the Chilean inflation reaction becomes more importan in the last twienty years because of the price liberalization and Chile's openness to international trade. Results highlight specific features of the Chilean economy not present in other countries. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws071505&r=mac |
| By: | Anna, BATYRA; Henri R., SNEESSENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics) |
| Abstract: | Significant differences in unemployment in Europe have been observed across skill groups, with the least skilled suffering the highest and most persistent unemployment rates. To identify policies alleviating this problem, we study the impact of reductions in employer social security contributions. We construct a general equilibrium model with three types of workers and firms, matching frictions, wage bargaining and a rigid minimum wage. We find evidence in favour of narrow tax cuts targeted at the minimum wage, but we argue that it is most important to account for the effects of such reductions on both job creation and job destruction. The failure to do so may explain the gap between macro- and microeconometric evaluations of such policies in France and Belgium. Policy impact on welfare and inefficiencies induced by job competition, ladder effects and on-th-job search are quantified and discussed. |
| Keywords: | Minimum Wage, Job Creation, Job Destruction, Job Competition, Search Unemployment, Taxation, Computable General Equilibrium Models |
| JEL: | C68 E24 J64 |
| Date: | 2007–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2007001&r=mac |
| By: | Paul Castillo (London School of Economics, Central Bank of Peru); Diego Winkelried (St John’s College, University of Cambridge) |
| Abstract: | The most salient feature of financial dollarization, and the one that causes more concern to policy makers, is its persistence: even after successful macroeconomic stabilizations, dollarization ratios often remain high. In this paper we claim that this persistence is connected to the fact that the participants in the dollar deposit market are fairly heterogenous, and so is the way they form their optimal currency portfolio.We develop as simple model when agents differ in their ability to process information, which turns out to be enough to generate persistence up on aggregation. We find empirical support for this claim with data from three Latin American countries and Poland. |
| Keywords: | Dollarization, individual heterogeneity, persistence, aggregation |
| JEL: | C43 E50 F30 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-004&r=mac |
| By: | Singh, Rajesh; Subramanian, Chetan |
| Abstract: | This is an Appendix to "The Optimal Choice of Monetary Policy Instruments in a Small Open Economy" Forthcoming in the Canadian Journal of Economics. |
| Date: | 2007–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12768&r=mac |
| By: | Ljungqvist, Lars; Sargent, Thomas J |
| Abstract: | Adding generous government supplied benefits to Prescott's (2002) model with employment lotteries and private consumption insurance causes employment to implode and prevents the model from matching outcomes observed in Europe. To understand the role of a 'not-so-well-known aggregation theory' that Prescott uses to rationalize the high labour supply elasticity that underlies his finding that higher taxes on labour have depressed Europe relative to the US, this paper compares aggregate outcomes for economies with two arrangements for coping with indivisible labour: (1) employment lotteries plus complete consumption insurance, and (2) individual consumption smoothing via borrowing and lending at a risk-free interest rate. The two arrangements support equivalent outcomes when human capital is not present; when it is present, allocations differ because households' reliance on personal savings in the incomplete markets model constrains the 'career choices' that are implicit in their human capital acquisition plans relative to those that can be supported by lotteries and consumption insurance in the complete markets model. Nevertheless, the responses of aggregate outcomes to changes in tax rates are quantitatively similar across the two market structures. Thus, under both aggregation theories, the high disutility that Prescott assigns to labour is an impediment to explaining European non-employment and benefits levels. Moreover, while the identities of the non-employed under Prescott's tax hypothesis differ between the two aggregation theories, they all seem counterfactual. |
| Keywords: | aggregation theories; employment lotteries; human capital; indivisible labour; labour supply elasticity; labour taxation; social and private insurance |
| JEL: | E24 E62 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6196&r=mac |
| By: | Jasmina Arifovic; James B. Bullard; Olena Kostyshyna |
| Abstract: | We analyze the effects of social learning in a widely-studied monetary policy context. Social learning might be viewed as more descriptive of actual learning behavior in complex market economies. Ideas about how best to forecast the economy's state vector are initially heterogeneous. Agents can copy better forecasting techniques and discard those techniques which are less successful. We seek to understand whether the economy will converge to a rational expectations equilibrium under this more realistic learning dynamic. A key result from the literature in the version of the model we study is that the Taylor Principle governs both the uniqueness and the expectational stability of the rational expectations equilibrium when all agents learn homogeneously using recursive algorithms. We find that the Taylor Principle is not necessary for convergence in a social learning context. We also contribute to the use of genetic algorithm learning in stochastic environments. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-007&r=mac |
| By: | Martin Keene; Peter Thomson (New Zealand Treasury) |
| Abstract: | The New Zealand Treasury forecasts tax revenue for the twice-yearly Economic and Fiscal Updates. The accuracy of these forecasts is important for the government's annual budget decisions as they affect key fiscal aggregates such as the operating balance and debt levels. Good decision-making in this area is important for macroeconomic stability and sustainability, one of the Treasury's outcomes. Over the past six years, Treasury tax forecasts, and the macroeconomic forecasts on which they are based, have underestimated the actual outturns. This report presents an analysis of the Treasury's tax revenue forecast errors, both in aggregate and disaggregated by individual tax type. The analysis focuses primarily on the annual one-year-ahead Budget forecasts that are typically based on rating up past tax revenues by growth rates in related macroeconomic variables such as GDP. The objective of the analysis is to better determine the major sources of tax revenue forecast error and to identify the potential for methodological improvements. A review of the Treasury’s tax forecasting methods is given and a general class of models proposed that encompasses these methods. Adopting one of the simplest of these as a benchmark, the individual tax revenue forecast errors are first disaggregated into component errors due to forecasting the macroeconomic drivers used as a proxy for the tax base, and a component due to forecasting the tax ratio, or ratio of tax revenue to proxy tax base. The tax ratio is further disaggregated into a component error due to forecasting the tax ratio trend and random error. The latter provides a measure of the best accuracy that can be achieved using the benchmark models adopted. Among other findings, the report shows that the main source of tax revenue underforecasting is the underforecasting of the macroeconomic variables used as taxbase proxies. The tax ratio forecasts were generally unbiased, but less precisely determined than the macroeconomic forecasts. This and other evidence indicate that better tax ratio forecasts are likely to be achieved, even with the simple benchmark model used here. The benchmark models have merit as competing models that could be investigated further alongside other simple structural time series models in a systematic evaluation using historical data. |
| Keywords: | Tax revenue forecasting; forecast error decompositions; disaggregation; benchmark models |
| JEL: | C53 E17 H68 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:07/02&r=mac |
| By: | Enzo Weber |
| Abstract: | This paper investigates the capital market relations between Euroland and the USA from 1990 until 2006. Formally based on the uncovered interest rate parity (UIP), backward recursive estimations establish a long-run equilibrium between European and US government bond yields. Since the mid-1990s though, cointegration can only be achieved additionally considering the exchange rate. The reason proves a stochastic trend common to the European interest and the exchange rate, consistently explained by central bank reactions and unfinished learning processes on the role of the euro. Furthermore, the US capital market dominance is strongly reduced, leading to transatlantic interdependence at eye level. |
| Keywords: | Capital Market, UIP, Euro Area, United States. |
| JEL: | E44 F31 C32 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-014&r=mac |
| By: | Carlo Rosa; Giovanni Verga |
| Abstract: | This paper examines the effect of European Central Bank communication on the pricediscovery process in the Euribor futures market using a new tick-by-tick dataset. First, weshow that two pieces of news systematically hit financial markets on Governing Councilmeeting days: the ECB policy rate decision and the explanation of its monetary policy stance.Second, we find that the unexpected component of ECB explanations has a significant andsizeable impact on futures prices. This indicates that the ECB has already acquired somecredibility: financial markets seem to believe that it does what it says it will do. Finally, ourresults suggest that the Euribor futures market is semi-strong form informational efficient. |
| Keywords: | market efficiency, central bank communication, news shock, tickby-tick Euriborfutures data, event-study analysis. |
| JEL: | E52 E58 G14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0764&r=mac |
| By: | Milton H. Marquis; Bharat Trehan |
| Abstract: | We construct a vintage capital model in which worker skills lie along a continuum and workers can be paired with different vintages (as technology evolves) under a matching rule of "best worker with the best machine." Labor reallocation in response to technology shocks has two key implications for the wage premium. First, it limits both the magnitude and duration of change in the wage premium following a (permanent) embodied technology shock, so empirically plausible shocks do not lead to the kind of increases in the wage premium observed in the U.S. during the 1980s and early 1990s (though an increase in labor force heterogeneity does). Second, positive disembodied technology shocks tend to push up the wage premium as well, and while this effect is small, it does mean that a higher premium does not provide unambiguous information about the underlying shock. Labor reallocation also means that if embodied technology comes to play a larger role in long-run growth, investment and savings tend to fall in steady state, with little effect on output and employment, enabling the household to increase consumption without sacrificing leisure. The short run effects are more conventional: permanent shocks to disembodied technology induce a strong wealth effect that reduces savings and induces a consumption boom while permanent shocks to embodied technology induce dominant substitution effects and an expansion characterized by an investment boom. |
| Keywords: | Productivity |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-06&r=mac |
| By: | Devereux, Michael B; Sutherland, Alan |
| Abstract: | This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. The method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios. |
| Keywords: | country portfolios; solution methods |
| JEL: | E52 E58 F41 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6208&r=mac |
| By: | Orazio Attanasio; Nicola Pavoni |
| Abstract: | We derive testable implications of model in which first best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment agents typically achieve more insurance than that obtained under autarchy via saving, and that consumption allocation gives rise to 'excess smoothness of consumption', as found and defined by Campbell and Deaton (1987). We argue that the evidence on excess smoothness is consistent with a violation of the simple intertemporal budget constraint considered in a Bewley economy (with a single asset) and use techniques proposed by Hansen et al. (1991) to test the intertemporal budget constraint. We also construct closed form examples where the excess smoothness parameter has a structural interpretation in terms of the severity of the moral hazard problem. Evidence from the UK on the dynamic properties of consumption and income in micro data is consistent with the implications of the model. |
| JEL: | D82 E21 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12994&r=mac |
| By: | Nir Jaimovich; Henry E. Siu |
| Abstract: | We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:387&r=mac |
| By: | Joshua Hausman; Jon Wongswan |
| Abstract: | This paper documents the impact of U.S. monetary policy announcement surprises on foreign equity indexes, short- and long-term interest rates, and exchange rates in 49 countries. We use two proxies for monetary policy surprises: the surprise change to the current target federal funds rate (target surprise) and the revision to the path of future monetary policy (path surprise). We find that different asset classes respond to different components of the monetary policy surprises. Global equity indexes respond mainly to the target surprise; exchange rates and long-term interest rates respond mainly to the path surprise; and short-term interest rates respond to both surprises. On average, a hypothetical surprise 25-basis-point cut in the federal funds target rate is associated with about a 1 percent increase in foreign equity indexes and a 5 basis point decline in foreign short-term interest rates. A surprise 25-basis-point downward revision in the path of future policy is associated with about a ½ percent decline in the exchange value of the dollar against foreign currencies and 5 and 8 basis points declines in short- and long-term interest rates, respectively. We also find that asset prices’ responses to FOMC announcements vary greatly across countries, and that these cross-country variations in the response are related to a country’s exchange rate regime. Equity indexes and interest rates in countries with a less flexible exchange rate regime respond more to U.S. monetary policy surprises. In addition, the cross-country variation in the equity market response is strongly related to the percentage of each country’s equity market capitalization owned by U.S. investors (a financial linkage), and the cross-country variation in short-term interest rates’ responses is strongly related to the share of each country’s trade that is with the United States (a real linkage) |
| Keywords: | Interest rates ; Foreign exchange rates ; Monetary policy ; International finance |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:886&r=mac |
| By: | Riccardo DiCecio; Edward Nelson |
| Abstract: | We estimate the dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) on United Kingdom data. Our estimates suggest that price stickiness is a more important source of nominal rigidity in the U.K. than wage stickiness. Our estimates of parameters governing investment behavior are only well behaved when post-1979 observations are included, which reflects government policies until the late 1970s that obstructed the influence of market forces on investment. |
| Keywords: | Equilibrium (Economics) - Mathematical models ; Economic policy - Great Britain |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-006&r=mac |
| By: | Dag Ehrenpreis (International Poverty Centre) |
| Keywords: | Poverty, Pro-Poor Growth, measures |
| JEL: | B41 D11 D12 E31 I32 O54 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:ifocus:0010&r=mac |
| By: | Enchuan Shao; Pedro Silos |
| Abstract: | This paper is concerned with the business cycle dynamics in search-and-matching models of the labor market when agents are ex post heterogeneous. We focus on wealth heterogeneity that comes as a result of imperfect opportunities to insure against idiosyncratic risk. We show that this heterogeneity implies wage rigidity relative to a complete insurance economy. The fraction of wealth-poor agents prevents real wages from falling too much in recessions since small decreases in income imply large losses in utility. Analogously, wages rise less in expansions compared with the standard model because small increases are enough for poor workers to accept job offers. This mechanism reduces the volatility of wages and increases the volatility of vacancies and unemployment. This channel can be relevant if the lack of insurance is large enough so that the fraction of agents close to the borrowing constraint is significant. However, discipline in the parameterization implies an earnings variance and persistence in the unemployment state that result in a large degree of self-insurance. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2007-05&r=mac |
| By: | Buti, Marco; Röger, Werner; Turrini, Alessandro Antonio |
| Abstract: | While according to the so-called “Brussels-Frankfurt consensus” sound fiscal policies and structural reforms support each other, it is often claimed that the EU fiscal framework, by reducing the budgetary room of manoeuvre and the political capital of governments, may deter reforms. The aim of this paper is to explore which factors determine the relation between fiscal discipline and reforms. By means of a simple model we show that, depending on the time horizon of the government, structural reforms may either be complement or substitute with fiscal discipline. If governments are forward-looking, substitution is more likely; if governments are short-sighted, reforms and fiscal discipline may become complement. We provide empirical evidence supporting this argument. In a sample of EU-15 countries over the past three decades, the introduction of the Maastricht constraints at the beginning of the 1990s does not seem to have affected the probability of labour market reforms on average, but had a positive and significant impact on countries with governments facing elections in the current or forthcoming year (which are hence assumed to behave myopically). Our results suggest that if governments are short-sighted, then the expectation that relaxing fiscal constraints may help to boost structural reforms may be ill-founded. |
| Keywords: | Economic effects of deficits; Stability and Growth Pact; structural reforms |
| JEL: | E62 H50 H55 H62 J58 L50 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6204&r=mac |
| By: | Boris Cournède |
| Abstract: | Over the next decades, many OECD countries are anticipating large increases in public spending as a result of population ageing and other long-term structural trends. The need to put public finances on a sustainable footing is widely recognised, but progress has been uneven and slow. Some policy makers may feel that action can be deferred for a few years at little cost because of the long-term nature of the problem. This paper questions this perception by proposing a model of the political costs of consolidating public finances. The main finding is that even a short delay increases political cost of consolidation quite markedly when ultimately policy makers are facing a deadline by which sustainability must be restored. The conclusion is very robust to changes in assumptions and specification. A variant of the model shows that with an infinite horizon the incentive to consolidate is weaker, which highlights the importance of setting a deadline. This paper relates to the 2007 Economic Survey of the Euro area (www.oecd.org/eco/surveys/euroarea). <P>L’économie politique du retard à consolider les finances publiques <BR>De nombreux pays de l'OCDE s'attendent à enregistrer de forte hausses de leurs dépenses publiques en raison du vieillissement démographique et d'autres tendances structurelles lourdes. Presque tout le monde s'accorde à reconnaître qu'il est nécessaire de rétablir la viabilité des finances publiques, mais peu de progrès ont été enregistrés. Il se pourrait que certains décideurs considèrent que la mise en oeuvre de mesures puisse être reportée pour quelques années sans qu'il n'en coûte beaucoup. Cette étude met en cause ce jugement en proposant un modèle du coût politique de la consolidation budgétaire. Le résultat principal est que même un court délai augmente le coût politique de la consolidation de manière importante lorsqu'au final les décideurs sont confrontés à une date limite à laquelle la viabilité budgétaire doit être rétablie. Ce résultat est très robuste à des changements d'hypothèses ou de spécification. Une variante du modèle montre qu'avec un horizon temporel infini l'incitation à consolider est plus faible, ce qui souligne combien il importe de fixer une date limite. Ce document se rapporte à l'Étude économique de zone euro 2007 (www.oecd.org/eco/etudes/zoneeuro). |
| Keywords: | public finances, finances publiques, population ageing, vieillissement démographique, fiscal consolidation, political economy, économie politique, structural adjustment, ajustement structurel, consolidation budgétaire |
| JEL: | D72 E62 |
| Date: | 2007–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:548-en&r=mac |
| By: | Barry E. Jones; Travis D. Nesmith |
| Abstract: | We derive a definition of linear cointegration for nonlinear stochastic processes using a martingale representation theorem. The result shows that stationary linear cointegrations can exhibit nonlinear dynamics, in contrast with the normal assumption of linearity. We propose a sequential nonparametric method to test first for cointegration and second for nonlinear dynamics in the cointegrated system. We apply this method to weekly US interest rates constructed using a multirate filter rather than averaging. The Treasury Bill, Commerical Paper and Federal Funds rates are cointegrated, with two cointegrating vectors. Both cointegrations behave nonlinearly. Consequently, linear models will not fully relicate the dynanics of monetary policy transmission. |
| Keywords: | Time-series analysis ; Cointegration ; Interest rates |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-03&r=mac |
| By: | Katya Lisenkova (University of Strathclyde); Peter McGregor (University of Strathclyde); Nikos Pappas (University of Strathclyde); Kim Swales (University of Strathclyde); Karen Turner (University of Strathclyde); Robert E. Wright (University of Strathclyde and IZA) |
| Abstract: | This paper combines a multi-period economic Computable General Equilibrium (CGE) modelling framework with a demographic model to analyse the macroeconomic impact of the projected demographic trends in Scotland. Demographic trends are defined by the existing fertility-mortality rates and the level of annual net-migration. We employ a combination of a demographic and a CGE simulation to track the impact of changes in demographic structure upon macroeconomic variables under different scenarios for annual migration. We find that positive net migration can cancel the expected negative impact upon the labour market of other demographic changes. (Pressure on wages, falling employment). However, the required size of the annual net-migration is far higher than the current trends. The policy implication suggested by the results is that active policies are needed to attract migrants. We nevertheless report results when varying fertility and mortality assumptions. The impact of varying those assumptions is rather small. |
| Keywords: | regional CGE modelling, ageing population, migration |
| JEL: | J11 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2623&r=mac |
| By: | James B. Bullard; George W. Evans; Seppo Honkapohja |
| Abstract: | We study how the use of judgment or "add-factors" in forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in a standard self-referential environment. Local indeterminacy is not a requirement for existence. We construct a simple asset pricing example and find that exuberance equilibria, when they exist, can be extremely volatile relative to fundamental equilibria. |
| Keywords: | Monetary policy ; Rational expectations (Economic theory) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-009&r=mac |
| By: | Joao F. Gomes; Leonid Kogan; Motohiro Yogo |
| Abstract: | The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flow and stock returns of durable-good producers are exposed to higher systematic risk. Using the NIPA input-output tables, we construct portfolios of durable-good, nondurable-good, and service producers. In the cross-section, a strategy that is long on durables and short on services earns a sizable risk premium. In the time series, a strategy that is long on durables and short on the market portfolio earns a countercyclical risk premium. We develop an equilibrium asset-pricing model that explains these empirical findings. |
| JEL: | D57 E21 G12 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12986&r=mac |
| By: | Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jung-Duk Lichtenberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Despite the remarkable economic and financial convergence over the last ten years in the euro area, mortgage interest rates still differ across countries. This note presents some stylised facts on the heterogeneity of mortgage interest rates across euro area countries on the basis of the Eurosystem’s harmonised MFI interest rate statistics. We also attempt to provide some insights into the reasons behind these cross-country differences using the methodology recently proposed by Affinito and Farabullini (2006). We differ from Affinito and Farabullini (2006) in that we focus on one particular banking market: the market for mortgage loans. This allows us to identify more clearly the role of specific structural features characterising that market in explaining mortgage rate dispersion. More specifically, we investigate the extent to which various mortgage loan demand and supply determinants help explaining the observed dispersion. It turns out that some of the heterogeneity can be explained by these factors, in particular those that relate to the supply side. However, a substantial part of the dispersion remains unexplained suggesting that much of the heterogeneity also reflects country-specific institutional differences that are likely to be caused by differences in the regulatory and fiscal framework of the mortgage markets. In order to test this, we extend our analysis to also include institutional factors and indeed find that crosscountry differences in enforcement procedures, tax subsidies and loan-to-value ratios influence the level of mortgage rates. JEL Classification: C23; E4; F36; G21; N24. |
| Keywords: | Mortgage markets; bank interest rates; euro area countries; financial integration; panel econometrics. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070733&r=mac |
| By: | David, Antonio C. |
| Abstract: | The author evaluates the effectiveness of policy measures adopted by Chile and Colombia, aiming to mitigate the deleterious effects of pro-cyclical capital flows. In the case of Chile, according to his Generalized Method of Moments (GMM) analysis, capital controls succeeded in reducing net short-term capital flows but did not affect long-term flows. As far as Colombia is concerned, the regulations were capable of affecting total flows and a lso long-term ones. In addition, the co-integration models indicate that the regulations did not have a direct effect on the real exchange rate in the Chilean case. Nonetheless, the model used for Colombia did detect a direct impact of the capital controls on the real exchange rate. Therefore, the results do not seem to support the idea that those regulations were easily evaded. |
| Keywords: | Macroeconomic Management,Capital Flows,Economic Theory & Research,Economic Stabilization,Financial Economics |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4175&r=mac |
| 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 dollarized 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: | Banking; Developing countries; Dollarization; Exchange rates |
| JEL: | E44 F36 O24 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6205&r=mac |
| By: | Erkki Koskela (University of Helsinki and IZA); Rune Stenbacka (Göteborg University and Swedish School of Economics, Helsinki) |
| Abstract: | We study both the various consequences and the incentives of outsourcing. We argue that the wage elasticity of labour demand is increasing as a function of the share of outsourcing, which is importantly a result consistent with existing empirical research. Furthermore, we show that a production mode with a higher proportion of outsourcing activity reduces the negotiated wage in the high-wage country with an imperfectly competitive labour market so that outsourcing reduces equilibrium unemployment. Finally, we characterize the optimal production mode and show that stronger labour market imperfections lead to a production mode with a higher share of outsourcing. |
| Keywords: | outsourcing, labour market imperfections, equilibrium unemployment |
| JEL: | E23 E24 J51 J64 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2628&r=mac |
| By: | Meredith Beechey; Jonathan H. Wright |
| Abstract: | Certain prominent scheduled macroeconomic news releases contain a rounded number on the first page of the release that is widely cited by newswires and the press and a more precise number in the text of the release. The whole release comes out at once. We propose a simple test of whether markets are paying attention to the rounded or unrounded numbers by studying the high-frequency market reaction to such news announcements. In the case of inflation releases, we find evidence that markets systematically ignore some of the information in the unrounded number. This is most pronounced for core CPI, a prominent release for which the rounding in the headline number is large relative to the information content of the release. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-05&r=mac |
| By: | Guibourg, Gabriela (Monetary Policy Department, Central Bank of Sweden); Segendorf, Björn (International Secretariat, Central Bank of Sweden) |
| Abstract: | We use an “unexplained demand for cash” approach to measure the size of the shadow economy in Sweden. The size of the shadow economy is found to have increased from 3.8 to 6.5 per cent of GDP from 1990 to 2004. This result is also supported by our finding of an increased residual between households’ recorded disposable income and their consumption, investments and changes in net financial positions. Moreover, the correlation between the demand for cash that cannot be explained by recorded transactions and this residual is strong. |
| Keywords: | Cash use; demand for cash; shadow economy; National Accounts; Financial Accounts; |
| JEL: | E26 E41 H26 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0204&r=mac |
| By: | K. Vela Velupillai |
| Abstract: | The mathematization of economics is almost exclusively in terms of the mathematics of real analysis which, in turn, is founded on set theory (and the axiom of choice) and orthodox mathematical logic. In this paper I try to point out that this kind of mathematization is replete with economic infelicities. The attempt to extract these infelicities is in terms of three main examples: dynamics, policy and rational expectations and learning. The focus is on the role and reliance on standard .xed point theorems in orthodox mathematical economics. |
| Keywords: | General Equilibrium Theory, Mathematical Economics, Theory of Policy, Rational Expectations Equilibrium |
| JEL: | C02 C60 D50 E61 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0703&r=mac |
| By: | Gladys Choy Chong (Central bank of Peru) |
| Abstract: | Este trabajo intenta entender los criterios que están detrás de las calificaciones, así como evaluar los factores que limitan la consecución del grado de inversión de Perú. El rating soberano es la opinión sobre la habilidad y la disposición de un gobierno de pagar puntualmente todas sus obligaciones financieras, que se emite sobre la base de indicadores cuantitativos (indicadores macroeconómicos) y cualitativos (riesgo político e institucional). Hay gran coincidencia en la calificación de países con grado de inversión. S&P y Fitch son más estrictos que Moody´s en sus calificaciones a países de grado de inversión, mientras que Moody´s lo es para los países con grado especulativo. La evolución de Perú ha venido siendo significativa, incluso por encima de sus pares en términos de crecimiento, inflación y ratios de vulnerabilidad. Respecto a las limitantes para una mejor calificación, los vinculados a la alta dependencia de commodities, no consideran la baja concentración de las exportaciones y su relativa mayor “diversificación”. Sobre el peso de la deuda externa, si bien ésta es aún elevada, los esfuerzos para reducirla son importantes, lo que junto a la ampliación de la base tributaria y mejor gestión del gasto mejorarán la flexibilidad fiscal. Sobre el alto nivel de dolarización de la economía, la mejor forma de reducirla es mediante la persistencia de inflaciones bajas, aspecto en el que Perú supera incluso a economías con grado de inversión. Ello aunado al significativo nivel de RIN constituyen la mejor cobertura frente a este riesgo. Para ayudar a vencer las deficiencias institucionales y limitaciones en el ámbito político, el gobierno debe buscar fomentar una reforma del poder judicial, reducir gradualmente el mercado informal y fortalecer las instituciones y las instancias políticas. Este favorable avance macroeconómico ha sido reconocido en mayor medida por Fitch y por S&P y contrasta ampliamente con el mantenimiento de la calificación por parte de Moody´s, en el que parece evidente que las restricciones relativas a la carga de la deuda en moneda extranjera y el grado de dolarización parecen haber tenido un peso extremadamente elevado que más que contrarresta la evolución favorable de la mayoría de indicadores macroeconómicos, tales como la importante acumulación de reservas internacionales, cuyo progreso es totalmente innegable. |
| Keywords: | Calificación, rating, riesgo, ratio, deuda, Perú |
| JEL: | E31 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-001&r=mac |
| By: | Raymundo Chirinos (Central bank of Peru) |
| Abstract: | El presente trabajo examina la relación entre comercio y crecimiento a través del mecanismo aprendizaje por las exportaciones (learning by exporting), por el cual cuanto más exporta un país, éste registra incrementos en su productividad que conducen a mayores tasas de expansión del producto. Se propone un modelo teórico que sustenta esta hipótesis a través de una adaptación del esquema de Ramsey-Cass-Koopmans a una economía abierta que emplee como canal de transmisión de la tecnología a las exportaciones per cápita. Asimismo, se presenta evidencia empírica -mediante el uso de un modelo de panel data- que respalda este mecanismo en una muestra amplia de países en desarrollo. |
| Keywords: | Crecimiento y comercio, learning by exporting, estimación por panel data |
| JEL: | E31 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2007-002&r=mac |
| By: | Julio César Alonso; Maria Emma Cantera; Beatriz Orozco |
| Abstract: | Este documento tiene como objetivo presentar una introducción a la estructura de las cuentas fiscales colombianas. Para tal fin se presenta una clasificación del Sector Público No Financiero y se describen sus principales cuentas de gastos y de ingresos. Así mismo, para el caso colombiano se presenta una breve descripción de la evolución de estas cuentas y del balance fiscal para las últimas décadas. |
| Date: | 2006–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001062:002893&r=mac |
| By: | Pedro Albarrán (Universidad Carlos III de Madrid); Raquel Carrasco (Universidad Carlos III de Madrid); Maite Martínez-Granado (Universidad del País Vasco) |
| Abstract: | In this paper we study the evolution of income inequality for employees and self-employed workers. We highlight the importance of separately analyze these different sources of income to gain a broader understanding of inequality. Using Spanish panel data on income and consumption from the ECPF for the period 1987-96, we decompose income shocks into a permanent and a transitory component. We find that there are noticeable differences in the evolution of income inequality, as well as in the relative importance of the permanent and transitory components across these groups. Our results points that the evolution of inequality can be basically explained by movements in the transitory component of income for the self-employed, while for the employees it is mainly driven by the permanent component, specially at the end of the period. Given these disparities, it seems that these two sources of income should be studied separately and that different policies are suitable for each group. |
| Keywords: | Permanent and transitory income inequality, consumption, self-employment |
| JEL: | D12 D31 D91 E21 |
| Date: | 2007–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200702&r=mac |
| By: | Acharya, Viral V; Imbs, Jean; Sturgess, Jason |
| Abstract: | We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value-added output, we calculate for each state the efficient frontier for investments in the real economy. We study how rapidly different states converge to this benchmark allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries and greater distance from the efficient frontier before liberalization. These effects are robust to industries integrating across states and to the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variance-covariance properties of investment returns, rather than on their average only. |
| Keywords: | Diversification; Financial Development; Growth; Sharpe Ratio; Volatility |
| JEL: | E44 F02 F36 G11 G21 G28 O16 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6202&r=mac |
| By: | Dean Baker |
| Abstract: | This updated paper provides key economic indicators of the state of the housing market -- including new 2006 data. It gives an up-to-date analysis of the available data sources, such as home sales, mortgage applications, vacancy rates and construction. |
| JEL: | G12 E66 E31 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-4&r=mac |
| By: | Robert Lacroix; Michel Trahan |
| Abstract: | <P>Le sous-financement chronique de l’enseignement et de la recherche universitaires a des conséquences de plus en plus dramatiques sur la qualité des institutions universitaires québécoises et sur la compétitivité future de notre économie. Après avoir rappelé ce constat, Robert Lacroix et Michel Trahan examinent la situation financière du gouvernement du Québec pour évaluer la marge de manœuvre possible dans les années à venir et la part de cette marge qui devrait aller à l’enseignement et à la recherche universitaires. Ils présentent, ensuite, un programme de réinvestissement sur trois ans qui remédierait au sous-financement actuel et permettrait aux universités de retrouver la position concurrentielle qu’elles avaient dans un passé pas si lointain.<p> Les auteurs concluent comme suit : « Au moment même où le Québec devait maintenir ou même accroitre son leadership scientifique et technologique, le sous-financement des universités et de la recherche universitaire s’est installé depuis plus de dix ans et s’est considérablement accru au cours des dernières années. Le Québec doit se ressaisir, établir clairement ses priorités et investir massivement dans les universités, la recherche universitaire et la valorisation de la recherche. Tout est encore possible mais le temps presse plus que jamais. » |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:circah:2007dt-01&r=mac |
| By: | Mark Weisbrot |
| Abstract: | Este informe temático describe la economÃa boliviana en el primer año de la presidencia de Evo Morales. Han habido mejoras en la mayorÃa de indicadores económicos, y también algunas nuevas iniciativas por parte del gobierno para cumplir con sus promesas a la mayorÃa empobrecida del paÃs. |
| JEL: | E66 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-2sp&r=mac |
| By: | Martín López, Sonia |
| Abstract: | The demographic change that is lived worldwide, and of particular form in Europe, as consequence of the aging of the population because of the increase of the life expectancy and the drastic reduction of the rates of fertility, has made jump the alarms because of the need to get a suitable management that does not put in danger the financial viability of the social protection systems. The members states have to make the necessary reforms that they lead to the modernization of their social protection systems guaranteeing both suitable and viable pensions and a sanitary assistance and an assistance of long duration of quality, accessible and lasting. To achieve these aims there is a widespread agreement to foment employment policies that stimulate the active aging and the prolongation of the professional life to stop the premature exit of the labour market of the 45-year-old major workers. Among the measurements to adopt for the maintenance of the workers in the companies there are the adjustment of the contents of the working places, the use of the internal knowledge and the permanent training of the workers. In the cases in which already there has been produced the expulsion of the labour market, the participation companies will can represent an exit of the situation of unemployment. But in order that the unemployed ones of major age decide to tackle their own managerial initiative they need formation, advice and helps. |
| Keywords: | Aging population; systems social protection; adjustment of the contents of the working places; workers of major age; cooperative societies; employee-owned companies |
| JEL: | E24 J54 H55 P13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2400&r=mac |
| By: | Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Marc, GERMAIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | The burden sharing of pollution abatement costs raises the issue of how to share the costs between entities (country, region or industry) and how the pollution permits should be distributed between the parties involved. This paper explores this issue in the framework of a dynamic endogenous growth 2 sectors - 2 regions - 2 inputs Heckscher-Ohlin model of a small open multi-regional economy with an international tradable permits market. Give an Òemission-based grand-fatheringÓ sharing rule, capital accumulation is more negatively affected by the environmental policy in the energy intensive sector. We show that such a property does not necessarily hold with a Òproduction-based grand-fatheringÓ sharing rule. We also show that the impact on capital is likely to translate into the sectoral added value level after some time, specially if the economy is submitted to an increasingly constraining environmental policy driving up the ratio price of permits to price of energy. Finally, we show that the impact of environmental policy at the regional level depends crucially on the specialization of the region along the baseline. |
| Keywords: | Pollution permits, Grand-fathering, Sectoral spillovers, Multi-regional economy, Endogenous growth |
| JEL: | D58 H21 E22 O40 |
| Date: | 2007–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2007010&r=mac |
| By: | Fabrice Murtin |
| Abstract: | This paper is the first empirical framework that explains the phenomenon of fast growthcombined with the demographic transition occurring in the United States since 1860. Ipropose a structural model that unifies those events through the role of education: the keyfeature is that parental education determines simultaneously fertility, mortality and children'seducation, so that the accumulation of education from one generation to another explains bothfast growth and the reduction of fertility and mortality rates. Using original data, the model isestimated and fits in a remarkable way income, the distribution of education and agepyramids. Moreover, some historical data on Blacks, assumed to constitute the bottom of thedistribution of education, show that the model predicts correctly the joint distribution offertility and education, and that of mortality and education. Comparisons with the PSIDsuggest that the intergenerational correlation of income is also well captured. Thus, thismicrofunded growth model based on human capital accumulation accounts for many traits ofAmerican economic development since 1860. In a second step, I investigate the long-runinfluence of income inequality on growth. Because children's human capital is a concavefunction of parental income, income inequality slows down the accumulation of humancapital across generations and hence growth. Simulations show that this effect is large. |
| Keywords: | Unified Growth Theory, Human capital, Technological Progress, Inequality andGrowth |
| JEL: | D31 E27 F02 N00 O40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0765&r=mac |
| By: | André Farber (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Roland Gillet (Université Paris1-Panthéon-Sorbonne, Paris and Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels, and DULBEA, Université Libre de Bruxelles.) |
| Abstract: | Farber, Gillet and Szafarz (2006) propose a general formula for the WACC in which the expected return on the tax shield appears explicitly. The classical Modigliani-Miller and Harris-Pringle WACC formulas for specific debt policies are then derived from the general formula after having determined the corresponding tax shield expected returns. Replying to Fernandez’ (2007) comment, this note explores, in addition, the validity of the general formula in the Miles-Ezzel setup with annual adjustment of the level of debt to maintain a constant market-value debt ratio. |
| Keywords: | WACC, value of tax shield. |
| JEL: | G30 G32 E22 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:07-004&r=mac |
| By: | Sanchez Alan (University of Oxford, Central Bank of Peru) |
| Abstract: | The aim of this research is to evaluate to what extent the actual level and dynamics of financial dollarization prevalent in Latin America can be explained by the portfolio approach proposed by Ize and Levi Yeyati (2003). Inasmuch as the result of a portfolio optimization is sensible to the estimation of the variance-covariance matrix, this paper considers several alternatives to estimate the expected volatility by means of historical data so as to resemble two polar cases: short-memory and long-memory adaptive expectations. The main finding is that, for the period 1995-2005, financial dollarization in Latin America can be partially explained by the MVP ratio only if long-memory of past volatility events is assumed. Additional results are reported for highly dollarized countries. |
| Keywords: | Financial Dollarization, persistence, Latin America |
| JEL: | E50 G11 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2006-010&r=mac |
| By: | Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]) |
| Abstract: | Ce texte traite du localisme monétaire. Il est défini comme l'organisation d'une localisation des échanges au sein d'un espace spécifique au moyen d'une adaptation du système monétaire existant ou de la construction d'un système monétaire ad hoc. Le texte met en avant les formes prises par le localisme monétaire depuis les années 1980, qui connaît une dynamique très forte. Il distingue un localisme territorial étatique, un localisme territorial infra-étatique et un localisme communautaire. Il dégage quatre rationalités dont les diverses combinaisons caractérisent les multiples cas de localisme monétaire contemporains : capter des revenus, protéger l'espace local, dynamiser l'activité locale et transformer la nature des échanges. Cinq exemples illustrent ces combinaisons. La thèse développée est qu'il peut être pertinent d'analyser sous la même bannière du localisme monétaire des phénomènes qui, en général, sont pourtant distingués ; la mise à jour des rationalités à l'oeuvre permet de saisir cette unité au-delà de la diversité des formes de localisme monétaire. |
| Keywords: | Monnaies locales;Souveraineté monétaire;localisation des économies |
| Date: | 2007–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00138438_v1&r=mac |
| By: | Mark Weisbrot |
| Abstract: | This issue brief describes Bolivia's economy in the first year of Evo Morales' presidency. There were improvements in most of the major economic indicators, as well as some new initiatives by the government to fulfill its promises to the country's impoverished majority. |
| JEL: | E66 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-2&r=mac |