nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒04‒09
144 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A New Cost Channel of Monetary Policy By M. Alper Cenesiz
  2. Money and Monetary Policy in DSGE Models By Arnab Bhattacharjee; Christoph Thoenissen
  3. Monetary Stabilisation Policy and Long-run Growth By Galindev Ragchaasuren
  4. Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics By Alexander Mihailov
  5. Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) By Cifter, Atilla; Ozun, Alper
  6. Monetary Policy Amplification Effects through a Bank Capital Channel By Alvaro Aguiar; Inês Drumond
  7. Simple Pricing Rules, the Phillips Curve and the Microfoundations of Inflation Persistence By Richard Mash
  8. Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability By Claudia Kwapil; Johann Scharler
  9. Optimal Monetary Policy in a Dual Labor Market Economy By Rossi, Lorenza; Mattesini, Fabrizio
  10. Bank Behaviour and the Cost Channel of Monetary Transmission By Eric Mayer; Oliver Hülsewig; Timo Wollmershäuser
  11. Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis By Bernd Hayo
  12. The narrative approach for the identification of monetary policy shocks in small open economies By Eleni Angelopoulou
  13. Monetary Policy and the Political Support for a Labor Market Reform By ÿlvaro Aguiar; Ana Paula Ribeiro
  14. Endogenous Cycles in Optimal Monetary Policy with a Nonlinear Phillips Curve By Gomes, O.; Mendes, D. A.; Mendes, V. P.; Sousa Ramos, J.
  15. Unemployment, Job Flows and Hours in a New Keynesian Model By Richard Holt
  16. Is a word to the wise indeed enough? ECB statements and the predictability of interest rate decisions By David-Jan Jansen; Jakob de Haan
  17. Asset pricing implications for a New Keynesian model By Bianca De Paoli, Alasdair Scott, Olaf Weeken
  18. Financial Fragility, Heterogeneous Firms and the Cross Section of the Business Cycle. By Sean Holly; Emiliano Santoro
  20. Are Euro Interest Rates led by FED Announcements? By Andrea Monticini; Giacomo Vaciago
  22. Financial Systems and the Cost Channel Transmission of Monetary Policy Shocks By Johann Scharler; Sylvia Kaufmann
  23. Assessing Inflation Targeting Through Intervention Analysis By Alvaro Angeriz; Philip Arestis
  24. Macro volatility in a model of the UK Gilt edged bond market By Peter Spencer
  25. Optimal Monetary Policy Rules for the Euro Area in a DSGE Framework By Pelin Ilbas
  26. The predictive content of the real interest rate gap for macroeconomic variables in the euro area By Jean-Stéphane MESONNIER
  27. Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models* By Matthew Canzoneri
  28. Credit Cycles in a OLG Economy with Money and Bequest By Agliari Anna; Assenza Tiziana; Delli Gatti Domenico; Santoro Emiliano
  29. Fiscal Discipline and Stability under Currency Board Systems By Oliver Grimm
  30. The Eurosystem, the US Federal Reserve and the Bank of Japan - similarities and differences By Dieter Gerdesmeier; Francesco Paolo Mongelli; Barbara Roffia
  31. A No-Arbitrage Analysis of Macroeconomic Determinants of Term Structures and the Exchange Rate<br> By Fousseni Chabi-Yo; Jun Yang
  32. Commodity prices, money and inflation By Frank Browne; David Cronin
  33. Assessing the Relation between Equity Risk Premia and Macroeconomic Volatilities By Renatas Kizys; Peter Spencer
  34. Corporate Balance Sheets in Developed Economies: Implications for Investment By Denise Côté; Christopher Graham
  35. Is Bad News About Inflation Good News for the Exchange Rate? By Richard Clarida; Daniel Waldman
  37. Expansionary fiscal consolidations in Europe: part of conventional wisdom? By António Afonso
  38. Caution or Activism? Monetary Policy Strategies in an Open Economy By Martin Ellison; Lucio Sarno; Jouko Vilmunen
  39. Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries By Donal Bredin; Stilianos Fountas
  41. The External Finance Premium and the Macroeconomy: US post-WWII Evidence By De Graeve Ferre
  42. Endogenous Cycles and Liquidity Risk By Jos van Bommel
  43. Using the Dynamic Bi-Factor Model with Markov Switching to Predict the Cyclical Turns in the Large European Economies By Konstantin A. Kholodilin
  44. Fiscal policy rules in practice By Thams, Andreas
  45. Monetary policy implementation: A European Perspective By Bindseil, Ulrich; Nyborg, Kjell G.
  46. Monetary Policy under Rule-of-Thumb Consumers and External Habits By Giovanni Di Bartolomeo; Lorenza Rossi; Massimiliano Tancioni
  47. Transition economy convergence in a two-country model - implications for monetary integration By Jan Bruha; Jirí Podpiera
  48. Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan By Paul Mizen; Tae-Hwan Kim; Alan Thanaset
  49. Sectoral money demand models for the euro area based on a common set of determinants By Julian von Landesberger
  51. Central Bank Transparency: Where, Why, and with What Effects? By N. Nergiz Dincer; Barry Eichengreen
  52. Argentina: The Central Bank in the Foreign Exchange Market By Roberto Frenkel
  54. The Costs of EMU for Transition Countries By Alexandra Ferreira Lopes
  55. Risk and Uncertainty in Central Bank Signals: An Analysis of MPC Minutes By Sheila Dow; Matthias Klaes; Alberto Montagnoli
  56. Behind the Gap Between Productivity and Wage Growth By Dean Baker
  57. Heterogeneity, Asymmetries and Learning in InfIation Expectation Formation: An Empirical Assessment By Damjan Pfajfar; Emiliano Santoro
  58. The Complex Response of Monetary Policy to Asset Prices By Ram Kharel; Chris Martin; Costas Milas
  59. Learning Hyperinflations By Atanas Christev
  60. Imperfect Demand Expectations and Endogenous Business Cycles By Orlando Gomes
  61. Hot Money Inflows and Monetary Stability in China: How the People's Bank of China Took up the Challenge By Vincent Bouvatier
  62. The Ups and Downs of New Zealand House Prices By Viv B. Hall; John McDermott
  63. A Simple Business-Cycle Model with Schumpeterian Features By Luis F. Costa; Huw D. Dixon
  64. The Good, The Bad, and The Ugly: An Inquiry into the Causes and Nature of Credit Cycles By Kiminori Matsuyama
  65. The Interaction of Inflation and Financial Development with Endogenous Growth By Max Gillman; Mark N Harris; Michal Kejak
  67. Price setting in the euro area: some stylised facts from individual producer price data By Dias, Daniel; Sabbatini, Roberto; Dossche, Maarten; Stahl, Harald; Gautier, Erwan; Vermeulen, Philip; Hernando, Ignacio
  68. Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information By De Pooter, Michiel; Ravazzolo, Francesco; van Dijk, Dick
  69. Structural balances and revenue windfalls - the role of asset prices revisited By Richard Morris; Ludger Schuknecht
  70. The New Keynesian Phillips Curve revisited By Pål Boug, Ådne Cappelen and Anders Rygh Swensen
  72. Price setting in the euro area : some stylised facts from individual producer price data By Philip Vermeulen; Daniel Dias; Maarten Dossche; Erwan Gautier; Ignacio Hernando; Roberto Sabbatini; Harald Stahl
  73. From Currency Unions to a World Currency: A Possibility? By Davide Furceri
  74. ``Taylored'' Rules. Does One Fit All? By Cinzia Alcidi; Alessandro Flamini; Andrea Fracasso
  75. Retirement, health, unemployment, the business cycle and automatic stabilization in the OECD By Julia Darby; Jacques Mélitz
  76. Nowcasting GDP and Inflation: The Real-Time Informational Content of Macroeconomic Data Releases By Domenico Giannone; Lucrezia Reichlin; David H Small
  77. What is global excess liquidity, and does it matter? By Rasmus Ruffer; Livio Stracca
  78. The foundations of money, payments and central banking: A review essay By Stephen Millard
  79. A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy By M. Ali Kemal
  80. Growth and Bubbles with Consumption Externalities By Kazuo Mino
  82. Inflation Targeting and Fear of Floating By Reginaldo Pinto Nogueira Junior
  83. Learning in a Misspecified Multivariate Self-Referential Linear Stochastic Model By Eran Guse
  84. Recession Looms for the U.S. Economy in 2007 By Dean Baker
  85. Explaining Exchange Rate Movements in New Member States of the European Union: Nominal and Real Convergence By Monika Blaszkiewicz-Schwartzman
  86. The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models By Huw Dixon
  87. The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data By Yoonsoo Lee
  88. The monetary model of hyperinflation : limits of the model validity By Alexandre SOKIC
  89. Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies By Enrique Alberola; José María Serena
  90. Investment, Profits and Employment in Kalecki & Keynes By Robert Dixon
  92. The Future of the Euro : A Public Choice Perspective By Vaubel, Roland
  93. Bayesian versus robust control approach towards parameter uncertainty in monetary policymaking: how close are the outcomes? Some illustrating evidence from the EMU economies By Juha Kilponen; Marc-Alexandre Sénégas; Jouko Vilmunen
  94. Business Cycles with Endogenous Mark-ups By Paulo Brito; Luis Costa; Huw Dixon
  95. Improving Business Cycle Forecasts’ Accuracy - What Can We Learn from Past Errors? By Roland Döhrn
  96. Exchange rate pass-through in emerging markets By Michele Ca’ Zorzi; Elke Hahn; Marcelo Sánchez
  97. The Impact Of The European Union Fiscal Rules On Economic Growth By Castro, Vítor
  98. Constructing Historical Euro Area Data By Heather Anderson; Mardi Dungey; Denise Osborn; Farshid Vahid
  99. Capital Flows, Interest Rates and Precautionary Behaviour: a model of Global Imbalances By Marcus Miller; Lei Zhang
  100. Empirical Macromodels Under Test By Buscher, Herbert S.; Buslei, Hermann; Göggelmann, Klaus; Koschel, Henrike
  101. Leading indicator properties of the US corporate spreads By Nektarios Aslanidis; Andrea Cipollini
  102. Creative Destruction and Firm-Specific Performance Heterogeneity By Hyunbae Chun; Jung-Wook Kim; Randall Morck; Bernard Yeung
  103. A Study on Household Consumption and Confidence Index: Case of Turkey By Erdogdu, Oya
  104. Signaling in a Global Game: Coordination and Policy Traps By George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
  105. Did F. A. Hayek Embrace Popperian Falsificationism? - A Critical Comment About Certain Theses of Popper, Duhem and Austrian Methodology By van den Hauwe, Ludwig
  106. Uncovering Yield Parity: A New Insight into the UIP Puzzle through the Stationarity of Long Maturity Forward Rates By Zsolt Darvas; Gábor Rappai; Zoltán Schepp
  107. Population ageing and consumption demand in Belgium By Mathieu Lefebvre
  109. Financial System Architecture: The Role of Systemic Risk, Added Value and Liquidity By Jose M P Jorge
  110. The Impact of Paying Interest on Reserves in the Presence of Government Deficit Financing By Mark G. Guzman
  111. The Labour Market Implications of Large-Scale Restructuring in the Banking Sector in Turkey By Kibritçioğlu, Aykut
  113. Policy Analysis in a Matching Model with Intensive and Extensive Margins By Lei Fang; Richard Rogerson
  114. Wealth as a Signal in the Search Model of Money By Tsunao Okumura
  115. Integrating credit and interest rate risk: A theoretical framework and an application to banks' balance sheets By Mathias Drehmann; Steffen Sorensen; Marco Stringa
  116. 2007 Housing Bubble Update: 10 Economic Indicators to Watch By Dean Baker
  117. La economía boliviana en el primer año By Mark Weisbrot
  118. Textiles Protection and Poverty in South Africa/La protection du secteur des textiles et la pauvreté en Afrique du Sud: une analyse en équilibre général calculable dynamique micro-simulé By Ramos Mabugu; Margaret Chitiga
  119. Use, misuse and proper use of national accounts statistics By Bos, Frits
  120. Household Savings in Germany By Börsch-Supan, Axel; Reil-Held, Anette; Rodepeter, Ralf; Schnabel, Reinhold
  121. The German Savings Puzzle By Börsch-Supan,Axel; Reil-Held, Anette; Rodepeter, Ralf; Schnabel, Reinhold
  122. Toda and Yamamoto Causality Tests Between Per Capita Saving and Per Capita GDP for India By Sinha, Dipendra; Sinha, Tapen
  123. Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK By Christian Mose Nielsen
  124. Bond Portfolios and Two-Fund Separation in the Lucas Asset-Pricing Model By Kenneth L. Judd; Felix Kubler; Karl Schmedders
  125. Internal Increasing Returns to Scale and Economic Growth By John A. List; Haiwen Zhou
  126. On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents. By Andres Erosa; Ana Hidalgo
  127. Macro-panels and Reality By Cubadda Gianluca; Hecq Alain; Palm Franz C.
  128. Real-Time Effects of Central Bank Interventions in the Euro Market By Rasmus Fatum; Jesper Pedersen
  129. Aging and International Capital Flows By Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim
  130. A simulation of the effects of the personal income tax reform on the tax burden By Isabel Argimón; Francisco de Castro; Ángel Luis Gómez
  131. Text and artefacts for creating a "World of Investment Decision-Making" : an empirical study into investment procedures By DAMBRIN, Claire; PEZET, Anne
  132. Sobre ?Clase y Explotación? en la Corriente Principal de la Economía By Howard Petith
  133. Argentina: Bolivia's Economy: The First Year By Mark Weisbrot
  134. Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators By Virginie Coudert; Mathieu Gex
  135. "Liquidity Risk Aversion, Debt Maturity, and Current Account Surpluses: A Theory and Evidence from East Asia" By Shin-ichi Fukuda; Yoshifumi Kon
  136. Stable Solutions to Homogeneous Difference-Differential Equations with Constant Coefficients By Krtscha, Manfred; v. Kalckreuth, Ulf
  137. The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis By Eduardo A. Cavallo
  138. Geography and Industry Meets Venture Capital By Yochanan Shachmurove
  139. An Early Warning Model for EU banks with Detection of the Adverse Selection Effect By Olivier BROSSARD (LEREPS-GRES ); Frédéric DUCROZET (PSE - Crédit Agricole); Adrian ROCHE (EconomiX - Crédit Agricole)
  140. Equilibre dynamique, étude de trajectoires dans un système économique. Le cas du marché du travail. By Marie Cottrell; Patrice Gaubert; Joseph Rynkiewicz; Patrick Letrémy
  141. Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region By Raghbendra Jha; T. Palanivel
  142. Pension reform, capital markets, and the rate of return By Börsch-Supan, Axel; Heiss, Florian; Winter, Joachim
  143. Marxian Insights from the Mainstream By Howard Petith
  144. The Rise of Democracy in Europe and the Fight Against Mass Poverty in Latin America: The Implications for Marxist Thought of Some Recent Mainstream Papers By Howard Petith

  1. By: M. Alper Cenesiz (Saarland University, University of Kiel)
    Abstract: In this paper, I developed a new cost channel of monetary policy transmission in a small scale, dynamic, general equilibrium model. The new cost channel of monetary policy transmission implies that the frequency of price adjustment increases in the nominal interest rate. I found that allowing for the new cost channel can account both for the muted and delayed inflation response and for the persistence of the output response to monetary policy shocks. Without any additional assumption, my model can also generate the delayed output response, though for a slightly more competitive goods market calibration
    Keywords: Price stickiness, Monetary policy, Price adjustment, Persistence
    JEL: E31 E32 E52
    Date: 2007–02–02
  2. By: Arnab Bhattacharjee (University of St Andrews); Christoph Thoenissen (University of St Andrews)
    Abstract: We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric distance measures based on comparing model and data variance-covariance matrices to compare the different models. We find all models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data
    Keywords: Intertemporal Macroeconomics, monetary policy, role of money, model selection, model selection
    JEL: C13 E32 E52
    Date: 2007–02–02
  3. By: Galindev Ragchaasuren (Department of Economics University of Essex)
    Abstract: This paper presents a stochastic monetary growth model with nominal rigidities and active monetary policy in which technological change contains both deliberate (internal) and serendipitous (external) learning mechanisms. The model is used to describe how the implications of monetary stabilization policy for the long-run economic performance could change due to the ambiguity on the relationship between secular growth and cyclical volatility
    Keywords: growth, cyclies, money, stabilisation policy
    JEL: E32 E52 O42
    Date: 2007–02–02
  4. By: Alexander Mihailov (University of Essex)
    Abstract: We investigate whether increased independence affects central bank behavior when monetary policy is already in an inflation targeting regime. Taking advantage of the recent UK experience to identify such an exogenous change, we estimate Taylor rules via alternative methods, specifications and proxies. Our contribution is to detect two novel results: the Bank of England has responded to the output gap, not growth; and in a stronger way after receiving operational independence. Both findings are consistent with the Bank's mandate and New Keynesian monetary theory. Economic expansion and anchored inflation have thus complemented greater autonomy in influencing the Bank's policy feedback
    Keywords: asymmetry of monetary policy reaction function across the business cycle, response to output gap vs output growth, Taylor rules, operational independence, inflation targeting, United Kingdom
    JEL: E52 E58 F41
    Date: 2007–02–02
  5. By: Cifter, Atilla; Ozun, Alper
    Abstract: This study aims to test the money base, money supply, credit capacity, industrial production index, interest rates, inflation and real exchange rate data of Turkey during the years 1997 – 2006 through the monetary transmission mechanism and passive money hypothesis using the vector error correction model based causality test. Empirical findings show that the passive money supply hypothesis of the new Keynesian economy is supported in part by accommodationalist views and they do not confirm to the view points of structuralist and liquidity preference theorist. However, according to the monetary transmission mechanism it has been established that long-term money supply only affects general price levels and production is influenced by interest rates in the new economy period for Turkish economy. Empirical findings show that in the new economy period interest transmission mechanism are brought to the fore.
    Keywords: Monetary transmission mechanism; money supply endogeneity; Credit; New Keynesian Economy
    JEL: E4 E52 E58 C32
    Date: 2007–01–01
  6. By: Alvaro Aguiar (Faculdade de Economia, Universidade do Porto); Inês Drumond (Faculdade de Economia, Universidade do Porto)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy, by bringing together the borrowers' balance sheet channel with an additional channel working through bank capital, considering capital adequacy regulations and households' preferences for liquidity. Detailing a dynamic new Keynesian general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that the introduction of bank capital amplifies monetary shocks to the macroeconomy through a liquidity premium effect on the external finance premium. This effect, together with the financial accelerator, generates quantitatively large amplification effects
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism
    JEL: E44 E32 E52 G28
    Date: 2007–02–02
  7. By: Richard Mash (Oxford University)
    Abstract: Models in which pricing decisions depend on indexing or rule of thumb behaviour have become prominent in the monetary policy literature and tend to match macroeconomic data well given their prediction of inflation persistence. The extent to which firms index their prices to past inflation has been assumed constant. We explore the consequences of endogenising the degree of indexing such that firms move closer to constrained optimal prices and find that the degree of indexing depends sensitively on firms’ perceptions of the degree of persistence in the economy. This has striking implications. Firstly models in which the degree of indexing is fixed are vulnerable to the Lucas critique since that parameter will change in different regimes. Secondly we study the interactions between perceived persistence, which governs indexing and thus the quantitative significance of lagged inflation in the Phillips curve, and actual persistence which depends on the latter. We find that if firms adjust their indexing behaviour to actual persistence, lagged inflation disappears from the Phillips curve and the models no longer predict persistence
    Keywords: Monetary policy, Phillips curve, Inflation Persistence, Microfoundations, Indexing
    JEL: E52 E58 E22
    Date: 2007–02–02
  8. By: Claudia Kwapil (Oesterreichische Nationalbank); Johann Scharler (Oesterreichische Nationalbank)
    Abstract: In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area.
    Keywords: Interest Rate Pass-Through, Equilibrium Determinacy, Stability
    JEL: E32 E52 E58
    Date: 2007–02–02
  9. By: Rossi, Lorenza; Mattesini, Fabrizio
    Abstract: We analyze, in this paper, DSNK general equilibrium model with indivisible labor where firms may belong to two different final goods producing sectors: one where wages and employment are determined in competitive labor markets and the orther where wages and employment are the result of a contractual process between unions and firms. The presence of monopoly unions introduces real wage rigidity in the model and this implies a trade-off between output stabilization and inflation stabilization i.e., as in Blanchard and Galì (2005), the so called "divine coincidence" does not hold. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock is crucially determined by the proportion of firms that belong to the competitive sector. The larger is this number, the smaller are these effects. We derive a welfare based objective function as a second order Taylor approximation of the expected utility of the economy's representative agent and we analyze optimal monetary policy under discretion and under constrained commitment. We show that the larger is the number of firms that belong to the competitive sector, the smaller should be the response of the nominal interest rate to exogenous productivity and cost-push shocks. If we consider, however, an instrument rule where the interest rate must react to inflationary expectations, the rule is not affected by the structure of the labor market. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is larger than real wage volatility.
    Keywords: optimal Monetary Policy; Taylor Rule; Dual Labor Market; Monopolist Union
    JEL: E32 E24 J51 J23 E52
    Date: 2007–01–09
  10. By: Eric Mayer (University of Wuerzburg); Oliver Hülsewig (Ifo Institute, Munich); Timo Wollmershäuser (Ifo Institute, Munich)
    Abstract: This paper provides a micro-foundation of the behavior of the banking industry in a Stochastic Dynamic General Equilibrium model of the New Keynesian style. The role of banks is reduced to the supply of loans to ¯rms that must pay the wage bill before they receive revenues from sell- ing their products. This leads to the so-called cost channel of monetary policy transmission. Our model is based on the existence of a bank{client relationship which provides a rationale for monopolistic competition in the loan market. Using a Calvo-type staggered price setting approach, banks decide on their loan supply in the light of expectations about the future course of monetary policy, implying that the adjustment of loan rates to a monetary policy shock is sticky. This is in contrast to Ravenna and Walsh (2006) who focus primarily on banks operating under perfect competition, which means that the loan rate always equals the money market rate. The structural parameters of our model are determined using a minimum distance estimation, which matches the theoretical impulse responses to the empirical responses of an estimated VAR for the euro zone to a monetary policy shock
    Keywords: New Keynesian Model, monetary policy transmission, bank behavior, cost channel, minimum distance estimation
    JEL: E44 E52 E58
    Date: 2007–02–02
  11. By: Bernd Hayo (University of Marburg)
    Abstract: This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception.
    Keywords: Taylor rule, monetary policy, ECB, European Monetary Union
    JEL: E5
    Date: 2007–02–02
  12. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business)
    Abstract: This paper reviews 22 years of UK monetary policy (1971-1992) using official record from the Quarterly Bulletin of the Bank of England. A definition of policy shocks, which allows for the exclusion of cases of interest rate increases, which were unrelated to the monetary policy objectives, is used. The empirical analysis shows that output displays the usual hump-shaped response after a shock to the policy indicator but adjustment to pre-shock levels is slow. Other variables also display theory-consistent behaviour. Based on this policy indicator monetary policy is found to cause very limited output fluctuation in a four year horizon. The policy indicator is found to outperform the intervention rate as a measure of policy
    Keywords: monetary policy shocks, narrative approach, UK
    JEL: E52 E58
    Date: 2007–02–02
  13. By: ÿlvaro Aguiar (CEMPRE-Faculdade de Economia do Porto); Ana Paula Ribeiro (CEMPRE-Faculdade de Economia do Porto)
    Abstract: Lagged benefits relative to costs can politically block an efficiency-enhancing labor market reform, lending support to the "two-handed approach". An accommodating monetary policy, conducted alongside the reform, could help bringing the positive effects of the reform to the fore. In order to identify the mechanisms through which monetary policy may affect the political sustainability of a reform, we add stylized features of the labor market to a standard New-Keynesian model for monetary policy analysis. A labor market reform is modeled as a structural change inducing a permanent shift in the flexible-price unemployment and output levels. In addition to the permanent gains, the impact of the timing and magnitude of the reform-induced adjustments on the welfare of workers - employed and unemployed - is crucial to the political feasibility of the reform. Since the adjustments depend, on one hand, on the macroeconomic structure and, on the other hand, can be influenced by monetary policy, we simulate various degrees of output persistence across different policy rules. We find that, if inertia is present, monetary policy affects the political support for the reform. Choosing a particular policy rule, as well as the business cycle timing of the reform, are means to enhance political sustainability
    JEL: E24 E37 E52 E61
    Date: 2007–02–02
  14. By: Gomes, O. (IPL, Lisbon); Mendes, D. A. (ISCTE, Lisbon); Mendes, V. P. (ISCTE, Lisbon); Sousa Ramos, J. (IST, Lisbon)
    Abstract: There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy with sticky prices a la Calvo and forward looking behavior. In this paper we extend this standard model by introducing nonlinearity into the Phillips curve. As the linear Phillips curve may be questioned on theoretical grounds and seems not to be favoured by empirical evidence, a similar procedure has already been undertaken in a series papers over the last few years, e.g., Schaling (1999), Semmler and Zhang (2004), Nobay and Peel (2000), Tambakis (1999), and Dolado et al. (2004). However, these papers were mainly concerned with the analysis of the problem of inflation bias, by deriving an interest rate rule which is nonlinear, leaving the issues of stability and the possible existence of endogenous cycles in such a framework mostly overlooked. Under the specific form of nonlinearity proposed in our paper (which allows for both convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into a fully deterministic structure of the standard model produces significant changes to the major conclusions regarding stability and the efficiency of monetary policy in the standard model. We should emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable and chaotic fixed points (endogenous cycles); (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem interesting. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate may have a lower mean and is certainly less volatile; secondly, for changes in the degree of price stickiness the results are not are clear cut as in the previous case, however, we can also observe that when such stickiness is high the inflation rate tends to display a somewhat larger mean and also higher volatility; and thirdly, it shows that the target values for inflation and the output gap (π^,x^), both crucially affect the dynamics of the economy in terms of average values and volatility of the endogenous variables --- e.g., the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility --- while in the linear case only the π^ does so (obviously, only affecting in this case the level of the endogenous variables). Moreover, the existence of endogenous cycles due to chaotic motion may raise serious questions about whether the old dictum of monetary policy (that the Central Bank should conduct policy with discretion instead of commitment) is not still very much in the business of monetary policy.
    Keywords: Optimal monetary policy, Interest Rate Rules, Nonlinear Phillips Curve, Endogenous Fluctuations and Stabilization
    JEL: E52 E58
    Date: 2007–02–02
  15. By: Richard Holt (Edinburgh University)
    Abstract: New Keynesian models attempt to account for economic fluctuations under nominal rigidities without modelling unemployment. They struggle to generate observed output and inflation persistence. To address these issues, recent research embeds labour search with matching frictions in a New Keynesian framework. Models with labour market search, matching and endogenous job destruction, feature unemployment, but generate an upward sloping Beveridge curve and overly volatile gross job flows. By introducing a second margin, hours, in the adjustment of labour input I obtain a negative unemployment-vacancy correlation and plausible gross job flow volatilities without affecting the desirable persistence properties of the model. I show that these results are affected by real wage rigidity, endogenous job destruction and capital adjustment costs
    Keywords: Beveridge Curve, Hours, Gross Job Flows, Inflation
    JEL: E24 E31 J64
    Date: 2007–02–02
  16. By: David-Jan Jansen (De Nederlandsche Bank); Jakob de Haan (Rijksuniversiteit Groningen)
    Abstract: We show that comments by euro area central bankers contain information on future ECB interest rate decisions, but that the comments mainly reflect recent developments in macroeconomic variables. Furthermore, models using only communication variables are outperformed by straightforward Taylor rule models. During the first years of the European Economic and Monetary Union, comments by ECB Executive Board members and high-level Bundesbank policy-makers were more informative than comments by national central bank presidents. We also find that differences of opinion were informative when they concerned the outlook for economic growth. Finally, our results suggest that the ECB used communication especially to signal interest rate increases
    Keywords: central bank communication, ECB, interest rate decisions
    JEL: E43 E52 E58
    Date: 2007–02–02
  17. By: Bianca De Paoli, Alasdair Scott, Olaf Weeken (Bank of England)
    Abstract: To match the stylised facts of goods and labour markets, the canonical New Keynesian model augments the optimising neoclassical growth model with nominal and real rigidities. We ask what the implications of this type of model are for asset prices. Using a second-order numerical solution to the model, we examine bond and equity returns, the equity risk premium, and the behaviour of the real and nominal term structure. We catalogue the factors that are most important for determining the size of risk premia and the slope and level of the yeild curve. In a world of technology shocks only, increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces risk premia. In a world of monetary policy shocks only, both real and nominal rigidities raise risk premia. The results indicate that the iimplications of the New Keynesian nodel for average asset returns depend critically on the characterisation of shocks hitting the model economy
    Keywords: Asset prices, New Keynesian, Rigidities
    JEL: E43 E44 E52 G12
    Date: 2007–02–02
  18. By: Sean Holly (Cambridge University); Emiliano Santoro (Cambridge University)
    Abstract: There is growing evidence that the cross section of the growth rate of firms is subject to systematic distortions at business cycle frequencies. In this paper we briefly review this evidence and then offer a theoretical model that incorporates nonlinearities in the way in which firms respond to aggregate and ideosyncratic shocks. We are able to replicate the most commonly found regularity - skewness in the cross section is counter-cyclical - and show that the strength of this relationship varies with the extent of financial fragility
    Keywords: financial fragility, cross section, business cycle
    JEL: E32 E44
    Date: 2007–02–02
  19. By: Riccardo Bonci (Bank of Italy); Francesco Columba (Bank of Italy)
    Abstract: We study in a VAR model the effects of monetary policy shocks with new Italian flow of funds data for 1980-2002. First, our results are consistent with the literature, without being affected by commonly found puzzles. Second, new features of the transmission of monetary policy shocks to the Italian economy are provided. We do not find evidence of financial frictions which prevent firms from reduction of nominal expenditures. Households quickly adjust portfolios leading to a careful evaluation of limited participation hypothesis. Finally, the public sector increases net borrowing after the shock, improving on puzzling opposite results in the literature.
    Keywords: flow of funds, monetary policy, VAR.
    JEL: E32 E52
    Date: 2007–02–02
  20. By: Andrea Monticini (University of Exeter); Giacomo Vaciago (Universita' Cattolica Milano)
    Abstract: This paper investigates, for the first time, the reactions of markets to the monetary policy decisions of their own Central Bank and to the decisions of the Central Banks of other countries. In particular, using daily interest rates to estimate the impact of the monetary policy announcements of a Central Bank, we analyse the effect of the FED, ECB, and BoE monetary policy announcements on their own markets, and on the others. Surprisingly, we find that while the US rates respond only to FED announcements, and the British rates respond mainly to BoE announcements and marginally to FED announcements, the response of Euro bond rates to the FED announcements is stronger than their response to ECB announcements
    Keywords: Monetary Policy, Term structure of interest rates, Interdependence
    JEL: E4 E43 E52 F42
    Date: 2007–02–02
  21. By: Hsiao Chink Tang
    Abstract: This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12-variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off, the interest rate channel is found to be the most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.
    Date: 2006–08
  22. By: Johann Scharler (Oesterreichische Nationalbank); Sylvia Kaufmann (Oesterreichische Nationalbank)
    Abstract: In this paper we study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We analyze the different effects that monetary policy has on the economy, in particular on output and inflation, which are due to differences in country-specific financial systems. For a plausible calibration of the model, differences in financial systems have a rather limited effect on the transmission mechanism and do not appear to give rise to cross country differences in the strength of the cost channel
    Keywords: Financial Systems, Cost Channel, Transmission Mechanism
    JEL: E40 E50
    Date: 2007–02–02
  23. By: Alvaro Angeriz (CCEPP and Wolfson College, University of Cambridge); Philip Arestis (CCEPP and Wolfson College, University of Cambridge)
    Abstract: The aim of this paper is to deal with the empirical aspects of the ‘new’ monetary policy framework, known as Inflation Targeting. Applying Intervention Analysis to multivariate Structural Time Series models, new empirical evidence is produced in the case of a number of OECD countries,. These results demonstrate that although Inflation Targeting has gone hand-in hand with low inflation, the strategy was introduced well after inflation had begun its downward trend. But, then, Inflation Targeting ‘locks in’ low inflation rates. The evidence produced in this paper suggests that non-IT central banks have also been successful on this score.
    Keywords: Inflation targeting, Intervention Analysis, Multivariate Structural Time Series
    JEL: E31 E52
    Date: 2007–02–02
  24. By: Peter Spencer (University of York)
    Abstract: This paper develops an arbitrage-free macroeconomic model of the yield curve and uses this to explain the behaviour of the UK Treasury bond market. Unlike previous models of this type, which assume a homoscedastic error process I develop a general affine model which allows volatility to be conditioned by the level of inflation (and possibly other macroeconomic variables). In my preferred empirical specification conditional volatility and risk premia are affine in the level of inflation. I test this model against more general specifications in which the risk premia also depend upon interest rate and other macro variables, but find little evidence of these wider effects. The resulting specification provides a parsimonious explanation of the behaviour of the UK yield curve, keying it in to the behaviour of the macroeconomy.
    Keywords: Times series models, Affine term structure model, macroeconomic factors, monetary policy
    Date: 2007–02–02
  25. By: Pelin Ilbas (Catholic University of Leuven)
    Abstract: This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period's inflation rate seem to perform relatively worse.
    Keywords: monetary policy, discretion, commitment
    JEL: E52 E58
    Date: 2007–02–02
  26. By: Jean-Stéphane MESONNIER (Banque de France)
    Abstract: The real interest rate gap -IRG-, i.e. the gap between the short term real interest rate and its “natural†level, is a theoretical concept of potential policy relevance for central banks, at least to evaluate the monetary policy stance, at best as a guideline for policy moves. This paper aims at clarifying the practical relevance of IRG indicators for monetary policy. To this end, it provides an empirical assessment of the usefulness of various univariate and multivariate estimates of the real IRG for predicting inflation, real activity and real credit growth in the euro area. On the basis of out-of-sample evidence using real-time data, I find that IRG measures are globally of little help to improve our knowledge of future inflation in the euro area. By contrast, some of the estimated IRG measures exhibit a significant predictive power for future real activity, in line with the intuition from a traditional IS curve, as well as for credit growth. Nevertheless, in most cases, the forecasting models that include estimated IRG do not outperform a simpler AR model augmented with the first difference of the nominal interest rate
    Keywords: natural rate of interest, monetary policy, forecasting
    JEL: C53 E37 E52
    Date: 2007–02–02
  27. By: Matthew Canzoneri (Department of Economics Georgetown University)
    Abstract: Non
    Date: 2007–02–02
  28. By: Agliari Anna (Catholic University of Piacenza); Assenza Tiziana (Catholic University of Piacenza); Delli Gatti Domenico (Catholic University of Piacenza); Santoro Emiliano (University of Cambridge and University of Trento)
    Abstract: In this paper we develop an extended version of the original Kiyotaki and Moore's model ("Credit Cycles" Journal of Political Economy, vol. 105, no 2, April 1997)(hereafter KM) using an overlapping generation structure instead of the assumption of infinitely lived agents adopted by the authors. In each period the population consists of two classes of heterogeneous interacting agents, in particular: a financially constrained young agent (young farmer), a financially constrained old agent (old farmer), an unconstrained young agent (young gatherer), an unconstrained old agent (old gatherer). By assumption each young agent is endowed with one unit of labour. Heterogeneity is introduced in the model by assuming that each class of agents use different technologies to pro- duce the same non durable good. If we study the effect of a technological shock it is possible to demonstrate that its effects are persistent over time in fact the mechanism that it induces is the reallocation the durable asset ("land")among agents. As in KM we develop a dynamic model in which the durable asset is not only an input for production processes but also collateralizable wealth to secure lenders from the risk of borrowers'default. In a context of intergenerational altruism, old agents leave a bequest to their offspring. Money is a means of payment and a reserve of value because it enables to access consumption in old age. For simplicity we assume that preferences are defined over consumption and bequest of the agent when old. Money plays two different and contrasting roles with respect to landholding. On the one hand, given the bequest, the higher the amount of money the young wants to hold, the lower landholding. On the other hand the higher the money of the old, the higher the resources available to him and the higher bequest and landholding. We study the complex dynamics of the allocation of land to farmers and gatherers - which determines aggregate output - and of the price of the durable asset. If a policy move does not change the ratio of money of the farmer and of the gatherer, i.e. if the central bank changes the rates of growth of the two monetary aggregates by the same amount, monetary policy is superneutral, i.e. the allocation of land to the farmer and to the gatherer does not change, real variables are unaffected and the only e¤ect of the policy move is an increase in the rate of inflation, which is pinned down to the (uniform) rate of change of money, and of the nominal interest rate. If, on the other hand, the move is differentiated, i.e. the central bank changes the rates of growth of the two monetary aggregates by different amounts so that the rates of growth are heterogeneous, money is not superneutral, i.e. the allocation of land changes and real variables are permanently affected, even if the rates of growth of the two aggregates go back to the original value afterwards
    Keywords: Credit Cycles, monetary policy
    JEL: E3 E4
    Date: 2007–02–02
  29. By: Oliver Grimm (Center of Economic Research (CER-ETH) at ETH Zurich)
    Abstract: In economic discussions, currency board systems are frequently described as arrangements with self-binding character to the monetary authorities by their strict rules and establishments by law. Hard pegs and especially currency boards are often seen as remedies to overcome economic and financial turmoils and to return to low inflation. A sustainable debt level closely linked to a disciplined fiscal policy is, however, a premise for medium-term success. We show in a two-period model that the choice of a currency board can increase fiscal discipline compared to a standard peg regime. We derive, furthermore, the conditions for a currency boards to gain a stability advantage compared to a common peg system.
    Keywords: currency board, fixed exchange rate, commitment, inflation bias, fiscal discipline, public debt, time-inconsistency problem
    JEL: E52 E58 E62 F33
    Date: 2007–03
  30. By: Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper provides a systematic comparison of the Eurosystem, the US Federal Reserve and the Bank of Japan. These monetary authorities exhibit somewhat different status and tasks, which reflect different historical conditions and national characteristics. However, widespread changes in central banking practices in the direction of greater independence and increased transparency, as well as changes in the economic and financial environment over the past 15-20 years, have contributed to reduce the differences among these three world’s principal monetary authorities. A comparison based on simple “over-the-counter” policy reaction functions shows no striking differences in terms of monetary policy implementation. JEL Classification: E40, E52, E58.
    Keywords: Monetary policy, central banks and their policies, monetary policy committees.
    Date: 2007–03
  31. By: Fousseni Chabi-Yo; Jun Yang
    Abstract: We study the joint dynamics of macroeconomic variables, bond yields, and the exchange rate in an empirical two-country New-Keynesian model complemented with a no-arbitrage term structure model. With Canadian and US data, we are able to study the impact of macroeconomic shocks from both countries on their yield curves and the exchange rate. The variance decomposition of the yield level shows that the US monetary policy and aggregate supply shocks explain a majority of the unconditional variations in Canadian yields. They also explain up to 50% of the variations in the expected excess holding period returns of Canadian bonds. In addition, Canadian monetary policy shocks explain more than 70% of the variations in Canadian yields over short and medium forecast horizons. It also explains around 40% of the expected excess holding period returns of Canadian bonds. Both Canadian and US macroeconomic shocks help explain the dynamics of the exchange rate and the time-varying exchange risk premium.
    Keywords: Debt management; Exchange rates; Interest rates; Financial markets; Econometric and statistical methods
    JEL: E12 E43 F41 G12 G15
    Date: 2007
  32. By: Frank Browne (Monetary Policy and Financial Stability Department, Central Bank and Financial Services Authority of Ireland, P.O. Box 559, Dame Street, Dublin 2, Ireland.); David Cronin (Corresponding author: Monetary Policy and Financial Stability Department, Central Bank and Financial Services Authority of Ireland, P.O. Box 559, Dame Street, Dublin 2, Ireland.)
    Abstract: The influence of commodity prices on consumer prices is usually seen as originating in commodity markets. We argue, however, that long run and short run relationships should exist between commodity prices, consumer prices and money and that the influence of commodity prices on consumer prices occurs through a money-driven overshooting of commodity prices being corrected over time. Using a cointegrating VAR framework and US data, our empirical findings are supportive of these relationships, with both commodity and consumer prices proportional to the money supply in the long run, commodity prices initially overshooting their new equilibrium values in response to a money supply shock, and the deviation of commodity prices from their equilibrium values having explanatory power for subsequent consumer price inflation. JEL Classification: E31, E51, E52.
    Keywords: Overshooting, VECM, impulse response analysis.
    Date: 2007–03
  33. By: Renatas Kizys (Department of Economics and Related Studies, University of York); Peter Spencer (Department of Economics and Related Studies, University of York)
    Abstract: In this paper, we used modified multivariate EGARCH-M models to assess the relation between the equity risk premium, macroeconomic risk, and inflationary expectations. To rationalise this link between equity risk premia and macroeconomic volatilities, we built our empirical study on the stochastic discount factor (SDF) model. As an innovative feature of our empirical model, we used long-term government bond yields in order to explain this risk-return relation. Our research suggests that stock market investors should use long-term government bond yield for the UK and term spread for the US in order to instrument their assessment of stock market investment opportunities and riskiness. We also document that the relevance of the short-term interest rates has decreased over the last decade, whereas the relevance of the long-term government bond yields, by contrast, has increased. With regard to the risk-return relation, we found the UK investors tend to significantly price in inflation risk premia. Estimation results strongly suggest that the decline in macroeconomic volatilities might have played an increasingly important role in reducing risk premia in the US and, to some extent, in the UK
    Keywords: Asset pricing, Risk premium, Macroeconomic volatility, Stochastic discount factor model, Multivariate EGARCH-M model
    JEL: E32 E44 G12
    Date: 2007–02–02
  34. By: Denise Côté; Christopher Graham
    Abstract: In this paper, the authors examine the aggregate national balance-sheets of non-financial corporations in Australia and the G7 countries with a view to assessing both their financial structure and their financial position. More importantly, the authors investigate whether the financial position of non-financial corporations (i.e., debt-to-equity ratio) is material to the economy's investment prospects and whether the importance of this channel differs depending on the structure of corporate financing i.e., bank-based or market-oriented financing structures. Based on a dynamic business investment error-correction model that controls for the opportunity cost of capital and output growth, the authors test the above hypotheses using a quarterly panel dataset of eight developed economies over the 1992-2005 period. Their empirical results suggest that the financial position of non-financial corporations has a statistically significant impact on aggregate business investment growth, although the effect is quantitatively modest. Thus, their findings are consistent with the prediction of models that feature credit market imperfections such as costly information and asymmetric information. Moreover, the effect of corporate financial position appears to be statistically equivalent regardless of whether a country's corporations predominantly finance their investments through bank borrowing or market-oriented financing.
    Keywords: Business fluctuations and cycles; International topics
    JEL: E22 E32 E44
    Date: 2007
  35. By: Richard Clarida; Daniel Waldman
    Abstract: We show in a simple -- but robust -- theoretical monetary exchange rate model that the sign of the covariance between an inflation surprise and the nominal exchange rate can tell us something about how monetary policy is conducted. Specifically, we show that 'bad news' about inflation -- that it is higher than expected -- can be 'good news' for the nominal exchange rate -- that it appreciates on this news -- if the central bank has an inflation target that it implements with a Taylor Rule. The empirical work in this paper examines point sampled data on inflation announcements and the reaction of nominal exchange rates in 10 minute windows around these announcements for 10 countries and several different inflation measures for the period July 2001 through March 2005. When we pool the data, we do in fact find that bad news about inflation is indeed good news for the nominal exchange rate, that the results are statistically significant, and that the r-square is substantial, in excess of 0.25 for core measures of inflation. We also find significant differences comparing the inflation targeting countries and the two non-inflation targeting countries.
    JEL: E31 F3 F31
    Date: 2007–04
  36. By: Timothy Kam; Kirdan Lees; Philip Liu
    Abstract: We estimate the underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stablizing the real exchange rate. All three central banks share a cocnern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective.
    JEL: C51 E52 F41
    Date: 2006–11
  37. By: António Afonso (ECB and ISEG/UTL-Technical University of Lisbon)
    Abstract: In order to assess whether expansionary fiscal consolidations can be part of conventional wisdom, panel data models for private consumption are estimated for the EU15 countries, using annual data over the period 1970–2005. Three alternative approaches to determine fiscal episodes are used, and the level of government indebtedness is also taken into account. The results show some evidence in favour of the existence of expansionary fiscal consolidations, for a few budgetary spending items (general government final consumption, social transfers, and taxes), depending on the specification and on the time span used. On the other hand, the possibility of asymmetric effects of fiscal episodes does not seem to be corroborated by the results
    Keywords: fiscal policy, expansionary fiscal consolidations, non-Keynesian effects, panel data models, European Union
    JEL: C23 E21 E62
    Date: 2007–02–02
  38. By: Martin Ellison (University of Warwick); Lucio Sarno (Warwick Business School); Jouko Vilmunen (Bank of Finland)
    Abstract: We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks
    Keywords: learning; monetary policy, open economy
    JEL: D83 E52 F41
    Date: 2007–02–02
  39. By: Donal Bredin (University College Dublin); Stilianos Fountas (University of Macedonia and National University of Ireland)
    Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over the last forty years. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman's belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., by short-run inflation uncertainty
    Keywords: Inflation, Inflation uncertainty, Markov process, regime-switching heteroskedasticity
    JEL: E31 C22
    Date: 2007–02–02
  40. By: Timo Henckel
    Abstract: Some authors have argued that multiplicative uncertainty may be beneficial to society as the cautionary move reduces the inflation bias. Contrary to this claim, I show that, when there are non-atomistic wage setters, an increase in multiplicative uncertainty rises the real wage premium and unemployment and hence may reduce welfare. Furthermore, since central bank preferences also affect real variables, delegating policy to an independent central banker with an optimal degree of conservatism cannot, in general, deliver a second-best outcome.
    JEL: E52
    Date: 2006–07
  41. By: De Graeve Ferre (Ghent University)
    Abstract: This paper embeds the financial accelerator into a medium-scale DSGE model and estimates it using Bayesian methods. Incorporation of financial frictions enhances the model's description of the main macroeconomic aggregates. The financial accelerator accounts for approximately ten percent of monetary policy transmission. The model-consistent premium for external finance compares well to observable proxies of the premium, such as the high-yield spread. Fluctuations in the external finance premium are primarily driven by investment supply and monetary policy shocks. In terms of recession prediction, false signals of the premium can be given an economic interpretation
    Keywords: financial accelerator, external finance premium, DSGE model, Bayesian estimation
    JEL: E4 E5 G32
    Date: 2007–02–02
  42. By: Jos van Bommel (University of Oxford)
    Abstract: Using an overlapping generations model with liquidity risk, we show that equilibrium aggregate investment and asset prices are cyclical. In an economy with neither a beginning nor an ending date, a stationary equilibrium can be obtained. In a startable equilibrium however, economic activity is highly cyclical. The first generations and consecutive odd ones invest most of their wealth in new long lived technologies, while even generations flock to seasoned claims that are sold by liquidity challenged older cohorts. We find that this liquidity driven cyclicality is driven by the optimal length of the investment horizon, not by agent live span
    Keywords: Business Cycles, Overlapping Generations, Liquidity
    JEL: E32 D91 E43
    Date: 2007–02–02
  43. By: Konstantin A. Kholodilin (DIW Berlin)
    Abstract: The appropriately selected leading indicators can substantially improve the forecasting of the peaks and troughs of the business cycle. Using the novel methodology of the dynamic bi-factor model with Markov switching and the data for three largest European economies (France, Germany, and UK) we construct composite leading indicator (CLI) and composite coincident indicator (CCI) as well as corresponding recession probabilities. We estimate also a rival model of the Markov-switching VAR in order to see, which of the two models brings better outcomes. The recession dates derived from these models are compared to three reference chronologies: those of OECD and ECRI (growth cycles) and those obtained with quarterly Bry-Boschan procedure (classical cycles). Dynamic bi-factor model and MSVAR appear to predict the cyclical turning points equally well without systematic superiority of one model over another
    Keywords: Forecasting turning points, composite
    JEL: E32 C10
    Date: 2007–02–02
  44. By: Thams, Andreas
    Abstract: This paper analyzes German and Spanish fiscal policy using simple policy rules. We choose Germany and Spain, as both are Member States in the European Monetary Union (EMU) and underwent considerable increases in public debt in the early 1990s. We focus on the question, how fiscal policy behaves under rising public debt ratios. It is found that both Germany and Spain generally exhibit a positive relationship between government revenues and debt. Using Markov-switching techniques, we show that both countries underwent a change in policy behavior in the light of rising debt/output ratios at the end of the 1990s. Interestingly, this change in policy behavior differs in its characteristics across the two countries and seems to be non-permanent in the case of Germany.
    Keywords: Fiscal policy; policy rule; policy interaction; sustainability of fiscal policy; regime switches
    JEL: E61 E62 E65
    Date: 2007–04
  45. By: Bindseil, Ulrich (European Central Bank, Germany); Nyborg, Kjell G. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Monetary policy implementation is one of the most significant areas of interaction between central banking and financial markets. Historically, how this interaction takes place has been viewed as having an important impact on the ultimate objective of monetary policy, for example price stability or stimulating economic growth. In this article, we survey different approaches to monetary policy implementation. We cover briefly some of the historical trends, but give particular attention to the practice that is now (again) very common world-wide; namely, targeting short term interest rates. We discuss various ways this can be done and the implications for financial markets. We emphasize different European approaches, while also providing comparisons with the Fed.
    Keywords: Monetary policy; short term interest rates; financial markets
    JEL: E52 G10
    Date: 2007–03–27
  46. By: Giovanni Di Bartolomeo (University of Rome I and University of Teramo); Lorenza Rossi (University of Rome II and ISTAT); Massimiliano Tancioni (University of Rome I)
    Abstract: This paper develops and estimates a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with rule-of-thumb consumers and external habits. Our theoretical model has a closed-form solution which allows the analytical derivation of its dynamical and stability properties. These properties are analyzed and discussed in the light of their implications for the efficacy and the calibration of the conduct of the monetary policy. The model is then evaluated empirically, employing numerical simulations based on Monte Carlo Bayesian estimates of the structural parameters and impulse response analyses based on weakly identified SVECMs. The estimates are repeated for each of the G7 national economies. Providing single country estimates and simulations, we derive some indications on the relative efficacy of monetary policy and of its potential asymmetric effects resulting from the heterogeneity of the estimated models.
    Keywords: Rule-of-thumb, habits, monetary policy transmission, price puzzle, DSGE New Keynesian model, monetary policy, SVECM and Monte Carlo Bayesian estimators.
    Date: 2007–02–02
  47. By: Jan Bruha (External Economic Relations Division, Czech National Bank, Na P??kop? 28, 115 03 Praha 1, Czech Republic.); Jirí Podpiera (External Economic Relations Division, Czech National Bank, Na P??kop? 28, 115 03 Praha 1, Czech Republic.)
    Abstract: In this paper we present a two-country dynamic general equilibrium model of ex ante unequally developed countries. The model explains a key feature recently observed in transition economies – the long-run trend real exchange rate appreciation – through investments into quality. Our exchange-rate projections bear important policy implications, which we illustrate on the collision between the price and nominal exchange rate criterion for the European Monetary Union in a set of selected transition economies in Central and Eastern Europe. JEL Classification: E58, F15, F43.
    Keywords: Two-country modeling, Convergence, Monetary Policy, Currency area.
    Date: 2007–03
  48. By: Paul Mizen (University of Nottingham); Tae-Hwan Kim (University of Nottingham); Alan Thanaset (University of Nottingham)
    Abstract: Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution corresponding to different levels of interest rates. We find support for the Taylor principle at all but low rates in normal times for the US and the UK, but an increasingly aggressive (nonlinear) response to inflation as rates increase. This is robust to the inflation horizon, instrument choice and use of a real time output gap data. In abnormal times, described by events in Japan, we find strong support for the Taylor principle, and increasing aggression to inflation when rates increase. We confirm that increasing aggression towards inflation can be observed as interest rates approach zero. The results have implications for the modeling of economies when inflation is very low, and provides some insights into Japanese monetary policy in particular
    Keywords: Taylor Principle, policy rules, quantile regression, low inflation, Japan
    JEL: E42 E52
    Date: 2007–02–02
  49. By: Julian von Landesberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Empirical money demand analysis undertaken at the aggregate level may obscure behavioural differences between the financial, non-financial corporation and household sectors. Looking at the individual and more homogenous sectors may allow more clearly interpretable empirical relationships between money holding, scale variables and opportunity costs to be estimated. Two possible approaches can be taken to address this issue: aggregate and sectoral money holdings are explained either by a common set of determinant variables or by specific determinants, which may differ across sectors. In this analysis, the first approach has been chosen in order to highlight the different elasticities of the long-run money demand with respect to a common set of macroeconomic determinants and thereby to allow comparison of the model for the aggregate M3 with corresponding models for households, non-financial corporations and non-monetary financial intermediaries. This paper presents results for cointegrated VAR systems estimated over a sample of quarterly data from 1991 to 2005. A SUR system is estimated to cross-check the robustness of the findings and to analyse the importance of common shocks across sectors. JEL Classification: E41, C32, E59.
    Keywords: Sectoral money holdings, money demand, cointegrated VAR systems.
    Date: 2007–03
  50. By: Viv B. Hall; C. John McDermott
    Abstract: The current economic expansion is one of the more enduring in New Zealand's post-war period. But is this a change from past behaviour? We examine New Zealand's post-war business cycles for the sample period 1946q1 to 2005q4, using a newly developed 60-year quarterly time series for real GDP. The non-parametric Bry and Boschan (1971) algorithm is used to derive Classical business cycle turning points, and to underpin the establishment of key cycle characteristics. The latter include cycle asymmetries, volatility, diversity and degree of duration dependence. Markov-switching models estimated by Gibbs-sampling methods (Kim and Nelson, 1999), are then used to derive mean growth rate and volatility regimes, and to draw implications. Results point to a return to a more rhythmic pattern of long expansions and short contractions, after that pattern was interrupted following the oil shocks of the 1970s and New Zealand's reforms of the mid to late 1980s and early 1990s. More rhythmic patterns should not be mistaken for a predetermined pattern, as duration test results show that cycle expansion paths do not age. This, together with the onservation that rates of growth are not dissimilar across the more sustained expansion phases, implies that in order to enhance New Zealand's prospoerity, policies are required that extend business cycle expansions without allowing the excesses that undermine those expansions to build up.
    JEL: E23 E32
    Date: 2006–08
  51. By: N. Nergiz Dincer; Barry Eichengreen
    Abstract: Greater transparency in central bank operations is the most dramatic change in the conduct of monetary policy in recent years. In this paper we present new information on its extent and effects. We show that the trend is general: a large number of central banks have moved in the direction of greater transparency since the late 1990s. We then analyze the determinants and effects of central bank transparency in an integrated empirical framework. Transparency is greater in countries with more stable and developed political systems and deeper and more developed financial markets. Our preliminary analysis suggests broadly favorable if relatively weak impacts on inflation and output variability.
    JEL: E0 E4 F0
    Date: 2007–03
  52. 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
  53. By: Warwick J. McKibbin; Kang Yong Tan
    Abstract: This paper studies the implications of adaptive learning in the modelling of international linkages in a two-region MSG-Cubed (MSG3) model built on micro-founded behaviours of firms and households. The nature of the transmission process under rational expectations versus the adaptive learning methodology (evans and Honkapohja, 2001) is explored. We investigate the propagation mechanism within and across borders for various shocks and policy changes within the United States: change in inflation target, fiscal policy, productivity shock, and rise in equity risk. Adaptive learning is found to change the short run sign of transmission in all cases except for the inflation target shock. Learning could also resolve the quantity anomaly puzzle in the international RBC literature. The findings suggest the choice of expectations formation scheme is crucial in large-scale macroeconomic models.
    JEL: D83 E60 F42
    Date: 2006–12
  54. By: Alexandra Ferreira Lopes (ISEG, ISCTE and DINÂ MIA)
    Abstract: Czech Republic, Hungary and Poland will have to join the European and Monetary Union. Surprisingly, there is very little work on the welfare consequences of the loss of monetary policy flexibility for these countries. This paper fills this void by providing a framework to evaluate quantitatively the economic costs of joining the EMU. Using a two country dynamic general equilibrium model with sticky prices we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each country. The main contribution of our general equilibrium approach is that we can evaluate the effects of monetary policy in terms of welfare. Our findings suggest that these economies may experience sizable welfare losses as a result of joining the EMU. Results show that the cost associated with the loss of the monetary policy flexibility is bigger in the presence of persistence technological shocks, weak correlation of monetary shocks, strong risk aversion and a small trade share with the EMU
    Keywords: Monetary Policy, Eastern and Central Europe Countries, Euro, Open Economy Macroeconomics, General Equilibrium
    JEL: C68 E52 F41
    Date: 2007–02–02
  55. By: Sheila Dow (Department of Economics, University of Stirling); Matthias Klaes (Keele University, Centre for Economic Research); Alberto Montagnoli (Department of Economics, University of Stirling)
    Abstract: This paper analyses the signal uncertainty implicit in the communications of the Bank of England's Monetary Policy Committee (MPC). Unlike previous studies, which seek to construct a qualitative uncertainty index that heavily relies on subjective interpretations of key expressions, we limit ourselves to lexical frequencies of those expressions. We establish seasonality in the term 'risk' that coincides with Inflation Report publication dates, and matches what we identify as a surprising degree of prima facie seasonality in interest rate changes. Our findings suggest that frequencies of key terms expressing signal uncertainty in MPC minutes may either yield proxy measures to the amount of information at the disposal of the MPC, or offer evidence for the presence of an irreducible kind of signal uncertainty that shows up as white noise, casting doubt on the soundness of the various qualitative uncertainty indices found in the literature.
    Keywords: MPC, signal uncertainty, central bank uncertainty, word frequencies, uncertainty index, seasonality
    JEL: E52 E58 E12 D81
    Date: 2007–02
  56. 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
  57. By: Damjan Pfajfar (University of Cambridge); Emiliano Santoro (University of Cambridge)
    Abstract: Relying on Michigan Survey' monthly micro data on inflation expectations we try to determine the main features -- in terms of sources and degree of heterogeneity - of inflation expectation formation over different phases of the business cycle and for different demographic subgroups. We identify three regions of the overall distribution corresponding to different expectation formation processes, which display a heterogeneous response to main macroeconomic indicators: a static or highly autoregressive (LHS) group, a "nearly" rational group (middle), and a group of "pessimistic" agents (RHS), who overreact to macroeconomic fluctuations. Different learning rules have been applied to the data, in order to test whether agents' are learning and whether their expectations are converging towards rational expectations (perfect foresight). The results obtained by applying conventional and recursive methods confirm our initial conjecture that behaviour of agents in the RHS of distribution is more associated with learning dynamics. We also regard the overall distribution as a mixture of normal distributions. This strategy allows us to get a deeper understanding of the existence and the main features of convergence and learning in the data, as well as to identify the demographic participation in each subcomponent
    Keywords: Heterogeneous Expectations, Adaptive Learning, Survey Expectations
    JEL: E31 C53 D80
    Date: 2007–02–02
  58. By: Ram Kharel (Economics and Finance Brunel University); Chris Martin (Economics and Finance Brunel University); Costas Milas (Keele)
    Abstract: There is a large literature on monetary policy and asset prices. There are 2 aspects to this literature: do monetary policymakers respond to asset prices? should monetary policymakers respond to asset prices? This paper addresses the first of thes
    Date: 2007–02–02
  59. By: Atanas Christev (Heriot-Watt University, Edinburgh)
    Abstract: Emprical studies of hyperinflations reveal that the rational expectations hypothesis fails to hold. To address this issue, we study a model of hyperinflation and learning in an attempt to better understand the volatility in movements of expectations, money, and prices. The findings surprisingly imply that the dynamics under neural network learning appear to support the outcome achieved under least squares learning reported in the earlier literature. Relaxing the assumption that inflationary expectations are rational, however, is essential since it improves the fit of the model to actual data from episodes of severe hyperinflation. Simulations provide ample evidence that if equilibrium in the model exists, then the inflation rate converges to the low inflation rational expectations equilibrium. This suggests a classical result: a permanent increase in the government deficit raises the stationary inflation rate (Marcet and Sargent, 1989)
    Keywords: Hyperinflation, Learning, Rational Expectations Equlibria, Neural Networks
    JEL: C62 E63 E65
    Date: 2007–02–02
  60. By: Orlando Gomes (Escola Superior de Comunicação Social)
    Abstract: Optimal growth models aim at explaining long run trends of growth under the strong assumption of full efficiency in the allocation of resources. As a result, the steady state time paths of the main economic aggregates reflect constant, exogenous or endogenous, growth. To introduce business cycles in this optimality structure one has to consider some source of inefficiency. By assuming that firms adopt a simple non optimal rule to predict future demand, we let investment decisions to depart from the ones that would guarantee the total efficiency outcome. The new investment hypothesis is considered under three growth setups (the simple one equation Solow model of capital accumulation, the Ramsey model with consumption utility maximization, and a two sector endogenous growth setup); for each one of the models, we find that endogenous business cycles of various orders (regular and irregular) are observable
    Keywords: Endogenous business cycles, Nonlinear dynamics, Growth models, Bifurcation analysis.
    JEL: C61 E32 O41
    Date: 2007–02–02
  61. By: Vincent Bouvatier (Universite Paris 1)
    Abstract: Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They were even stronger than current account surpluses or net foreign direct investment inflows. As a result, the pace of international reserves accumulation in China increased significantly. This paper investigates if the rapid build up of international reserves in 2003 and 2004 was a source of monetary instability in China. The relationship between international reserves and domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from March 1995 to December 2005. Empirical results show that this relationship was stable and consistent with monetary stability. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this monetary stability
    Keywords: hot money inflows, international reserves, VECM, Granger causality
    JEL: C32 E5
    Date: 2007–02–02
  62. By: Viv B. Hall (Victoria University of Wellington); John McDermott (Victoria University of Wellington)
    Abstract: This paper identifies the expansion and contraction phases of New Zealand's national and regional house prices, by employing techniques typically used to study cycles in real activity, the so-called Classical cycle dating method. We then enquire into the nature of the cycles, addressing five questions: (1) What are the New Zealand and regional house price cycles, and do the regional cycles differ from the national cycle?; (2) What are the typical durations, magnitudes and shapes of these house price cycles?; (3) Do cycles in house prices match cycles in economic activity, at either national or regional levels?; (4) Does it matter which of the two main sets of house price series are used? i.e. Quotable Value New Zealand (QVNZ) or Real Estate Institute of New Zealand (REINZ)?; and (5) Does the sample period matter? Findings are evaluated in the context of work by Grimes, Aitken and Kerr (2004), and Hall and McDermott (2005). Avenues for further research are suggested.
    Keywords: House price cycles; regional business cycles; classical business cycle; New Zealand
    JEL: C22 E31 E32 R11 R15 R21
    Date: 2006–07
  63. By: Luis F. Costa (ISEG/Technical University of Lisbon and UECE); Huw D. Dixon (University of York)
    Abstract: We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new ‘prosperity plateau,’ but contractionary shocks only affect the market power of mature industries
    Keywords: Entry, Hysteresis, Mark-up
    JEL: E62 L13 L16
    Date: 2007–02–02
  64. By: Kiminori Matsuyama
    Abstract: This paper builds models of nonlinear dynamics in the aggregate investment and borrower net worth and uses them to study the causes and nature of endogenous credit cycles. The basic model has two types of projects: the Good and the Bad. The Bad is highly productive, but, unlike the Good, it generates less aggregate demand spillovers and contributes little to improve borrower net worth. Furthermore, it is relatively difficult to finance externally due to the agency problem. With a low net worth, the agents cannot finance the Bad, and much of the credit goes to finance the Good, even when the Bad projects are more profitable than the Good projects. This over-investment to the Good creates a boom and generates high aggregate demand spillovers. This leads to an improvement in borrower net worth, which makes it possible for the agents to finance the Bad. This shift in the composition of the credit from the Good to the Bad at the peak of the boom causes a deterioration of net worth. The whole process repeats itself. Endogenous fluctuations occur, as the Good breeds the Bad, and the Bad destroys the Good. The model is then extended to add a third type of the projects, the Ugly, which are unproductive but easy to finance. With a low net worth, the Good competes with the Ugly, creating the credit multiplier effect; with a high net worth, the Good competes with the Bad, creating the credit reversal effect. By combining these two effects, this model generates intermittency phenomena, i.e., relatively long periods of small and persistent movements punctuated intermittently by seemingly random-looking behaviors. Along these cycles, the economy exhibits asymmetric fluctuations; it experiences a long and slow process of recovery from a recession, followed by a rapid expansion, and possibly after a period of high volatility, plunges into a recession.
    Keywords: wealth-dependent borrowing constraints, heterogeneity of projects, aggregate demand spillovers, credit multiplier effect, credit reversal effect, endogenous credit cycles, nonlinear dynamics, chaos, flip and tangent bifurcations, homoclinic orbits, intermittency, asymmetric fluctuations
    JEL: E32 E44
  65. By: Max Gillman (Cardiff Business School); Mark N Harris (Monash University); Michal Kejak (CERGE-EI Prague)
    Abstract: A cash-in-advance, endogenous growth, economy defines financial development within a banking sector production function as the degree of scale economies for normalized capital and labor. Less financially developed economies have smaller such returns to scale, and can be credit constrained endogenously by a steeply sloping marginal cost of credit supply. The degree of scale economies uniquely determines the marginal cost curvature and the unit cost of financial intermedition, which is expressed in terms of an interest differential. The interest differential result allows for calibration of the finance production function using industry data. A hypothesis of how financial development interacts with inflation and growth is tested, using fixed effects panel estimation with endogeneity tests, dynamic panel estimation, and an extended use of multiple inflation rate splines in estimation of the growth rate
    Keywords: Inflation, financial development, growth, panel data
    JEL: C23 E44 O16
    Date: 2007–02–02
  66. By: Jan Libich
    Abstract: This paper shows an avenue through which a numerical inflation target ensures low inflation and high credibility: one that is independent of the usual Walsh incentive contract. Our novel game theoretic framework - a generalization of alternating move games - formalizes the fact that since the target is explicit/legislated, it cannot be frequently reconsidered. The "explicitness" therefore serves as a commitment device. There are two key results. First, it is shown that if the inflation target is sufficiently rigid (explicit) relative to the public's wages, low inflation is time consistent and hence credible even if the policymaker's output target is above potential. Second, it is found that the central banker's optimal explicitness level is decreasing in the degree of her patience/independence (due to their substitutability in achieving credibility). Our analysis therefore offers an explanation for the "inflation and credibility convergence" over the past two decades as well as the fact that inflation targets were legislated primarily by countries that had lacked central bank independence like New Zealand, Canada and the UK rather than the US, Germany, or Switzerland. We show that there exists fair empirical support for all the predictions of our analysis.
    JEL: E42 E61 C70 C72
    Date: 2006–09
  67. By: Dias, Daniel; Sabbatini, Roberto; Dossche, Maarten; Stahl, Harald; Gautier, Erwan; Vermeulen, Philip; Hernando, Ignacio
    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 nondurable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: Price-setting, producer prices
    JEL: C25 D40 E31
    Date: 2007
  68. By: De Pooter, Michiel; Ravazzolo, Francesco; van Dijk, Dick
    Abstract: We forecast the term structure of U.S. Treasury zero-coupon bond yields by analyzing a range of models that have been used in the literature. We assess the relevance of parameter uncertainty by examining the added value of using Bayesian inference compared to frequentist estimation techniques, and model uncertainty by combining forecasts from individual models. Following current literature we also investigate the benefits of incorporating macroeconomic information in yield curve models. Our results show that adding macroeconomic factors is very beneficial for improving the out-of-sample forecasting performance of individual models. Despite this, the predictive accuracy of models varies over time considerably, irrespective of using the Bayesian or frequentist approach. We show that mitigating model uncertainty by combining forecasts leads to substantial gains in forecasting performance, especially when applying Bayesian model averaging.
    Keywords: Term structure of interest rates; Nelson-Siegel model; Affine term structure model; forecast combination; Bayesian analysis
    JEL: C53 E47
    Date: 2006–11–06
  69. By: Richard Morris (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main; Germany.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we revisit one of the “missing links” between budget balances and the economic cycle, namely the impact of asset prices on fiscal revenues. We estimate revenue elasticities with respect to equity and real estate price indices for 16 OECD countries, as well as for a synthetic euro area aggregate. For a sub-sample of euro area countries, we use these elasticities to investigate the impact of asset prices on budget balances and the assessment of the fiscal stance by adjusting existing estimates of cyclically adjusted balances for the asset price “cycle”. The results support the view that asset price movements are a major factor behind unexplained changes in the cyclically adjusted balance, which, if not accounted for, can lead to erroneous conclusions regarding underlying fiscal developments. JEL Classification: H2, H6, E6, G1.
    Keywords: Fiscal policies, deficits, asset prices, tax revenues.
    Date: 2007–03
  70. By: Pål Boug, Ådne Cappelen and Anders Rygh Swensen (Statistics Norway)
    Abstract: Recently, several authors have questioned the evidence claimed by Galí and Gertler (1999) and Galí, Gertler and López-Salido (2001) that a hybrid version of the New Keynesian Phillips Curve approximates European and US inflation dynamics quite well. We re-examine the evidence using likelihood-based methods. Although including lagged inflation enhances the empirical fit, the improvement is not large enough to yield a model that passes a likelihood ratio test. We also show that the likelihood surface is rather flat, especially in the European case, indicating that the model may be weakly identified as criticised by others using alternative methods.
    Keywords: European and US inflation; the New Keynesian Phillips Curve; vector autoregressive models and likelihood ratio tests.
    JEL: C51 C52 E31
    Date: 2007–03
  71. By: Edda Claus; Mardi Dungey; Renee Fry
    Abstract: Two impediments to effective monetary policy operation include illiquidity in bond markets and the move towards the zero bound of interest rates. Either or both of these scenarios have been evident in many countries in the last decade, raising the suggestion that alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at a short (2 year) and a long (10 year) time frame as those obtained under current arrangements. The results show that current monetary policy arrangements are least costly in terms of the output loss from achieving lower inflation outcomes. However, if this option ceases to be available the next best alternative is to use the equity market option provided a longer run focus is maintained. Focus on short horizons increases the longer term output costs of the policy in all cases.
    JEL: E52 C51
    Date: 2006–07
  72. By: Philip Vermeulen (European Central Bank); Daniel Dias (Banco de Portugal); Maarten Dossche (National Bank of Belgium); Erwan Gautier (Banque de France); Ignacio Hernando (Banco de España); Roberto Sabbatini (Banca d’Italia); Harald Stahl (Deutsche Bundesbank)
    Abstract: This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: Price-setting, producer prices
    JEL: E31 D40 C25
    Date: 2007–03
  73. By: Davide Furceri (University of Illinois at Chicago)
    Abstract: The purpose of this paper is to analyze the main macroeconomic determinants of benefits and costs by undertaking processes of monetary integration, and investigate the possibility that currency unions could be lead to the creation of a global currency in the future. In particular, we will consider two main costs and benefits predicted by the theory of Optimum Currency Areas: (i) the business-cycle correlation between the candidate’s economy and that of the currency zone as a whole, and (ii) the candidate economy’s inflationary bias. Using this methodology, the results of the paper provide empirical evidence of the existence of several optimal currency areas in the world. Moreover, the creation of a world common currency area is not as unrealistic as it might seem at first sight.
    Keywords: Currency Unions, World Currency
    JEL: E32 F33 F41
    Date: 2007–02–02
  74. By: Cinzia Alcidi (Graduate Institute of International Studies, Geneva); Alessandro Flamini (Keele University, Centre for Economic Research); Andrea Fracasso (Graduate Institute of International Studies, Geneva)
    Abstract: Modern monetary policymakers consider a huge amount of information in their evaluation of events and contingencies. However, most research on monetary policy relies on simple rules, and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We model the Federal Reserve reaction function during the Greenspan tenure as a Logistic Smoothing Transition Regime model in which a series of economically meaningful transition variables drive the transition across monetary regimes and allow the coefficients of the rule to change over time. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules.
    Keywords: Judgement, LSTR, Monetary Policy Regime, Risk Management, Taylor Rule.
    JEL: E4 E5
    Date: 2005–04
  75. By: Julia Darby (University of Strathclyde); Jacques Mélitz (University of Strathclyde, CREST-INSEE, and CEPR)
    Abstract: Official adjustments of the budget balance to the cycle assume that the only category of gov-ernment spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, sickness, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common to use official figures for cyclically adjusted budget balances, di-vide by potential output, and use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of the cyclically-independent ratios of budget balances di-vided by potential output. (A fortiori, they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.) Accordingly, the paper makes use of detailed data from the OECD’s Social Expenditure database to produce separate estimates of the impact of the cycle on disaggregated components of the budget balance, both in levels and in the form of their ratios to output. In addition, we discuss the relation between the two sorts of estimates. When the focus is on ratios of expenditure and revenue to output, the cyclical adjustments de-pend more on inertia in government spending on goods and services than they do on taxes (which are largely proportional to output). But they depend even still more on transfer pay-ments. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to “let the automatic stabilizers work.â€
    Keywords: automatic stabilization, discretionary fiscal policy, cyclically adjusted budget balances
    JEL: E0 E6
    Date: 2007–02–02
  76. By: Domenico Giannone (ECARES Université Libre de Bruxelles); Lucrezia Reichlin (European Central Bank); David H Small (Federal Reserve Board)
    Abstract: This paper formalizes the process of updating the nowcast and forecast on out-put and inflation as new releases of data become available. The marginal contribution of a particular release for the value of the signal and its precision is evaluated by computing "news" on the basis of an evolving conditioning information set. The marginal contribution is then split into what is due to timeliness of information and what is due to economic content. We find that the Federal Reserve Bank of Philadelphia surveys have a large marginal impact on the nowcast of both inflation variables and real variables and this effect is larger than that of the Employment Report. When we control for timeliness of the releases, the effect of hard data becomes sizeable. Prices and quantities affect the precision of the estimates of inflation while GDP is only affected by real variables and interest rates
    JEL: E52 C33 C53
    Date: 2007–02–02
  77. By: Rasmus Ruffer (European Central Bank); Livio Stracca (European Central Bank)
    Abstract: This paper endeavours to provide a comprehensive analysis of the nature and the possible importance of “global excess liquidityâ€, a concept which has attracted considerable attention in recent years. The contribution of this paper is threefold. First, we present some conceptual discussion on the meaning of excess liquidity in countries with developed financial markets, where the monetary base plays only a relatively minor quantitative role. Moreover, we analyse the theoretical channels through which shocks to excess liquidity may be transmitted across borders. The co-movement between several measures of excess liquidity across a relatively large number of countries is significant, but the evidence of cross-country spill-over of excess liquidity on excess liquidity and nominal spending abroad is not very strong. Last, we estimate an SVAR model for an aggregate of the major industrialised countries and analyse the transmission of shocks to global excess liquidity to a number of domestic variables in the world’s two largest economies (the US and the euro area). Our overall conclusion is that global excess liquidity appears to be a useful measure of the monetary policy stance at the level of the world economy. Moreover, there is some evidence that global excess liquidity shocks have some spill-over on output, the price level and asset prices in the euro area, while the US appears to be more insulated from global shocks
    Keywords: Global excess liquidity, monetary aggregates, international transmission of shocks, international economics.
    JEL: E41 E51
    Date: 2007–02–02
  78. By: Stephen Millard (Bank of England)
    Abstract: The purpose of this paper is to understand the economics behind the evolution of payments where by payments I mean the ‘transfer of monetary value’ (in return for goods, services, or real or financial assets). It is clear from this definition of payments that, in order for there to be payments, there first needs to be money. So, the paper first discusses why money might evolve as a result of some frictions inherent in real-world economies. It then discusses the evolution of banks, arguing that banks developed in order to provide payment services (making ‘money’ work more efficiently). The paper then discusses how banks can save on the use of collateral to make payments – collateral that they can convert into loans to earn a return – by the development of ‘payment systems’. Such systems will involve some form of netting of payments (clearing) and final settlement in some asset. ‘Central banks’ fit into this picture by providing, in their liabilities, a settlement asset that the other banks are happy to use. In so doing, they are incentivised to worry about monetary and financial stability
    Keywords: Money, banks, payment systems, central banks
    JEL: E42 E58
    Date: 2007–02–02
  79. By: M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005
    Keywords: Underground Economy, Tax Evasion
    JEL: E26 H26
    Date: 2007
  80. By: Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agentsf consumption behaviors, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady-state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping-generations economy with or without asset bubbles.
    Keywords: Consumption Externalities, Overlapping Generations, Long-run Growth, Asset Bubbles.
    JEL: E32 J24 O40
    Date: 2007–02
  81. By: Chin Nam Low; Heather Anderson; Ralph Snyder
    Abstract: This paper considers Beveridge-Nelson decomposition in a context where the permanent and transitory components both follow a Markov switching process. Our approach insorporates Markov switching into a single source of error state-space framework, allowing business cycle asymmetries and regime switches in the long-run multiplier.
    JEL: C22 C51 E32
    Date: 2006–07
  82. By: Reginaldo Pinto Nogueira Junior (University of Kent at Canterbury)
    Abstract: The paper presents evidence on the “Fear of Floating†hypothesis in an Inflation Targeting regime. We use the methodologies of Calvo and Reinhart (2002) and Ball and Reyes (2004) for a set of developed and emerging market economies to examine the existence of a possible trend of greater exchange rate flexibility after the adoption of the new regime. This exercise shows a strong movement of the economies towards a more flexible exchange rate regime after the adoption of Inflation Targeting. We also analyse interventions in the foreign exchange market using a structural VAR, and conclude that although “Fear of Floating†cannot be totally discarded it is not the only explanation for interventions, as the exchange rate pass-through still is an important issue for the attainment of the inflation targets for many economies
    Keywords: Inflation Targeting, Exchange Rate Pass-through, Fear of Floating
    JEL: E42 E52 E58
    Date: 2007–02–02
  83. By: Eran Guse (University of Cambridge)
    Abstract: This paper introduces a general method to study stability (under learning) of equilibria resulting from agents with misspecified perceptions of the law of motion of the economy. This is done by transforming the actual and perceived laws of motion into the form of seemingly unrelated regressions and then linearly projecting the actual law of motion into the same class as the perceived law of motion. I study the New Keynesian IS-LM model with inertia under all possible classes of restricted perceptions. It turns out that the results found in Bullard and Mitra (2002, 2003) are robust under misspecified expectations
    Keywords: Adaptive Learning, Expectational Stability, Monetary Policy Rules, Restricted Perceptions Equilibria, Seemingly Unrelated Regression
    JEL: E4 E5
    Date: 2007–02–02
  84. By: Dean Baker
    Abstract: This paper forecasts that weakness in the housing market is likely to push the economy into a recession in 2007. Economist Dean Baker provides predictions for GDP, job and wage growth; inflation (CPI); investment; exports and imports; and more.
    Date: 2006–11
  85. By: Monika Blaszkiewicz-Schwartzman (NUIM, Ireland)
    Abstract: This paper uses the univariate and bivariate structural VAR variance framework to quantify real and nominal exchange rate volatility in the selective New Member States of the European Union, and identify factors responsible for movements of those rates. The scale and the nature of nominal and real exchange rate volatility are tightly linked to fulfilment of Maastricht criteria, real convergence, and the effectiveness of the nominal exchange rate in absorbing asymmetric real shocks. Given that there is no consensus on the appropriate definition of real convergence, and since the degree of real exchange rate volatility reflects the scale of idiosyncratic shocks, as well as overall flexibility of the economy to adjust to these shocks, this paper measures the degree of real convergence by the degree of real exchange rate variability. The results indicate that (i) real asymmetric shocks are not insignificant when compared with the poorer Old Member States of the European Union (ii) the nominal exchange rates, in general, do play a stabilising role, and that (iii) nominal shocks, on average, do not move real exchange rates. Therefore, based on the analysis conducted in this paper, it appears that among the New Member States, only Estonia and Slovenia are ready to give up monetary and exchange rate independence
    Keywords: Exchange Rate Volatility, Convergence, European Monetary Integration, Structural Vector Autoregression, Heteroskedasticity, Small-sample Confidence Intervals
    Date: 2007–02–02
  86. By: Huw Dixon (University of York)
    Abstract: This paper shows how any steady state distribution of ages and related hazard rates can be represented as a distribution across firms of completed contract lengths. The distribution is consistnet with a Generalised Taylor Economy or a Generalised Calvo model with duration dependent reset probabilities. Equivalent distributions have different degrees of forward lookingness and imply different behaviour in response to monetary shocks. We also interpret data on the proportions of firms changing price in a period, and the resultant range of average contract lengths
    Keywords: Contract length, steady state, hazard rate, Calvo, Taylor
    JEL: E50
    Date: 2007–02–02
  87. By: Yoonsoo Lee
    Abstract: This paper provides new evidence that estimates based on aggregate data will understate the true procyclicality of total factor productivity. I examine plant-level data and show that some industries experience countercyclical reallocations of output shares among firms at different points in the business cycle, so that during recessions, less productive firms produce less of the total output, but during expansions they produce more. These reallocations cause overall productivity to rise during recessions, and do not reflect the actual path of productivity of a representative firm over the course of the business cycle. Such an effect (sometimes called the cleansing effect of recessions) may also bias aggregate estimates of returns to scale and help explain why decreasing returns to scale are found at the industry-level data.
    Keywords: Entry, Exit, Productivity, Returns to Scale
    JEL: D24 E32 O47
    Date: 2007–03
  88. By: Alexandre SOKIC (Centre Interdisciplinaire de Recherche sur le Commerce Extérieur et l’Economie Ecole Supérieure du Commerce Extérieur Pôle Universitaire Léonard de Vinci 92916 Paris La Défense)
    Abstract: The Cagan monetary model of hyperinflation has a relatively simple structure and a rich set of solutions. However, the wealth of possible solutions of this model does not constitute an asset for it. The introduction of rational expectations into the model was often at the origin of these validity problems as shown in Buiter (1987) or Kiguel (1989). Then, this model has usually been associated with the adaptive expectations assumption in the literature. In the same spirit Evans (1995) stressed that the assumption of adaptive expectations is a sufficient condition to ensure its validity. This articles aims at highlighting the strict association met in the literature between the assumption of adaptive expectations and the correct running of the monetary model of hyperinflation. A complete resolution of the model under the assumption of adaptive expectations is carried out. This approach completes the analyses made in Bruno & Fisher (1987, 1990), taken up again in Blanchard and Fischer (1990) and still recently in Walsh (2003). The aim is to show that the way inflationary expectations are formed is not crucial for the validity of the model. Rather crucial is the adjustment lag of real cash balances to their desired level
    Keywords: hyperinflation, seigniorage, hyperinflationary bubbles
    JEL: E31 E41
    Date: 2007–02–02
  89. By: Enrique Alberola (Banco de España); José María Serena (Banco de España)
    Abstract: This paper assesses whether domestic costs of reserve accumulation -and in particular monetary costs- constitute an eventual limit to the process in emerging markets. We find that sterilization is the first measure to deal with these costs. Then, we turn to study whether diminishing ability to deal with the monetary inflows through sterilization is an effective limit to the process, Indeed, when the scope for sterilization is reduced, accumulation diminishes. However, this constraint, albeit relevant in practice, has not constituted an effective limit to accumulation, hitherto.
    Keywords: international reserves, monetary policy, central banks, sterilization, internal costs
    JEL: E58 F36 G15
    Date: 2007–03
  90. By: Robert Dixon
    Abstract: This paper sets out my response to the articles by Paul Davidson in the Journal of Post Keynesian Economics in 2000 and 2002 dealing with the (supposed) superiority of Keynes’s explanation of the “ultimate cause” of unemployment over that of Kalecki. I show that there are a number of serious errors in Davidson’s explanation of Kalecki’s theories. I also argue that we would have less of this sort of nonsense if ‘post keynesians’ like Davidson were to recognize that, for Keynes as for Kalecki, aggregate demand shocks are profit shocks. In the final section of the paper I explain why it is that I none-the-less agree most emphatically with Davidson when he says that Kalecki and Keynes had quite different ideas on the ‘causes’ or ‘origins’ of (involuntary) unemployment in a capitalist economy.
    Date: 2007
  91. By: Philip Liu
    Abstract: The importance of the time-consistency poblem depends critically on the model one is working with and its parameterizations. This paper attempts to quantify the magnitude of stabilization bias for a small open economy using an empirically estimated micro-founded dynamic stochastic general equilibrium model. The resultant model is used to investigate the degree to which precommitment policy can improve welfare. Rather than presenting a point estimate of the welfare gain measures, the paper maps out the entire distribution of the welfare gain using the Bayesian posterior distribution of the model's parameters. The welfare improvement is an increasing function of the weight the central bank places on exchange rate variability. However, there is no simple relationship between the gains from precommitment and the degree of openness of the economy.
    JEL: C15 C51 E17 E61
    Date: 2006–12
  92. By: Vaubel, Roland (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Judging from past inflation and opinion poll data, France occupies the inflation median in the ECB Council if real exchange rate changes are ignored. Central bank independence does not have a significant effect on inflation if the population's sensitivity to inflation is controlled for. Owing to a clustering of election dates, the economy of the euro-zone is likely to be booming from May 2002 to June 2004. Between the euro-zone and the U.S. dollar, nominal exchange-rate trends are increasingly in line with the required real exchange rate trends. In this respect, exchange-rate flexibility has outperformed the Bretton Woods system. Of all 15 EU members, Britain is the least suitable candidate for joining the euro-zone as far as the need for real exchange rate adjustment is concerned. Most of the Eastern European countries require even considerably larger real exchange rate adjustments vis-à-vis the euro-zone. The European System of Central Banks is highly overstaffed by international standards. Its personnel has to be cut by at least 12 per cent (6,520 persons), notably in France, Belgium and Italy.
  93. By: Juha Kilponen (Economics Department, Bank of Finland); Marc-Alexandre Sénégas (GRAPE, University Montesquieu-Bordeaux IV); Jouko Vilmunen (Research Department, Bank of Finland)
    Abstract: This paper tries to assess the proximity of the macroeconomic outcomes which could arise from a monetary policymaking process based upon either a robust control or a Bayesian (à la Brainard) approach towards parameter uncertainty. We use a small, structural, backward-looking, aggregate model of the EMU economies as the basis for this empirical exercise. After deriving the optimal feedback rules which correspond to the two approaches that we consider in this study, we assess their relative performances with respect to the behavior of the output gap and the in.ation rate volatilities and compare with the no-uncertainty benchmark case. We are particularly interested in the output-in.ation variability trade-o¤ which is usually associated with the implementation of the optimal monetary policy rule in the literature and in the distortions that the presence of parameter uncertainty and its taking into account via the robust control approach or the Bayesian method may induce to this trade-o¤. The results show that the performances of the rules are not too divergent but they appear to be highly contingent upon the preference parameters in the model, ie the relative weight that the monetary authorities attach to output variability (w.r.t. in.ation variability) in the loss function and the robustness aversion of the policymaker which is associated to the robust control approach. In particular, non-standard shapes of the output-in.ation variability trade-o¤ obtain in the robust control case what may be due to the way the misspeci-.cations associated with the worst case scenario feedback into the structural equations of the model. When the rules are considered within the nominal model, the volatility outcomes appear to be closer to each other.
    Keywords: monetary policy, uncertainty, robust control, Brainard
    JEL: E52 E47
    Date: 2007–02–02
  94. By: Paulo Brito (UECE-ISEG, Technical University of Lisbon); Luis Costa (UECE-ISEG, Technical University of Lisbon); Huw Dixon (Department of Economics, University York, UK)
    Abstract: Endogenous mark-ups have been a matter of interest in macroeconomics, especially from the middle 1990’s onwards. However, the complexity of this class of models, does not allow general ualitative conclusions in most cases, and there is plenty of room for investigation, especially in the reasons driving the emergence of multiple equilibria and non-saddle-point dynamics. In this article we extend a simple dynamic general equilibrium model to include the possibility of strategic interaction between producers in each industry, and entry affects the level of macroeconomic efficiency through an endogenous mark-up. We demonstrate multiple equilibria is a likely outcome even in an exogenous labour-supply framework. A pair of equilibria exists (a stable and an unstable one) and they are connected through a heteroclinic orbit. When we allow labour supply to vary, a third equilibrium may emerge if the government is present in the economy, and local indeterminacy may exist
    Keywords: Endogenous mark-ups, Multiple equilibria, Local dynamics
    JEL: C6 D4 D5 E3
    Date: 2007–02–02
  95. By: Roland Döhrn
    Abstract: This paper addresses the question whether forecasters could have been able to produce better forecasts by using the available information more efficiently (informational efficiency of forecast). It is tested whether forecast errors covariate with indicators such as survey results, monetary data, business cycle indicators, or financial data. Because of the short sampling period and data problems, a non parametric ranked sign test is applied. The analysis is carried out for GDP and its main components. The study differentiates between two types of errors: Type I error occurs when forecasters neglect the information provided by an indicator.As type II error a situation is labelled in which forecasters have given too much weight to an indicator. In a number of cases forecast errors and the indicators are correlated, though mostly at a rather low level of significance. In most cases type I errors have been found. Additional tests reveal that there is little evidence of institution specific as well as forecast horizon specific effects. In many cases, co-variations found for GDP are not refected in one of the expenditure side components et vice versa.
    Keywords: Short term forecast, Forecast evaluation, informational efficiency
    JEL: E37 C53 C42
    Date: 2006–10
  96. By: Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Elke Hahn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in “emerging” than in “developed” countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor’s hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support. JEL Classification: C32, E31.
    Keywords: Exchange Rate Pass-Through, Emerging Markets.
    Date: 2007–03
  97. By: Castro, Vítor (University of Warwick, University of Coimbra and NIPE)
    Abstract: This study intends to provide an empirical answer to the question of whether Maastricht and SGP fiscal rules have affected growth of European Union countries. A growth equation augmented with fiscal variables and controlling for the period in which fiscal rules were implemented in Europe is estimated over a panel of 15 EU countries (and 8 OECD countries) for the period 1970-2005 with the purpose of answering this question. The equation is estimated using both a dynamic fixed effects estimator and a recently developed pooled mean group estimator. GMM estimators are also used in a robustness analysis. Empirical results show that growth of real GDP per capita in the EU was not negatively affected in the period after Maastricht. This is the case when the recent performance of EU countries is compared both with their past performance and with the performance of other developed countries. Results even show that growth is slightly higher in the period in which the fulfilment of the 3% criteria for the deficit started to be officially assessed. Therefore, this study concludes that the institutional changes that occurred in Europe after 1992, especially the implementation of Maastricht and Stability and Growth Pact fiscal rules, should not be blamed for being harmful to growth in Europe.
    Keywords: European Union ; Economic Growth ; Fiscal rules ; Pooled mean group estimator
    JEL: E62 H6 O47
    Date: 2007
  98. By: Heather Anderson (Australian National University); Mardi Dungey (University of Cambridge); Denise Osborn (University of Manchester); Farshid Vahid (Australian National University)
    Abstract: The conduct of time series analysis on the Euro Area currently presents problems in terms of availability of sufficiently long data sets. The ECB has provided a dataset of quarterly data from 1970 covering many data series in its Area Wide Model (AWM), but not for a number of important financial market series. This paper discusses methods for producing such backdata and in the resulting difficulties in selecting aggregation methods. Simple applicaiton of the AWM weights results in orders of magnitude difference in financial series. The use of different aggregation methods across series induces relationships. The effects of different possible methods of constructing data are shown through estimation of simple Taylor rules, which result in different weights on output gaps and inflation deviation for what are purportedly the same data
    Keywords: Euro area, data aggregation, Taylor rule
    JEL: C82 C43 E58
    Date: 2007–02–02
  99. By: Marcus Miller (Warwick University); Lei Zhang (Warwick University)
    Abstract: A dynamic stochastic model of global equilibrium, where countries outside the US face higher risk than the US itself, predicts current account surpluses in the RoW and US deficits. With Loss Aversion, such precautionary savings can cause substantial ‘global imbalances’, particularly if there is an inefficient supply of global ‘insurance’. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level (though the required real interest may be negative). Low interest rates and high savings outside the US appear to be an efficient global equilibrium: but is this sustainable? A precautionary savings glut appears to us to be a temporary phenomenon, destined for correction as and when adequate reserve levels are achieved. But if the process of correction is triggered by ‘Sudden Stop’ on capital flows to the US, might it not lead to the inefficient outcomes forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment.
    Keywords: stochastic dynamic general equilibrium, loss aversion, liquidity trap
    JEL: D51 D52 E12
    Date: 2007–02–02
  100. By: Buscher, Herbert S.; Buslei, Hermann; Göggelmann, Klaus; Koschel, Henrike (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper examines the employment effects of a revenue-neutral cut in the social-security contribution rate in Germany by running policy simulations in four different types of macroeconomic models. Two models are based on time-series data where the labor market is modeled basically demand orientated, whereas the other two models are supply orientated computable general equlibrium models. While the predicted employment effects of the cut in the contribution rate are qualitatively similar across modles three years after the cut, they differ considerably in magnitude. These differences can to a large extent be attributed to differnces in the basic structure of the modles. Of special importance is how prices and wages react in each model to the cut in the social security tax rate on one side, and the necessary increase of the indirect tax rate on the other side. The results, therefore, provide a guideline for assessing the outcome of policy simulations and for the further development of macroeconomic models suitable for this kind of experiments.
    JEL: C50 C53 E17 H55 C68
  101. By: Nektarios Aslanidis (University of Monash); Andrea Cipollini (University of Essex)
    Abstract: The focus of this paper is on the leading indicator properties of high-yield corporate spreads regarding the level of real economic activity. This is motivated by both the financial accelerator mechanism underlying business cycle fluctuations as suggested by Bernanke and Gertler (1989). We examine the out-of-sample forecast performance of the high-yield spreads regarding employment and industrial production in the US, using both a point forecast and a probability forecast exercise. Our main findings suggest the use of few factors obtained by pooling information from a number of sub sectors high-yield credit spreads. This can be justified by observing that there is a substantial gain from using a Dynamic Factor fitted to credit spreads compared to the prediction produced by benchmarks, such as an AR and ARDL models, where the exogenous regressor is either the term spread, or the aggregate high-yield spread.
    Keywords: credit spreads, dynamic factor, forecasting
    JEL: C53 E32 C22
    Date: 2007–02–02
  102. By: Hyunbae Chun; Jung-Wook Kim; Randall Morck; Bernard Yeung
    Abstract: Traditional U.S. industries with higher firm-specific stock return and fundamentals performance heterogeneity use information technology (IT) more intensively and post faster productivity growth in the late 20th century. We argue that elevated firm performance heterogeneity mechanically reflects a wave of Schumpeter's (1912) creative destruction disrupting a wide swath of U.S. industries, with newly successful IT adopters unpredictably undermining established firms. This evidence validates endogenous growth theory models of creative destruction, such as Aghion and Howitt (1992); and suggests that recent findings of more elevated firm-specific performance variation in richer, faster growing countries with more transparent accounting, better financial systems, and more secure property rights might partly reflect more intensive creative destruction in those economies.
    JEL: E32 G3 O3 O4 O51
    Date: 2007–04
  103. By: Erdogdu, Oya
    Abstract: The permanent income hypothesis states a strong relationship between household consumption and lifetime income. Based on this argument, this study, following previous studies in that respect, analyzes the possible impact of expectations in this relationship in case of uncertainty in the model. The empirical analyses for Turkey could not find a statistically significant relationship between household consumption, income and confidence index which is used as a proxy for income expectations. However, besides, expectations on purchasing power and employmet opportunities having statistically significant effect on household consumption expenditures, they do decrease the percentage of unexplained variance.
    Keywords: Consumption; expectations; confidence index
    JEL: E21
    Date: 2006–11
  104. By: George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
    Abstract: This paper examines the ability of a policy maker to control equilibrium outcomes in a global coordination game; applications include currency attacks, bank runs, and debt crises. A unique equilibrium is known to survive when the policy is exogenously fixed. We show that, by conveying information, endogenous policy re-introduces multiple equilibria. Multiplicity obtains even in environments where the policy is observed with idiosyncratic noise. It is sustained by the agents coordinating on different interpretations of, and different reactions to, the same policy choices. The policy maker is thus trapped into a position where both the optimal policy and the coordination outcome are dictated by self-fulfilling market expectations.
    Keywords: global games, complementarities, signaling, self-fulfilling expectations, multiple equilibria, currency crises, regime change.
    JEL: C7 D8 E5 E6 F3
  105. By: van den Hauwe, Ludwig
    Abstract: Hayek´s methodological outlook at the time he engaged in business cycle research was actually closer to praxeological apriorism than to Popperian falsificationism. A consideration of the Duhem thesis highlights the fact that even from a mainstream methodological perspective falsificationism is more problematic than is often realized. Even if the praxeological and mainstream lines of argumentation reject the Popperian emphasis on falsification for different reasons and from a different background, the prospects for falsificationism in economic methodology seem rather bleak.
    Keywords: General Methodology; Austrian Methodology; Falsificationism; Popper; Hayek; Duhem; Duhemian Argument; Testing of Theories; Meaning and Interpretation of Econometric Results; Correlation and Causality;
    JEL: C10 B20 E32 B53 B23 B40 A12
    Date: 2006
  106. By: Zsolt Darvas (Corvinus University Budapest); Gábor Rappai (University of Pécs); Zoltán Schepp (University of Pécs)
    Abstract: Results and models of this paper are based on a strikingly new empirical observation: long maturity forward rates between bilateral currency pairs of the US, Germany, UK, and Switzerland are stationary. Based on this result, we suggest a new explanation for the UIP-puzzle maintaining rational expectations and risk neutrality. The model builds on the interaction of foreign exchange and fixed income markets. Ex ante short run and long run UIP and the EHTS is assumed. We show that ex post shocks to the term structure could explain the behavior of the nominal exchange rate including its volatility and the failure of ex post short UIP regressions. We present evidence on ex post validity of long run UIP and strikingly new evidence on the stationarity of the long forward exchange rates of major currencies. We set up, calibrate and simulate a stylized model that well captures the observed properties of spot exchange rates and UIP regressions of major currencies. We define the notion of yield parity and test its empirical performance for monthly series of major currencies with favorable results
    Keywords: EHTS, forward discount bias, stationarity of long maturity forward rates, UIP, yield parity
    JEL: E43 F31
    Date: 2007–02–02
  107. By: Mathieu Lefebvre
    Abstract: This paper analyses the effect of population ageing on consumptions aggregates in Belgium. Since consumption expenditures change markedly over the life-cycle, the structure of aggregate consumption is likely to change in the course of population ageing. First, we estimate the effect of age on expenditures for 10 composite goods coming from household’s surveys. This is done using a pseudo-panel method. Second, age-specific profiles are used to forecast composition of consumption until 2050. The results point to increases in health, housing and leisure expenditures and decreases in equipment, clothing and transport expenditures. These changes are relatively moderate but non negligible. They will translate in sectoral shifts and most probably in changes in sectoral employment.
    Keywords: Consumption, demographic ageing, projections.
    JEL: D12 E21 J21
    Date: 2006
  108. By: Gordon Menzies; Daniel Zizzo
    Abstract: We present a macroeconomic market experiment on the financial determination of exchange rates, and consider whether the assumption that belief formation be treated as a classical hypothesis test, which we label inferential expectations, can explain the effect of uncertainty on exchange rates. In a non-stochastic environment, exchange rates closely follow standard predictions. In our stochastic environment, inferential expectations with a low test size alpha (conservative inferential expectations) predict exchange rates better than rational expectations in ten sessions out of twelve. Belief conservatism appears magnified rather than diminished at the market level, and the degree of belief conservatism seems connected to the failure of uncovered interest rate parity regressions.
    JEL: C91 D84 E50 F31
    Date: 2006–12
  109. By: Jose M P Jorge (Universidade do Porto)
    Abstract: Risky investment projects make the coordination among small, uninformed investors hard to achieve, and generate inefficient low levels of investment. Several authors have pointed out the benefits to an economy from multiple avenues of financial intermediation. This paper explains endogenously different financial architectures and classifies them according to the capacity of financial intermediaries to reallocate risks and create added value. In some of these architectures, financial intermediaries improve coordination among agents by providing insurance over the primitive payoffs available in decentralized financial markets. This enhances efficiency and stabilizes the economy against fundamental shocks and confidence shifts. In other financial architectures financial intermediation plays a minor role or is unfeasible
    Keywords: Banking, Financial System, Systemic Risk, Global Games
    JEL: G21 E44 G28 C72
    Date: 2007–02–02
  110. By: Mark G. Guzman (University of Reading)
    Abstract: This paper re-examines the impact that paying interest on reserves has on price level indeterminacy, price level volatility, and overall economic well-being. Unlike previous papers which examined these issues, the model developed in this paper allows the return on reserves to equal the return on government securities, which is less than the prevailing return on storage. Equally important, this model also considers how deficit financing changes the impact that paying interest on reserves has on the economy. I show that the number of steady state equilibria is equal to, or greater than, the number that arise when no interest is paid on reserves. Consequently, the level of economic indeterminacy is equal to or greater than in an economy without interest payments. When the level of indeterminacy is the same, then economic volatility is reduced with the introduction of interest payments. However, when greater indeterminacy in the interest-on-reserves economy exists, then there also exists greater volatility. In addition, paying interest on reserves can be welfare enhancing under certain conditions. When it is not, an appropriate expansionary open market operation can sometimes, although not always, offset the welfare losses associated with interest payments. Finally, under a narrow set of conditions, unpleasant monetarist arithmetic may also obtain.
    Keywords: Interest on reserves, deficit financing, prive level volatility
    JEL: D6 E3 E5
    Date: 2007–02–02
  111. By: Kibritçioğlu, Aykut
    Abstract: This paper is concerned with the causes, timing and effects of banking sector restructuring and financial crisis in Turkey. The main focus of the study, however, is on labour market implications of the banking crisis and banking reform in recent years. The paper is organised as follows. Section 2 presents a brief summary of the macroeconomic background to the latest banking sector crisis in Turkey. In section 3, the efforts of recent Turkish Governments towards restructuring and rehabilitation of the banking sector are considered. Then, following a statistical review of the main features of the Turkish banking sector, section 4 focuses on the labour market problems that can be linked to the Government's restructuring and rehabilitation programme in banking. Section 5 draws some lessons from this restructuring programme. Finally, section 6 concludes with some remarks on future prospects in the banking sector.
    Keywords: restructuring; labour market; unemployment; banking sector; banking crisis; Turkey
    JEL: G34 G21 J21 E44
    Date: 2006–05–10
  112. By: Iris Claus
    Abstract: This paper develops an open economy model to assess the long-run effects of taxation where firms are finance constrained. Finance constraints arise because of imperfect information between borrowers and lenders. Only borowers (firms) can costlessly observe actual returns from production. Imperfect information and finance constraints magnify the effects of taxation. A reduction (rise) in income taxation increases (lowers) firms' internal funds and their ability to assess external finance to expand production. The findings thus underline the importance of incorporating access to finance into models that assess the impact of taxation.
    JEL: H2 E44 F41
    Date: 2006–08
  113. By: Lei Fang; Richard Rogerson
    Abstract: The large differences in hours of work across industrialized countries reflect large differences in both employment to population ratios and hours per worker. We imbed the canonical model of labor supply into a standard matching model to produce a model in which both the intensive and extensive margins are operative. We then assess the implications of several policies for changes along the two margins. Firing taxes and entry barriers both lead to changes in hours and employment in opposite directions, while tax and transfer policies lead to decreases in both employment and hours per worker.
    JEL: E2 J2
    Date: 2007–04
  114. By: Tsunao Okumura
    Abstract: This paper investigates the possibility that wealth (holdings of money) serves as a signal of ability to produce high quality products for agents who cannot directly observe the quality of the products. A producer’s wealth may advertise past success in selling products to agents who knew the producer’s ability and thus signal its ability. This analysis shows that such signaling effects may arise in equilibrium and may lead to more unequal distributions of wealth and lower welfare than would otherwise arise.
    Keywords: Random matching, Money holdings, Signaling, Distribution of wealth, Welfare, Divisible money, Product quality.
    JEL: E40 D82 D83 D31
  115. By: Mathias Drehmann (Systemic Risk Assessment Division, Bank of England); Steffen Sorensen (Systemic Risk Assessment Division, Bank of England); Marco Stringa (Systemic Risk Assessment Division, Bank of England)
    Abstract: Credit and interest rate risk in the banking book are the two most important risks faced by commercial banks. In this paper we derive a consistent and general framework to measure the riskiness of a bank which is subject to correlated interest rate and credit risk. The framework accounts for all sources of credit risk, interest rate risk and their combined impact As we model the whole balance sheet of a bank the framework not only enables us to assess the impact of credit and interest rate risk on the bank's economic value but also on its future earnings and capital adequacy. We apply our framework to a hypothetical bank in normal and stressed conditions. The simulation highlights that it is fundamental to measure the impact of correlated interest rate and credit risk jointly on the whole portfolio of banks, including assets, liabilities and off-balance sheet items
    Keywords: Integration of credit risk & interest rate risk, asset & liability management of banks, economic value, stress testing
    JEL: G21 E47 C13
    Date: 2007–02–02
  116. 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
  117. By: Mark Weisbrot
    Abstract: Este informe temático describe la economía boliviana en el primer año de la presidencia de Evo Morales. Han habido mejoras en la mayoría de indicadores económicos, y también algunas nuevas iniciativas por parte del gobierno para cumplir con sus promesas a la mayoría empobrecida del país.
    JEL: E66
    Date: 2007–01
  118. By: Ramos Mabugu; Margaret Chitiga
    Abstract: There is an important debate going on in South Africa on whether to apply safeguard trade barriers to protect textiles. This presents an interesting case of how a country might use safeguard trade barriers in order to better achieve a domestic policy objective. Much of the current discourse on textiles protection focuses on static effects of protection. The aim of this paper is to take this discussion a step further by introducing the effect of textiles protection on poverty and its dynamics. To assess these effects of protection, a sequential dynamic computable general equilibrium model linked to a nationally representative household survey of 2000 is used. The simulation involves a doubling of the import tariffs on textiles. The textile sector is, obviously, the biggest winner, followed by the service sector, which sells more than half of its production as inputs for the textile sector. All other sectors experience falling output with the worst affected being the export-oriented sectors. Because the protected sectors are relatively more labour intensive, wages increase in both the short and long terms. Capital returns are sector specific in the short run and go up markedly for textiles and services but decline for all the other sectors. Overall, welfare falls both in the short and long term as the rise in factor prices is completely offset by the increase in consumer prices. The proportion of people living below US$2 per day increases marginally in the short run following increased textiles protection because of the observed increase in consumer price index that is higher than the increase in consumption for most households. Unskilled Indians are the only group to experience a reduction in poverty and welfare increases in the short run. The average poverty gap and the squared poverty gap also follow the same pattern as poverty headcount because most households are being pushed into poverty./L'Afrique du Sud représente un cas idéal pour évaluer la pertinence de mettre en place des barrières commerciales de sauvegarde pour protéger le secteur des textiles. Cette étude évalue les impacts de la protection tarifaire du secteur sud-africain des textiles au moyen d'un modèle d'équilibre général calculable dynamique, de nature séquentielle, lié aux micro données provenant de l'enquête nationale auprès des ménages de 2000. Les résultats de la simulation démontrent que le secteur des textiles est le plus grand bénéficiaire de cette mesure, suivi du secteur des services. Tous les autres secteurs enregistrent une décroissance de leur production et, parmi eux, ceux à vocation exportatrice s'avèrent être les plus sévèrement touchés. Les salaires augmentent à court et à long terme. Le capital étant immobile à court terme entre les secteurs, son rendement augmente sensiblement dans les activités de production des textiles et des services, mais diminue dans les autres activités. Le bien-être diminue à la fois à court et à long terme alors que la pauvreté augmente de façon significative à court terme.
    Keywords: Sequential dynamic CGE, microsimulation, textiles, protection, poverty, welfare, growth, South Africa/Équilibre général calculable, MEGC dynamique séquentiel, micro simulation, textiles, protection, pauvreté, bien-être, croissance, Afrique du Sud
    JEL: D58 E27 F17 I32 O15 O55
    Date: 2006
  119. By: Bos, Frits
    Abstract: In this paper, the relevance of national accounts statistics and their underlying conceptual framework is investigated for their four roles: description and object of analysis, tool for analysis and forecasting, tool for communication and decision-making and input for alternative accounts budgetary rules and estimates. For each role, the merits and limitations of national accounts statistics are described and discussed. Proper use should be stimulated by improving education and marketing and by supplementing national accounts with information about their meaning and reliability.
    Keywords: National accounts; relevance and reliability; forecasting; economic and fiscal policy
    JEL: H00 C0 E01
    Date: 2007
  120. By: Börsch-Supan, Axel; Reil-Held, Anette; Rodepeter, Ralf; Schnabel, Reinhold (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper describes how German households save, and how their saving behavior is linked to public policy, notably pension policy.<br>Our analysis is based on a synthetic panel of four cross sections of the German Income and Expenditure Survey (Einkommens- und Verbrachsstichproben", EVS), 1978, 1983, 1988 and 1993. The paper carefully distiguhishes among several savings measures, namely first the sum of purchases of assets minus the sum of sales of assets, and second the residual of income minus consumption. Our main finding is a hump-shaped age-saving profile. However, savings remain positive in old age, even for most low income households. The generous mandatory German public pension system is a prime candidate to explain this pattern.
  121. By: Börsch-Supan,Axel; Reil-Held, Anette; Rodepeter, Ralf; Schnabel, Reinhold (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Germany has one of the most generous public pension and health insurance systems of the world, yet private savings are high until old age. Savings remain positive in old age, even for most low income households. How can we explain what we might want to term the "German savings puzzle"? We provide a complicated answer that combines historical facts with capital market imperfections, housing, tax and pension policies. The first part of the paper describes how German households save, based on a synthetic panel of four cross sections of the German Income and Expenditure Survey ("Einkommens- und Verbrauchsstichproben") collected between 1978 and 1993. The second part links saving behaviour with public policy, notably tax and pension policy.
  122. By: Sinha, Dipendra; Sinha, Tapen
    Abstract: This paper looks at the relationship between per capita saving and per capita GDP for India using the Toda and Yamamoto tests of Granger causality. Data are for 1950-2004. We distinguish between three types of saving. These are household saving, corporate saving and public saving. The results show that there is no causality between per capita GDP and per capita household saving/per capita corporate saving in either direction. However, there is bi-directional causality between per capita household saving and per capita corporate saving.
    Keywords: Toda-Yamamoto; causality
    JEL: E21 C22
    Date: 2007–01–04
  123. By: Christian Mose Nielsen (Department of Economics, Politics and Public Administration, Aalborg University)
    Abstract: Using UK data for the period 1997:3 to 2005:5, this paper examines whether the expectations hypothesis is supported by recent UK data when the short-end of the term structure of interest rates is considered and whether the results of the tests of the expectations hypothesis are sensitive to the choice of data. The main results can be nicely summarized by considering five virtual researchers who test the expectations hypothesis using five different data sets for the 1997:3 to 2005:5 period for the 1 to 12-month maturity spectrum and who get quite different results. The main conclusion to be drawn from the analysis in this paper is thus that robustness check may be very important when testing the expectations hypothesis using the 1 to 12-month maturity spectrum of the term structure. Furthermore, the results suggest that the specific data set used in tests of the expectations hypothesis may be a candidate explanation of a rejection of the expectations hypothesis - along with the possibility that a time-varying term premium and/or a structural break are responsible for the rejection
    Keywords: Expectations hypothesis
    Date: 2007–02–02
  124. By: Kenneth L. Judd; Felix Kubler; Karl Schmedders
    Abstract: The two-fund separation theorem from static porfolio analysis generalizes to dynamic Lucas-style asset model only when a consol is presemt. If all bonds have finite maturity and do not span the consol, then equilibrium will devitate, often significantly, from two-fund separation even with the classical preference assumptions. Furthermore, equilibrium bond trading volume is unrealistically large, particularly for long-term bond, and would be very costly in the presence of transaction costs. We demonstrate that investors choosing two-fund portfolios with bond ladders that approximately replicate consols do almost as well as traders with equilibrium investment strategies. This result is enhanced by adding bonds to the collection of assets even if they are not necessary for spanning. In the light of these results, we argue that transaction cost considerations make portfolios using two-fund separation and bond laddering nearly optimal investment strategies.
    Keywords: Dynamically complete markets, general equilibrium, consol, bonds, interest rate fluctuation, reinvestment risk, bond laddering
  125. By: John A. List; Haiwen Zhou
    Abstract: This study develops a model of endogenous growth based on increasing returns due to firms' technology choices. Particular attention is paid to the implications of these choices, combined with the substitution of capital for labor, on economic growth in a general equilibrium model in which the R&D sector produces machines to be used for the sector producing final goods. We show that incorporating oligopolistic competition in the sector producing finals goods into a general equilibrium model with endogenous technology choice is tractable, and we explore the equilibrium path analytically. The model illustrates a novel manner in which sustained per capita growth of consumption can be achieved -- through continuous adoption of new technologies featuring the substitution between capital and labor. Further insights of the model are that during the growth process, the size of firms producing final goods increases over time, the real interest rate is constant, and the real wage rate increases over time.
    JEL: E10 E22 O41
    Date: 2007–03
  126. By: Andres Erosa; Ana Hidalgo
    Abstract: We develop a theory of capital-market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, low development of financial markets, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications of our theory are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.
    Keywords: Macroeconmics, Capital Market Imperfections, Total-factor Productivity, Relative Prices, Sectorial Allocation, Limited Enforcement
    JEL: E2 E5 O16
    Date: 2007–04–03
  127. By: Cubadda Gianluca; Hecq Alain; Palm Franz C. (METEOR)
    Abstract: This note argues that large VAR models with common cyclical feature restrictions provide an attractive framework for parsimonious implied univariate final equations, justifying on the one hand the estimation of homogenous panels with dynamic heterogeneity and a common factor structure, and on the other hand the aggregation of time series. However, starting with a too restrictive DGP might preclude from looking at interesting empirical issues.
    Keywords: Economics (Jel: A)
    Date: 2007
  128. By: Rasmus Fatum (University of Alberta); Jesper Pedersen (Department of Economics, University of Copenhagen)
    Abstract: This paper investigates the real-time effects of foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Denmark is currently pursuing an active intervention policy under the provisions of the Exchange Rate Mechanism (ERM II) and intervenes on a discretionary basis when considered necessary. Prior participation in ERM II is a requirement for adoption of the Euro. Therefore, our study is of particular relevance for the new European Union member states that are either currently participating in ERM II or expected to do so at a later date as well as for Denmark. Our analysis employs the two-step weighted least squares estimation procedure of Andersen, Bollerslev, Diebold and Vega (2003) and an array of robustness tests. We find that intervention exerts a statistically and economically significant influence on exchange rate returns when the direction of intervention is consistent with fundamentals and intervention is carried out during a period of high exchange rate volatility. We also show that the exchange rate does not adjust instantaneously to the unannounced and discretionary interventions under study. We conclude that intervention can be an important short-term policy instrument for exchange rate management.
    Keywords: foreign exchange intervention; intraday data; ERM II
    JEL: D53 E58 F31 G15
    Date: 2007–03
  129. By: Börsch-Supan, Axel; Ludwig, Alexander; Winter, Joachim (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Throughout the world, population aging is a major challenge that will continue well into the 21 st century. While the patterns of the demographic transition are similar in most countries, timing differs substantially, in particular between industrialized and less developed countries. To the extent that capital is internationally mobile, population aging will therefore induce capital flows between countries. In order to quantify these international capital flows, we employ a multi- country overlapping generations model and combine it with long-term demographic projections for several world regions over a 50 year horizon. Our simulations suggest that capital flows from fast-aging industrial countries (such as Germany and Italy) to the rest of the world will be substantial. Closed-economy models of pension reform are likely to miss quantitatively important effects of international capital mobility.
    JEL: E27 F21 G15 H55 J11
  130. By: Isabel Argimón (Banco de España); Francisco de Castro (Banco de España); Ángel Luis Gómez (Banco de España)
    Abstract: The new Personal Income Tax Law came into force in January 2007. The main changes with respect to the previous regulation are the new tax treatment of personal and family circumstances and saving returns. This study aims to quantify the overall effect of the reform on tax revenue and to assess its redistributive impact by considering the different main income sources. In order to attain these objectives, we have used an Instituto de Estudios Fiscales sample of 2002 income tax returns to construct a baseline scenario for 2007 to simulate the reform. The reform will involve a moderate tax cut in relation to the baseline scenario. However, in relative terms, the tax reduction will be especially intense for lowest income and joint returns. Pensioners, recipients of business and professional incomes and dependent employees, though to a lower extent, would benefit from lower taxes. Lastly, the reform of the personal income tax is estimated to increase progressivity moderately, although lower tax revenues will imply lower redistributive capacity.
    Keywords: personal income tax reform, cost of the reform, effective tax rates, income sources, population deciles
    JEL: H24 K34 E62 D31
    Date: 2007–03
  131. By: DAMBRIN, Claire; PEZET, Anne
    Abstract: The investment procedure prescribes the stages and tests through which all investment projects must pass before being accepted or not. It governs the conditions of acceptability and constitutes a powerful device of a priori control. In this paper, we intend to understand how investment procedures enable grand ideals regarding investment to be institutionalised. In particular, over and above the assumed effectiveness and rationale of these procedures, we identify the mechanisms through which these procedures construct social roles. In this respect, this research goes beyond the procedures’ technical functions and focuses on the very form of procedures. Indeed, the form of a procedure presents two features: it is written, generally consigned to a “manual”; and it relies on “cognitive artefacts” (Norman, 1991) or “technologies of the intellect” (Goody, 1977) such as lists, tables and formulae like Discounted Cash Flow. This paper shows how this specific form takes effect during the process of institutionalisation, through which grand investment ideals (e.g. competitiveness, value creation) are transformed into concrete devices and into roles (Miller, 1991). Thanks to an enquiry conducted in 2003 and 2004, investment procedures in six large companies in a French context are analysed. It is argued that (1) the formalisation of the objectives of the procedures, as well as the definitions of investment through typologies shape the actors’ boundaries of action; (2) valuation methods based on the domination of economic-mathematical formula favour short-term over long-term reflection; (3) the setting of decision-making thresholds formalise individuals’ tasks and responsibilities. Therefore, the very form of procedures shape each phase of the institutionalisation process as defined by Hasselbladh and Kallinikos (2000) and contribute to creates a singular world – that of investment decisions.
    Keywords: procedure; investment; written text; artefacts; technologies of the intellect; institutionalisation
    JEL: D92 E22 F21 G11
    Date: 2007–04–04
  132. By: Howard Petith
    Abstract: :  Recently a number of articles have appeared in the mainstream that deal with the economy in terms of class and exploitation. This paper sets out two of them in a simplified maner and explains why they may be of interest to left wing Latin American economists.
    Keywords: Latin America, Marxism, Democracy
    JEL: E11 O54
    Date: 2007–03–20
  133. 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
  134. By: Virginie Coudert; Mathieu Gex
    Abstract: Financial institutions often refer to empirical risk aversion indicators to gauge investors’ market sentiment. Fluctuations in risk aversion are generally considered as a factor explaining crises. Periods of strong risk appetite can create speculative bubbles on financial prices, building up vulnerabilities. Then a sudden reversal in risk aversion may trigger sharp falls in asset prices and prompt a financial crisis. A crucial point is to clearly define the concept of risk aversion. In the framework of asset pricing models, more precisely the Consumption CAPM (CCAPM), a risk premium can be decomposed into a “price of risk”, which is common to all assets, and a “quantity of risk”, which is specific to each asset. The empirical indicators of risk aversion used by financial institutions aim at assessing this “price of risk”. Those empirical indicators can be put together in four main groups. 1) The indicators of the GRAI (Global Risk Aversion Index) type are based on the idea that an increase in risk aversion should lead to a rise in risk premia across all markets, but the rise should be greater on the riskiest markets (Persaud, 1996, Kumar and Persaud, 2002). By using the CAPM, regarded as a special case of the CCAPM, this idea amounts to assessing changes in risk aversion as the correlation between price changes and their volatility. 2) Risk aversion can also be estimated as the common factor driving risk premia. This common factor can be evaluated through a factor analysis such as the Principal Component Analysis (PCA). 3) Some financial institutions also use raw series, as the VIX which is the implied volatility on the S&P 500, or combinations of raw series. 4) There are also other indicators, such as the State Street’s one which does not fall into the previous categories.
    Keywords: Risk aversion; leading indicators of crises; currency crises; stock market crises; crises prediction; models; financial markets; crisis
    JEL: C33 E44 F37 G12
    Date: 2007–01
  135. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Yoshifumi Kon (Graduate School of Economics, University of Tokyo)
    Abstract: After a series of crises, many developing countries came to recognize that reducing liquidity risk is an important self-protection. However, they have alternative strategies for the self-protection. The purpose of this paper is to show that macroeconomic impacts might be very different depending on which strategy developing countries will take. In the first part, we investigate what macroeconomic impacts an increased aversion to liquidity risk can have in a simple open economy model. When the government keeps foreign reserves constant, an increased aversion to liquidity risk reduces liquid debt and increases illiquid debt. However, its macroeconomic impacts are not large, causing only small current account surpluses. In contrast, when the government responds to the shock, the changed aversion increases foreign reserves and may lead to a rise of liquidity debt. In particular, under some reasonable parameter set, it causes large macroeconomic impacts, including significant current account surpluses. In the second part, we provide several empirical supports to the implications. In particular, we explore how foreign debt maturity structures changed in East Asia. We find that many East Asian economies reduced short-term borrowings temporarily after the crisis but increased short-term borrowings in the early 2000s. Since short-term debt is liquid debt, the instantaneous change after the crisis is consistent with the case where only private agents responded to increased aversion to liquidity risk. However, accompanied by substantial rises in foreign exchange reserves, the change in the early 2000s is consistent with the case where the government also started to respond. We discuss that our results have important implications for the recent deterioration in the U.S. current account.
    Date: 2007–04
  136. By: Krtscha, Manfred; v. Kalckreuth, Ulf (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: In economic reality, reactions to external shocks often come with a delay. On the other hand, agents try to anticipate future developments. Both can lead to difference-differential equtaions with an advancing argument. These are more difficult to handle than either difference or differential equations, but they have the merit of added realism and increased credibility. We present a general method for determining the stability of any solution to a homogeneous linear difference-differential equtaion with constant coefficients and advancing arguments. We will also demonstrate the applicability of our concepts to economic modelling.
    JEL: C61 E50
  137. By: Eduardo A. Cavallo (Inter-American Development Bank)
    Abstract: This study explores the determinants of corporate bond spreads in emerging markets economies. Using a largely unexploited dataset, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, sovereign risk, and global factors. A variance decomposition analysis shows that firm-level characteristics account for the larger share of the variance. In addition, the paper finds two asymmetries. The first is in line the sovereign ceiling “lite” hypothesis which states that the transfer of risk from the sovereign to the private sector is less than 1 to 1. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding.
    Keywords: Corporate Bond Spreads, Sovereign Ceiling, Default Risk, Emerging Market
    JEL: E43 F30 F34 G15
    Date: 2007–04
  138. By: Yochanan Shachmurove (Department of Economics, The City College of the City University of New York, and Department of Economics, University of Pennsylvania)
    Abstract: Do certain regions inherently enjoy an advantage in venture capital investment decisions? And how do industry characteristics affect venture capital activity? These questions fall under the reemerging study of economic geography, which suggests the importance of industrial location to economic decision making. Through the lens of economic geography, this paper examines the impact of industrial and regional characteristics on venture capital activities from 1996 to 2005. Analyzing venture capital data with nineteen regions and seventeen industries, this study affirms the significance of geography and industry to investment trends in venture capital.
    Keywords: Venture Capital, Venture-Backed Public Companies, Economic Geography, Location, Biotechnology, Business Products and Services, Computers and Peripherals, Consumer Products and Services, Electronics and Instrumentation, Financial Services, Healthcare Services, Industrial and Energy, Information Technology Services, Media and Entertainment, Medical Devices and Equipment, Networking and Equipment, Retailing and Distribution, Semiconductors, Software, Telecommunications.
    JEL: C12 D81 D92 E22 G12 G24 G3 M13 M21 O16 O3
    Date: 2007–03–30
  139. By: Olivier BROSSARD (LEREPS-GRES ); Frédéric DUCROZET (PSE - Crédit Agricole); Adrian ROCHE (EconomiX - Crédit Agricole)
    Abstract: We estimate an early warning model of banks’ failure using a panel of 82 EU banks observed between 1991 and 2005. We make two contributions to the literature. Firstly, we construct a distance-to-default indicator and test its predictive power. The tests implemented here are very similar to those realized by Gropp, Vesala and Vulpes (2005), but our time dimension is four years longer and we use a more restrictive definition of banks’ “failure”. This first part of the paper establishes the accuracy of our data and confirms the robustness of distance-to-default as an early indicator of EU banks’ fragility. Our second advance consists in introducing a variable detecting the adverse selection problem that can be caused by rapid growth strategies. A measure of past average growth of assets is shown to be a very significant and powerful predictor of future banks’ difficulties. We discuss the origins and implications of such an effect.
    Keywords: failures; early warning systems; CAMEL ratings; distance to default
    JEL: G21 G33 G14 E58
    Date: 2007
  140. By: Marie Cottrell (SAMOS - Statistique Appliquée et MOdélisation Stochastique - [Université Panthéon-Sorbonne - Paris I], CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Patrice Gaubert (SAMOS - Statistique Appliquée et MOdélisation Stochastique - [Université Panthéon-Sorbonne - Paris I], CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Joseph Rynkiewicz (SAMOS - Statistique Appliquée et MOdélisation Stochastique - [Université Panthéon-Sorbonne - Paris I], CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Patrick Letrémy (SAMOS - Statistique Appliquée et MOdélisation Stochastique - [Université Panthéon-Sorbonne - Paris I], CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Le papier se propose d'étudier la dynamique du marché du travail, en cherchant à caractériser des équilibres dynamiques et des trajectoires possibles. L'arrière-plan théorique est la théorie du marché du travail segmenté. L'idée est que cette théorie est particulièrement bien adaptée pour rendre compte des trajectoires observées, du fait de l'hétérogénéité des situations des salariés.
    Keywords: Marché du travail segmenté; Carte de Kohonen;
    Date: 2007–04–03
  141. By: Raghbendra Jha; T. Palanivel
    Abstract: This paper examines whether the resource positions of the developing counties in the Asia Pacific region and the support they are receiving from donor countries are adequate to ensure that the MDG will be attained by 2015. It begins by examining the extant record of economic growth and emphasises the need for higher economic growth in order to accelerate the pace of poverty reduction. It argues that neither the level of economic growth nor its current structure can ensure that MDG1 is attained by 2015. The paper argues that domestic savings and investment rates in most large developing countries in the Asia Pacific region are not high enough for growth rates to rise high enough to ensure that MDG1 (halving poverty measured at $1 PPP per capita over the period 1990—2015) is attained. Further, the ICOR in most of these countries has been stagnant or rising in many of these countries so that it would be unrealistic to expect sharp enough rises in the productivity of capital to ensure that existing investment rates can ensure that MDG1 is attained by 2015. The paper then examines some of the reasons for this lacklustre performance. Tax revenues have been stagnant and public expenditures on education and health have been low whereas many developing countries in the Asia Pacific region bear substantial burdens of debt servicing. Many of these countries also face considerable capital flight, exacerbating already tentative external situations. Furthermore whereas the current outlook for FDI looks promising for some Asian countries, international aid has been stagnant and in, many cases, net financial flows into developing countries has been negative. The paper then considers avenues for increasing the resource base for these counties. It considers a variety of measures including tax reform and expenditure switching policies. It advances policies to reduce capital flight and argues that international debt reduction should accompany any policy to increase international aid to the developing countries of the Asia Pacific region. It lists a number of additional sources of multilateral aid that could replenish developing country resources but argues that measures to increase the absorptive capacity of developing countries as well as reduction in the volatility of aid must accompany to increase international aid. Further, increases in international aid should ensure that the real exchange rates of the recipient countries should not rise. If the real exchange rates were to rise, some of these countries could be exposed to Dutch disease type of phenomena.
    Keywords: Millennium Development Goals, Asia Pacific Countries, Resource Augmentation
    JEL: E01 E61 F42 F29
    Date: 2007
  142. By: Börsch-Supan, Axel; Heiss, Florian; Winter, Joachim (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre-funding – for capital markets in Germany. We use a stylized overlapping generations model to predict rates of return over a long horizon taking demographic projections as given. Our simulations show that a transition to a partially funded system crowds out existing savings only partially. The capital stock increases initially, but decreases when the babyboom generations enter retirement. The corresponding decrease in the rate of return, which results from both population aging and pre-funded pensions, is only modest, less than one percentage point in the closed economy, fixed-technology case. The return on capital can be improved by international diversification, that is, by investing pension funds in countries with a more favorable demographic transition path. Feedback effects from strengthened capital markets and improved corporate governance, which are unlikely to be achieved with capital market reforms alone, will raise capital performance further.
    JEL: E27 G15 G34 H55 J11
  143. By: Howard Petith
    Abstract: Starting in 1999 a group of papers have appeared in mainstream journals that treat of the relation between capitalism and democracy in an eminently Marxian fashion. These analyses bear on a number of papers published mainly in S&S, specifically those of Castañada, Ellman, Harnacker, Nimtz and Petras. This paper provides résumés of all of these works and then sets out the implications of the mainstream papers for the left wing ones. It concludes by emphasising the importance for the left of the mainstream results.
    Keywords: Marxism, Democracy
    JEL: E11 O52 O54 N46
    Date: 2007–03–20
  144. By: Howard Petith
    Abstract: Recently a number of mainstream papers have treated the rise of democracy in 19th century Europe and its instability in Latin America in an eminently Marxist fashion. This paper sets out their implications for Marxist thought. With respect to Europe, Marx's emphasis on political action backed by the threat of violence is vindicated but his justification for socialism is not. With respect to Latin America, the unequal distribution of wealth is the cause of political instability that is, in turn, the root cause of mass poverty. In addition it is possible to explain some of the paradoxical characteristics of neo-liberalism and to make a weak argument for socialism in spite of its rejection in Europe.
    Keywords: Marxism, Democracy, Europe, Latin America
    JEL: E11 O52 O54 N46

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