|
on Macroeconomics |
|
Issue of 2007‒04‒14
forty-six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Mewael F. Tesfaselassie |
| Abstract: | In a model with forward-looking expectations, the paper examines communication of central bank forecasts when the inflation target is subject to unobserved changes. It characterizes the effect of disclosure of forecasts on inflation and output stabilization and the choice of an active versus passive monetary policy. The paper shows that these choices depend on the slope of the Phillips curve, the central bank's preference weight on inflation relative to output and the ratio of the variability of the inflation target relative to the cost-push disturbance. The paper briefly discusses how disclosure of forecasts may be beneficial for a society that is more concerned about inflation stabilization than the central bank. |
| Keywords: | Forward-looking expectations, inflation target, central bank fore- casts, disclosure policy |
| JEL: | E42 E43 E52 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1319&r=mac |
| By: | Vladislav Damjanovic; Charles Nolan |
| Abstract: | We study the impact of two-sided nominal shocks in a simple dynamic, general equilibrium (S,s)-pricing macroeconomic model comprised of heterogeneous sectors. The simple model we develop has a number of appealing empirical implications; it captures why some sectors of the economy have systematically more flexible prices, the smooth dynamics of aggregate output following a monetary shock, and a degree of price asynchronization. Incorporating multiple sectors is central to arriving at these three results. |
| Keywords: | Price rigidity, Ss pricing, macroeconomic dynamics. |
| JEL: | E31 E32 E37 E58 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0709&r=mac |
| By: | Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting. |
| Keywords: | Monetary policy framework |
| JEL: | E5 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-26&r=mac |
| By: | Tatiana Kirsanova; Simon Wren-Lewis |
| Abstract: | We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However this fiscal stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare. |
| Keywords: | Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation |
| JEL: | E52 E61 E63 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:306&r=mac |
| By: | Caterina Mendicino (Monetary and Financial Analysis Department, Bank of Canada, 234 Wellington St., Ottawa, K1A 0G9, Ontario, Canada.) |
| Abstract: | This paper investigates the role of credit market size as a determinant of business cycle fluctuations. First, using OECD data I document that credit market depth mitigates the impact of variations in productivity to output volatility. Then, I use a business cycle model with borrowing limits a la Kiyotaki and Moore (1997) to replicate this empirical regularity. The relative price of capital and the reallocation of capital are the key variables in explaining the relation between credit market size and output volatility. The model matches resonably well the reduction in productivity-driven output volatility implied by the established size of the credit market observed in OECD data. JEL Classification: E21, E22, E44, G20. |
| Keywords: | Credit frictions, reallocation of capital, asset prices. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070743&r=mac |
| By: | Pierdzioch, Christian; Cenesiz, M. Alper |
| Abstract: | The money multiplier measures the accumulated effect of a monetary policy shock on key macroeconomic variables like output and hours worked. Conventional wisdom suggests that financial market integration should significantly increase the money multiplier. Based on a dynamic general equilibrium model, we derive the result that costs of adjusting hours worked substantially dampen the effect of financial market integration on the money multiplier. Costs of adjusting hours worked capture in an efficient and stylized manner that adjustment processes in the labor market typically are costly and time consuming. Empirical evidence supports the result of our theoretical analysis. |
| Keywords: | Financial market integration; Money multiplier; Costs of adjusting hours worked |
| JEL: | F36 F41 E44 |
| Date: | 2007–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2657&r=mac |
| By: | Carlsson, Mikael (Research Department); Westermark, Andreas (Department of Economics) |
| Abstract: | We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante. |
| Keywords: | Monetary Policy; Wage Bargaining; Downward Nominal Wage Rigidity |
| JEL: | E52 E58 J41 |
| Date: | 2007–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2007_015&r=mac |
| By: | Helge Braun; Reinout De Bock; Riccardo DiCecio |
| Abstract: | We use structural vector autoregressions to analyze the responses of worker flows, job flows, vacancies, and hours to shocks. We identify demand and supply shocks by restricting the short-run responses of output and the price level. On the demand side we disentangle a monetary and non-monetary shock by restricting the response of the interest rate. The responses of labor market variables are similar across shocks: expansionary shocks increase job creation, the hiring rate, vacancies, and hours. They decrease job destruction and the separation rate. Supply shocks have more persistent effects than demand shocks. Demand and supply shocks are equally important in driving business cycle fluctuations of labor market variables. Our findings for demand shocks are robust to alternative identification schemes involving the response of labor productivity at different horizons and an alternative specification of the VAR. However, supply shocks identified by restricting productivity generate a higher fraction of responses inconsistent with standard search and matching models. |
| Keywords: | Labor market ; Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-15&r=mac |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates. |
| Keywords: | Monetary policy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-08&r=mac |
| By: | Campbell Leith; Simon Wren-Lewis |
| Abstract: | Most recent work deriving optimal monetary policy utilising New Neo-Classical Synthesis (NNCS) models abstract from the impact of monetary policy on the government`s finances, by assuming that any change in the government`s budget can be financed through lump sum taxes. In this paper, we assume that the government does not have access to such taxes to satisfy its intertemporal budget constraint in the face of shocks. We then consider optimal monetary and fiscal policies under discretion and commitment in the face of technology, preference and cost-push shocks. We confirm that the optimal precommitment policy implies a random walk in the steady-state level of debt. We also find that the time-inconsistency in the optimal precommitment policy is such that governments are tempted, given inflationary expectations, to utilise their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We show that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level. This implies that under a discretionary policy the random walk result is overturned: debt will always be returned to this initial steady-state even although there is no explicit debt target in the government`s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilise the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policy, but can be significant for discretionary policy. |
| Keywords: | New Keynesian Model, Government Debt, Monetary Policy, Fiscal Policy |
| JEL: | E62 E63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:310&r=mac |
| By: | Richard Dennis |
| Abstract: | Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspecified. I begin by showing how to solve linear-quadratic robust Markov-perfect Stackelberg problems where the leader fears that private agents form expectations using the misspecified model. Next, I exploit the connection between robust control and uncertainty aversion to present and interpret my results in terms of the distorted beliefs held by the central bank, households, and firms. My main results are as follows. First, the central bank's pessimism leads it to forecast future outcomes using an expectations operator that, relative to rational expectations, assigns greater probability to extreme inflation and consumption outcomes. Second, the central bank's skepticism about its model causes it to move forcefully to stabilize inflation following shocks. Finally, even in the absence of misspecification, policy loss can be improved if the central bank implements a robust policy. |
| Keywords: | Monetary policy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-09&r=mac |
| By: | Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | The key question asked by standard monetary models used for policy analysis, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:388&r=mac |
| By: | Pierdzioch, Christian; Kizys, Renatas |
| Abstract: | An important question for stock market investors and bank supervisors is to which extent the stock returns of banks reflect business-cycle sensitive risk in the banking industry. In order to find an answer to this question, we built on the stochastic discount factor model to derive a multivariate exponential GARCH-in-mean model. We used monthly U.S. data for the period from 1980 to 2006 to estimate the model. The novel feature of our empirical analysis is that we used both real-time and revised macroeconomic data to measure the business cycle. Our empirical results suggest that using real-time rather than revised macroeconomic data can significantly alter estimates of the risk premium that stock market investors require for bearing business-cycle sensitive risk in the banking industry. |
| Keywords: | Stochastic discount factor model; multivariate exponential GARCH-in-mean model; risk in the banking industry; real-time macroeconomic data |
| JEL: | E32 C32 G12 E44 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2658&r=mac |
| By: | Osterloh, Steffen |
| Abstract: | In this paper the accuracy of a wide range of German business cycle forecasters is assessed for the past 10 years. For this purpose, a data set is used comprising forecasts published on a monthly basis by Consensus Economics. The application of several descriptive as well as statistical measures reveals that the accuracy of the 2-years forecasts is low relative to a simple naïve forecast. This observation can mainly be explained by a systematic overestimation of the growth rates by the forecasters. Moreover, the lack of accuracy can also be explained partly by insufficient information efficiency as well as imitation behaviour. Finally, it is shown that notwithstanding the common errors which affected the accuracy of all forecasters mainly because of their systematic overestimation, they differ significantly in their forecast accuracy. |
| Keywords: | business cycle forecasting, forecast evaluation, Consensus forecasts |
| JEL: | C52 E32 E37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5480&r=mac |
| By: | Carlos Bowles (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roberta Friz; Veronique Genre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Geoff Kenny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Aidan Meyler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Tuomas Rautanen |
| Abstract: | Eight years have passed since the European Central Bank (ECB) launched its Survey of Professional Forecasters (SPF). The SPF asks a panel of approximately 75 forecasters located in the European Union (EU) for their short- to longer-term expectations for macroeconomic variables such as euro area inflation, growth and unemployment. This paper provides an initial assessment of the information content of this survey. First, we consider shorter-term (i.e., one- and two-year ahead rolling horizon) forecasts. The analysis suggests that, over the sample period, in common with other private and institutional forecasters, the SPF systematically under-forecast inflation but that there is less evidence of such systematic errors for GDP and unemployment forecasts. However, these findings, which generally hold regardless of whether one considers the aggregate SPF panel or individual responses, should be interpreted with caution given the relatively short sample period available for the analysis. Second, we consider SPF respondents’ assessment of forecast uncertainty using information from heir probability distributions. The results suggest that, particularly at the individual level, SPF respondents do not seem to fully capture the overall level of macroeconomic uncertainty. Moreover, even at the aggregate level, a more sophisticated evaluation of the SPF density forecasts using the probability integral transform largely confirms this assessment. Lastly, we consider longer-term macroeconomic expectations from the SPF, where, as expectations cannot yet be assessed against so few actual realisations, we provide a mainly qualitative assessment. With regard to inflation, the study suggests that the ECB has been successful at anchoring longterm expectations at rates consistent with its primary objective to ensure price stability over the medium term. Long-term GDP expectations – which should provide an indication of the private sector’s assessment of potential growth – have declined over the sample period and the balance of risks reported by respondents has generally been skewed to the downside. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070059&r=mac |
| By: | Sabine Herrmann (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany.); Eva Katalin Polgar (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The primary goal of monetary policy in most economies of the world is to achieve and maintain price stability. This paper evaluates price developments and consumer price indices in south-eastern European countries, i.e. countries that have either recently joined the EU or are candidate or potential candidate countries. It is motivated by the fact that, in transition countries, inflation has generally been higher and more volatile than in advanced economies. The analysis reveals that the subindex housing/energy appears to be the main driving force behind overall inflation in the region. In most of the countries under review, administered prices prove to be an important factor in consumer price developments, with their weights increasing over time. Inflation volatility in south-eastern Europe is significantly higher than in the euro area. While this is partly due to a higher level of inflation, it also reflects a more pronounced share for the most volatile sub-indices as well as the marked impact of administered prices on the overall price index, a phenomenon which has also been seen in the central and eastern European countries. While in most south-eastern European countries no HICP has been calculated yet, there is little evidence suggesting that the future use of the HICP will result in a systematic change in inflation patterns in the respective countries. However, as deviations have been observed in a few countries for certain periods, without further information on the structure of the respective national CPI and the HICP such differences cannot be fully excluded. JEL Classification: E21, O52, O57, P22. |
| Keywords: | South-eastern Europe, inflation developments, inflation volatility, consumer price indices, HICP, administered prices. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070057&r=mac |
| By: | Campbell Leith; Simon Wren-Lewis |
| Abstract: | A common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, leading to pressures on monetary policy makers to react. In this paper we develop a small open economy model which features traded and non-traded goods sectors with which to assess the extent to which monetary policy should respond to exchange rate misalignments. To do so we initially contrast the efficient outcome of the model with that under flexible prices and find that the flex-price equilibrium exhibits an excessive exchange rate appreciation in the face of a positive UIP shock. By introducing sticky prices in both sectors we provide a role for policy in the face of UIP shocks. We then derive a quadratic approximation to welfare which comprises quadratic terms in the output gaps in both sectors as well as sectoral rates of inflation. These can be rewritten in terms of the usual aggregate variables, but only after including terms in relative sectoral prices and/or the terms of trade to capture the sectoral composition of aggregates. We derive optimal policy analytically before giving numerical examples of the optimal response to UIP shocks. Finally, we contrast the optimal policy with a number of alternative policy stances and assess the robustness of results to changes in model parameters. |
| Keywords: | Exchange Rate Misalignment, Monetary Policy, Non-Traded Goods |
| JEL: | F41 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:305&r=mac |
| By: | Rochelle M. Edge; Michael T. Kiley; Jean-Philippe Laforte |
| Abstract: | This paper presents a monetary DSGE model of the U.S. economy. The model captures the most important production, expenditure, and nominal-contracting decisions underlying economic data while remaining sufficiently small to allow it to provide a clear interpretation of the data. We emphasize the role of model-based analyses as vehicles for storytelling by providing several examples--based around the evolution of natural rates of production and interest--of how our model can provide narratives to explain recent macroeconomic fluctuations. The stories obtained from our model are both similar to and quite different from conventional accounts. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-08&r=mac |
| By: | Bjoern Bruegemann; Giuseppe Moscarini |
| Abstract: | Recent findings have revived interest in the link between real wage rigidity and employment fluctuations, in the context of frictional labor markets. The standard search and matching model fails to generate substantial labor market fluctuations if wages are set by Nash bargaining, while it can generate fluctuations in excess of what is observed if wages are completely rigid. This suggests that less severe rigidity may suffice. We study a weaker notion of real rigidity, which arises only in frictional labor markets, where the wage is the sum of the worker's opportunity cost (the value of unemployment) and a rent. With wage rigidity this sum is acyclical; we consider rent rigidity, where only the rent is acyclical. We offer two contributions. First, we derive upper bounds on labor market volatility that apply if the model of wage determination generates weakly procyclical worker rents, and that are attained by rent rigidity. Quantitatively, the bounds are tight: rent rigidity generates no more than a third of observed volatility, an outcome that is closer to Nash bargaining than to wage rigidity. Second, we show that the bounds apply to a sequence of famous solutions to the bargaining problem under asymmetric information: at best they generate rigid rents but not rigid wages. |
| JEL: | E24 E32 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13030&r=mac |
| By: | Kristie M. Engemann; Michael T. Owyang |
| Abstract: | During the typical recovery from U.S. post-War period economic downturns, employment recovers to its pre-recession level within months of the output trough. However, during the last two recoveries, employment has taken up to two years to achieve its pre-recession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the last two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and non-durable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately. |
| Keywords: | Business cycles ; Labor market |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-13&r=mac |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:13&r=mac |
| By: | John C. Bluedoen; Christopher Bowdler |
| Abstract: | We analyze the international transmission of interest rates under pegged and non-pegged exchange rate regimes, demonstrating that transmission depends upon the informational properties of a base country`s interest rate change. We differentiate between interest rate movements which are predictable/unpredictable and dependent/independent (i.e., a function of non-monetary factors such as cost-push inflation). Under capital mobility, we show that predictable or dependent interest rate changes should elicit interest rate pass-through for an imperfectly credible peg that is less than unity, whilst interest rate changes that are unpredictable and independent should elicit pass-through greater than unity. Using a real-time identification of unpredictable and independent U.S. federal funds rate changes, we provide evidence consistent with these propositions. When the federal funds rate change is unpredictable and independent, the joint hypothesis of unit within-month pass-through to pegs and zero within-month pass-through to non-pegs cannot be rejected. The same hypothesis is strongly rejected following actual, aggregate federal funds rate changes which include predictable and dependent components. In a dynamic context, we find that maximum interest rate pass-through to pegs is delayed. Moreover, even though there is a full transmission of unpredictable and independent federal funds rate changes, they explain only a small portion of pegged regime interest rate changes. |
| Keywords: | Interest Rate Pass-Through, Monetary Policy Identification, Open Economy Trilemma, Exchange Rate Regime |
| JEL: | F33 F41 F42 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:290&r=mac |
| By: | Fazal Husain (Pakistan Institute of Development Economics, Islamabad); Abdul Rashid (College of Business Management, Karachi) |
| Abstract: | This study extends the analysis of casuality by Husain and Rashid by taking care of the shift in the variables due to the price hikes in the early 1970s. We investigate the casual relations between real money and real income, between nominal money and nominal income, and between nominal money and prices using using the annual data set from 1959-60 to 2003-04, examining the stochastic properties of the variables used in the analysis and taking care of the expected shifts in the series through dummies. The analysis indicates significant shifts in the variables during the sample period. In this context, the shift of the early 1970s seems to be more important to be incorporated in the analysis. The study finds an active role of money in the Pakistani economy, as it is found to be the leading variable in changing prices without any feed back. In the case of income, the study finds the feed back mechanism of money, which is generally missing in the earlier studies probably because of not taking care of the shift in the macroeconomic variables in Pakistan in the early 1970s. |
| Keywords: | Money; Income; Prices, Price hikes, Casual relations, Pakistan |
| JEL: | E3 E4 N4 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2006:8&r=mac |
| By: | Vítor Castro (Universidade de 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 augment 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 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:10/2007&r=mac |
| By: | Richard Rogerson; Johanna Wallenius |
| Abstract: | We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns. |
| JEL: | E2 J2 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13017&r=mac |
| By: | Roberto Frenkel; Martín Rapetti |
| Abstract: | This paper offers a comprehensive look at how Argentina managed a remarkable economic recovery from its collapse in 2001. The authors show how the Argentine government's policy of targeting a stable and competitive real exchange rate was crucial to the country's economic recovery. They also analyze the various sources of aggregate demand and government revenue in different phases of the expansion. In addition to the crucial role of the exchange rate, the authors look at other policies - such as an export tax, capital controls, and the default on much of the country's sovereign debt - which were met with disapproval by many economists and other commentators but played an important role in the recovery. |
| JEL: | E58 E52 E42 F31 F41 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-12&r=mac |
| By: | Michal Brzoza-Brzezina; Jesus Crespo Cuaresma |
| Abstract: | We use a Bayesian dynamic latent factor model to extract world, regional and country factors of real interest rate series for 22 OECD economies. We find that the world factor plays a privileged role in explaining the variance of real rates for most countries in the sample, and accounts for the steady decrease in interest rates in the last decades. Moreover, the relative contribution of the world factor is rising over time. We also find relevant differences between the group of countries that follow fixed exchange rate strategies and those with flexible regimes. |
| Keywords: | Real interest rates, natural rate of interest, Bayesian dynamic factor models. |
| JEL: | E43 C11 E58 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2007-06&r=mac |
| By: | Claeys, Sophie (Research Department, Central Bank of Sweden); Schoors, Koen (CERISE) |
| Abstract: | Supervisors sometimes have to manage both the micro- and macro- prudential dimensions of bank stability. These may either conflict or complement each other. We analyze prudential supervision by the Central Bank of Russia (CBR). We find evidence of micro-prudential concerns, measured as the rule-based enforcement of bank standards. Macro-prudential concerns are also documented: Banks in concentrated bank markets, large banks, money center banks and large deposit banks are less likely to face license withdrawal. Further, the CBR is reluctant to withdraw licenses when there are “too many banks to fail”. Finally, macro-prudential concerns induce regulatory forbearance, revealing conflicts with micro-prudential objectives. |
| Keywords: | Prudential Supervision; Bank Stability; Systemic Stability |
| JEL: | E50 G20 N20 |
| Date: | 2007–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0205&r=mac |
| By: | Fei Peng (University of Birmingham Business School); W. Stanley Siebert (University of Birmingham Business School and IZA) |
| Abstract: | This paper compares the cyclical behaviour of male real wages in Germany and the UK using the German Socio-Economic Panel 1984-2002 and the British Household Panel Survey 1991-2004. We distinguish between job stayers (remaining in the same job), and within- and between-company job movers. Stayers are the large majority in both countries. Using changes in the unemployment rate as the cyclical measure, we find real wages of stayers in the private sector in West Germany - but not East Germany - to be procyclical, and quite sensitive to unemployment, comparable to the US and the UK. We find cyclicality in the public sector in neither country. Thus real wage flexibility is similar in the two countries, apart from East Germany, despite apparent differences in wage-setting institutions. |
| Keywords: | real wage cyclicality, job stayers, Germany, United Kingdom, GSOEP, BHPS |
| JEL: | E32 J31 K31 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2688&r=mac |
| By: | Klump, Rainer; Saam, Marianne |
| Abstract: | Normalising CES production functions in the calibration of basic dynamic models allows to choose technology parameters in an economically plausible way. When variations in the elasticity of substitution are considered, normalisation is necessary in order to exclude arbitrary effects. As an illustration, the effect of the elasticity of substitution on the speed of convergence in the Ramsey model is computed with different normalisations. |
| Keywords: | CES production functions, normalisation, calibration, Ramsey model |
| JEL: | E24 E27 O41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:5471&r=mac |
| By: | Sinha, Dipendra; Sinha, Tapen |
| Abstract: | This paper examines the relationship between the growth rates of household saving, public saving, corporate saving and economic growth in India using multivariate Granger causality tests. The conventional wisdom suggests that the causality flows from saving to economic growth. We show that the causality goes in the opposite direction for India. Hence, higher saving is the consequence of higher economic growth and not a cause. |
| Keywords: | Economic growth; public saving; corporate saving; household saving |
| JEL: | O11 E21 O16 |
| Date: | 2007–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2597&r=mac |
| By: | Laura X. L. Liu; Toni Whited; Lu Zhang |
| Abstract: | The neoclassical q-theory is a good start to understand the cross section of returns. Under constant return to scale, stock returns equal levered investment returns that are tied directly with characteristics. This equation generates the relations of average returns with book-to-market, investment, and earnings surprises. We estimate the model by minimizing the differences between average stock returns and average levered investment returns via GMM. Our model captures well the average returns of portfolios sorted on capital investment and on size and book-to-market, including the small-stock value premium. Our model is also partially successful in capturing the post-earnings-announcement drift and its higher magnitude in small firms. |
| JEL: | E13 E22 E44 G12 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13024&r=mac |
| By: | David Rosnick; Mark Weisbrot |
| Abstract: | This report examines the International Monetary Fund's (IMF) projections for economic growth for Argentina and Venezuela in recent years. It shows that the IMF consistently made large errors in overestimating Argentina's GDP growth for the years 2000, 2001 and 2002, during the country's 1998-2002 depression, and large underestimates for the years 2003-2006, as Argentina's economy grew rapidly. The paper also notes the IMF's repeated large errors in underestimating Venezuela's GDP growth for the years since 2004. |
| JEL: | E27 F34 F33 F47 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2007-10&r=mac |
| By: | Stanley Sienkiewicz |
| Abstract: | This paper discusses the potential money laundering threat that prepaid cards face as they enter the mainstream of consumer payments. Over the past year, several government agencies have issued reports describing the threat to the U.S. financial system, including the use of prepaid cards by money launderers. Also, this paper incorporates the presentations made at a workshop hosted by the Payment Cards Center at which Patrice Motz, executive vice president, Premier Compliance Solutions, and Paul Silverstein, executive vice president, Epoch Data Inc., led discussions. These two leading anti-money laundering strategists explained how money laundering occurs in financial payments and how firms can mitigate and detect money laundering activities. This paper provides an overview of money laundering, describes how prepaid cards could be abused, and outlines how both the government and the payment sectors have responded to mitigate risks. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:07-02&r=mac |
| By: | Gerald Carlino; Robert DeFina; Keith Sill |
| Abstract: | This study documents a general decline in the volatility of employment growth during the period 1960 to 2002 and examines its possible sources. A unique aspect of the analysis is the use of state-level panel data. Estimates from a pooled cross-section/time-series model indicate that aggregate and state-level factors each explain an important share of the total variation in state-level volatility. Specifically, state-level factors have contributed as much as 29 percent, while aggregate factors are found to account for up to 45 percent of the variation. With regard to state-level factors, the share of state total employment in manufacturing and state banking deregulation each contributed significantly to fluctuations in volatility. Among the aggregate factors separately identified, monetary policy, changes in the inventory-to-sales ratio, changes in the ratio of total trade to GDP, and oil prices significantly affected state-level volatility, although to differing degrees. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:07-11&r=mac |
| By: | Diego Restuccia; Richard Rogerson |
| Abstract: | We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for cross-country differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP. |
| JEL: | E2 O1 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13018&r=mac |
| By: | Marco Leonardi (University of Milan and IZA); Giovanni Pica (University of Salerno and CSEF) |
| Abstract: | In a perfect labor market severance payments can have no real effects as they can be undone by a properly designed labor contract (Lazear 1990). We give empirical content to this proposition by estimating the effects of EPL on entry wages and on the tenure-wage profile in a quasi-experimental setting. We consider a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. Estimates which account for the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold show no effect of the reform on entry wages and a decrease of the returns to tenure by around 20% in the first year and by 8% over the first two years. We interpret these findings as broadly consistent with Lazear’s (1990) prediction that firms make workers prepay the severance cost. |
| Keywords: | costs of unjust dismissals, severance payments, regression discontinuity design |
| JEL: | E24 J63 J65 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2680&r=mac |
| By: | Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Annette Kamps (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Elitza Mileva |
| Abstract: | This paper provides an assessment of Russia’s long-term growth prospects. In particular, it addresses the question of the medium- and long-term sustainability of the country’s currently high growth rates. Starting from the notion that Russia’s fast economic expansion in recent years has benefited from a number of singular factors such as the unprecedented rise in oil prices, the paper presents new evidence on Russia’s oil price dependency using a Vector Error Correction Model (VECM) framework. The findings indicate that the positive impact of rising oil prices on Russia’s GDP growth has increased in recent years, but tends to be buffered by an appreciation of the real effective exchange rate which is stimulating imports. Additionally, there is empirical confirmation that growth in the service sector – a symptom usually associated with the Dutch disease phenomenon – is mainly a result of the transition process. Finally, the paper provides an overview of the relevant factors that are likely to affect Russia’s growth performance in the future. JEL Classification: O43, O 47, O51, O11, O14. |
| Keywords: | Russia, economic growth. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070058&r=mac |
| By: | Sule Alan; Orazio Attanasio; Martin Browning |
| Abstract: | In this paper we exploit the specific structure of the Euler equation and develop two alternative GMM estimators that deal explicitly with measurement error. The first estimator assumes that the measurement error is lognormally distributed. The second estimator drops the distributional assumption and solves out for the unknown, but constant, conditional mean. Our Monte Carlo results suggest that both proposed estimators perform much better than conventional alternatives based on the exact Euler equation or its log-linear approximation, especially with short panels. The empirical application of the proposed estimators yields plausible estimates of the coefficient of relative risk aversion and discount rate. |
| Keywords: | Nonlinear Models, Measurement Error, Euler Equation |
| JEL: | C13 E21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:283&r=mac |
| By: | Wynne Godley; Dimitri B. Papadimitriou; Gennaro Zezza |
| Abstract: | he collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the U.S. economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so. Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium termÑnot just the next few months. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levysa:sa_apr_07&r=mac |
| By: | Maria João Thompson (Universidade do Minho - NIPE) |
| Abstract: | The presence of complementarities generally makes a growth model nonlinear, hence delivering multiple equilibria. Introducing internal investment costs in the R&D-based growth literature, we develop a growth model which combines the assumptions of complementarities between capital goods in the production function and of internal costly investment in capital. We find that with such combination of complementarities and costly investment, the growth model delivers a single equilibrium. |
| Keywords: | Complementarities, Costly Investment, Economic Growth |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:8/2007&r=mac |
| By: | Timothy Besley; Torsten Persson |
| Abstract: | Economists generally assume the existence of sufficient institutions to sustain a market economy and tax the citizens. However, this starting point cannot easily be taken for granted in many states, neither in history nor in the developing world of today. This paper develops a framework where "policy choices", regulation of markets and tax rates, are constrained by "economic institutions", which in turn reflect past investments in legal and fiscal state capacity. We study the economic and political determinants of these investments. The analysis shows that common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Preliminary empirical evidence based on cross-country data find a number of correlations consistent with the theory. |
| JEL: | D70 E60 H10 K40 O10 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13028&r=mac |
| By: | Jeremy J. Nalewaik |
| Abstract: | This work estimates Markov switching models on real time data and shows that the growth rate of gross domestic income (GDI), deflated by the GDP deflator, has done a better job recognizing the start of recessions than has the growth rate of real GDP. This result suggests that placing an increased focus on GDI may be useful in assessing the current state of the economy. In addition, the paper shows that the definition of a low-growth phase in the Markov switching models has changed over the past couple of decades. The models increasingly define this phase as an extended period of around zero rather than negative growth, diverging somewhat from the traditional definition of a recession. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-07&r=mac |
| By: | Eduardo Cavallo (Inter-American Development Bank); Patricio Valenzuela (International Monetary Fund) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:1032&r=mac |
| By: | Kurmas Akdogan; Yunus Aksoy |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0703&r=mac |
| By: | Paul Dorosh (The World Bank, Washington, D. C.); Muhammad Khan Niazi (Innovative Development Strategies, Islamabad); Hina Nazli (Innovative Development Strategies, Islamabad) |
| Abstract: | This paper describes the structure and construction of a social accounting matrix (SAM) for Pakistan for 2001-02. A SAM is an internally consistent extended set of national accounts that disaggregates value-added in each production activity into payments to various factors (e.g., land, labour, capital), and disaggregates household incomes and expenditures according to various household types. Because this Pakistan SAM is designed for analysis of the links between growth and rural poverty, agricultural activities, agricultural factors of production, and rural household accounts are more disaggregated than are those for urban activities and households. Rural household groups in the SAM are split according to three regions (Punjab, Sindh, and Other Pakistan) to capture the large differences in the structure of agricultural production and incomes across Pakistan. On average, household incomes in the SAM are 2.1 times greater than household expenditures in the HIES Survey, reflecting the apparent substantial under-reporting of expenditures (particularly on services) and informal sector incomes in the HIES and other household surveys. Agricultural factor incomes as calculated in the SAM account for only 23 percent of total factor incomes in Pakistan, but 60 percent of total factor incomes for agricultural households. 91 percent of agricultural incomes derive from land, water, own-farm labour, or livestock; earnings of hired labour and (nonlivestock) agricultural capital account for only 9 percent of agricultural incomes. Incomes of large- and medium-farm rural households, calculated using land area cultivated, data from the Agricultural Census, and other data, are significantly higher than indicated in household surveys |
| Keywords: | National accounts, Social accounting matrix |
| JEL: | E01 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2006:9&r=mac |