nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒04‒21
72 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis By CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien
  2. Misperceived Money and Inflation Dynamics By COLLARD, Fabrice; DELLAS, Harris
  3. Monetary policy credibility and inflation risk premium: a model with application to Brazilian data By Alexandre Lowenkron; Marcio Gomes Pinto Garcia
  4. Liquidity preference as rational behaviour under uncertainty By Mierzejewski, Fernando
  5. Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic By Roman Horváth
  7. The Dynamic Effects of Disinflation Policies By COLLARD, Fabrice; FÈVE, Patrick; MATHÉRON, Julien
  8. Labor Search and Matching in Macroeconomics By Eran Yashiv
  9. Search Frictions on Product and Labor Markets: Money in the Matching Function By Etienne Lehmann; Bruno Van der Linden
  10. Learning and the Great Inflation By Carboni, Giacomo; Ellison, Martin
  11. Rescuing the LM (and the money market) in a modern Macro course By Roberto Tamborini
  12. Price Rigidity and Flexibility: Recent Theoretical Developments By Levy, Daniel
  13. Optimal Monetary Policy under Downward Nominal Wage Rigidity By Carlsson, Mikael; Westermark, Andreas
  14. Information-Price Updating and Inertia By COLLARD, Fabrice; DELLAS, Harris
  15. Pillars of Globalization: A history of monetary policy targets, 1797-1997 By Flandreau, Marc
  16. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies" By Kolver Hernandez
  17. Product Creation and Destruction: Evidence and Price Implications By Christian Broda; David E. Weinstein
  18. The Role of Interbank Markets in Monetary Policy: A Model with Rationing By Xavier Freixas; José Jorge
  19. The Hungarian Monetary Transmission Mechanism: an Assessment By Balázs Vonnák
  20. Checking Out: Exits from Currency Unions By Rose, Andrew K
  21. Monetary Policy before Euro Adoption: Challenges for EU New Members By Jan Filácek; Roman Horváth; Michal Skorepa
  23. The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? By George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  24. Monetary Commitment, Institutional Constraints and Inflation: Empirical Evidence for OECD Countries since the 1970s By Andreas Freytag; Friedrich Schneider
  25. Regional and Outward Economic Integration in South-East Asia By Enzo Weber
  26. Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change By Fabrizio Coricelli; Balázs Égert; Ronald MacDonald
  27. Price Rigidity and Flexibility: New Empirical Evidence By Levy, Daniel
  28. Relationship between inflation, unemployment and labor force change rate in France: cointegration test By Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
  29. Interest Rate Pass-Through in Central and Eastern Europe: Reborn from Ashes Merely to Pass Away? By Balázs Égert; Jesus Crespo-Cuaresma; Thomas Reininger
  30. The Japanese economy By Kitov, Ivan
  31. Some Business Cycles Consequences of Signing Trade Agreements: The Case of NAFTA By Bejan, Maria
  32. Monetary Equilibrium and the Differentiability of the Value Function By Aliprantis, C.D.; Camera, G.; Ruscitti, F.
  33. Real GDP per capita in developed countries By Kitov, Ivan
  34. Exact prediction of inflation in the USA By Ivan, Kitov
  35. On Some Slippery Slopes: Horizontalists, Structuralists and Diagrams By Peter Howells
  36. Retail Energy Prices and Consumer Expenditures By Edelstein, Paul; Kilian, Lutz
  37. "Benjamin Franklin and the Birth of a Paper Money Economy" By Farley Grubb
  38. Inflation as a function of labor force change rate: cointegration test for the USA By Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
  39. Public Capital Spending Shocks and the Price of Investment: Evidence from a Panel of Countries. By Stuart J. Fowler; Bichaka Fayissa
  40. Central bank communication, transparency and interest rate volatility: Evidence from the USA By Iris Biefang-Frisancho Mariscal; Peter Howells
  41. "Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  42. Equilibrium Unemployment with Outsourcing and Wage Solidarity Under Labour Market Imperfections By Erkki Koskela; Rune Stenbacka
  43. Measuring Time-Varying Economic Fears with Consumption-Based Stochastic Discount Factors By Belén Nieto; Gonzalo Rubio
  44. Women and budget deficits By Sébastien Wälti; Signe Krogstrup
  45. Providing Intuition to the Fieller Method with Two Geometric Representations using STATA and Eviews By J.G. Hirschberg; J. N. Lye
  46. Characteristics of Unemployment Dynamics. The Chain Reaction Approach By Karanassou, Marika; Snower, Dennis J.
  47. Modeling the evolution of Gini coefficient for personal incomes in the USA between 1947 and 2005 By Kitov, Ivan
  48. Forecasting with estimated dynamic stochastic general equilibrium models: The role of nonlinearities By Paul Pichler
  49. Interior Optima and the Inada Conditions By Aliprantis, C.D.; Camera, G.; Ruscitti, F.
  50. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  51. Why Do Emerging Economies Borrow Short Term? By Broner, Fernando A; Lorenzoni, Guido; Schmukler, Sergio
  53. "Inverse Limits and Models with Backward Dynamics" By David Stockman; Judy Kennedy; James Yorke
  54. Dynamics of the Financial Wealth of the Institutional Sectors in Bulgaria: Empirical Studies of the Post-Communist Period By Nikolay Nenovsky; Gergana Mihaylova
  55. Modelling Payments Systems: A Review of the Literature By Jonathan Chiu; Alexandra Lai
  56. Testing the permanent income hypothesis in the developing and developed countries: A comparison between Fiji and Australia By Rao, B. Bhaskara; Sharma, Kanhaiya Lal
  57. Borders and the Constraints of Globalization By Michele FRATIANNI
  58. "Chaotic Equilibria in Models with Ill-Defined Forward Dynamics" By David Stockman; Judy Kennedy
  59. Modelling real GDP per capita in the USA: cointegration test By Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
  61. Credit Elasticities in Less-Developed Economies: Implications for Microcredit By Dean Karlan; Jonathan Zinman
  62. The companies of participation before the challenge of the management of the demographic change By Martín López, Sonia
  63. Employment Performance and Institutions: New Answers to an Old Question By Bruno Amable; Lilas Demmou; Donatella Gatti
  64. Invariants et variantes de la souveraineté monétaire : réflexions sur un cadre conceptuel compréhensif By Jérôme Blanc
  65. Se complica el panorama monetario By FEDESARROLLO
  66. The EU Budget Dispute - A Blessing in Disguise? By Ondřej Schneider
  67. Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges? By Balázs Égert; Kirsten Lommatzsch; Amina Lahrèche-Révil
  68. Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa By Nancy Birdsall
  69. Observing Unobservables: Identifying Information Asymmetries with a Consumer Credit Field Report By Dean Karlan; Jonathan Zinman
  70. Exogenous underdevelopment pattern By Salvatore Michele De Marco
  71. Reducing Income Transfers to Refugee Immigrants: Does Starthelp Help You Start? By Michael Rosholm; Rune M. Vejlin
  72. Why Doesn't Africa Get More Equity Investment? Frontier Stock Markets, Firm Size and Asset Allocations of Global Emerging Market Funds By Todd Moss; Vijaya Ramachandran; Scott Standley

  1. By: CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien
    JEL: L52 E31 E32 E52
    Date: 2007–02
  2. By: COLLARD, Fabrice; DELLAS, Harris
    JEL: E32 E52
    Date: 2006
  3. By: Alexandre Lowenkron (Banco BBM); Marcio Gomes Pinto Garcia (Department of Economics, PUC-Rio)
    JEL: E58 E44 G12 E65
    Date: 2007–04
  4. By: Mierzejewski, Fernando
    Abstract: An important concern of macroeconomic analysis is how interest rates affect the cash balance demanded at a certain level of nominal income. In fact, the interest-rate- elasticity of the liquidity demand determines the effectiveness of monetary policy, which is useless under absolute liquidity preference, i.e. when the money demand is perfectly elastic. An actuarial approach is developed in this paper for dealing with random income. Assuming investors face liquidity constraints, a level of surplus exists which maximises expected value. Moreover, the optimal liquidity demand is expressed as a Value at Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations. The more unstable the economy, the greater the interest-rate-elasticity of the money demand. Moreover, part of the adjustment to reestablish the short-run monetary equilibrium may be performed through volatility shocks.
    Keywords: Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk.
    JEL: E40 E44 E41 E58 E0 E52 E12
    Date: 2006–11–30
  5. By: Roman Horváth
    Abstract: This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1- 2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.
    Keywords: equilibrium interest rates, Taylor rule, augmented Kalman filter
    JEL: E43 E52 E58
    Date: 2006–10–01
  6. By: Edda Claus; Iris Claus
    Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
    JEL: E32 E44 E50 F41
    Date: 2007–02
  7. By: COLLARD, Fabrice; FÈVE, Patrick; MATHÉRON, Julien
    JEL: E31 E32 E52
    Date: 2007–03
  8. By: Eran Yashiv (Tel Aviv University, CEPR, CEP (LSE) and IZA)
    Abstract: The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: how are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and - when inserted into business cycle models - improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts.
    Keywords: search, matching, macroeconomics, business cycles, worker flows, growth, policy
    JEL: E24 E32 E52 J23 J31 J41 J63 J64 J65
    Date: 2007–04
  9. By: Etienne Lehmann (CREST, Université Catholique de Louvain and IZA); Bruno Van der Linden (Université Catholique de Louvain, FNRS, ERMES and IZA)
    Abstract: This paper builds a macroeconomic model of equilibrium unemployment in which firms persistently face difficulties in selling their production and this affects their decisions to create jobs. Due to search-frictions on the product market, equilibrium unemployment is a U-shaped function of the ratio of total demand to total supply on this market. When prices are at their Competitive Search Equilibrium values, the unemployment rate is minimized. Yet, the Competitive Search Equilibrium is not efficient. Inflation is detrimental to unemployment.
    Keywords: equilibrium unemployment, matching, inflation, demand constraints
    JEL: E12 E24 E31 J63
    Date: 2007–03
  10. By: Carboni, Giacomo; Ellison, Martin
    Abstract: We respond to the challenge of explaining the Great Inflation by building a coherent framework in which both learning and uncertainty play a central role. At the heart of our story is a Federal Reserve that learns and then disregards the Phillips curve as in Sargent's Conquest of American Inflation, but at all times takes into account that its view of the world is subject to considerable uncertainties. Allowing Federal Reserve policy to react to these perceived uncertainties improves our ability to explain the Great Inflation with a learning model. Bayesian MCMC estimation results are encouraging and favour a model where policy reacts to uncertainty over a model where uncertainty is ignored. The posterior likelihood is higher and the internal Federal Reserve forecasts implied by the model are closer to those reported in the Greenbook.
    Keywords: Great Inflation; learning; monetary policy; uncertainty
    JEL: E52 E58 E65
    Date: 2007–04
  11. By: Roberto Tamborini
    Abstract: This paper considers recent proposals of introductory-level macroeconomic models that drop the LM apparatus in favour of the straightforward use of the Taylor rule as a means to determine the nominal interest rate and to link the monetary block with the real block of the economy. Whilst one can only agree with the various complaints made against the traditional treatment of the LM apparatus that still survives in modern textbooks, the new IS-AS-TR workhorse has several drawbacks as well, the most serious one being that it completely hides the concept of monetary equilibrium from view, transmitting the faulty idea that the central bank can set the (real!) interest rate at will, with no connection at all with money demand and supply. The paper suggest how a Macro course could be structured around a model of New Keynesian inspiration where the LM block is amended rather than suppressed. Section 2 surveys the foundations of the macro-model. Section 3 deals with the foundations of the role of money in the model, and shows how to derive a consistent LM "gap function" in relation to "output gaps" and "inflation gaps" according to current practice. Section 4 expands upon the monetary block, highlighting that it admits of two monetary policy regimes, the "exogenous-money regime", and the "endogenous-money regime". The latter leads quite naturally to the Taylor rule, while making it clear that this is a particular choice of the central bank, and that it implies an endogenous path of the money stock determined by the underlying money market equilibrium. Section 5 concludes.
    Date: 2007
  12. By: Levy, Daniel
    Abstract: The price system, the adjustment of prices to changes in market conditions, is the primary mechanism by which markets function and by which the three most basic questions get answered: what to produce, how much to produce and for whom to produce. To the behaviour of price and price system, therefore, have fundamental implications for many key issues in microeconomics and industrial organization, as well as in macroeconomics and monetary economics. In microeconomics, managerial economics, and industrial organization, economists focus on the price system efficiency. In macroeconomics and monetary economics, economists focus on the extent to which nominal prices fail to adjust to changes in market conditions. Nominal price rigidities play particularly important role in modern monetary economics and in the conduct of monetary policy because of their ability to explain short-run monetary non-neutrality. The behaviour of prices, and in particular the extent of their rigidity and flexibility, therefore, is of central importance in economics. This introductory essay briefly summarizes the eight studies of price rigidity that are included in this special issue.
    Keywords: Price Rigidity; Price Flexibility; Cost of Price Adjustment; Menu Cost; Managerial and Customer Cost of Price Adjustment; New Keynesian Economics; Price System
    JEL: E31 E50 M30 D21 D40 M20 L11 E12 E52 L16
    Date: 2007–04–17
  13. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Department of Economics, Uppsala University)
    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: 2007–04–01
  14. By: COLLARD, Fabrice; DELLAS, Harris
    JEL: E32 E52
    Date: 2006–11
  15. By: Flandreau, Marc
    Abstract: This paper studies the evolution of monetary policy targets over the course of the past 200 years. We argue that policy targets are set as part of an assignment procedure that is intended to address both time consistency and monitoring problems. As a result, central banks, after having been assigned to target the exchange rate in the 19th century, are now entrusted with targeting the rate of inflation. Critical advances in the measurement of inflation have proved decisive in bringing about this radical transformation.
    Keywords: central banks; exchange rates; inflation; monetary policy targets
    JEL: E1 E3 E5
    Date: 2007–04
  16. By: Kolver Hernandez (Department of Economics,University of Delaware)
    Abstract: Experiences of high-inflation economies suggest that exchange rate-based (ERB) and money-based (MB) disinflations induce sharply different dynamics in consumption and GDP. I study the role of nominal rigidities to explain such dynamics. I build on Calvo pricing to introduce elements of state-dependent into an otherwise standard small open economy. This new feature delivers state-dependent nominal rigidities (SDNR). Nonlinear simulations show that the model with SDNR generates a dynamic behavior consistent with both ERB and MB disinflations; however the model’s special case with constant nominal rigidities is not successful rationalizing ERB disinflations.
    Keywords: Nominal rigidities, disinflations, state-dependent pricing, exchange-rate based stablizations
    JEL: E31 E32 E37
    Date: 2006
  17. By: Christian Broda; David E. Weinstein
    Abstract: This paper describes the extent and cyclicality of product creation and destruction in a large sector of the U.S. economy and quantifies its implications for the measurement of consumer prices. We find four times more entry and exit in product markets than is typically found in labor markets because most product turnover happens within the boundaries of the firm. Net product creation is strongly pro-cyclical, but contrary to the behavior of labor flows, it is primarily driven by creation rather than destruction. High rates of innovation are also accompanied by substantial price volatility of products. These facts suggest that the CPI deviates from a true cost-of-living index in three important dimensions. The quality bias that arises as new goods replace outdated ones causes the CPI to overstate inflation by 0.8 percent per year; the cyclicality of the bias implies that business cycles are more volatile than indicated by official statistics; and finally, sampling error is sufficiently large that over the last 10 years policymakers could not statistically distinguish whether quarterly inflation was accelerating or decelerating 65 percent of the time.
    JEL: E21 E31 E32
    Date: 2007–04
  18. By: Xavier Freixas; José Jorge
    Abstract: This paper analyses the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has three major implications: first, it reconciles the irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy (magnitude puzzle), second, it shows that monetary policy affects long term credit (composition puzzle) and finally, that banks’ liquidity positions condition their reaction to monetary policy (Kashyap and Stein liquidity puzzle).
    Keywords: Banking, Rationing, Monetary Policy
    JEL: E44 G21
    Date: 2007–03
  19. By: Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: This paper attempts to aggregate and summarise fresh results concerning the monetary transmission mechanism in Hungary. Within a research project at the MNB nine studies have been published investigating the channels through which Hungarian monetary policy affects the economy. We create a framework for synthesising particular results based on Mishkin’s (1996) classification. We analyse how aggregate demand is affected through those channels. Our conclusion is that during the past ten years monetary policy did exert a measurable influence on real activity and prices. The dominance of the exchange rate channel explains why prices respond faster and output responds more mildly than in closed developed economies like the U.S. or the euro area. We expect that after adopting the euro the absence of exchange rate will be compensated by the fact that the interest rate channel will work through foreign demand as well. Therefore, no significant asymmetries can be expected inside the euro area in terms of monetary transmission.
    Keywords: monetary transmission mechanism, monetary policy shock, exchange rate channel.
    JEL: E44 E52 E58
    Date: 2007
  20. By: Rose, Andrew K
    Abstract: This paper studies the characteristics of departures from monetary unions. During the post-war period, almost seventy distinct countries or territories have left a currency union, while over sixty have remained continuously in currency unions. I compare countries leaving currency unions to those remaining within them, and find that leavers tend to be larger, richer, and more democratic; they also tend to have higher inflation. However, there are typically no sharp macroeconomic movements before, during, or after exits.
    Keywords: country; data; empirical; monetary; panel; probit; statistic
    JEL: E42 E58
    Date: 2007–04
  21. By: Jan Filácek; Roman Horváth; Michal Skorepa
    Abstract: This article analyzes the main issues for monetary policy in new EU member states before their euro adoption. These are typically rooted in the challenge of fulfilling concurrently of the Maastricht inflation and exchange rate criterion, as these countries are experiencing equilibrium real exchange rate appreciation. In this article we first distinguish between the wording, written interpretation and “revealed” interpretation of the inflation and exchange rate criteria. Then we discuss the options for monetary policy in the period of fulfilment of these criteria in terms of its transparency, its continuity with the previous monetary policy regime, the choice of central parity for the ERM II, the setting of the fluctuation bandwidth, the probability of fulfilment of both criteria and the impact on economic stability.
    Keywords: monetary policy, euro adoption, ERM II, EU
    JEL: E58 E52 F42 F33
    Date: 2006–11–01
  22. By: Kirdan Lees; Troy Matheson; Christie Smith
    Abstract: We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts froma DSGE-VAR and a "vanilla" DSGE model are competitive with, and in some dimensions superrior to, the Reserve Bank of New Zealand's official forecasts. We also use the estimated DSGE-VAR structure to identify optimal policy rules that are consistent with the Reserve bank's Policy Targets Agreement. Optimal policy rules under parameter certainty prove to be relatively similar to the certainty case. The optimal policies react aggressively to inflation and contain a large degree of interest rate smoothing, but place a low weight on responding to output or the change in the nominal exchange rate.
    JEL: C51 E52 F41
    Date: 2007–01
  23. By: George Hondroyiannis (Bank of Greece, Economic Research Department and Harokopio University); P.A.V.B. Swamy (US Bureau of Labour Statistics); George S. Tavlas (Bank of Greece, Economic Research Department)
    Abstract: The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.
    Keywords: New Keynesian Phillips curve; time-varying coefficients; spurious relationships.
    JEL: C51 E31
    Date: 2007–02
  24. By: Andreas Freytag (University of Jena, School of Busniess and Economics); Friedrich Schneider (Department of Economics, Johannes Kepler University Linz)
    Abstract: Central bank independence (CBI) is a very important precondition for price stability. However, the empirical evidence for a correlation between both is relatively weak. In this paper, this weakness is countered with a) an extended measure of monetary commitment, which includes well-known criteria for CBI and external criteria such as convertibility and exchange rate regimes and b) the argument that monetary commitment can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment with data from four decades confirms the crucial role of monetary commitment for price stability.
    Keywords: central bank independence, price stability, monetary commitment
    JEL: E50
    Date: 2007–03–30
  25. By: Enzo Weber
    Abstract: The subject of this paper tackles questions of macroeconomic integration of the South-East Asian countries South Korea, Singapore and Taiwan. Economically, the analysis is based on notions of stochastic long-run convergence and business cycle synchrony in the GDPs. According tests for cointegration and common serial correlation features reveal a high degree of coherence in long-run growth and medium-run fluctuations. This allows extracting a common stochastic growth trend and a common business cycle. Further analysis shows, both of these components are subject to stronger influences from the US than from Japan. Convergence towards these matured economies conspicuously appears since the 1990s.
    Keywords: Real Convergence, Cointegration, Common Cycles, South-East Asia.
    JEL: E32 F15 C32
    Date: 2007–04
  26. By: Fabrizio Coricelli; Balázs Égert; Ronald MacDonald
    Abstract: This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical ndings for Central and Eastern Europe are then briey compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
    Keywords: Monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006–11–01
  27. By: Levy, Daniel
    Abstract: The marketplace, along with its price system, is the single most important institution in a western-style free enterprise economy. The ability of prices to adjust to changes in supply and demand conditions enables the market to function efficiently and lies behind the magical invisible hand mechanism. To the behaviour of prices and in particular to the ability of prices to adjust to changes in market conditions, therefore, have fundamental implications for many key issues in many areas of both microeconomics as well as macroeconomics. It is, therefore, critical to study and understand whether there are barriers to price adjustments, what are the nature of these barriers, how the barriers lead to price rigidity, what are possible implications of these rigidities, etc. This introductory essay briefly summarizes the fourteen empirical studies of price rigidity that are included in this special issue.
    Keywords: Price Rigidity; Price Flexibility; Cost of Price Adjustment; Menu Cost; Managerial and Customer Cost of Price Adjustment; Pricing; Price System; Price Setting; New Keynesian Economics; Store-Level Data; Micro-Level Data
    JEL: E31 E50 M30 D21 D40 M20 E58 L11 E12 E52 L16
    Date: 2007–04–17
  28. By: Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
    Abstract: A linear and lagged relationship between inflation, unemployment and labor force change rate, π(t)=A0UE(t-t0)+A1dLF(t-t1)/LF(t-t1)+A2 (where A0, A1, and A2 are empirical country-specific coefficients), was found for developed economies. The relationship obtained for France is characterized by A0=-1, A1=4, A2=0.095, t0=4 years, and t1=4 years. For GDP deflator, it provides a root mean square forecasting error (RMFSE) of 1.0% at a four-year horizon for the period between 1971 and 2004. The relationship is tested for cointegration. All three variables involved in the relationship are proved to be integrated of order one. Two methods of cointegration testing are used. First is the Engle-Granger approach based on the unit root test in the residuals of linear regression, which also includes a number of specification tests. Second method is the Johansen cointegration rank test based on a VAR representation, which is also proved to be an adequate one via a set of appropriate tests. Both approaches demonstrate that the variables are cointegrated and the long-run equilibrium relation revealed in previous study holds together with statistical estimates of goodness-of-fit and RMSFE. Relationships between inflation and labor force and between unemployment and labor force are tested separately in appropriate time intervals, where the Banque de France monetary policy introduced in 1995 does not disturb the long-term links. All the individual relationships are cointegrated in corresponding intervals. The VAR and vector error correction (VEC) models are estimated and provide just a marginal improvement in RMSFE at the four-year horizon both for GDP deflator (down to 0.9%) and CPI (~1.1%) on the results obtained in the regression study. The VECM approach also allows re-estimation of the coefficients in the individual and generalized relationship between the variables both for cointegration rank 1 and 2. Comparison of the standard cointegration approach to the integral approach to the estimation of the coefficients in the individual and generalized relationships between the studied variables demonstrates the superiority of the latter. The cumulative inflation curve or inflation index, which is the actually measured evolution of price level, is much better predicted in the framework of the integral approach, which is a powerful tool for revealing true relationships between non-stationary variables and can be potentially used for rejection of spurious regression. The cumulative curves allow avoiding obvious drawbacks of the VECM representation and cointegration tests – increasing signal to noise ratio after differentiation and severe dependence on statistical properties of error terms. The confirmed validity of the linear lagged relationship between inflation, unemployment and labor force change indicates that since 1995 the Banque de France has been wrongly applying the policy fixing the monetary growth to the reference value around 4.5%. As a result of the policy, during the last ten years unemployment in France was twice as large as the one dictated by its long-term equilibrium link to labor force change. This increased unemployment compensates the forced price stability.
    Keywords: cointegration; inflation; unemployment; labor force; forecasting; France; VAR; VECM
    JEL: C32 E37 E31 J21 E32
    Date: 2007–02
  29. By: Balázs Égert; Jesus Crespo-Cuaresma; Thomas Reininger
    Abstract: In this study, we seek to better understand the interest rate pass-through in five Central and Eastern European countries – the Czech Republic, Hungary, Poland, Slovakia and Slovenia, the CEE-5. Our pass-through estimates for several retail rates are generally lower than those reported in the literature, given the absence of cointegration between policy rates and long- or even short-term market rates. In addition, the pass-through has been declining over time in the CEE-5, and we argue that it is likely to decrease further in the future. Finally, the pass-through appears similar in the CEE-5 than in Spain and is higher than in core euro area countries. Hence, euro adoption by the CEE-5 would not further increase heterogeneity within the euro area with regard to the interest rate passthrough. However, substantially more research is needed to establish commonalities and differences between the CEE-5 and the euro area with respect to the reaction of prices and output to monetary policy action.
    Keywords: interest rate pass-through, monetary transmission mechanism, transition economies, Central and Eastern Europe, Austria, Germany, Spain.
    JEL: E43 E50 E52 C22 G21 O52
    Date: 2006–11–01
  30. By: Kitov, Ivan
    Abstract: The Japanese economic behavior is modeled. GDP evolution is represented as a sum two components: economic tend and fluctuations. The trend is an inverse function of GDP per capita with a constant numerator. The growth rate fluctuations are numerically equal to two thirds of the relative change in the number of eighteen-year-olds. Inflation is represented by a linear function of labor force change rate. The models provide an accurate description for the poor economic performance and deflation separately. Using the models, GDP per capita is predicted for the next ten years and recommendations are given to overcome deflation.
    Keywords: economic growth; inflation; modeling; Japan
    JEL: E37 E31 O11 J21
    Date: 2006
  31. By: Bejan, Maria
    Abstract: This paper investigates the effects of signing a trade agreement on the correlations of the business cycle fluctuations of consumption, investment and output between two countries. We construct an international business cycle model with trade costs and we calibrate it to the United States and Mexico in order to estimate the impact of NAFTA on their co-movements. Although there exist some discrepancies between the theory and data in the degree of correlation, the direction of change corresponds to the one in the data.
    Keywords: International Business Cycles; Trade Agreements; International Co-movements
    JEL: F15 F11 E32
    Date: 2006–08
  32. By: Aliprantis, C.D.; Camera, G.; Ruscitti, F.
    Abstract: In this study we offer a new approach to proving the differentiability of the value function, which complements and extends the literature on dynamic programming. This result is then applied to the analysis of equilibrium in the recent class of monetary economies developed in [13]. For this type of environments we demonstrate that the value function is differentiable and this guarantees that the marginal value of money balances is well defined.
    Keywords: Monetary Equilibrium ; Differentiability ; Value Function
    JEL: E00 C61
    Date: 2007–04
  33. By: Kitov, Ivan
    Abstract: Growth rate of real GDP per capita is represented as a sum of two components – a monotonically decreasing economic trend and fluctuations related to a specific age population change. The economic trend is modeled by an inverse function of real GDP per capita with a numerator potentially constant for the largest developed economies. Statistical analysis of 19 selected OECD countries for the period between 1950 and 2004 shows a very weak linear trend in the annual GDP per capita increment for the largest economies: the USA, Japan, France, Italy, and Spain. The UK, Australia, and Canada show a larger positive linear trend. The fluctuations around the trend values are characterized by a quasi-normal distribution with potentially Levy distribution for far tails. Developing countries demonstrate the increment values far below the mean increment for the most developed economies. This indicates an underperformance in spite of large relative growth rates.
    Keywords: economic development; economic trend; business cycle; GDP per capita
    JEL: O11 O51 E32
    Date: 2006
  34. By: Ivan, Kitov
    Abstract: A linear and lagged relationship between inflation and labor force growth rate has been recently found for the USA. It accurately describes the period after the late 1950s with linear coefficient 4.0, intercept -0.03, and the lag of 2 years. The previously reported agreement between observed and predicted inflation is substantially improved by some simple measures removing the most obvious errors in the labor force time series. The labor force readings originally obtained from the Bureau of Labor Statistics (BLS) website are corrected for step-like adjustments. Additionally, a half-year time shift between the inflation and the annual labor force readings is compensated. GDP deflator represents the inflation. Linear regression analysis demonstrates that the annual labor force growth rate used as a predictor explains almost 82% (R2=0.82) of the inflation variations between 1965 and 2002. Moving average technique applied to the annual time series results in a substantial increase in R2. It grows from 0.87 for two-year wide windows to 0.96 for four-year windows. Regression of cumulative curves is characterized by R2>0.999. This allows effective replacement of GDP deflation index by a “labor force growth” index. The linear and lagged relationship provides a precise forecast at the two-year horizon with root mean square forecasting error (RMSFE) as low as 0.008 (0.8%) for the entire period between 1965 and 2002. For the last 20 years, RMSFE is only 0.4%. Thus, the forecast methodology effectively outperforms any other forecasting technique reported in economic and financial literature. Moreover, further significant improvements in the forecasting accuracy are accessible through improvements in the labor force measurements in line with the US Census Bureau population estimates, which are neglected by BLS.
    Keywords: inflation; labor force; forecast; the USA
    JEL: E61 E31 J21
    Date: 2006–07
  35. By: Peter Howells (School of Economics, University of the West of England)
    Abstract: Since Basil Moore published Horizontalists and Verticalists in 1988, there have been numerous attempts to model an endogenous money supply within a graphical framework which would also facilitate discussion of some of the controversial issues surrounding it. These have not generally been very successful until Fontana’s recent (2003, 2006) adoption of a pure flow of funds framework. More recently, the ‘New Keynesian consensus’ in macroeconomics has finally forced a rejection of the exogenous money paradigm and the LM part of the familiar IS/LM/AS model. In this paper we show how, with some modification, Fontana’s approach can be combined with ‘mainstream’ replacements of IS/LM (Carlin and Soskice, 2006; Bofinger, Mayer and Wollmerhäuser, 2006) to produce a model of the monetary sector which illustrates both the current wisdom about monetary policy (e.g. Woodford, 2003) and the post-Keynesian insights that have been developed over the last twenty years.
    Keywords: Macroeconomics; Post Keynesian;
    JEL: E12
    Date: 2007–03
  36. By: Edelstein, Paul; Kilian, Lutz
    Abstract: In the absence of a major disruption in spending by consumers and firms, the effects of energy price shocks on the economy will be small. In this paper, we quantify the direct effect on real consumption of (1) unanticipated changes in discretionary income, (2) shifts in precautionary savings, and (3) changes in the operating cost of energy-using durables. We also evaluate the evidence for asymmetries in the response of real consumption that would be expected, for example, if shifting expenditure patterns cause sectoral reallocations. While we do find evidence of changing expenditure patterns based on a detailed analysis of more than 130 expenditure items, there is no compelling evidence for an allocative effect on consumer spending, aggregate unemployment, or consumer expectations. The absence of such an effect, despite a comparatively large effect of energy price shocks on the consumption of new domestically produced automobiles, is consistent with the small share of the U.S. auto industry in domestic real GDP and employment. It is also consistent with the symmetric behavior of real consumption in 1979 (when energy prices rose sharply) and in 1986 (when they fell equally sharply). This finding has important implications for theoretical models of the transmission of energy price shocks. Our analysis also sheds light on the declining importance of energy price shocks for the U.S. economy. We not only document the extent to which consumption aggregates have become less responsive to energy price shocks since the mid-1980s, but we trace the declining importance of energy price shocks relative to the 1970s to changes in the composition of U.S. automobile production and the declining overall importance of the U.S. automobile sector.
    Keywords: asymmetry; consumer sentiment; consumption; energy prices; price elasticity of energy demand; purchasing power
    JEL: E21 Q43
    Date: 2007–04
  37. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: Paper money has often been controversial and misunderstood. Why it has value, why that value changes over time, how it influences economic activity, who should be allowed to make it, how its use and creation should be controlled, and whether it should exist at all—are questions that have perplexed the public, vexed politicians, and puzzled economic experts. Knowing how, when, and why paper money first became commonplace in America and the nature of the institutions propagating it, can help us better comprehend paper money’s role in society. Benjamin Franklin (1706-1790) dealt often with this topic and his writings can teach us much about it.
    Keywords: Monetary Policy, Economic History
  38. By: Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
    Abstract: Previously, a linear and lagged relationship between inflation and labor force change rate, π(t)= A1dLF(t-t1)/LF(t-t1)+A2 (where A1 and A2 are empirical country-specific coefficients), was found for developed economies. The relationship obtained for the USA is characterized by A1=4.0, A2=-0.03075, and t1=2 years. It provides a root mean square forecasting error (RMFSE) of 0.8% at a two-year horizon for the period between 1965 and 2002 (the best among other inflation forecasting models) and has a perfect parsimony - only one predictor. The relationship is tested for cointegration. Both variables are integrated of order one according to the presence of a unit root in the series and its absence in their first differences. Two methods of cointegration testing are applied - the Engle-Granger one based on the unit root test of the residuals including a variety of specification tests and the Johansen cointegration rank test based on the VAR representation. Both approaches demonstrate that the variables are cointegrated and the long-run equilibrium relation revealed in previous study holds. According to the Granger causality test, the labor force change is proved to be a weakly exogenous variable - a natural result considering the time lead and the existence of a cointegrating relation. VAR and VECM representations do not provide any significant improvement in RMSFE. There are numerous applications of the equation: from purely theoretical - a robust fundamental relation between macroeconomic and population variables, to a practical one - an accurate out-of-sample inflation forecasting at a two-year horizon and a long-term prediction based on labor force projections. The predictive power of the relationship is inversely proportional to the uncertainty of labor force estimates. Therefore, future inflation research programs should start from a significant improvement in the accuracy of labor force estimations
    Keywords: cointegration; inflation; labor force; forecasting; USA; VAR; VECM
    JEL: C32 E31 E32
    Date: 2007–01
  39. By: Stuart J. Fowler; Bichaka Fayissa
    Abstract: A multi-sector growth model is developed where public spending affects output in one of two ways. First, the government taxes income to fund capital expenditures. Second, public capital is used in the production of both final goods and intermediate private capital goods. Inclusion of an intermediate private capital sector allows the potential of public capital investment to affect output in an indirect way that has previously not been studied in that past public investments make the accumulation process for private capital more efficient. In this case, it is shown that public investment policy is directly related to the relative price of intermediate investment goods and final goods. Using a panel of OECD countries, we find that public capital spending shocks account for a statistically important percentage of the movements in the relative price of private investment. As a result, deviations in public investment policy can account for a nontrivial portion of the cyclical variations in output even though the direct effect of public investment policy on final good production is found to be small (public capital's share in the output of final goods is only 2%).
    Keywords: General Equilibrium Dynamics, Investment Specific Technological Progress, Public Capital Spending Shocks, Method of Simulated Moments.
    JEL: E32 O40
  40. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: The FOMC has changed its way of communication twice, recently: from 2000-2003, the Committee imparted information about its assessment on the economic outlook (the balance-of-risk statements) and since August 2003 the FOMC informs additionally about its outlook’s implications on the future federal funds target rate (forward-looking language). The result should be that agents do not need to deduce FOMC’s likely policy move on every twitch of central bank communication and macroeconomic news. Markets have anticipated FOMC policy decisions on the day of the meeting very well since 1994. Therefore, the focus of the paper is on the behaviour of market rates between FOMC meetings and on testing for greater ‘smoothness’ and lower volatility of market rates since 2000. We apply an EGARCH model to forward rates at the short end of the yield curve. The model is used to test for the effects of the three disclosure regimes (pre-2000, 2000-2003, post-2003) on the dependence of previous and current changes of the market rates in the conditional mean equation. It is expected to observe higher inertia during the periods when market participants are better informed. Furthermore, generally, news increases interest rate volatility, since markets adjust interest rates in response to relevant news. However, other FOMC communication (other than the press statements after the FOMC meeting), may have a lower news value in the new disclosure regimes than it had in the pre-2000 period. Therefore, ‘other’ central bank communication may affect the volatility of interest rates differently in the three different regimes. This effect is tested for in the conditional variance of the regression model. We find that there is evidence of differences in smoothness between the period until 2000 and the period of the balance-of-risk statement. Furthermore, we find that the effect of other than Fed press statements after FOMC meetings varies in the three periods. This is particularly so for Fed communication concerning economic outlook and speeches by the chairman of the Board.
    Keywords: Macroeconomics; Post Keynesian;
    JEL: E12
    Date: 2007–03
  41. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: We characterize Markov-perfect equilibria in a setting where the absence of government commitment affects the financing of productive public capital. We show that at any date, a government in office only considers intertemporal distortions over two consecutive periods in choosing taxes. We then use our framework to quantify the value of commitment, which we define as that obtained from binding governments to a course of actions that produce the second-best allocations.
    Keywords: Public Investment, Commitment, Time consistency, Discretion, Ramsey, Markov-Perfect
    JEL: E61 E62 H11
    Date: 2006
  42. By: Erkki Koskela (University of Helsinki and IZA); Rune Stenbacka (Göteborg University and Swedish School of Economics, Helsinki)
    Abstract: We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high-skilled and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will magnify, and not dampen, this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.
    Keywords: outsourcing, wage solidarity, labour market imperfections, equilibrium unemployment
    JEL: E23 E24 J31 J51
    Date: 2007–04
  43. By: Belén Nieto; Gonzalo Rubio
    Abstract: This paper analyzes empirically the volatility of consumption-based stochastic discount factors as a measure of implicit economic fears by studying its relationship with future economic and stock market cycles. Time-varying economic fears seem to be well captured by the volatility of stochastic discount factors. In particular, the volatility of recursive utility-based stochastic discount factor with contemporaneous growth explains between 9 and 34 percent of future changes in industrial production at short and long horizons respectively. They also explain ex-ante uncertainty and risk aversion. However, future stock market cycles are better explained by a similar stochastic discount factor with long-run consumption growth. This specification of the stochastic discount factor presents higher volatility and lower pricing errors than the specification with contemporaneous consumption growth.
    Keywords: Stochastic discount factor, economic fears, distance between probability measures, volatility of stochastic discount factor, consumption
    JEL: G10 G12 E44
    Date: 2007–04
  44. By: Sébastien Wälti (Department of Economics, Trinity College Dublin); Signe Krogstrup (Graduate Institute of International Studies, Geneva)
    Abstract: If women have different economic preferences than men, then female economic and political empowerment is likely to change policy and household decisions, and in turn macroeconomic outcomes. We test the hypothesis that female enfranchisement leads to lower government budget deficits due gender differences in preferences over fiscal outcomes. Estimating the impact of women’s vote on budget deficits in a differences-in-differences regression for Swiss cantonal panel data, we find that including women in the electorate reduces average per capita budget deficits by a statistically significant amount.
    Keywords: Fiscal policy, budget deficit, enfranchisement, median voter, gender
    JEL: D7 E6 H6 J16
    Date: 2006–09
  45. By: J.G. Hirschberg; J. N. Lye
    Abstract: The Fieller Method for the construction of confidence intervals for ratios of the expected value of two normally distributed random variables has been shown by a number of authors to be a superior method to the delta approximation. However, it is not widely used due in part, to the tendency to present the intervals only in a formula context. In addition, potential users have been deterred by the potential difficulty in interpreting non-finite confidence intervals when the confidence level is less than 100%. In this paper we present two graphical methods which can be easily constructed using two widely used statistical software packages (Eviews and Stata) for the representation of the Fieller intervals. An application is presented to assess the results of a model of the non-accelerating inflation rate of unemployment (NAIRU).
    Keywords: Fieller method, ratios of parameters, confidence interval, confidence ellipsoid,1st derivative function, NAIRU, EViews, STATA
    JEL: C12 C20 E24
    Date: 2007
  46. By: Karanassou, Marika (Department of Economics, Queen Mary and Westfield College, London, United Kingdom); Snower, Dennis J. (The Kiel Institute for the World Economy, Kiel, Germany)
    Abstract: The aim of this paper is to analyze and estimate salient characteristics of unemployment dynamics. Movements in unemployment are viewed as "chain reactions" of responses to labour market shocks, working their way through systems of interacting lagged adjustment processes. In the context of estimated labour market systems for Germany, the UK, and the US, we construct aggregate measures of unemployment responses to temporary and permanent shocks. These measures are temporal and quantitative. Furthermore, we estimate the contributions of individual lagged adjustments to these aggregate measures. Our empirical results indicate that lagged adjustment processes play an important part in explaining how temporary and permanent shocks affect unemployment, that temporary and permanent shocks can yield quite different inter-country comparisons of unemployment effects, and that the quantitative and temporal measures can also yield markedly different inter-country comparisons.
    Keywords: Unemployment, Natural rate hypothesis, Labour markets, Employment, Adjustment costs
    JEL: J32 J60 J64 E30 E37
    Date: 2007–04
  47. By: Kitov, Ivan
    Abstract: The evolution of Gini coefficient for personal incomes in the USA between 1947 and 2005 is analyzed and modeled. There are several versions of personal income distribution (PID) provided by the US Census Bureau (US CB) for this period with various levels of resolution. Effectively, these PIDs result in different Gini coefficients due to the differences between discrete and continuous representations. When all persons of 15 years of age and over are included in the PIDs, Gini coefficient drops from 0.64 in 1947 to 0.54 in 1990. This effect is observed due to a significant decrease in the portion of people without income. For the PIDs not including persons without income, Gini coefficient is varying around 0.51 between 1960 and 2005 with standard deviation of 0.004, i.e. is in fact constant. This Gini coefficient is practically independent on the portion of population included in the PIDs according to any revision of income definitions. The driving force of the model describing the evolution of individual incomes (microeconomic level) and their aggregate value (macroeconomic level) is the change in nominal GDP per capita. The model accurately predicts the evolution of Gini coefficient for the PIDs for people with income. The model gives practically unchanged (normalized) PIDs and Gini coefficient between 1947 and 2005. The empirical Gini curves converge to the predicted one when the number of people without income decreases. Asymptotically, the empirical curves should collapse to the theoretical one when all the working age population obtains an appropriate definition of income. Therefore the model Gini coefficient potentially better describes true behavior of inequality in the USA because the definitions of income used by the US Census Bureau apparently fail to describe true income distribution.
    Keywords: Gini index; personal income distribution; Pareto distribution; microeconomic modeling; USA; real GDP; macroeconomics
    JEL: E17 D31 E64 J1 O12 D01
    Date: 2007–04
  48. By: Paul Pichler
    Abstract: We show that redistributive tax and transfer systems have a distortionary e®ect and an insurance e®ect, if agents face idiosyncratic uninsurable earnings risk. These two e®ects imply that redistributive taxes decrease both mean consumption and the standard deviation of consumption. Using household data, we construct an `income compression' measure of the redistributiveness of the tax system and empirically test for the presence of these two e®ects by exploiting di®erences in US state taxes. We ¯nd that tax redistributiveness explains much of the variation in the mean and standard deviation of the within-state consumption distributions over the US. This provides evidence for the presence of both distortionary and insurance e®ects of redistributive taxes and transfers.
    JEL: C68 E47 E52
    Date: 2007–03
  49. By: Aliprantis, C.D.; Camera, G.; Ruscitti, F.
    Abstract: We present a new proof of the interiority of the policy function based on the Inada conditions. It is based on supporting properties of concave functions.
    Keywords: Interior Optima ; Inada Conditions
    JEL: E00 C61
    Date: 2007–04
  50. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.
    Keywords: Capital Taxation, Ramsey, Commitment, Markov-Perfect equilibrium, Time consistent policy, Overlapping Generations
    JEL: H3 H6 H21 E62
    Date: 2006
  51. By: Broner, Fernando A; Lorenzoni, Guido; Schmukler, Sergio
    Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.
    Keywords: emerging market debt; financial crises; investor risk aversion; maturity structure; risk premium; term premium
    JEL: E43 F30 F32 F34 F36 G15
    Date: 2007–04
  52. By: John W. Galbraith (and TKACZ, Greg); Greg Tkacz
    Abstract: For quantities that are approximately stationary, the information content of statistical forecasts tends to decline as the forecast horizon increases, and there exists a maximum horizon beyond which forecasts cannot provide discernibly more information about the variable than is present in the unconditional mean (the content horizon). The pattern of decay of forecast content (or skill) with increasing horizon is well known for many types of meteorological forecasts; by contrast, little generally-accepted information about these patterns or content horizons is available for economic variables. In this paper we attempt to develop more information of this type by estimating content horizons for variety of macroeconomic quantities; more generally, we characterize the pattern of decay of forecast content as we project farther into the future. We find wide variety of results for the different macroeconomic quantities, with models for some quantities providing useful content several years into the future, for other quantities providing negligible content beyond one or two months or quarters.
    JEL: C53 E17
    Date: 2007
  53. By: David Stockman (Department of Economics,University of Delaware); Judy Kennedy (Department of Mathematics,University of Delaware); James Yorke (Institute for Physical Science and Technology, University of Maryland)
    Abstract: Some economic models like the cash-in-advance model of money have the property that the dynamical system characterizing equilibria is multi-valued going forward in time, but single-valued going backward in time, i.e., the model has backward dynamics. In this paper, we apply the theory of inverse limits to characterize topologically the set of equilibria in a dynamic economic model with this property. We show that such techniques are particularly well-suited for analyzing the dynamics going forward in time even though the dynamics are multi-valued in this direction. In particular, we analyze the inverse limit of the cash-in-advance model of money and illustrate how information about the inverse limit is useful for detecting or ruling out complicated dynamics.
    Keywords: backward dynamics, chaos, inverse limits, continuum theory, cash-in advance
    JEL: C6 E3 E4
    Date: 2006
  54. By: Nikolay Nenovsky; Gergana Mihaylova
    Abstract: The question of who benefits and who loses from the transition, the channels and mechanisms of redistribution of wealth in the post-communist period, and the relation between redistribution and monetary regime are, in our opinion, fundamental in understanding theoretically the deep systemic changes in Eastern Europe. This article has two basic tasks – one empirical and one theoretical. Our empirical task is to analyse the dynamics of the financial wealth of the institutional sectors in Bulgaria in the period 1998-2005 and to identify the major net creditors and net debtors. The empirical data used for the purpose are based on adapted methodology for the financial account of the Bulgarian economy according to the requirements of the System of National Accounts (SNA). Econometric simulations have been carried out of the major factors conditioning the change in the sectoral financial wealth. The empirical investigations are given in Part 3. Our theoretical task is to prove the hypothesis (which is to a large extent supported by the empirical results) about the functional relationship between the dynamics of redistribution and the change in monetary regime. This is presented in Part 2 and is discussed in Part 4.
    Keywords: redistribution, financial wealth, financial account, Bulgaria
    JEL: D31 E42 P30
    Date: 2007–03–01
  55. By: Jonathan Chiu; Alexandra Lai
    Abstract: Payments systems play a fundamental role in an economy by providing the mechanisms through which payments arising from transactions can be settled. The existing literature on the economics of payments systems is large but loosely organized, in that each model uses a distinct set-up and sometimes a distinct equilibrium concept. As a result, it is not easy to generalize how model features are related to model implications. The authors conduct a non-technical survey of the literature and discuss some of these connections. They organize the literature according to three general classes of modelling approaches, and compare those approaches in terms of their strengths and weaknesses. They also describe the policy implications across the three model classes and relate them to the model environment/assumptions. The authors summarize what can be learned from the literature with respect to policy issues and identify areas for future research.
    Keywords: Payment, clearing, and settlement systems
    JEL: E42 E58 G21
    Date: 2007
  56. By: Rao, B. Bhaskara; Sharma, Kanhaiya Lal
    Abstract: Hall (1978) has stimulated considerable controversy and empirical work on testing the permanent income hypothesis (PIH). Much of the empirical work is on the developed countries where opportunities for inter-temporal substitution are generally higher than in the developing countries. Therefore, it is expected that PIH would be valid for only a smaller proportion of consumers in the developing countries. This paper uses the extended framework of Campbell and Mankiw (1989) to estimate the proportion of consumers for whom PIH is valid in Fiji and Australia. Our results show that PIH consumers are about 40\% higher in Australia than in Fiji.
    Keywords: Consumption function; Developing countries; Permanent income hypothesis; Hall’s random walk hypothesis; Campbell-Mankiw tests.
    JEL: E21 E20 E29
    Date: 2007–04–14
  57. By: Michele FRATIANNI (Indiana University, Graduate School of Business Bloomington)
    Abstract: National borders are a big hurdle to the expansion of the open economy. Integration today remains imperfect because national borders translate into trading costs, including differences in monetary regimes. Political borders shelter many goods and services from external competition and, consequently, represent a critical exogenous force in the integration process. Borders are thicker for the small countries than the large countries. Regional trade arrangements have softened or, in some cases, pushed outward national borders, but in the process new borders have emerged. Borders affect also finance and monies. While the speed of financial integration suggests currency consolidation and a decline in the ratio of independent monies to sovereign nations, the formation of multilateral monetary unions pushes the ratio towards unity.
    Keywords: borders, gravity model, integration, monetary unions, rta
    JEL: E58 F15 F33 G15
    Date: 2007–04
  58. By: David Stockman (Department of Economics,University of Delaware); Judy Kennedy (Department of Mathematics,University of Delaware)
    Abstract: Some economic models like the cash-in-advance model of money or overlapping generations model have the property that the dynamics are ill-defined going forward in time, but well-defined going backward in time. In such instances, what does it mean for an ill-defined dynamical system to be chaotic? Furthermore, under what conditions are such dynamical systems chaotic? In this paper, we provide a definition of chaotic that is in the spirit of Devaney for a dynamical system with ill-defined forward dynamics. We utilize the theory of inverse limits to provide necessary and sufficient conditions for such a dynamical system to be chaotic
    Keywords: cash-in-advance, overlapping generations, chaos, inverse limits
    JEL: C6 E3 E4
    Date: 2006
  59. By: Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
    Abstract: A two-component model for the evolution of real GDP per capita in the USA is presented and tested. The first component of the GDP growth rate represents an economic trend and is inversely proportional to the attained level of real GDP per capita itself, with the nominator being constant through time. The second component is responsible for fluctuations around the economic trend and is defined as a half of the growth rate of the number of 9-year-olds. This nonlinear relationship between the growth rate of real GDP per capita and the number of 9-year-olds in the USA is tested for cointegration. For linearization of the problem, a predicted population time series is calculated using the original relationship. Both single year of age population time series, the measured and predicted one, are shown to be integrated of order 1 – the original series have unit roots and their first differences have no unit root. The Engel-Granger approach is applied to the difference of the measured and predicted time series and to the residuals or corresponding linear regression. Both tests show the existence of a cointegrating relation. The Johansen test results in the cointegrating rank 1. Since a cointegrating relation between the measured and predicted number of 9-year-olds does exist, the VAR, VECM, and linear regression are used in estimation of the goodness of fit and root mean-square errors, RMSE. The highest R2=0.95 and the best RMSE is obtained in the VAR representation. The VECM provides consistent, statistically reliable, and significant estimates of the coefficient in the cointegrating relation. Econometrically, the tests for cointegration show that the deviations of real economic growth in the USA from the economic trend, as defined by the constant annual increment of real per capita GDP, are driven by the change in the number of 9-year-olds.
    Keywords: GDP per capita; population estimates; cointegration; VAR; VECM; USA
    JEL: O42 E37 C53 O51 E32
    Date: 2007
  60. By: Alison Booth; Facundo Sepulveda
    Abstract: We study the joint determination of fertility subsidies and Social Security taxes in an overlapping generations model where agents are heterogeneous in endowments. In equilibria where Social Security is valued, old and poor young agents form a coalition that sustains Social Security. When voting for fertility subsidies, the young take into account both the deadweight loss of such subsidies and the gains from a higher future tax base. They also take into account a third effect of increasing population growth: that of a decrease in future Social Security benefits as a consequence of a change in the identity of the future decisive voter.
    JEL: E62 H2 H30 H55 J13 J14
    Date: 2007–03
  61. By: Dean Karlan; Jonathan Zinman
    Abstract: Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: interest rates, subsidies,credit elasticity,loan maturity, microfinance, credit market
    JEL: G21 M20 E51 E43 H20
  62. By: Martín López, Sonia
    Abstract: The demographic change that is lived worldwide, and of particular form in Europe, as consequence of the aging of the population because of the increase of the life expectancy and the drastic reduction of the rates of fertility, has made jump the alarms because of the need to get a suitable management that does not put in danger the financial viability of the social protection systems. The members states have to make the necessary reforms that they lead to the modernization of their social protection systems guaranteeing both suitable and viable pensions and a sanitary assistance and an assistance of long duration of quality, accessible and lasting. To achieve these aims there is a widespread agreement to foment employment policies that stimulate the active aging and the prolongation of the professional life to stop the premature exit of the labour market of the 45-year-old major workers. Among the measurements to adopt for the maintenance of the workers in the companies there are the adjustment of the contents of the working places, the use of the internal knowledge and the permanent training of the workers. In the cases in which already there has been produced the expulsion of the labour market, the participation companies will can represent an exit of the situation of unemployment. But in order that the unemployed ones of major age decide to tackle their own managerial initiative they need formation, advice and helps.
    Keywords: Aging population; systems social protection; adjustment of the contents of the working places; workers of major age; cooperative societies; employee-owned companies
    JEL: P13 J54 E24 H55
    Date: 2006
  63. By: Bruno Amable (University of Paris I and CEPREMAP); Lilas Demmou (CEPREMAP); Donatella Gatti (University of Paris 13, CEPN, CEPREMAP and IZA)
    Abstract: This paper provides new evidence on the linkages between a large array of institutional arrangements (on product, labour and financial markets) and employment performance. Our analysis includes unemployment, inactivity and jobless rates, thus allowing us to control for possible substitution effects across situations of non-employment and to check whether institutional rigidities affecting unemployment impact inactivity along the same line. To cope with common problems related to the inclusion of time-invariant institutional variables in fixed effects models, we present results of regressions based on three different estimators: PCSE, GLS and FEVD, the last one being a new procedure specifically designed to treat slowly changing variables. We build time series data to account for annual evolution of employment protection legislation (EPL), and use new data for unemployment insurance net replacement rates. Moreover, we check for interdependencies across product and labour markets legislation by investigating the marginal impact of selected institutional variables. Among other results, we find evidence of a positive effect of EPL on employment performance as well as of a substitutability relationship across product and labour markets regulation policies.
    Keywords: unemployment, inactivity, institutions, time-invariant variables
    JEL: E24 J21
    Date: 2007–04
  64. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Ce texte propose un cadre conceptuel visant à rendre compte de façon compréhensive de la souveraineté monétaire, à partir de deux niveaux de conceptualisation. A un niveau primaire on pose quatre invariants constitutifs de la souveraineté monétaire. A un niveau supérieur en interviennent les variantes. On examine ces variantes dans le contexte de la seconde moitié du XXe siècle. On met en avant l'émergence et la stabilité de l'une d'elles, le principe d'exclusivité monétaire nationale.
    Keywords: Monnaie; souveraineté monétaire; exclusivité monétaire nationale
    Date: 2007–04–17
    Abstract: • Se complica el panorama monetario. • El Gobierno debe pararse con firmeza en el tema de Transferencias. • Desempleo: ¿ estadística y/o realidad? Actualidad • A la expectativa de las cifras del Censo • Todo parece indicar que la población colombiana es menor a la esperada • La población colombiana se está envejeciendo • Según el censo de 2005 existen menos personas por hogar. Encuesta de Opinión Financiera • Las expectativas de incrementos de tasas de interés del Emisor aumentaron levemente • Los administradores esperan disminución en los spreads • La política monetaria preocupa a los administradores. Encuesta de Opinión del Consumidor • La confianza de los consumidores presenta un nuevo retroceso • El consumo de bienes durables continúa dinámico • La disposición para la compra de vivienda se mantiene en niveles elevados • La capacidad de ahorro de los hogares es todavía baja • La clase alta lidera la confianza de los consumidores. Encuesta de Opinión Empresarial • En enero de 2007 la confianza de los industriales se mantiene estable • Sigue aumentando el número de empresarios que piensa que la capacidad instalada puede resultar insuficiente • La percepción sobre la situación económica se mantiene en niveles favorables • La confianza de los exportadores parece mejorar.
    Date: 2007–03–22
  66. By: Ondřej Schneider (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyses the European budget and the position of the ten new member states. We argue that the EU budget should be reconsidered, as the Union has expanded to 27 member states and has become more heterogeneous. The budget priorities must be re-oriented towards potentially productive spending programmes. A simple economic growth model illustrates that the current EU budget setting is, at best, neutral with respect to the EU-wide long-term growth potential and may actually hamper growth in the majority of the EU countries if the distortionary nature of taxation is taken into account.
    Keywords: Budget, European Union, growth
    JEL: E6 H77
    Date: 2007–04
  67. By: Balázs Égert; Kirsten Lommatzsch; Amina Lahrèche-Révil
    Abstract: We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.
    Keywords: real exchange rate, equilibrium exchange rate, productivity, tradables, Balassa-Samuelson effect
    JEL: C15 E31 F31 O11 P17
    Date: 2007–01–01
  68. By: Nancy Birdsall
    Abstract: The implicit assumption of the donor community is that Africa is trapped by its poverty, and that aid is necessary if Africa is to escape the trap. In this note I suggest an alternative assumption: that Africa is caught in an institutional trap, signaled and reinforced by the small share of income of its independent middle-income population. Theory and historical experience elsewhere suggest that a robust middle-income group contributes critically to the creation and sustenance of healthy institutions, particularly healthy institutions of the state. I propose that if external aid is to be helpful for institution-building in Africa’s weak and fragile states, donors need to emphasize not providing more aid but minimizing the risks more aid poses for this group in Africa. Most middle-income households in Africa are actually poor by international standards, or at risk of becoming poor. While maintaining their concern for the “poor” as conventionally defined, donors need also to avoid harm to the fragile “middle”. Of special concern should be the implications of high and unpredictable aid inflows for small entrepreneurial activity and job creation in the private sector. In the more than 20 countries already highly dependent on aid (where aid constitutes 10 percent or more of GNP and as much as 50 percent of total government spending), donors (in collaboration with recipient governments) should be monitoring more closely than has been the case the effects of aid and of planned aid increases on the labor market, particularly for skilled workers; on interest rates and other macroeconomic variables; on domestic investor confidence (given the volatility of past aid); and on incentives for domestic revenue generation.
    Keywords: sub-Saharan African, institution-building, external aid, weak and fragile states, private sector, domestic investor confidence, private investment
    JEL: E0 F33 F34 F35 O43
  69. By: Dean Karlan; Jonathan Zinman
    Abstract: Information asymmetries--which occur when one party to a transaction has more or better information than the other party--such as moral hazard or adverse selection, can cause inefficiency, overinvestment, or poverty traps. Unfortunately, they are difficult to identify in practice. This working paper by Dean Karlan, CGD non-resident fellow, and his co-author provides a microfoundation for studying the real effects of credit constraints by identifying the presence (or absence) of two specific credit market failures: adverse selection adverse selection (where sellers lack information) and moral hazard (where buyers or borrowers lack information). The experiment identifies information asymmetries by randomizing loan pricing using 58,000 direct mail offers along three dimensions: an initial "offer interest rate" featured on the direct mail solicitation, the actual interest rate on the loan contract revealed only after the borrower agreed to the initial offer rate, and the interest rate on future loans offered only to those who remained in good standing. Findings show evidence of moral hazard with weaker evidence of adverse selection. A rough calibration shows that approximately 7% to 16% of default is due to asymmetric information problems. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: Information asymmetries, adverse selection, moral hazard, microfinance, credit market
    JEL: G21 M20 E51 D82
  70. By: Salvatore Michele De Marco
    Abstract: The main dynamics of capitalism is the creation of overproduction in order to search for an internal and foreign market outlet. While increasing the overproduction, both the expansion process and the internationalization of consumption raise. The context just described leads to think about the existence of rich and emerging economies producing an excess of supply compared with their internal demand (net supply) that must be allocated to the poor economies showing an excess of demand compared with their internal supply (net demand). We are, after all, in the compensating structure of the world economy, where the poor countries are setting against the rich and emerging countries; these last two are in competition with each other. Besides, the poor countries absorb the surplus of the rich and emerging ones. The assertion of monetarism, in the last decades, encouraging the market outlets abroad to the detriment of the outlets towards the public sector, leads to stress the tensions between the advantaged and disadvantaged nations. This context makes more doubtful the future economical perspectives. The compensating structure of the world economy facilitates the exogenous nature of the underdevelopment of wide areas of the planet that are addressed to absorb the productive excesses of the advanced economies. The purpose of this current theoretical contribution is just to formalize, through an appropriate economical and mathematical pattern, the interdependence between the strong economical world and the weak economical world.
    Keywords: Monetarism; Underdevelopment; Market outlet; Overproduction.
    JEL: E10 F01 F02 F15 F16 F17 O19
    Date: 2007–04
  71. By: Michael Rosholm (University of Aarhus and IZA); Rune M. Vejlin (University of Aarhus)
    Abstract: In this paper we estimate the causal effect of lowering the public income transfers administered to newly arrived refugee immigrants in Denmark - the so-called starthelp - using a competing risk mixed proportional hazard framework. The two competing risks are exit to job and exit out of the labour force. A standard search model predicts that lower benefits decrease the reservation wage and/or increase the search effort. However, newly arrived refugee immigrants may initially have a weak position in the labour market due to the fact that they do not know the language and typically have no education, or alternatively, their education is not recognized in Denmark. Hence, there may be no demand for their skills. The empirical question addressed here is whether lower benefits affect their job finding rate; if no employer wants to hire them at the going minimum wage, the fact that the reservation wage is lowered may have little effect. For identification we use a ‘quasi-natural’ experiment, in which the rules for welfare benefits in Denmark changed rather dramatically. Refugee immigrants obtaining residence permit before July 1st 2002 received and continue to receive larger income transfers than those obtaining their residence permit after July 1st. We find that lowering public income transfers has a small positive effect on the job finding rate, once calendar time effects are introduced into the model. However, introducing time-variation in the effect, we find that most of the positive effect stems from a large positive effect after two years in Denmark. We also find that the exit rate from the labour force is positively affected by lower transfers, but here the effect is large during the first year in the host country, and then it declines. Furthermore, we investigate heterogeneous treatment effects, and we find, generally, that those which we consider the weakest in the labour market are close to being immune to this treatment.
    Keywords: economic incentives, refugee immigrants, duration model, quasi-natural experiment
    JEL: E64 J18 J23 J38 J58 J65 J68
    Date: 2007–04
  72. By: Todd Moss; Vijaya Ramachandran; Scott Standley
    Abstract: This paper addresses the question of investment in sub-Saharan African listed securities by examining characteristics of the continent’s 15 equity markets, the rise and fall of African regional funds, and the asset allocation trends for global emerging market (GEM) funds. The data shows that South Africa is now a leading destination of capital, but that few managers invest elsewhere on the continent. However, we find that African markets are not treated differently than other markets and present evidence that small market size and low levels of liquidity are a binding deterrent for foreign institutional investors. Thus, orthodox market variables rather than market failure appear to explain Africa’s low absolute levels of inward equity flows. The paper then turns to new data from firm surveys to explore why African firms remain small. The implications of our findings are threefold: (a) efforts to encourage greater private investment in these markets should concentrate on domestic audiences and specialized regional funds, (b) the depth and success of the Johannesburg Stock Exchange can perhaps be better utilized to benefit other parts of the continent, and (c) any long-term strategy should concentrate on the underlying barriers to firm entry and growth.
    Keywords: sub-Saharan African, equity markets, global emerging market,inward equity flows, private investment, Johannesburg Stock Exchange
    JEL: E22 F21 G15

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