nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒05‒12
75 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example By Lars E.O. Svensson
  2. The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence By Povoledo, Laura
  3. Does Inflation Targeting Matter? A Reassessment By Luke B. Willard
  4. Win or Lose, It’s the Policy We Choose: Comparative economic performance of the inflation targeters By Beja, Jr., Edsel
  5. Inflation in Croatia with outlook to future By Paunić, Alida
  6. Search Frictions in Physical Capital Markets as a Propagation Mechanism By André Kurmann; Nicolas Petrosky-Nadeau
  7. Why has Core Inflation Remained so Muted in the Face of the Oil Shock? By Paul van den Noord; Christophe André
  8. Money, output and the payment system: Optimal monetary policy in a model with hidden effort By Joseph H. Haslag; Joydeep Bhattacharya; Antoine Martin
  9. Does single monetary policy have asymmetric real effects in EMU ? By Marilyne Huchet-Bourdon
  10. Monetary Policy in an Economy Sick with Dutch Disease By Kirill Sosunov; Oleg Zamulin
  11. Phillips Curve for Advanced Economies on Period 1996-2007 - United States and Euro Area Case By Manuel, Eduardo
  12. Optimal monetary policy under a floating regime with non-atomistic wage setters By Vincenzo Cuciniello
  13. Monetary Policy and Japan’s Liquidity Trap By Lars E.O. Svensson
  14. Money Demand in Estonia By Boriss Siliverstovs
  15. "Oil Shocks and Macroeconomic Activity: A Putty-Clay Perspective" By David R. Stockman
  16. The Neoliberal Myth in Latin America: The Cases of Mexico and Argentina in the ‘90s By Veronica Ronchi
  17. The flat tax in Romania. A good economic strategy? By Socol, Cristian; Marinas, Marius; Socol, Aura Gabriela
  18. Sales and the real effects of monetary policy By Patrick J. Kehoe; Virgiliu Midrigan
  20. Housing Markets and Adjustment in Monetary Union By Peter Hoeller; David Rae
  21. Improving Monetary Policy Models By Christopher A. Sims
  22. Do sentiment indicators help to assess and predict actual developments of the Chinese economy? By Mehrotra, Aaron; Rautava, Jouko
  23. The macroeconomics of the labor market: Three fundamental views By Marika Karanassou; Hèctor Sala; Dennis J. Snower
  24. "Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription" By Kenneth Lewis; Laurence Seidman
  25. Labor Reallocation over the Business Cycle: New Evidence from Internal Migration By Raven E. Saks; Abigail Wozniak
  26. The Timing and Magnitude of Exchange Rate Overshooting By Niklas J. Westelius; Mathias Hoffmann; Jens Sondergaard
  27. Liquidity-saving mechanisms By Antoine Martin; James McAndrews
  28. The Yield Curve through Time and Across Maturities By Richard Startz; Kwok Ping Tsang
  29. Local linear impulse responses for a small open economy By Alfred A Haug; Christie Smith
  30. Forecasting with Factors: The Accuracy of Timeliness By Christian Gillitzer; Jonathan Kearns
  31. The McKenna Rule and UK World War I Finance By James M Nason; Shaun P Vahey
  32. Why does overnight liquidity cost more than intraday liquidity? By Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
  33. Implications of Two Measures of Persistence for Correlation Between Permanent and Transitory Shocks in U.S. Real GDP By Daisuke Nagakura; Eric Zivot
  34. The Continental Dollar: How Much Was Issued and What Happened to It? By Farley Grubb
  35. Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets By Demir, Firat
  36. Americans Do I.T. Better: US Multinationals and the Productivity Miracle By Nick Bloom; Raffaella Sadun; John Van Reenen
  37. Do fiscal rules cause budgetary outcomes? By Signe Krogstrup; Sébastien Wälti
  38. Non-linear models: applications in economics By Albu, Lucian-Liviu
  39. Women and Budget Deficits By Signe Krogstrup; Sébastien Wälti
  40. Some Evidence on the Relevance of the Chain-reaction Theory in Selected Countries By Hofer, Helmut; Kunst, Robert M.; Schwarzbauer, Wolfgang; Schuh, Ulrich; Snower, Dennis J.
  41. Why Do Emerging Economies Borrow Short Term? By Fernando A. Broner; Guido Lorenzoni; Sergio L. Schmukler
  42. Household loan loss risk in Finland – estimations and simulations with micro data By Herrala, Risto; Kauko, Karlo
  43. Credit Constraints and Stock Price Volatility By Galina Hale; Assaf Razin; Hui Tong
  44. Taste for variety and endogenous fluctuations in a monopolistic competition model By Thomas Seegmuller
  45. The spread of Keynesian economics : a comparison of the Belgian and Italian experiences By Ivo Maes
  46. Reserve levels and intraday federal funds rate behavior By Spence Hilton; Warren B. Hrung
  47. Public Expenditure Composition and Economic Growth: Optimal Adjustment by Using Gradient Method By Tatsuyoshi Miyakoshi; Yoshihiko Tsukuda; Tatsuhito Kono; Makoto Koyanagi
  48. The Welfare Gains from Stabilization in a Stochastically Growing Economy with Idiosyncratic Shocks and Flexible Labor Supply By Stephen Turnovsky; Marcelo Bianconi
  49. Growth, Income Inequality, and Fiscal Policy: What are the Relevant Tradeoffs? By Cecilia Garcia-Penalosa; Stephen Turnovsky
  50. Globalisation and the Macroeconomic Policy Environment By Karine Hervé; Isabell Koske; Nigel Pain; Franck Sédillot
  51. China's Growth to 2030: The Roles of Demographic Change and Investment Premia By Rod Tyers; Jane Golley
  52. Understanding the Evolution of the U.S. Wage Distribution: A Theoretical Analysis By Fatih Guvenen; Burhanettin Kuruscu
  53. Product Market Regulation, Firm Selection and Unemployment By Gabriel Felbermayr; Julien Prat
  54. Estimating hedonic price indexes for personal computers in russia: Case of Yekaterinburg By Parkhomenko, Alexander; Redkina, Anastasia; Maslivets, Olga
  55. Does Age Structure Forecast Economic Growth? By David E. Bloom; David Canning; Günther Fink; Jocelyn Finlay
  56. The irony in the derivatives discounting By HENRARD, Marc
  57. Persistent Appreciations and Overshooting: A Normative Analysis By Ricardo J. Caballero; Guido Lorenzoni
  58. Inter-Regional Output Spillovers of Policy Shocks in China By Nicolaas Groenewold; Guoping Lee; Anping Chen
  59. Why Reform Fails: The ‘Politics of Policies’ in Costa Rican Telecommunications Liberalization By Bert Hoffmann
  60. The Relationship between the Beveridge-Nelson Decomposition and Unobserved Component Models with Correlated Shocks By Kum Hwa Oh; Eric Zivot; Drew Creal
  61. Monetary Policy Today: Sixteen Questions and about Twelve Answers By Alan S. Blinder
  62. A flexible approach to parametric inference in nonlinear time series models By Gary Koop; Simon Potter
  63. Treatment of consumption in Islamic Economics: an appraisal By Hasan, Zubair
  64. A Quantitative Analysis of the Evolution of the U.S. Wage Distribution: 1970-2000 By Fatih Guvenen; Burhanettin Kuruscu
  65. A Comparison of Univariate Stochastic Volatility Models for U.S. Short Rates Using EMM Estimation By Ying Gu; Eric Zivot
  66. Some Issues in Using Sign Restrictions for Identifying Structural VARs By Renee Fry; Adrian Pagan
  67. Political institutions and the development of telecomunications By Veneta Andonova; Luis Díaz-Serrano
  68. The Performance of Foreign Firms and the Macroeconomic Impact of FDI By Kyoji Fukao
  69. Crédibilité et currency board : le cas lituanien By Jérôme Blanc; Jean-François Ponsot
  70. Another Look at the Null of Stationary RealExchange Rates. Panel Data with Structural Breaks and Cross-section Dependence By Syed A. Basher; Josep Lluís Carrion-i-Silvestre
  71. Calculation of the variance in surveys of the economic climate By Manuela Alcañiz; Àlex Costa; Montserrat Guillén; Carme Luna; Cristina Rovira
  72. The global implications of freer skilled migration By Rod Tyers; Iain Bain; Jahnvi Vedi
  73. Payments and Mechanism Design By Thor Koeppl; Cyril Monnet; Ted Temzelides
  74. Consumption Persistence and the Equity Premium Puzzle: A Resolution or Not? (Job Market Paper) By Jun Ma
  75. Testing for Granger causality between stock prices and economic growth By Foresti, Pasquale

  1. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: The introduction of inflation targeting has led to major progress in practical monetary policy. Recent debate has focused on the interest-rate assumption underlying published projections of inflation and other target variables. This paper discusses the role of alternative interest-rate paths in the monetary-policy decision process and the recent publication by Norges Bank (the central bank of Norway) of optimal interest-rate projections with fan charts.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy.
    JEL: E42 E52 E58
    Date: 2006–05
  2. By: Povoledo, Laura
    Abstract: This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments.
    Keywords: New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles
    JEL: F41 E32
    Date: 2007–04
  3. By: Luke B. Willard (Princeton University)
    Abstract: This paper uses a number of identification approaches (using instrumental variables, assumptions about heteroscedasticity and panel fixed effects) to estimate the effect of inflation targeting on inflation. Generally, it finds the effect is small and insignificant.
    Keywords: Inflation; Monetary policy
    JEL: E31 E52
    Date: 2006–02
  4. By: Beja, Jr., Edsel
    Abstract: The inflation-growth relationship for the inflation targeters is estimated for the period 2001-2006. Results show that while inflation is negatively correlated with growth, the indicators for aggregate expenditures and productivity are positively correlated with growth; thus a positive combination of policies can be more useful for broad-based macroeconomic performances.
    Keywords: Inflation targeting; inflation-growth tradeoff
    JEL: E31 O50 E50 O40 E60
    Date: 2007–04–25
  5. By: Paunić, Alida
    Abstract: Central Banks have gained much credibility in controlling one important macroeconomic variable: inflation. This paper tries to examine the relation between inflation and other economic variables in Croatia by searching for the best forecasting model.
    Keywords: inflation; modeling; unemployment
    JEL: E31 C53 C51
    Date: 2007–05
  6. By: André Kurmann; Nicolas Petrosky-Nadeau
    Abstract: We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firm-level capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations.
    Keywords: Capital allocation frictions, search and matching, credit frictions, business cycles, dynamic general equilibrium
    JEL: E22 E32 E44
    Date: 2007
  7. By: Paul van den Noord; Christophe André
    Abstract: To help policymakers form a judgment on inflation risks and the required monetary policy stance the OECD has developed an analytical framework based on a set of 'eclectic' Phillips curves estimated for the two largest OECD economies, the United States and the euro area, which is presented in this paper. This framework is used in the preparation of the Economic Outlook to explain recent developments in core inflation, excluding food and energy, based on developments in measures of economic slack (the output gap), spill-over effects from energy prices onto core inflation and lagged responses to past inflation via expectations formation. The fact that the knock-on effects from energy shocks onto core inflation appear small in comparison with the 1970s can be explained by the secular fall in energy intensity, a low and stable rate of 'mean inflation' -- to which observed inflation reverts after a shock has worked its way through -- and persistent slack in the aftermath of the bursting of the dotcom bubble. <P>Pourquoi l?inflation sous-jacente est elle restée si modérée en dépit du choc pétrolier ? <BR>Afin d'aider les décideurs politiques à apprécier les risques inflationnistes et l'orientation requise pour la politique monétaire, l'OCDE a développé un cadre analytique fondé sur un ensemble de courbes de Phillips 'éclectiques' estimées pour les deux plus grandes économies de l'OCDE, les États-unis et la zone euro, qui est présenté dans ce document. Ce cadre est utilisé dans la préparation des Perspectives économiques pour expliquer l'évolution récente de l'inflation sous-jacente, hors alimentation et énergie, en fonction de l'évolution de mesures de la robustesse de la conjoncture (l'écart de production), des effets de contagion des prix de l'énergie sur l'inflation sous-jacente et des réponses différées à l'inflation passée à travers la formation des anticipations. Le fait que les effets d'entraînement des prix de l'énergie sur l'inflation sous-jacente apparaissent faibles comparés aux années 1970 peut s'expliquer par la baisse séculaire de l'intensité énergétique, un taux d'inflation 'moyen' faible et stable -- vers lequel l'inflation observée converge une fois qu'un choc a été absorbé -- et par une faiblesse persistante de l'économie à la suite de l'éclatement de la bulle 'dotcom'.
    Keywords: monetary policy, politique monétaire, energy, énergie, inflation, inflation
    JEL: E31 E52 Q40
    Date: 2007–04–23
  8. By: Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Joydeep Bhattacharya; Antoine Martin
    Abstract: We propose a new explanation for the observed difference in the cost of intraday and overnight liquidity. We argue that the low cost of intraday liquidity is an application of the Friedman rule in an environment where a deviation of the Friedman rule is optimal with respect to overnight liquidity. In our environment the cost of overnight liquidity affects output while the cost of intraday liquidity only redistributes resources between money holders and non-money holders. We show that it is optimal to set a high overnight rate to reduce the incentives to overuse money. In contrast, intraday liquidity should have a low cost to provide risk-sharing.
    Keywords: Friedman rule; monetary policy; random-relocation models
    JEL: E31 E51 E58
    Date: 2007–03–14
  9. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - [CNRS : UMR6211] - [Université Rennes I][Université de Caen])
    Abstract: This article compares reactions of economies in Economic Monetary Union to a single monetary policy. For that, we estimate a reaction function supposed to represent the behaviour of European Central Bank over the period 1980-1998. Then residuals are introduced into the production equation of each country. We break up monetary shocks in two axes: first, anticipated against unanticipated shocks and then positive against negative shocks. These distinctions permit a best evaluation of the degree of homogeneity of the effects of monetary policy. France, Germany, Spain and Austria seem more sensitive to unanticipated interest rates increases contrary to Belgium and Italy. These results illustrate all the problem of single monetary policy.
    Keywords: monetary policy shocks, reaction function, asymmetric effects, Economic Monetary Union.
    Date: 2007–04–26
  10. By: Kirill Sosunov (Higher School of Economics); Oleg Zamulin (New Economic School)
    Abstract: The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one - to inflation.
    Keywords: Dutch disease, Monetary Policy, Russia
    JEL: E52 F4
    Date: 2007–05
  11. By: Manuel, Eduardo
    Abstract: This paper explains and shows us the Phillips Curve for advanced economies on period 1996-2007 for specially for the United States and Euro area case. The informations for 2006 and 2007 was considered being in attention the forecasting of International Monetary Fund (IMF) for these years. We concluded that the true form of Phillips curve for short and long-run will not be verified always that exist equal evolution of their variables or for others words, always that inflation and unemployment rates growing to same direction, in both regions or in any region, the Phillips curve never will have their normal form and this just happen when inflation and unemployment rates growing for different directions (in the short-run) and when inflation rate is growing and unemployment doesn't (in the long-run).
    Keywords: Phillips curve; Inflation; Unemployment
    JEL: E23 E31 A22 E29 E13 E12 A23
    Date: 2006–06–28
  12. By: Vincenzo Cuciniello (Facoltà di Economia "Richard M. Goodwin" (Faculty of Economics), Università degli Studi di Siena (University of Siena))
    Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.
    Keywords: Central bank conservatism, centralization of wage setting, inflationary bias.
    JEL: E2 E42 E5 F31 F41
    Date: 2007–03–12
  13. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. Therefore, monetarypolicy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level. Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent. In an open economy, the Foolproof Way (consisting of a price-level target path, currency depreciation and commitment to a currency peg and a zero interest rate until the price-level target path has been reached) is likely to be the most effective policy to raise expectations of the future price level, stimulate the economy, and escape from a liquidity trap. It is the first-best policy to end stagnation and deflation in Japan. The Foolproof Way without the explicit exchange-rate policy, namely a price-level target path and a commitment to a zero interest rate until the price-level target path has been reached, would be a second-best policy. The current policy, a commitment to a zero interest rate until inflation has become nonnegative is at best a third-best policy, since it accommodates all deflation that has occurred before inflation turns nonnegative and therefore is not effective in inducing inflation expectations.
    Date: 2006–01
  14. By: Boriss Siliverstovs
    Abstract: This study develops a parsimonious stable coefficient money demand model for Estonia for the period from 1995 till 2006. Using the Johansen Full Information Maximum Likelihood framework the two cointegrating vectors are found among the system variables including the real money balances, the gross domestic product, the long- and short-term interest rates, and the rate of inflation. The first cointegrating vector is identified as the money demand function whereas the second as the interest rate parity. Our study contributes to better understanding of the factors shaping the demand for money in the new Member States of the European Union that committed themselves to adopting of the Euro currency in the near future.
    Keywords: M2 money demand, stability, new EU member states, Estonia
    JEL: C32 E41
    Date: 2007
  15. By: David R. Stockman (Department of Economics,University of Delaware)
    Abstract: I extend the Atkeson and Kehoe (1999) putty-clay model to include elastic labor supply and more general forms of technology to explore the impact of oil shocks on the macroeconomy. In particular, I am interested in (1) how this extension affects their results with regard to permanent changes in the price of oil, (2) a comparison of the business cycle properties of the putty-putty and putty-clay models, and (3) whether or not this extended putty-clay model is subject to the Rotemberg and Woodford (1996) critique of the standard perfectly competitive real business cycle model with energy. Results are reported for a wide range of parameter values illustrating that (1) contrary to the Atkeson-Kehoe result, the response of output and capital to permanent changes in the price of oil is identical in both the putty-putty and putty-clay models and is sensitive to the elasticity of substitution between capital services and labor, (2) there are stark differences in several business cycle features, namely the volatility of energy use and the correlations of output with consumption, investment and hours, and (3) the Rotemberg-Woodford critique applies to the putty-clay model revealing both amplification and timing problems.
    Keywords: energy, putty-clay, dynamic general equilbrium
    JEL: E32 Q43
    Date: 2006
  16. By: Veronica Ronchi (Università degli Studi di Milano)
    Abstract: During the ‘90s most Latin American countries were submitted to neoliberal structural reform policies. Neoliberal policies imposed market supremacy, reduced the State’s role in the economy and deregulated the markets. This paper aims at describing how these policies affected the most important macroeconomic indexes, with special emphasis on Argentina and Mexico, the two countries that suffered most from the economic crises of the ‘80s and ‘90s, and where the neoliberal policies were applied with greater orthodoxy. In spite of a slight improvement in some macroeconomic indexes, in Latin America neoliberalism failed to reduce poverty and unemployment, and was unable to guarantee a fair distribution of the wealth and improve welfare.
    Keywords: Latin America, Mexico, Argentina, ’90s, Neoliberalism
    JEL: E21 E22 E24 E26 N16 N26 N36 O16
    Date: 2007–04
  17. By: Socol, Cristian; Marinas, Marius; Socol, Aura Gabriela
    Abstract: This paper evaluates the main effects of the implementation of tax flat system in Romanian economy. If accompanying measures are not going to be enforced, the introduction of the flat rate of 16% in Romania will lead to unsustainable budgetary deficits and inflationist pressures. The flat tax favors the workers with big salaries and also big and financially solid companies (which, mainly “export” the profit). It will attack the fragile macroeconomic stability. It is uncertain if it will lead to the increase of the degree of employment, having in view the fact that the contributions to the social insurances have a very high level. The alternative scenario is simple. Romania should have chosen to continue what it was confirmed to be a valid element of the economic evolution towards a European standard (progressive fiscal system).
    Keywords: flat tax; fiscal policy; inflation; AD-AS model
    JEL: E62 E31 H21
    Date: 2007–04–05
  18. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large fraction of price changes are sales related, the models must either exclude sales from the data or leave them in and implicitly treat sales like any other price change. When sales are included, prices change frequently and standard sticky price models with this high frequency of price changes predict small effects from money shocks. If sales are excluded, prices change much less frequently and a standard sticky price model with this low frequency of price changes predict much larger effects of money shocks. This paper adds a motive for sales in a parsimonious extension of existing sticky price models. We show that the model can account for most of the patterns of sales in the data. Using our model as the data generating process, we evaluate the existing approaches and find that neither well approximates the real effects of money in our economy in which sales are explicitly modeled.
    Date: 2007
  19. By: Jan Libich; Petr Stehlik
    Abstract: This paper proposes a simple framework that generalizes the timing structure of macroeconomic (as well as other) games. Building on alternative move games and models of "rational inattention" the players' actions may be rigid, ie optimally chosen to be infrequent. This rigidity makes the game more dynamic/asynchronous and by linking successive periods it can serve as commitment. Therefore, it can enhance cooperation and often eliminate inefficient equilibrium outcomes. We apply the framework to the Kydland-Prescott-Barro-Gordon monetraty policy game and dervice the conditions - the sufficient degree of commitment - under which the influential time-inconsistency problem disappears. Interestingly, (i) this can happen even in a finite game (possibly as short as two periods), (ii) the required degree of commitment may be rather (even infinitesimally) low and (iii) the policymaker's commitment may substitute for his conservatism and/or patience in achieving credibility. The analysis makes several predictions about explicit inflation targeting and central bank dependence (and their relationship) that we show to be empirically supported. In doing so we show that our theoretical results reconcile some conflicting empirical findings of the literature.
    JEL: C70 C72 E42 E61
    Date: 2007–04
  20. By: Peter Hoeller; David Rae
    Abstract: This paper highlights the factors that limit or increase cyclical divergence in the euro area and reviews one policy area that is important in fostering a speedy adjustment to shocks: the transmission of monetary policy via the housing market. A high interest rate sensitivity of housing markets is beneficial as monetary policy is more powerful in damping cyclical fluctuations overall in the euro area. However, housing and mortgage markets still differ widely, leading to asymmetric behaviour of individual countries. Large differences exist in home-ownership rates, financial markets, taxation and supply constraints. Moreover, it is important to have a financial system that can withstand asset price bubbles. In this context, the procyclicality of bank provisioning is of concern as it could lead to a credit crunch and reinforce a downturn. Prudential supervision across the area has become better co-ordinated, but still remains fragmented. <P>Marchés immobiliers et ajustement en union monétaire <BR>Cet article met en évidence les facteurs qui limitent ou renforcent les divergences cycliques au sein de la zone euro et il passe en revue un des aspects importants de la politique économique permettant de promouvoir un ajustement rapide aux chocs : la transmission de la politique monétaire via le marché immobilier. Une forte sensibilité du marché du logement aux taux d'intérêt est bénéfique car la politique monétaire est plus efficace pour amortir les fluctuations cycliques de façon générale dans la zone euro. Cependant, les marchés immobiliers et hypothécaires diffèrent encore fortement, ce qui conduit à des comportements asymétriques des différents pays. Des différences importantes existent du point de vue de la proportion des propriétaires de leur logement, des marchés financiers, de la fiscalité et des contraintes affectant l'offre. De plus, il est important d'avoir un système financier qui peut résister à des bulles financières. Dans ce contexte, le comportement pro-cyclique des banques en matière de provisionnement est problématique car il pourrait conduire à une réduction de l'offre de crédit et un renforcement du ralentissement. La supervision prudentielle dans l'ensemble de la zone est devenue mieux coordonnée, mais elle reste fragmentée.
    Keywords: housing market, marché immobilier, monetary union, union monétaire
    JEL: E32 G21 L74
    Date: 2007–04–17
  21. By: Christopher A. Sims (Princeton University and NBER)
    Abstract: If macroeconomic models are to be useful in policy-making, where uncertainty is pervasive, the models must be treated as probability models, whether formally or informally. Use of explicit probability models allows us to learn systematically from past mistakes, to integrate model-based uncertainty with uncertain subjective judgment, and to bind data-bassed forecasting together with theory-based projection of policy effects. Yet in the last few decades policy models at central banks have steadily shed any claims to being believable probability models of the data to which they are fit. Here we describe the current state of policy modeling, suggest some reasons why we have reached this state, and assess some promising directions for future progress.
    Date: 2006–05
  22. By: Mehrotra, Aaron (BOFIT); Rautava, Jouko (BOFIT)
    Abstract: This paper evaluates the usefulness of business sentiment indicators for forecasting developments in the Chinese real economy. We use data on diffusion indices collected by the People’s Bank of China for forecasting industrial production, retail sales and exports. Our bivariate vector autoregressive models, each composed of one diffusion index and one real sector variable, generally outperform univariate AR models in forecasting one to four quarters ahead. Similarly, principal components analysis, combining information from various diffusion indices, leads to enhanced forecasting performance. Our results indicate that Chinese business sentiment indicators convey useful information about current and future developments in the real economy. They also suggest that the official data provide a fairly accurate picture of the Chinese economy.
    Keywords: forecasting; diffusion index; VAR; China
    JEL: E32 E37 P27
    Date: 2007–05–04
  23. By: Marika Karanassou (Department of Economics, Queen Mary, University of London and IZA); Hèctor Sala (Grup d'Anàlisi Econòmica Aplicada (GEAP) i IZA, Departament d'Economia Aplicada, Universitat Autònoma de Barcelona); Dennis J. Snower (President Institute for World Economics, University of Kiel, CEPR and IZA)
    Abstract: We distinguish and assess three fundamental views of the labor market regarding the movements in unempoyment: (i) the frictionless equilibrium view; (ii) the chain reaction theory, or prolonged adjustment view; and (iii) the hysteresis view. While the frictionless view implies a clear compartmentalization between the short- and long-run, the hysteresis view implies that all the short-run fluctuations automatically turn into long-run changes in the unemployment rate. We assert the problems faced by these conceptions in explaining the diversity of labor market experiences across the OECD labor markets. We argue that the prolonged adjustment view can overcome these problems since it implies that the short, medium, and long runs are interrelated, merging with one another along an intertemporal continuum.
    Keywords: Unemployment, interactive labor market dynamics, interplay of lags and shocks, frictional growth, growth drivers.
    JEL: E22 E24 J21 J30
    Date: 2006–12
  24. By: Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman
    Abstract: Two recent empirical studies of the 2001 recession published in the American Economic Review imply that an old-fashioned Keynesian fiscal stimulus—a cash transfer (“tax rebate”) or tax cut to households-- can overcome the zero interest-rate bound problem. We provide a quantitative estimate of the cash transfer that would achieve recovery from a severe recession when confronted with the zero bound. We obtain our result by adapting and simulating a macro-econometric model that has been recently econometrically estimated. With the interest rate near zero, a cash transfer equal to 3% of quarterly GDP repeated four times (quarterly) would reduce the unemployment rate nearly a full percentage point.
    Keywords: Recession, Fiscal Policy, Tax Rebate
    Date: 2006
  25. By: Raven E. Saks (Federal Reserve Board of Governors); Abigail Wozniak (University of Notre Dame and IZA)
    Abstract: This paper establishes the cyclical properties of a novel measure of worker reallocation: longdistance migration rates within the US. This internal migration offers a bird’s eye view of worker reallocation in the economy as long-distance migrants often change jobs or employment status, altering the spatial allocation of labor. Using historical reports of the Current Population Survey (CPS), we examine gross migration patterns during the entire postwar era, a period that spans ten recessions over more than fifty years. We obtain additional evidence on inter-state and inter-metropolitan population flows during the past thirty years from statistics compiled by the Internal Revenue Service. We find that internal migration within the US is strongly procyclical in both sources. Even after accounting for variation in relative local economic conditions, migration is lower during downturns in the national economy. Using individual-level CPS data, we find that migration is procyclical for most major demographic and labor force groups, although it is strongest for younger workers. Our findings suggest that cyclical fluctuations in internal migration are driven by economywide changes in the net cost to worker reallocation with a major role for the job finding rate of young workers.
    Keywords: internal migration, worker reallocation, business cycles, procyclical migration
    JEL: J6 E32
    Date: 2007–04
  26. By: Niklas J. Westelius (Hunter College); Mathias Hoffmann (University of Cologne); Jens Sondergaard (Johns Hopkins University, Department of International Economics (SAIS))
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to over-shoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a New Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy?s sensitivity to exchange rate dynamic a¤ect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning.
    JEL: F41 F31 E31
    Date: 2007
  27. By: Antoine Martin; James McAndrews
    Abstract: We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
    Keywords: Bank liquidity ; Payment systems ; Banks and banking ; Banks and banking, Central ; Monetary theory
    Date: 2007
  28. By: Richard Startz; Kwok Ping Tsang
    Abstract: We develop an unobserved component model in which the short-term interest rate is composed of a stochastic trend and a stationary cycle. Using the Nelson-Siegel model of the yield curve as inspiration, we estimate an extremely parsimonious state-space model of interest rates across time and maturity. Our stochastic process generates a three-factor model for the term structure. At the estimated parameters, trend and slope factors matter while the third factor is empirically unimportant. Our baseline model fits the yield curve well. Model generated estimates of uncertainty are positively correlated with estimated term premia. An extension of the model with regime switching identifies a high-variance regime and a low-variance regime, where the high-variance regime occurs rarely after the mid-1980s. The term premium is higher, and more so for yields of short maturities, in the high-variance regime than that in the low-variance regime. The estimation results support our model as a simple and yet reliable framework for modeling the term structure.
    Date: 2007–03
  29. By: Alfred A Haug; Christie Smith (Reserve Bank of New Zealand)
    Abstract: Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are robust to this problem, and Monte Carlo evidence suggests they provide reliable estimates of the true impulse responses. We use local linear projections to investigate the dynamic properties of a model for a small open economy, New Zealand. We compare impulse responses from local projections to those from standard techniques, and consider the implications for monetary policy. We pay careful attention to the dimensionality of the model, and focus on the effects of policy on GDP, interest rates, prices and the exchange rate.
    JEL: C51 E52 F41
    Date: 2007–04
  30. By: Christian Gillitzer (Reserve Bank of Australia); Jonathan Kearns (Reserve Bank of Australia)
    Abstract: This paper demonstrates that factor-based forecasts for key Australian macroeconomic series can outperform standard time-series benchmarks. In practice, however, the advantages of using large panels of data to construct the factors typically comes at the cost of using less timely series, thereby delaying when the forecasts can be made. To produce more timely forecasts it is possible to use a narrower data panel, though this will possibly result in less accurate factor estimates and so less accurate forecasts. We demonstrate this trade-off between accuracy and timeliness with out-of-sample forecasts. With the exception of only consumer price inflation, the forecasts do not become less accurate as they utilise less information by excluding less timely series. So while factor forecasts have large data requirements, we show that these should not prevent their practical use when timely forecasts are needed.
    Keywords: forecasting; factor models; Australia
    JEL: C53 E27 E37
    Date: 2007–04
  31. By: James M Nason; Shaun P Vahey (Reserve Bank of New Zealand)
    Abstract: This paper argues that UK WWI fiscal policy followed the ‘English method’ identified by Sprague (1917) and his discussants, and revived by the US to finance the Korean War (see Ohanian 1997). During WWI, UK fiscal policy adopted the “McKenna rule” named for Reginald McKenna, Chancellor of the Exchequer (1915-16). McKenna presented his fiscal rule to Parliament in June 1915. The McKenna rule guided UK fiscal policy for the rest of WWI and the interwar period. We draw on narrative evidence to show that motivation for the McKenna rule came from a desire to treat labour and capital fairly and equitably, not pass WWI costs onto future generations, and commit to a debt retirement path and higher taxes. However, a permanent income model suggests the McKenna rule adversely affected the UK because a higher debt retirement rate produces a lower consumption-output ratio. Data from 1916-37 supports this prediction.
    JEL: E6 N4
    Date: 2007–04
  32. By: Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non?money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.>
    Keywords: Bank liquidity ; Payment systems ; Friedman, Milton ; Banks and banking, Central
    Date: 2007
  33. By: Daisuke Nagakura; Eric Zivot
    Abstract: Conventionally, shocks to permanent and transitory components in the unobserved components (UC) model for the log of real GDP are assumed to be uncorrelated. This assumption is mainly for identification of model parameters. In this paper, we show important implications of two popular measures of persistence for the correlation between permanent and transitory shocks in the UC model, and demonstrate that the correlation is negative for the log of U.S. real GDP under a very general specification of the cycle process.
    Date: 2007–01
  34. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: The U.S. Congress issued paper money called Continental Dollars to finance the American Revolution. The story of the Continental Dollar is familiar to all - excessive amounts were issued causing hyper-inflation. It became worthless and was forgotten. However, the details of this story, including its veracity, are less well known. Scholars even disagree over how much was issued. Evidence is gathered to establish the exact amount and time path of Continental Dollars emitted and then remitted to the U.S. Treasury and burned. Why some Dollars were hoarded rather than trashed between 1779 and 1790 is also documented.
    Keywords: Monetary Policy, Economic History
  35. By: Demir, Firat
    Abstract: Based on the Euler equation approach, the paper analyzes the impacts of availability of internal funds on fixed investment spending in the presence of multiple investment options. It is argued that after financial liberalization real sector firms face a portfolio allocation problem between fixed and financial investments. Therefore, depending on the respective rates of returns the availability of internal funds may be a necessary but not sufficient condition for financing real investment projects. The empirical results using firm level data for Mexico and Turkey confirm this hypothesis and suggest that profits from fixed and financial assets have differential effects on fixed investment spending.
    Keywords: Private Investment; Financing Constraints; Cash Flow; Portfolio Choice
    JEL: G11 E22 C33 E44 O16
    Date: 2007–01
  36. By: Nick Bloom; Raffaella Sadun; John Van Reenen
    Abstract: The US has experienced a sustained increase in productivity growth since the mid-1990s, particularly in sectors that intensively use information technologies (IT). This has not occurred in Europe. If the US "productivity miracle" is due to a natural advantage of being located in the US then we would not expect to see any evidence of it for US establishments located abroad. This paper shows in fact that US multinationals operating in the UK do have higher productivity than non-US multinationals in the UK, and this is primarily due to the higher productivity of their IT. Furthermore, establishments that are taken over by US multinationals increase the productivity of their IT, whereas observationally identical establishments taken over by non-US multinationals do not. One explanation for these patterns is that US firms are organized in a way that allows them to use new technologies more efficiently. A model of endogenously chosen organizational form and IT is developed to explain these new micro and macro findings.
    JEL: E22 O3 O47 O52
    Date: 2007–05
  37. By: Signe Krogstrup (The Graduate Institute of International Studies, Geneva); Sébastien Wälti (Department of Economics, Trinity College Dublin)
    Abstract: This paper focuses on the observed empirical relationship between fiscal rules and budget deficits, and examines whether this correlation is driven by an omitted variable, namely voter preferences. We make use of two different estimation methods to capture voter preferences in a panel of Swiss sub-federal jurisdictions. First, we include a recently constructed measure of fiscal preferences. Second, we capture preferences through fixed effects with a structural break as women are enfranchised. We find that fiscal rules continue to have a significant impact on real budget balances.
    Keywords: Fiscal policy, fiscal rules, fiscal institutions, budget deficits, fiscal preferences, endogeneity
    JEL: C2 D7 E6 H6
    Date: 2007–04
  38. By: Albu, Lucian-Liviu
    Abstract: The study concentrated on demonstrating how non-linear modelling can be useful to investigate the behavioural of dynamic economic systems. Using some adequate non-linear models could be a good way to find more refined solutions to actually unsolved problems or ambiguities in economics. Beginning with a short presentation of the simplest non-linear models, then we are demonstrating how the dynamics of complex systems, as the economic system is, could be explained on the base of some more advanced non-linear models and using specific techniques of simulation. We are considering the non-linear models only as an alternative to the stochastic linear models in economics. The conventional explanations of the behaviour of economic system contradict many times the empirical evidence. We are trying to demonstrate that small modifications in the standard linear form of some economic models make more complex and consequently more realistic the behaviour of system simulated on the base of the new non-linear models. Finally, few applications of non-linear models to the study of inflation-unemployment relationship, potentially useful for further empirical studies, are presented.
    Keywords: non-linear model; continuous time map; strange attractor; fractal dimension; natural unemployment
    JEL: E32 E27 C63 C02
    Date: 2006
  39. By: Signe Krogstrup (IUHEI, The Graduate Institute of International Studies, Geneva); Sébastien Wälti
    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: Budget deficits; Economics-of-gender; enfranchisement; fiscal policy; women; time preference; altruism
    JEL: D7 E6 H6 J16
    Date: 2007–04
  40. By: Hofer, Helmut (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Schwarzbauer, Wolfgang (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Schuh, Ulrich (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Snower, Dennis J. (The Kiel Institute for the World Economy, Kiel, Germany)
    Abstract: In this paper we challenge the traditional labour market view, which argues that unemployment is determined in the long-term by its equilibrium rate, which in turn is affected by permanent shocks of some exogenous variables. In our empirical approach we decompose the dynamics of employment and labour force into transitory and permanent components. We estimated a small labour market model using VAR techniques. By simulating the model we are able to quantify the relative importance of the permanent and transitory components for the movements of the unemployment rate in four countries (Austria, France, UK, and USA). We find that the transitory component has a significant impact on unemployment only in the US. In contrast to that the permanent component appear to influence unemployment significantly in all included countries. In combination with the observation that labour market dynamics differ between countries, this may have powerful policy implications.
    Keywords: Unemployment, Natural rate hypothesis, Labour markets, Employment, Adjustment costs
    JEL: J32 J60 J64 E30 E37
    Date: 2007–05
  41. By: Fernando A. Broner; Guido Lorenzoni; Sergio L. Schmukler
    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.
    JEL: E43 F30 F34 G15
    Date: 2007–05
  42. By: Herrala, Risto (Bank of Finland Monetary Policy and Research/Monitoring); Kauko, Karlo (Bank of Finland Research)
    Abstract: This discussion paper presents a microsimulation model of household distress. We use logit analysis to estimate the extent to which a household’s risk of being financially distressed depends on net income after tax and loan servicing costs. The impact of assumed macroeconomic shocks on this net income concept is calculated at the household level. The microsimulation model is used to simulate both the number of distressed households and their aggregate debt in various macroeconomic scenarios. The simulations indicate that household credit risks to banks are relatively well contained.
    Keywords: financial stability; indebtedness; micro simulations; households
    JEL: D14 E47 G21 R29
    Date: 2007–05–08
  43. By: Galina Hale; Assaf Razin; Hui Tong
    Abstract: This paper addresses how creditor protection affects the volatility of stock market prices. Credit protection reduces the probability of oscillations between binding and non-binding states of the credit constraint; thereby lowering the rate of return variance. We test this prediction of a Tobin's q model, by using cross-country panel regression on stock price volatility in 40 countries over the period from 1984 to 2004. Estimated probabilities of a liquidity crisis are used as a proxy for the probability that credit constraints are binding. We find support for the hypothesis that institutions that help reduce the probability of oscillations between binding and non-binding states of the credit constraint also reduce asset price volatility.
    JEL: E44 E5
    Date: 2007–05
  44. By: Thomas Seegmuller (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost) and monopoly profits affect the occurence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies : consumers' taste for variety due to endogenous product diversity. introducing monopolistic competition (Dixit and Stiglitz (1977), Benassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions : a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity which has a direct influence on the real wage and the real interest rate.
    Keywords: Endogenous fluctuations, taste for variety, imperfect competition.
    Date: 2007–04–25
  45. By: Ivo Maes (National Bank of Belgium, Research Department)
    Abstract: Keynesian economics dominated economic thought and macroeconomic policy-making in the 1950s and 1960s. However, the diffusion of Keynesian economics has been uneven. In this paper, we compare the spread of Keynesian economics in two continental European countries: Belgium and Italy. We focus on the post-World War II period, taking as the main message of Keynesian economics that the market is inherently unstable and that the government has a key role in economic life in steering effective demand. We further follow Coddington's distinction between "hydraulic", "disequilibrium" and "fundamentalist" Keynesianism. The study shows that Belgium and Italy were two countries were Keynesian economics gained ground only relatively late. The breakthrough of (hydraulic) Keynesianism came in areas which were close to the policy-making process: setting up national income accounts, the construction of macroeconomic models and correcting regional imbalances. The main difference between the two countries was the strong position of fundamentalist Keynesianism in the academic world in Italy, while in Belgium, disequilibrium Keynesianism was more influential.
    Keywords: Keynesian economics, Belgium, Italy, macroeconomic policy-making
    JEL: B22 E60
    Date: 2007–05
  46. By: Spence Hilton; Warren B. Hrung
    Abstract: We analyze the impact of aggregate reserve levels on the intraday behavior of the federal funds rate over a sample period extending from 2002 to 2005. We study both how the reserve levels accumulated earlier in a maintenance period influence the morning level of the funds rate relative to the target set by the FOMC, and how same-day reserve levels as well as the reserve levels accumulated earlier affect intraday movements of the funds rate. The impact of recurring calendar events on the behavior of the federal funds rate is also explored. In general, we find a negative relationship between our measures of reserve levels and our two measures of federal funds rate behavior.
    Keywords: Federal funds rate ; Bank reserves ; Monetary policy
    Date: 2007
  47. By: Tatsuyoshi Miyakoshi (Osaka School of International Public Policy, Osaka University); Yoshihiko Tsukuda (Graduate School of Economics, Tohoku University); Tatsuhito Kono (Graduate School of Engineering, Tohoku University); Makoto Koyanagi (Graduate School of Economics, Tohoku University)
    Abstract: Previous researches studied how the components of fiscal spending affect the economic growth but did not explicitly enquire into how to adjust the components in order to achieve the highest rate of economic growth starting from the present shares of components. We investigate how to determine the optimal adjustment by introducing a gradient method which explicitly takes account for the adjustment cost and incorporates the constraint that shares of components are summed up to one. The resulting optimal adjustment shares are proportional to the deviations from the average over elements of a gradient vector and independent from the choice of regression equations. The optimal adjustment share is completely estimated by using the linear regression with any choice of omitted variable if the adjustment cost is given. The result is free from multicollinearity problem but is considering all adjustment costs unlike most of previous researches. The paper also provides an illustrative example taken from the annual panel data for the Japanese prefectural governments.
    Keywords: Economic growth; Public expenditure composition; Adjustment
    JEL: E62 E23 H50
    Date: 2007–05
  48. By: Stephen Turnovsky; Marcelo Bianconi
  49. By: Cecilia Garcia-Penalosa; Stephen Turnovsky
  50. By: Karine Hervé; Isabell Koske; Nigel Pain; Franck Sédillot
    Abstract: This paper investigates the macroeconomic policy challenges associated with a prospective continuation of international trade and financial integration over the next two decades, making use of a global macroeconomic model newly developed by the OECD. The analysis has several important policy implications. First, with the shares of non-OECD economies in world output, trade, and capital markets rising substantially, global economic developments would become much more dependent on developments in these economies than they used to be. Second, the sustainability of existing global current account imbalances will depend in part on the future build-up and composition of international assets and liabilities. While the imbalances could be sustainable for some time if economic integration continues at its current pace, a slowdown of the globalisation process would raise the likelihood of a disruptive adjustment in financial markets. Third, the increase in trade and financial linkages implies that macroeconomic shocks in a given country or region have a larger impact on other economies in the future than they do today. Policymakers in the OECD may have to act more promptly and more vigorously to economic 'shocks' in the non-OECD economies in order to limit the impact on OECD economies. <P>Mondialisation et environnement de politique macroéconomique <BR>Ce papier étudie les défis de politiques économiques posés par la poursuite éventuelle au cours des deux prochaines décennies de l’intégration commerciale et financière internationales. Cette étude est fondée sur l’utilisation d’un modèle macroéconomique mondial récemment développé par l’OCDE. L’analyse conduit à plusieurs implications politiques importantes. Tout d?abord, avec une part croissante des économies non membres de l’OCDE dans la production mondiale, le commerce et les marchés financiers, les changements économiques mondiaux deviendront beaucoup plus dépendants de ceux de ces économies. Ensuite, la soutenabilité des déséquilibres mondiaux des comptes courants existants dépendra en partie de la construction et de la composition futures des avoirs et engagements internationaux. Alors que les déséquilibres devraient être soutenables un certain temps si l’intégration économique continue à ce rythme, un ralentissement du processus de mondialisation augmenterait la possibilité d’un ajustement brutal des marchés financiers. Enfin, l’accroissement des liens commerciaux et internationaux implique que les chocs macroéconomiques affectant un pays ou une région donnée auront dans le futur un impact plus fort sur les autres économies que maintenant. Les décideurs politiques des pays de l’OCDE devraient donc agir plus rapidement et plus fortement aux chocs économiques affectant les économies non membres de l’OCDE afin d’en limiter l’impact sur les économies membres.
    Keywords: growth, globalisation, croissance, macroeconomic policies, politique macro-économique, current account, compte courant, mondialisation
    JEL: E17 E60 F01 F47
    Date: 2007–05–04
  51. By: Rod Tyers; Jane Golley (College of Business and Economics, Australian National University)
    Abstract: China's economic growth has, hitherto, depended on its relative abundance of production labour and its increasingly secure investment environment. Within the next decade, however, China's labour force will begin to contract. This will set its economy apart from other developing Asian countries where relative labour abundance will increase, as will relative capital returns. Unless there is a substantial change in population policy, the retention of China's large share of global FDI will require further improvements in its investment environment. These linkages are explored using a new global demographic model that is integrated with an adaptation of the GTAP-Dynamic global economic model in which regional households are disaggregated by age and gender. Interest premia are integral with projections made using these models and in this paper their influence on China's economic growth performance is investigated under alternative assumptions about fertility decline and labour force growth. China's share of global investment is found to depend sensitively on both its labour force growth and its interest premium though the results suggest that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labour force.
    Keywords: Chinese economy, demographic change, investment risk and economic growth
    JEL: C68 E22 E27 F21 F43 J11
    Date: 2006–05
  52. By: Fatih Guvenen; Burhanettin Kuruscu
    Abstract: In this paper we present an analytically tractable overlapping generations model of human capital accumulation, and study its implications for the evolution of the U.S. wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill-biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with several features of the U.S. data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within-group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC, and interpreting the transformation that the U.S. economy has gone through since the 1970's.
    JEL: E21 E24 J24 J31
    Date: 2007–05
  53. By: Gabriel Felbermayr (University of Tübingen); Julien Prat (University of Vienna and IZA)
    Abstract: This paper analyzes the effect of Product Market Regulation (PMR) on unemployment in a search model with heterogeneous multiple-worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs lower unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003). We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs.
    Keywords: product market regulation, unemployment, search model, firms heterogeneity
    JEL: E24 J63 L16 O00
    Date: 2007–04
  54. By: Parkhomenko, Alexander; Redkina, Anastasia; Maslivets, Olga
    Abstract: Economists have been noting for decades that Consumer Price Index (CPI) in the developed countries is overstating inflation by 0,5−2,0% per year. A significant part of the bias is due to the presence of technology products and differentiated products in the CPI basket. An increase share of these products in the Russian CPI may also lead to a substantial upward bias. Nowadays hedonic indices are believed to be the most efficient way to reduce this bias. They can be used in two ways: to estimate the bias in CPI and to elaborate alternative official price indices for information and communication technology (ICT) products. We estimate a 25% fall in the price of personal computers for 20 months (03.04-11.05) using this method. A 25−44% upward bias in price index for PC in Russia was also calculated. We have found that the Russian CPI could be upward biased by 0,18-0,32% per year due to new goods and quality change effects for PC (given 1% expenditure share).
    Keywords: CPI; price index; hedonic price index; CPI bias
    JEL: E31 C43
    Date: 2007–01–05
  55. By: David E. Bloom; David Canning; Günther Fink; Jocelyn Finlay (Harvard School of Public Health)
    Abstract: High ratios of working age to dependent population can yield a increases the rate of economic growth. We estimate the parameters model with a cross section of countries over the period 1960 to 1980 inclusion of age structure improves the model’s forecasts for the period that including age structure improves the forecast, although there instability between periods with an unexplained growth slowdown the model to generate growth forecasts for the period 2000–2020.
    Keywords: Economic Growth, Demography, Forecast Evaluation, Error Decomposition, Panel Analysis.
    Date: 2006–12
  56. By: HENRARD, Marc
    Abstract: A simple and fundamental question in derivatives pricing is the way (contingent) cash-flows should be discounted. As cash can not be invested at Libor the curve is probably not the right discounting curve, even for Libor derivatives. The impact on derivative pricing of changing the discounting curve is discussed. The pricing formulas for vanilla products are revisited in the funding framework described.
    Keywords: Cost of funding; coherent pricing; interest rate derivative pricing; Libor; irony.
    JEL: E43 G13 D24
    Date: 2007–03–26
  57. By: Ricardo J. Caballero; Guido Lorenzoni
    Abstract: Most economies experience episodes of persistent real exchange rate appreciations, when the question arises whether there is a need for intervention to protect the export sector. In this paper we present a model of irreversible destruction where exchange rate intervention may be justified if the export sector is financially constrained. However the criterion for intervention is not whether there are bankruptcies or not, but whether these can cause a large exchange rate overshooting once the factors behind the appreciation subside. The optimal policy includes ex-ante and ex-post interventions. Ex-ante (i.e., during the appreciation phase) interventions have limited effects if the financial resources in the export sector are relatively abundant. In this case the bulk of the intervention takes place ex-post, and is concentrated in the first period of the depreciation phase. In contrast, if the financial constraint in the export sector is tight, the policy is shifted toward ex-ante intervention and it is optimal to lean against the appreciation. On the methodological front, we develop a framework to study optimal dynamic interventions in economies with financially constrained agents.
    JEL: E0 E2 F0 F4 H2
    Date: 2007–05
  58. By: Nicolaas Groenewold (UWA Business School, University of Western Australia); Guoping Lee (School of Economics and Finance, Xi'an Jiaotong University); Anping Chen (School of Economics and Finance, Xi'an Jiaotong University)
    Abstract: In China inter-regional per capita output disparities are large and persistent and increasingly a matter for policy concern at the highest levels of government. Interregional spillovers are an important ingredient in the design of regional development policy. Yet little is known about the direction, magnitude and timing of output spillovers from one region to another. In this paper we focus on spillovers from policy shocks. We use a conventional three-region disaggregation of the Chinese economy and extend existing literature by explicitly introducing policy variables into a VAR model of regional outputs. We find that both policy variables have significant and positive effects on output in each of the regions when entered separately. In the short run both policy variables have a greater effect on the coastal region than on the other two and the effect in the central region is larger than in the western region, giving some credence to the common presumption that at least part of the expenditure boosts in the poorer inland regions find their way to the coastal provinces. These results are generally confirmed when we use the whole model to simulate the effects over time of the policy shocks. A shock to the coastal region not only has no beneficial spillovers to the other regions but actually depresses the output of the inland provinces. This is also true of a shock to the central region which comes at the expense of the western region. Only the western region has consistent positive spillovers on the other regions; looked at another way, a boost to the western region is shifted partially to the other regions.
    Date: 2006
  59. By: Bert Hoffmann (GIGA Institute of Latin American Studies)
    Abstract: As the 'Washington Consensus' reforms are losing momentum in Latin America, the Inter- American Development Bank (IDB) is calling for shifting the focus from the content of policy choices to the political process of their implementation. As this paper studies the paradigmatic case of telecommunications reform in Costa Rica it underscores the importance of these 'politics of policies'. The analysis finds, however, that the failure of repeated liberalization initiatives was not only due to policy-makers' errors in steering the project through 'the messy world of politics' (IDB); instead, as liberalization remained unpopular, policy content indeed mattered, and only the interaction of both explains the outcome. Particular attention is drawn to the political feed-back effects, as the failed reform, precisely because it had been backed by bi-partisan support, became a catalyst for the disintegration of the country's long-standing two-party system.
    Keywords: Liberalization, privatization, telecommunications, public enterprises, Costa Rica, development model, Inter-American Development Bank
    JEL: E61 E65 H42 L33 L96
    Date: 2007–04
  60. By: Kum Hwa Oh; Eric Zivot; Drew Creal
    Abstract: Many researchers believe that the Beveridge-Nelson decomposition leads to permanent and transitory components whose shocks are perfectly negatively correlated. Indeed, some even consider it to be a property of the decomposition. We demonstrate that the Beveridge-Nelson decomposition does not provide definitive information about the correlation between permanent and transitory shocks in an unobserved components model. Given an ARIMA model describing the evolution of U.S. real GDP, we show that there are many state space representations that generate the Beveridge-Nelson decomposition. These include unobserved components models with perfectly correlated shocks and partially correlated shocks. In our applications, the only knowledge we have about the correlation is that it lies in a restricted interval that does not include zero. Although the filtered estimates of the trend and cycle are identical for models with different correlations, the observationally equivalent unobserved components models produce different smoothed estimates.
    Date: 2006–07
  61. By: Alan S. Blinder (Princeton University)
    Abstract: My assignment is to survey the main questions swirling around monetary policy today. I emphasize three words in this sentence, each for a different reason. “Main” is because one person’s side issue is another’s main issue. So I had to be both selective and judgmental in compiling my list, else this paper would have been even longer than it is. “Policy” indicates that I have restricted myself to issues that are truly relevant to real-world policymakers, thus omitting many interesting but purely academic issues. “Today” means that I focus on current issues, thus passing over some illustrious past issues. All these omissions still leave a rather long list; so I will treat some issues quite briefly.
    Date: 2006–07
  62. By: Gary Koop; Simon Potter
    Abstract: Many structural break and regime-switching models have been used with macroeconomic and financial data. In this paper, we develop an extremely flexible parametric model that accommodates virtually any of these specifications?and does so in a simple way that allows for straightforward Bayesian inference. The basic idea underlying our model is that it adds two concepts to a standard state space framework. These ideas are ordering and distance. By ordering the data in different ways, we can accommodate a wide range of nonlinear time series models. By allowing the state equation variances to depend on the distance between observations, the parameters can evolve in a wide variety of ways, allowing for models that exhibit abrupt change as well as those that permit a gradual evolution of parameters. We show how our model will (approximately) nest almost every popular model in the regime-switching and structural break literatures. Bayesian econometric methods for inference in this model are developed. Because we stay within a state space framework, these methods are relatively straightforward and draw on the existing literature. We use artificial data to show the advantages of our approach and then provide two empirical illustrations involving the modeling of real GDP growth.
    Keywords: Time-series analysis ; Econometric models ; Economic forecasting
    Date: 2007
  63. By: Hasan, Zubair
    Abstract: This paper attempts a broad appraisal of the literature on macro consumption function in Islamic economics. It starts with a brief look at the microelements of the concept and clears several cobwebs concerning wants and needs, scarcity of resources, the basket of goods, and the efficacy of utility and its maximization for consumer equilibrium. The explanations narrow down the conceptual gaps between the micro and macro level articulations of the subject. Next, the paper reviews some selected macro models resting on division of income on the basis of nisab between the upper (rich) and the lower (poor) classes of society for analyzing the impact of zakah-moderation mechanism on economic growth via the saving-investment route. It is demonstrated that, contrary to the claim based on models, the positive impact of Islamic scheme on the variables studied is uncertain, to put it mildly. Finally, attention is drawn to some recent developments in the treatment of consumption in economics as also to interest being shown in the subject in other social sciences. This inter-disciplinary approach seeks to detach consumption from income and links it to wealth. It also brings in environmental and ethical concerns into the picture. The effort promises to bring the treatment of consumption closer in the two economic disciplines, secular and Islamic: it is a welcome development.
    Keywords: Consumer behavior wants macro model
    JEL: D11 E2
    Date: 2007
  64. By: Fatih Guvenen; Burhanettin Kuruscu
    Abstract: In this paper, we construct a parsimonious overlapping generations model of human capital accumulation, and study its quantitative implications for the evolution of the U.S. wage distribution from 1970 to 2000. One of the key features of the model is that individuals differ in their ability to accumulate human capital, which is the main source of wage inequality in this model. We examine the response of this model to skill-biased technical change (SBTC), which is modeled as an increase in the trend growth rate of the price of human capital starting in early 1970's. Due to the heterogeneity in ability and age, the responses of different individuals to SBTC are systematically different from each other, generating rich behavior in the evolution of relative wages. We consider different scenarios regarding how individuals' expectations evolve during SBTC. Specifically, we study the case where individuals immediately realize the advent of SBTC (perfect foresight); and the case where they initially underestimate the future growth of the price of human capital (pessimistic priors), but learn the truth in a Bayesian fashion over time. Lack of perfect foresight appears to have little effect on the main results of the paper. The model is quantitatively consistent with several trends including the rise in overall wage inequality; the fall and rise in the college premium; the rise in within-group inequality; the stagnation in median wage growth, and the small rise in consumption inequality despite the large rise in wage inequality. Overall, the model shows promise for explaining disparate trends in the evolution of the wage distribution in a unifying human capital framework.
    JEL: E21 E25 J24 J31
    Date: 2007–05
  65. By: Ying Gu; Eric Zivot
    Abstract: In this paper, the efficient method of moments (EMM) estimation using a seminonparametric (SNP) auxiliary model is employed to determine the best fitting model for the volatility dynamics of the U.S. weekly three-month interest rate. A variety of volatility models are considered, including one-factor diffusion models, two-factor and three-factor stochastic volatility (SV) models, non-Gaussian diffusion models with Stable distributed errors, and a variety of Markov regime switching (RS) models. The advantage of using EMM estimation is that all of the proposed structural models can be evaluated with respect to a common auxiliary model. We find that a continuous-time twofactor SV model, a continuous-time three-factor SV model, and a discrete-time RS-involatility model with level effect can well explain the salient features of the short rate as summarized by the auxiliary model. We also show that either an SV model with a level effect or a RS model with a level effect, but not both, is needed for explaining the data. Our EMM estimates of the level effect are much lower than unity, but around 1/2 after incorporating the SV effect or the RS effect.
    Date: 2006–08
  66. By: Renee Fry; Adrian Pagan
    Abstract: The paper looks at estimation of structural VARs with sign restrictions. Since sign restrictions do not generate a unique model it is necessary to find some way of summarizing the information they yield. Existing methods present impulse responses from different models and it is argued that they should come from a common model. If this is not done the implied shocks implicit in the impulse responses will not be orthogonal. A method is described that tries to resolve this difficulty. It works with a common model whose impulse responses are as close as possible to the median values of the impulse responses (taken over the range of models satisfying the sign restrictions). Using a simple demand and supply model it is shown that there is no reason to think that sign restrictions will generate better quantitative estimates of the effects of shocks than existing methods such as assuming a system is recursive.
    Date: 2007–04–13
  67. By: Veneta Andonova (Department of Bussines, Universidad de los Andes); Luis Díaz-Serrano (Grup de Recerca en Economia del Benestar (CREB-GRIT-IZA), Departament d'Economia, Universitat de Barcelona)
    Abstract: It has traditionally been argued that the development of telecommunications infrastructure is dependent on the quality of countries’ political institutions. We estimate the effect of political institutions on the diffusion of three telecommunications services and find it to be much smaller in cellular telephony than in the others. By evaluating the importance of institutions for technologies rather than for industries, we reveal important growth opportunities for developing countries and offer policy implications for alleviating differences between countries in international telecommunications development.
    Keywords: Political constraints, Telecommunications, GMM, Economic development.
    JEL: E32 R10
    Date: 2006–12
  68. By: Kyoji Fukao
    Abstract: In this paper, I examine the macroeconomic impact of inward FDI in Japan. From a general equilibrium point of view of the macroeconomy, probably the most important host country benefit of inward FDI is improvements in productivity caused by the inflow of managerial resources. In the first part of this paper, which is largely based on the results of Fukao, Ito and Kwon (2005), I review the evidence suggesting that inward FDI raises the average total factor productivity of firms in Japan. In the second part, using a general equilibrium model of an open macroeconomy, I simulate the macroeconomic impact of an increase in the inward FDI stock. The results suggest that if Prime Minister Abe's goal on inward FDI, which is to increase the inward FDI stock to 5 percent of GDP by the end of 2010 is achieved, this will help to raise Japan's GDP by 0.226 percent and real wage rates by 0.156 percent. Dividend payments abroad by foreign-owned firms and the fall in Japan's foreign investment income caused by the inflow of capital (or the decline in capital outflows), will make the increase in Japan's GNP (which includes net foreign investment income) smaller than the increase in GDP. The increase in GNP will be 0.125 percent of GDP.
    Date: 2007–05
  69. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]); Jean-François Ponsot (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: Si le currency board établi en Lituanie en avril 1994 s'est accompagné de la stabilité monétaire, il n'a pas pour autant bénéficié de la crédibilité qu'il était censé apporter. Ce texte s'interroge sur ce défaut de crédibilité. On examine d'abord l'hypothèse courante selon laquelle l'écart entre le modèle pur de currency board, censé apporter par lui-même la crédibilité, et le modèle lituanien, est à l'origine de ce déficit. On interroge ensuite les circonstances et les effets de la crise bancaire systémique de 1995-96. On traite enfin des conséquences des chocs exogènes sur l'économie lituanienne. Le tout conduit à avancer une autre hypothèse : les contraintes du currency board - fût-il impur - ont provoqué le besoin de restauration de marges de manœuvre discrétionnaires, ce qui a été traduit comme une dénaturation. Le défaut de crédibilité est alors le produit du currency board lui-même.
    Keywords: Caisse d'émission. Crédibilité. Politique monétaire. Crise bancaire.
    Date: 2007–04–30
  70. By: Syed A. Basher (Department of Economics. York University.); Josep Lluís Carrion-i-Silvestre (Faculty of Economics, University of Barcelona.)
    Abstract: This paper re-examines the null of stationary of real exchange rate for a panel of seventeen OECD developed countries during the post-Bretton Woods era. Our analysis simultaneously considers both the presence of cross-section dependence and multiple structural breaks that have not received much attention in previous panel methods of long-run PPP. Empirical results indicate that there is little evidence in favor of PPP hypothesis when the analysis does not account for structural breaks. This conclusion is reversed when structural breaks are considered in computation of the panel statistics. We also compute point estimates of half-life separately for idiosyncratic and common factor components and find that it is always below one year.
    Keywords: Purchasing power parity, Half-lives, Panel unit roottests, Multiple structural breaks, Cross-section dependence.
    JEL: C32 C33 E31
    Date: 2007–05
  71. By: Manuela Alcañiz (Grup de Recerca de Risc en Finances i Assegurances (RISC), Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona); Àlex Costa (Institut d'Estadística de Catalunya); Montserrat Guillén (Grup de Recerca de Risc en Finances i Assegurances (RISC), Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona); Carme Luna (Institut d'Estadística de Catalunya); Cristina Rovira (Institut d'Estadística de Catalunya)
    Abstract: Public opinion surveys have become progressively incorporated into systems of official statistics. Surveys of the economic climate are usually qualitative because they collect opinions of businesspeople and/or experts about the long-term indicators described by a number of variables. In such cases the responses are expressed in ordinal numbers, that is, the respondents verbally report, for example, whether during a given trimester the sales or the new orders have increased, decreased or remained the same as in the previous trimester. These data allow to calculate the percent of respondents in the total population (results are extrapolated), who select every one of the three options. Data are often presented in the form of an index calculated as the difference between the percent of those who claim that a given variable has improved in value and of those who claim that it has deteriorated. As in any survey conducted on a sample the question of the measurement of the sample error of the results has to be addressed, since the error influences both the reliability of the results and the calculation of the sample size adequate for a desired confidence interval. The results presented here are based on data from the Survey of the Business Climate (Encuesta de Clima Empresarial) developed through the collaboration of the Statistical Institute of Catalonia (Institut d’Estadística de Catalunya) with the Chambers of Commerce (Cámaras de Comercio) of Sabadell and Terrassa.
    Keywords: Economic climate, variances, sampling methods.
    JEL: E32 R10
    Date: 2006–11
  72. By: Rod Tyers (School of Economics, College of Business and Economics, Australian National University); Iain Bain; Jahnvi Vedi
    Abstract: One consequence of the trade and technology driven increases in skill premia in the older industrial regions since the 1980s has been a perceived “skill shortage” in those regions, along with freer migration of skilled and professional workers from developing regions. While skilled migration flows remain too small to have large short-run effects on labour markets, a further opening to skilled migrants by the industrialised North could see substantial changes in labour markets and overall growth performance. The links between demographic change, migration flows and growth performance are here explored using a new demographic sub-model that is integrated with an adaptation of the GTAP-Dynamic global economic model in which regional households are disaggregated by age and gender. Skilled migration flows are assumed to be motivated by real wage differences to an extent that is variably constrained by immigration policies. A uniform relaxation of these constraints has most effect on labour markets in the traditional migrant destinations, Australia, Western Europe and North America, where it restrains the skill premium and substantially enhances GDP growth. The skill premium is raised, however, in regions of origin, and particularly in South Asia, although the extent of this is shown to depend sensitively on the responsiveness of skill acquisition to regional skill premia.
    Keywords: Demographic change, skilled migration, labour markets, economic growth.
    JEL: C68 E22 E27 F21 F43 J11
    Date: 2006–06
  73. By: Thor Koeppl (Queen's University); Cyril Monnet (European Central Bank); Ted Temzelides (University of Pittsburg)
    Abstract: We use mechanism design to study efficient intertemporal payment arrangements when the ability of agents to perform certain welfare-improving transactions is subject to random and unobservable shocks. Efficiency is achieved via a payment system that assigns balances to participants, adjusts them based on the histories of transactions, and periodically resets them through settlement. Our analysis has several implications for the design of actual payment systems. Efficiency requires that, in order to overcome informational frictions, agents participating in transactions that do not involve monitoring frictions subsidize those that are subject to such frictions. Optimal settlement frequency should balance liquidity costs from settlement against the need to provide intertemporal incentives. Settlement costs must be borne by agents for whom the incentives to participate in the system are highest. Finally, an increase in settlement costs implies that, in order to counter a higher exposure to default, the frequency of settlement must increase and, at the same time, the volume of transactions must decrease.
    Keywords: Payment Systems, Frequency of Settlement, Liquidity Costs, Subsidization across Transactions
    Date: 2007–01
  74. By: Jun Ma
    Abstract: As first pointed out by Mehra and Prescott (1985), the excess return of equities over the risk-free rate, roughly 6%, is too high to be readily reconciled with a standard intertemporal model. Recently, Bansal and Yaron (2000, 2004) have demonstrated a resolution of the equity premium puzzle when high persistence in the consumption growth process is combined with the Generalized Expected Utility (GEU) specification of Epstein and Zin (1989, 1991). However, Nelson and Startz (2006) and Ma, Nelson, and Startz (2006) have shown that standard estimates of persistence are generally spurious in time series models that are weakly identified. This motivates the re-examination of the evidence for resolution of the equity premium puzzle in this paper. Using the valid Anderson-Rubin type test proposed by Ma and Nelson (2006) I show that weak identification may account for the apparent resolution and valid confidence regions and tests reject high persistence in consumption growth. Also, the possibility of integrated expectations is examined using the Median Unbiased Estimator of Stock and Watson (1998) and little supporting evidence is found. Evidently, the equity premium puzzle remains just that.
    Date: 2006–11
  75. By: Foresti, Pasquale
    Abstract: This paper has focused on the relationship between stock market prices and growth. A Granger-causality analysis has been carried out in order to assess whether there is any potential predictability power of one indicator for the other. The conclusion that can be drawn is that stock market prices can be used in order to predict growth, but the opposite it is not true.
    JEL: C22 E37
    Date: 2006

This nep-mac issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.